As filed with the Securities and Exchange Commission on April 30, 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. 47 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 49 /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 was filed on or prior
to March 30, 1998.
Total number of pages: ___
Index to Exhibits is located on page:
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 of Regulation C)
Item of Form N-1A CAPTION or Location in Prospectus
- ----------------- ----------------------------------
Part A
I. Cover Page ................ Cover Page
II. Synopsis............... FUND EXPENSES
III. Condensed Financial Information... *
IV. General Description of Registrant.. INVESTMENT OBJECTIVE,
INVESTMENT POLICIES,
INVESTMENT RISKS,
INVESTMENT LIMITATIONS,
GENERAL INFORMATION
V. Management of the Fund......... MANAGEMENT OF THE TRUST,
GENERAL INFORMATION
V.A. Management's Discussion of
Fund Performance............... *
VI. Capital Stock and Other Securities. GENERAL INFORMATION,
DIVIDENDS, DISTRIBUTIONS AND
TAXES,
IMPORTANT ACCOUNT INFORMATION,
REDEEMING YOUR SHARES,
TRANSFERRING OWNERSHIP,
OTHER SERVICES
VII. Purchase of Securities Being
Offered ........ INVESTMENT POLICIES***,
NET ASSET VALUE PER SHARE,
OPENING AN ACCOUNT AND
PURCHASING SHARES,
OTHER SERVICES
VIII. Redemption or Repurchase.. REDEEMING YOUR SHARES
IX. Pending Legal Proceeding .......... *
<PAGE>
CAPTION or Location in Statement
Item of Form N-1A of Additional Information
- ----------------- ---------------------------------
Part B
- ------
X. Cover Page................. Cover Page
XI. Table of Contents.......... TABLE OF CONTENTS
XII. General Information and History.. *
XIII. Investment Objectives and Policies. INVESTMENT POLICIES AND
LIMITATIONS,
RISK FACTORS AND SPECIAL
CONSIDERATIONS
XIV. Management of the Fund......... MANAGEMENT OF THE TRUST
XV. Control Persons and Principal
Holders of Securities........... MANAGEMENT OF THE TRUST,
PRINCIPAL HOLDERS OF SHARES
XVI. Investment Advisory and Other
Services .......... MANAGEMENT OF THE TRUST,
INVESTMENT ADVISORY SERVICES,
CUSTODIAN,
INDEPENDENT ACCOUNTANTS
XVII. Brokerage Allocation and Other
Practices..................... PORTFOLIO TRANSACTIONS
XVIII. Capital Stock and Other Securities. DESCRIPTION OF THE TRUST
XIX. Purchase, Redemption and Pricing
of Securities Being Offered.... PRICING OF SHARES BEING OFFERED,
REDEMPTIONS IN KIND
XX. Tax Status.................... TAXATION
XXI. Underwriters..................... *
XXII. Calculation of Performance Data.... PERFORMANCE DATA
XXIII. Financial Statements........... **
* Not applicable.
** Incorporated by reference.
*** Relates only to Royce GiftShares Fund, a series of the Trust.
<PAGE>
The Royce Funds
- --------------------------------------------------------------------------------
Royce Premier Fund Royce GiftShares Fund
Royce Micro-Cap Fund Royce Total Return Fund
Pennsylvania Mutual Fund Royce Low-Priced Stock Fund
PMF II Royce Financial Services Fund
- --------------------------------------------------------------------------------
PROSPECTUS--April 30, 1998
- --------------------------------------------------------------------------------
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information--1-800-221-4268
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES--1-800-841-1180 INVESTMENT ADVISOR
SERVICES--1-800-33-ROYCE
- --------------------------------------------------------------------------------
The Funds listed above are series of The Royce Fund (the "Trust"), a diversified
open-end management investment company. The Funds share an investment focus on
small capitalization companies that are selected on a value basis. This
Prospectus relates only to the Investment Class of shares of the above Funds,
which are offered without sales charges or commissions. Shares of other Fund
classes are generally offered only through certain broker-dealers.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses ................................ 2
Financial Highlights ......................... 3
Investment Performance and Volatility ........ 6
Investment Objectives ........................ 7
Investment Policies .......................... 8
Investment Risks ............................. 10
Investment Limitations ....................... 12
Management of the Trust ...................... 14
General Information .......................... 14
Royce GiftShares Fund Investors .............. 15
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Dividends, Distributions and Taxes ........... 16
Net Asset Value Per Share .................... 17
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares ..... 17
Choosing a Distribution Option ............... 19
Important Account Information ................ 19
Redeeming Your Shares ........................ 20
Exchange Privilege ........................... 22
Transferring Ownership ....................... 22
Statements and Reports ....................... 22
</TABLE>
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus sets forth concisely the information that you
PROSPECTUS should know about a Fund before you invest. It should be
retained for future reference. A Statement of Additional
Information dated April 30, 1998, containing further information
about the Funds and the Trust, has been filed with the
Securities and Exchange Commission and incorporated by reference
into this Prospectus. A copy may be obtained without charge by
writing to the Trust or calling Investor Information.
If you are viewing the electronic version of this Prospectus
through an online computer service, you may request a printed
version free of charge by calling or e-mailing Investor
Information. The E-mail address for The Royce Funds is
[email protected], and the Internet Home Page is
http://www.roycefunds.com
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed on the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Investment Class Shares
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES The following table summarizes all expenses and fees
that you would incur as a shareholder of the Funds in connection
with an investment in the class of shares offered by this
Prospectus.
Shareholder Transaction Expenses and Other Costs
<TABLE>
<CAPTION>
<S> <C>
Sales Load Imposed on Purchases .................................. None
Sales Load Imposed on Reinvested Dividends ....................... None
Deferred Sales Load .............................................. None
Redemption Fee--on purchases held for 1 year or more ............. None
Early Redemption Fee--on purchases held for less than 1 year ..... 1%*
Annual Trustee's Fee (Royce GiftShares Fund only) ................ $50
</TABLE>
Annual Fund Operating Expenses
<TABLE>
<CAPTION>
Total
Management Operating
Fees** 12b-1 Fees** Other Expenses**
(after waivers) (after waivers) Expenses (after waivers)
----------------- ----------------- ---------- ----------------
<S> <C> <C> <C> <C>
Royce Premier Fund .................... 1.00% None .24% 1.24%
Royce Micro-Cap Fund .................. 1.19 None .30 1.49
Pennsylvania Mutual Fund .............. .78 None .27 1.05
PMF II ................................ .69 None .56 1.25
Royce GiftShares Fund ................. .00 .00% 1.49 1.49
Royce Total Return Fund ............... .83 None .42 1.25
Royce Low-Priced Stock Fund ........... .86 .00 .63 1.49
Royce Financial Services Fund ......... .20 .00 1.29 1.49
</TABLE>
The purpose of the above tables is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an investor
in the Funds. 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. These examples should not
be considered representations of past or future expenses or performance.
Actual expenses may be higher or lower than those shown.
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
------ ------- ------- ------
<S> <C> <C> <C> <C>
Royce Premier Fund ...................... $13 $39 $68 $150
Royce Micro-Cap Fund .................... 15 47 81 178
Pennsylvania Mutual Fund ................ 11 33 58 128
PMF II .................................. 13 40 69 151
Royce GiftShares Fund*** ................ 15 47 81 178
Royce Total Return Fund ................. 13 40 69 151
Royce Low-Priced Stock Fund ............. 15 47 81 178
Royce Financial Services Fund ........... 15 47 81 178
</TABLE>
------------
* Early redemption fee does not apply to Royce GiftShares Fund.
** Management Fees would have been 1.50%, 1.00%, 1.00%, 1.00%, 1.50% and
1.50% for Royce Micro-Cap, PMF II, GiftShares, Total Return, Low-Priced Stock
and Financial Services Funds, respectively; 12b-1 Fees would have been .25%
for Royce GiftShares, Low-Priced Stock and Financial Services Funds,
respectively; and Total Operating Expenses would have been 1.80%, 1.56%,
3.82%, 1.42%, 2.38% and 3.04% for Royce Micro-Cap, PMF II, GiftShares, Total
Return, Low-Priced Stock and Financial Services Funds, respectively, without
waivers of management fees and, for Royce GiftShares Fund, expense
reimbursement by Royce & Associates, Inc. ("Royce"), the Funds' investment
adviser, and of 12b-1 fees by Royce Fund Services, Inc. ("RFS"), the Funds'
distributor. Royce and RFS have committed to waive their fees to the extent
necessary to maintain Total Operating Expenses of the Funds, other than
Pennsylvania Mutual and Royce Premier, at or below the percentages set forth
in the above table through 1998 (Royce GiftShares Fund through 2002).
*** Exclusive of Royce GiftShares Fund's $50 annual trustee's fee per account.
For trust accounts opened prior to or during 1998, Royce will pay that portion
of the currently effective annual trustee's fee in excess of $50 per account
and the trustee's fees for establishing and terminating the accounts.
2
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL The following financial highlights are part of the Funds'
HIGHLIGHTS financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The Funds' financial
statements and Coopers & Lybrand L.L.P.'s reports thereon are
included in the Funds' Annual Reports to Shareholders and are
incorporated by reference into the Statement of Additional
Information and this Prospectus. Further information about the
Funds' performance is contained elsewhere in this Prospectus and
in the Funds' Annual Reports to Shareholders for 1997, which may
be obtained without charge by calling Investor Information.
<TABLE>
<CAPTION>
Royce Premier
-------------------------------------------------------------------
Year ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year .................... $ 7.81 $ 7.12 $ 6.48 $ 6.41 $ 5.52 $ 5.00
------ ------ ------ ------ ------ ------
Income from Investment
- ----------------------
Operations
----------
Net investment
income (loss) .......... 0.09 0.10 0.10 0.06 0.02 0.02
Net realized and
unrealized gain
on investments ......... 1.35 1.18 1.05 0.15 1.03 0.77
------ ------ ------ ------ ------ ------
Total from
Investment
Operations ........... 1.44 1.28 1.15 0.21 1.05 0.79
------ ------ ------ ------ ------ ------
Less Distributions
- ------------------
Dividends paid
from net
investment
income ................. (0.09) (0.10) (0.09) (0.05) (0.02) (0.02)
Distributions paid
from capital
gains .................. (0.46) (0.49) (0.42) (0.09) (0.14) (0.25)
------- ------ ------ ------ ------ ------
Total
Distributions ......... (0.55) (0.59) (0.51) (0.14) (0.16) (0.27)
------- ------ ------ ------ ------ ------
Net Asset Value,
End of Year ............. $ 8.70 $ 7.81 $ 7.12 $ 6.48 $ 6.41 $ 5.52
======= ====== ====== ====== ====== ======
Total Return ............. 18.4% 18.1% 17.8% 3.3% 19.0% 15.8%
======= ====== ====== ====== ====== ======
Ratios/Supplemental Data
- ------------------------
Net Assets, End of
Year (millions) ........ $ 533 $ 317 $ 302 $ 202 $ 47 $ 2
Ratio of Expenses
to Average Net
Assets(1) .............. 1.24% 1.25% 1.25% 1.38% 1.50% 1.77%
Ratio of Net
Investment
Income (Loss) to
Average Net
Assets(1) .............. 1.20% 1.25% 1.48% 1.19% 0.68% 0.53%
Portfolio Turnover
Rate ................... 18% 34% 39% 38% 85% 116%
Average
Commission
Rate Paid+ ............. $.0608 $.0621
<CAPTION>
Royce Micro-Cap
--------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year .................... $ 8.14 $ 7.53 $ 6.48 $ 6.47 $ 5.83 $ 5.00
------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment
income (loss) .......... 0.00 (0.01) 0.00 0.00 0.00 (0.01)
Net realized and
unrealized gain
on investments ......... 2.01 1.17 1.24 0.23 1.38 1.48
------ ------ ------ ------ ------ ------
Total from
Investment
Operations ........... 2.01 1.16 1.24 0.23 1.38 1.47
------ ------ ------ ------ ------ ------
Less Distributions
- ------------------
Dividends paid
from net
investment
income ................. (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Distributions paid
from capital
gains .................. (0.75) (0.55) (0.19) (0.22) (0.74) (0.64)
------ ------ ------ ------ ------ ------
Total
Distributions ........ (0.75) (0.55) (0.19) (0.22) (0.74) (0.64)
------ ------ ------ ------ ------ ------
Net Asset Value,
End of Year ............. $ 9.40 $ 8.14 $ 7.53 $ 6.48 $ 6.47 $ 5.83
====== ====== ====== ====== ====== ======
Total Return ............. 24.7% 15.5% 19.1% 3.6% 23.7% 29.4%
====== ====== ====== ====== ====== ======
Ratios/Supplemental Data
- ------------------------
Net Assets, End of
Year (millions) ........ $ 200 $ 141 $ 98 $ 27 $ 10 $ 3
Ratio of Expenses
to Average Net
Assets(1) .............. 1.49% 1.79% 1.94% 1.99% 1.99% 1.69%
Ratio of Net
Investment
Income (Loss) to
Average Net
Assets(1) .............. 0.04% (0.20%) 0.10% 0.02% (0.09%) (0.21%)
Portfolio Turnover
Rate ................... 8% 70% 25% 54% 116% 171%
Average
Commission
Rate Paid+ ............. $.0549 $ .0476
</TABLE>
- ------------
(1)Expense ratios are shown after waiver of fees by the investment adviser and
distributor. Expense ratios before fee waivers would have been 1.28%, 1.68% and
4.17% for 1996, 1993 and 1992, respectively, for Royce Premier Fund, and 1.80%,
1.87%, 1.97%, 2.34%, 2.49% and 3.77% for 1997, 1996, 1995, 1994, 1993 and 1992,
respectively, for Royce Micro-Cap Fund.
+ Beginning in 1996, the Funds are required to disclose average commission rates
paid per share for purchases and sales of investments.
3
<PAGE>
<TABLE>
<CAPTION>
Pennsylvania Mutual Fund
-----------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year .................... $ 7.11 $ 7.71 $ 7.41 $ 8.31 $ 8.00
------ ------ ------ ------ ------
Income from Investment
- ----------------------
Operations
----------
Net investment
income ................. 0.07 0.11 0.11 0.12 0.11
Net realized and
unrealized gain
(loss) on
investments ............ 1.70 0.84 1.27 (0.18) 0.79
------ ------ ------ ------ ------
Total from
Investment
Operations ........... 1.77 0.95 1.38 (0.06) 0.90
------ ------ ------ ------ ------
Less Distributions
- ------------------
Dividends paid
from net
investment
income ................. (0.06) (0.11) (0.11) (0.11) (0.11)
Distributions paid
from capital
gains .................. (1.00) (1.44) (0.97) (0.73) (0.48)
------ ------ ------ ------ ------
Total
Distributions ........ (1.06) (1.55) (1.08) (0.84) (0.59)
------ ------ ------ ------ ------
Net Asset Value,
End of Year ............. $ 7.82 $ 7.11 $ 7.71 $ 7.41 $ 8.31
====== ====== ====== ====== ======
Total Return ............. 25.0% 12.8% 18.7% (0.7%) 11.3%
====== ====== ====== ====== ======
Ratios/Supplemental Data
- ------------------------
Net Assets, End of
Year (millions) ........ $ 508 $ 457 $ 630 $ 771 $1,022
Ratio of Expenses
to Average Net
Assets(1) .............. 1.05% . 99% .98% .98% .98%
Ratio of Net
Investment
Income to
Average Net
Assets ................. 0.88% 1.05% 1.18% 1.33% 1.23%
Portfolio Turnover
Rate ................... 18% 29% 10% 17% 24%
Average
Commission
Rate Paid+ ............. $.0629 $.0588
<CAPTION>
Pennsylvania Mutual Fund
---------------------------------- -------------------------------------------------------
Year ended December 31,
------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1997 1996
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year .................... $ 7.29 $ 5.78 $ 6.85 $ 6.41 $ 5.47 $ 5.26 $ 5.00
------ ------ -------- -------- -------- ------ ------
Income from Investment
Operations
Net investment
income .................. 0.11 0.12 0.17 0.21 0.14 0.07 0.00
Net realized and
unrealized gain
(loss) on
investments ............. 1.07 1.72 (0.96) 0.86 1.20 1.03 0.26
------ ------ -------- -------- -------- ------ ------
Total from
Investment
Operations ............. 1.18 1.84 (0.79) 1.07 1.34 1.10 0.26
------ ------ -------- -------- -------- ------ ------
Less Distributions
- --------------------------
Dividends paid
from net
investment
income .................. (0.10) (0.12) ( 0.16) (0.22) (0.12) (0.08) (0.00)
Distributions paid
from capital
gains ................... (0.37) (0.21) ( 0.12) (0.41) (0.28) (0.36) (0.00)
------ ------ -------- -------- -------- ------- -------
Total
Distributions .......... (0.47) (0.33) ( 0.28) (0.63) (0.40) (0.44) (0.00)
------ ------ -------- -------- -------- ------- -------
Net Asset Value,
End of Year ............. $ 8.00 $ 7.29 $ 5.78 $ 6.85 $ 6.41 $ 5.92 $ 5.26
====== ====== ======== ======== ======== ======= =======
Total Return ............. 16.2% 31.8% (11.5%) 16.7% 24.6% 20.8% 5.2%
====== ====== ======== ======== ======== ======= =======
Ratios/Supplemental Data
- --------------------------
Net Assets, End of
Year (millions) ......... $1,102 $ 789 $ 549 $ 550 $ 444 $ 22 $ 18
Ratio of Expenses
to Average Net
Assets(1) ............... .91% .95% .96% .97% 1.01% .99% .97%*
Ratio of Net
Investment
Income to
Average Net
Assets .................. 1.48% 1.73% 2.62% 2.93% 2.35% 1.23% .83%*
Portfolio Turnover Rate.... 22% 29% 15% 23% 24% 77% 1%
Average
Commission
Rate Paid+ .............. $.0564 $.0586
</TABLE>
- ------------
(1) Expense ratios before waivers of fees by the investment adviser would have
been 1.03% and .99% for 1996 and 1995, respectively, for Pennsylvania Mutual
Fund and 1.56% and 1.97% for 1997 and 1996, respectively, for PMF II (inception
date November 19, 1996).
* Annualized.
+ Beginning in 1996, the Funds are required to disclose average commission rates
paid per share for purchases and sales of investments.
4
<PAGE>
<TABLE>
<CAPTION>
Royce GiftShares Royce Total Return
- -------------------------------------- ---------------------------------------------------------------------
Year Period Year Period
ended ended ended ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
- ------------------------- ------------ --------------------------------------------------- -----------------
1997 1996 1995(2) 1997 1996 1995 1994 1993(3)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$5.83 $ 5.01 $ 5.00 $ 6.29 $ 5.76 $ 5.12 $ 5.00 $ 5.00
------- ------- ------ ------ ------ ------ ------- --------
(0.01) 0.00 0.00 0.11 0.14 0.13 0.02 0.00
1.52 1.27 0.01 1.38 1.28 1.24 0.24 0.00
------- ------- ------ ------ ------ ------ ------- --------
1.51 1.27 0.01 1.49 1.42 1.37 0.26 0.00
------- ------- ------ ------ ------ ------ ------- --------
(0.00) (0.00) (0.00) (0.11) (0.16) (0.13) (0.02) (0.00)
(0.43) (0.45) (0.00) (0.15) (0.73) (0.60) (0.12) (0.00)
------- ------- ------ ------ ------ ------ ------- ---------
(0.43) (0.45) (0.00) (0.26) (0.89) (0.73) (0.14) (0.00)
------- ------- ------ ------ ------- ------ ------- ---------
$ 6.91 $ 5.83 $ 5.01 $ 7.52 $ 6.29 $ 5.76 $ 5.12 $ 5.00
======= ======= ====== ====== ====== ====== ======= =========
26.0% 25.6% 0.2% 23.7% 25.5% 26.9% 5.2% 0.00 %
======= ======== ====== ====== ======= ====== ======= =========
$ 4 $ 1 $ .5 $ 120 $ 6 $ 3 $ 2 $ .5
1.49% 1.49% 0.70%* 1.25% 1.25% 1.67% 1.96% 0.29%*
(0.32%) (0.05%) 0.00%* 3.15% 2.50% 2.42% 0.49% (0.29%)*
64% 93% 0% 26% 111% 68% 88% 0%
$ .0558 $ .0566 $.0625 $.0605
<CAPTION>
Royce Low-Priced Stock Royce Financial Services(5)
--------------------------------------------------------------------- ------------------------------------
Year Period Year Year
ended ended ended ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
--------------------------------------------------- ----------------- ------------------------------------
1997 1996 1995 1994 1993(3) 1997 1996 1995 1994(4)
---- ---- ---- ---- ------ ---- ---- ---- ------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6.30 $ 5.62 $ 5.07 $ 5.01 $ 5.00 $ 6.03 $ 5.68 $ 5.06 $ 5.00
------- ------- ------ ------ ------ ------ ------- ------ ------
(0.03) (0.03) (0.00) (0.03) 0.00 0.00 0.01 0.00 0.00
1.26 1.31 1.14 0.18 0.01 1.16 0.81 1.07 0.06
------- ------- ------ ------ ------ ------ ------- ------ ------
1.23 1.28 1.14 0.15 0.01 1.16 0.82 1.07 0.06
------- ------- ------ ------ ------ ------ ------- ------ ------
(0.00) (0.00) (0.00) (0.00) (0.00) (0.02) (0.00) (0.00) (0.00)
(0.71) (0.60) (0.59) (0.09) (0.00) (0.96) (0.47) (0.45) (0.00)
------- ------- ------- ------ ------ ------ ------- ------ ------
(0.71) (0.60) (0.59) (0.09) (0.00) (0.98) (0.47) (0.45) (0.00)
------- ------- ------- ------ ------ ------ ------- ------ ------
$6.82 $ 6.30 $ 5.62 $ 5.07 $ 5.01 $ 6.21 $ 6.03 $ 5.68 $ 5.06
======= ======= ====== ====== ====== ====== ======= ====== ======
19.5% 22.8% 22.5% 3.0% 0.2% 19.4% 1 4.6% 21.2% 1.2%
======= ======= ====== ====== ====== ====== ======= ====== ======
$ 18 $ 16 $ 4 $ 2 $ .5 $ 2 $ 2 $ 2 $ .5
1.49% 1.88% 1.97% 1.89% 0.29%* 1.49% 1.56% 1.97% 1.78%*
(0.47%) (0.67%) (1.11%) (1.11%) (0.29%)* (0.01%) 0.17% (0.58%) 0.00%*
99% 137% 114% 95% 0% 66% 81% 106% 0%
$.0541 $ .0464 $.0616 $ .0591
</TABLE>
- ------------
(1)Expense ratios before waivers of fees and reimbursement of expenses by the
investment adviser and distributor would have been 3.82%, 6.53% and 1.95% for
1997, 1996 and 1995, respectively, for Royce GiftShares Fund; 1.67%, 2.23%,
2.38%, 3.21% and 2.04% for 1997, 1996, 1995, 1994 and 1993, respectively, for
Royce Total Return Fund; 2.38%, 2.59%, 3.47%, 3.63% and 2.04% for 1997, 1996,
1995, 1994 and 1993, respectively, for Royce Low-Priced Stock Fund; and 3.04%,
3.31%, 3.72% and 3.69% for 1997, 1996, 1995 and 1994, respectively, for Royce
Financial Services Fund.
(2)From inception of the Fund on December 27, 1995.
(3)From inception of the Fund on December 15, 1993.
(4)From inception of the Fund on December 15, 1994.
(5)Effective November 25, 1997, the Fund changed its investment objective and
policies to concentrate its investments in the financial services industry.
* Annualized.
5
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT The Funds may include in communications to current or
PERFORMANCE prospective shareholders figures reflecting total return over
AND VOLATILITY various time periods. "Total return" is the rate of return
on an amount invested in a Fund from the beginning to the end
of the stated period. "Average annual total return" is the
Total return annual compounded percentage change in the value of an amount
is the change invested in a Fund from the beginning until the end of the
in value over stated period. Total returns are historical measures of past
a given time performance and are not intended to indicate future
period, assuming performance. Total returns assume the reinvestment of all net
reinvestment of investment income dividends and capital gains distributions.
any dividends The figures do not reflect a Fund's early redemption fee
and capital because this fee applies only to redemptions of share
gains purchases held for less than one year. Additionally, the
distributions performance of a Fund may be compared to (i) the performance
of various indices and investments for which reliable
performance data is available and (ii) averages, performance
rankings or other information prepared by recognized mutual
fund statistical services.
The Funds' average annual total returns for the periods ended
December 31, 1997 were:
<TABLE>
<CAPTION>
One Three Five Ten Twenty Since
Year Year Year Year Year Inception Inception Date
---------- ---------- ---------- ---------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Royce Premier ................ 18.4% 18.1% 15.2% -- -- 15.3% December 31, 1991
Royce Micro-Cap .............. 24.7 19.7 17.1 -- -- 19.0 December 31, 1991
Pennsylvania Mutual .......... 25.0 18.7 13.1 13.8% 16.2% -- --
PMF II ....................... 20.8 -- -- -- -- 24.0 November 19, 1996
Royce GiftShares ............. 26.0 -- -- -- -- 25.7 December 27, 1995
Royce Total Return ........... 23.7 25.3 -- -- -- 19.7 December 15, 1993
Royce Low-Priced Stock ....... 19.5 21.6 -- -- -- 16.5 December 15, 1993
Royce Financial Services ..... 19.4 18.4 -- -- -- 18.6 December 15, 1994
</TABLE>
"Risk" may be The relative risk of investing in a particular fund should
viewed as the be considered in addition to the total returns of the
volatility of a fund. Risk, in terms of how volatile an investor's returns
Fund's total returns have been, can be measured in a number of ways, including
over time standard deviation and beta.
Standard deviation measures the range of performance
within which monthly total returns have fallen. The
lower the standard deviation of the fund, the less
volatile and more consistent the fund's monthly total
returns have been over that period. When the standard
deviation of a fund is lower than the standard
deviation of an index such as the S&P 500, the fund
has been less volatile than the index.
Beta measures a fund's sensitivity to market
movements. The beta for the index generally chosen to
represent the market (the S&P 500) is 1.00. If the
fund has a beta greater than 1.00, it has been more
volatile than the index; if its beta is less than
1.00, it has been less volatile than the index.
6
<PAGE>
These measures of risk, which are historical in nature and not
necessarily predictive of future volatility, are more fully
described in the Statement of Additional Information. For the
three year period ended December 31, 1997, standard deviation
and beta for the Funds, the Russell 2000, an index
representative of small capitalization company stocks, and the
S&P 500 were:
<TABLE>
<CAPTION>
Standard
Deviation Beta
----------- ---------
<S> <C> <C>
Royce Premier .................. 9.21 .38
Royce Micro-Cap ................ 12.75 .48
Pennsylvania Mutual ............ 10.26 .43
Royce Total Return ............. 7.20 .18
Royce Low-Priced Stock ......... 17.04 .46
Russell 2000 ................... 18.20 .99
S&P 500 ........................ 13.30 1.00
</TABLE>
Investors evaluating these and other quantitative measures of
risk should understand that the risk profiles of the Funds'
portfolios may change over time. The investment risks associated
with the types of securities in which the Funds may invest are
described below--see "Investment Risks".
- --------------------------------------------------------------------------------
INVESTMENT Each Fund has different investment objectives and/or its
OBJECTIVES own method of achieving its objectives and is designed to
meet different investor needs. Since certain risks are
inherent in owning any security, there can be no assurance
that any of the Funds will achieve their objectives.
Royce Premier Fund's investment objectives are primarily
long-term growth and secondarily current income. It seeks to
achieve these objectives through investments in a limited
portfolio of common stocks and convertible securities of
companies viewed by Royce as having superior financial
characteristics and/or unusually attractive business prospects.
Royce Micro-Cap Fund seeks long-term capital appreciation,
primarily through investments in common stocks and convertible
securities of micro-cap companies. Production of income is
incidental to this objective.
Pennsylvania Mutual Fund and PMF II seek long-term capital
appreciation. They do so primarily through investments in common
stocks and convertible securities of small and micro-cap
companies. Production of income is incidental to this objective.
Royce GiftShares Fund, a special purpose fund, seeks long-term
capital appreciation, primarily through investments in a limited
portfolio of common stocks and convertible securities of small
and micro-cap companies.
Royce Total Return Fund's investment objective is an equal focus
on both long-term growth of capital and current income. It seeks
to achieve this objective through investments in a diversified
portfolio of dividend-paying common stocks.
Royce Low-Priced Stock Fund's investment objective is long-term
capital appreciation. It seeks to achieve this objective
primarily through investments in common stocks and convertible
securities of companies with shares that trade at prices below
$15 per share.
Royce Financial Services Fund seeks long-term capital
appreciation by investing primarily in common stocks and
convertible securities of companies principally engaged in the
financial services industry.
These investment objectives are fundamental and may not be
changed without the approval of a majority of the Fund's
outstanding voting shares.
7
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT Royce uses a "value" method in managing the Funds' assets.
POLICIES In its selection process, Royce puts primary emphasis on the
understanding of various internal returns indicative of
The Funds invest profitability, balance sheet quality, cash flows and the
on a value basis relationship that these factors have to the price of a
given security.
The Funds invest Royce's value method is based on its belief that the
primarily in small securities of certain small companies may sell at a discount
and micro-cap from its estimate of such companies' "private worth," that
companies is, what a knowledgeable buyer would pay for the entire
company. Royce attempts to identify and invest in these
securities for each of the Funds, with the expectation that
this "value discount" will companies narrow over time and
thus provide capital appreciation for the Funds.
Royce Premier Fund
Normally, Royce Premier Fund will invest at least 80% of its
assets in a limited number of common stocks, convertible
preferred stocks and convertible bonds. At least 65% of
these securities will be income-producing and/or issued by
companies with stock market capitalizations under $1 billion
at the time of investment. The remainder of its assets may
be invested in securities of companies with higher stock
market capitalizations, non-dividend-paying common stocks
and non-convertible preferred stocks and debt securities. In
its selection process for the Fund, Royce puts primary
emphasis on companies with market capitalizations between
$300 million and $1 billion which have unusually strong
returns on assets, cash flows and balance sheets or unusual
business strengths and/or prospects. Other characteristics,
such as a company's growth potential and valuation
considerations, are also used in selecting the Fund's
investments.
Royce Micro-Cap Fund
At least 80% of the assets of Royce Micro-Cap Fund will
normally be invested in common stocks and securities
convertible into common stocks of small and micro-cap
companies, with at least 65% of the Fund's assets normally
issued by companies with stock market capitalizations under
$300 million at the time of investment. The remainder of its
assets may be invested in securities of companies with
higher stock market capitalizations and non-convertible
preferred stocks and debt securities.
Pennsylvania Mutual Fund
The Fund normally invests at least 65% of its assets in
common stocks and securities convertible into common stocks.
Both small and micro-cap companies (stock market
capitalizations below $1 billion) are included in the Fund's
portfolio. In the upper end of this range, $300 million to
$1 billion in stock market capitalization, the Fund focuses
on companies that Royce believes have superior financial
characteristics and/or unusually attractive business
prospects, companies Royce classifies as "premier." The Fund
also focuses on companies at the lower end of the range,
below $300 million, the sector known as "micro-cap."
PMF II
PMF II will normally invest at least 65% of its assets in
common stocks and securities convertible into common stocks.
Although the Fund focuses on small and micro-cap companies,
it is not required to invest a specified percentage of its
assets in the securities of such companies and may, in
certain market environments, have an equal or greater
weighting of the securities of larger capitalization
companies in its portfolio. The Fund may also invest up to
15% of its assets in below investment grade non-convertible
debt securities.
Royce GiftShares Fund
Royce GiftShares Fund will normally invest at least 65% of
its assets in a limited number of common stocks and
convertible securities. At least 75% of these securities
will be issued by small (under $1 billion in market
capitalization) and micro-cap (under $300 million)
companies. The remainder of its assets may be invested in
securities of companies with higher market capitalizations
and non-convertible preferred stocks and debt securities.
8
<PAGE>
Investments in Royce GiftShares Fund are suitable for making
long-term gifts which may qualify for the Federal annual gift
tax exclusion and which may also be designed to help fund the
beneficiary's college and post-secondary education. See "Royce
GiftShares Fund Investors" below for further information.
Royce Total Return Fund
In accordance with its dual objective of capital appreciation
(realized and unrealized) and current income, Royce Total Return
Fund will normally invest at least 65% of its assets in common
stocks and convertible securities. At least 90% of these
securities will be income producing, and at least 65% will be
issued by companies with stock market capitalizations under $1
billion at the time of investment. The remainder of the Fund's
assets may be invested in securities with higher stock market
capitalizations, non-dividend-paying common stocks and
non-convertible securities. While most of the Fund's securities
will be income-producing, the composite yield of the Fund will
vary and may be either higher or lower than the composite yield
of the stocks in the S&P 500.
Royce Low-Priced Stock Fund
Normally, Royce Low-Priced Stock Fund will invest at least 65%
of its assets in common stocks and convertible securities of
companies with shares that trade at prices below $15 at the time
of investment. In addition, at least 65% of these securities
will be issued by companies with market capitalizations under $1
billion at the time of investment. In determining whether a
convertible security is low-priced, Royce may consider either
the price of the convertible security itself or the price of the
security into which it is convertible. The remainder of its
assets may be invested in stocks of companies with higher prices
or higher market capitalizations and non-convertible preferred
stocks and debt securities.
Royce Financial Services Fund
Royce Financial Services Fund normally invests at least 65% of
its assets in the common stocks and convertible securities of
companies "principally" engaged in the financial services
industry. Examples of such companies include commercial and
industrial banks, savings and loan associations, companies
engaged in consumer and industrial finance, insurance,
securities brokerage, investment management and other financial
intermediaries. For these purposes, a company is deemed to be
"principally" engaged in the financial services industry if, as
of the end of or for its most recent fiscal year, at least 50%
of its consolidated assets, revenues or net income are committed
to, or are derived from, financial services-related activities.
Royce Financial Services Fund may also indirectly invest in the
securities of domestic and foreign financial services and
non-financial services companies by investing up to 20% of its
assets in the securities of other investment companies that
invest primarily in such companies. The other investment
companies in which the Fund may invest may be domestic companies
registered under the Investment Company Act of 1940 (the "1940
Act") or foreign companies that are not so registered or
otherwise regulated. They usually have their own management fees
and expenses, and Royce will also earn its fee on Fund assets
invested in such other companies, which would result in a
duplication of fees to the extent of any such investment.
However, Royce will waive its management fee on any Fund assets
invested in other open-end investment companies, and no sales
charge will be borne by the Fund in connection with such an
investment.
The assets of the Fund that are not required to be invested in
equity securities of companies engaged in the financial services
industry may be invested in common stocks and convertible
securities of companies engaged in non-financial services
industries and/or in non-convertible preferred stocks and debt
securities.
9
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT As mutual funds investing primarily in common stocks and/or
RISKS securities convertible into common stocks, the Funds are
The Funds are subject to market risk, that is, the possibility that
subject to certain common stock prices will decline over short or even
investment risks extended periods. The Funds invest substantial portions of
their assets in securities of small and/or micro-cap
companies. Such companies may not be well-known to the
investing public, may not have significant institutional
ownership and may have cyclical, static or only moderate
growth prospects. In addition, the securities of such
companies may be more volatile in price, have wider spreads
between their bid and ask prices and have significantly
lower trading volumes than larger capitalization stocks.
Thus, purchases and sales of such securities may have a
greater impact on their market prices than would be the
case with larger capitalization stocks. Accordingly,
Royce's investment focus requires it to have a long-term
investment outlook for the securities in which it invests.
The Funds should not be used by market timers.
Because the Funds will invest primarily in small and/or
micro-capitalization securities, they may not be able to
purchase or sell more than a limited number of shares of a
portfolio security at then quoted market prices, and may
require a considerable period of time to acquire or dispose
of their positions in the security. This risk will increase
to the extent other Royce-managed accounts or other
investors are seeking to purchase or sell a portfolio
security held by the Funds. See "Net Asset Value Per
Share".
Although Royce Premier and GiftShares Funds are diversified
within the meaning of the Investment Company Act of 1940
(the "1940 Act"), they will normally be invested in a
limited number of securities. The Funds' relatively limited
portfolios may involve more risk than investing in other
Royce Funds or in a broadly diversified portfolio of common
stocks of large and well-known companies. To the extent
that the Funds invest in a limited number of securities,
they may be more susceptible to any single corporate,
economic, political or regulatory occurrence than a more
widely diversified fund.
Pennsylvania Mutual Fund, PMF II, Royce Micro-Cap, Total
Return, Low-Priced Stock and GiftShares Funds invest
substantially in micro-cap and/or low-priced securities
that are followed by relatively few securities analysts,
with the result that there tends to be less publicly
available information concerning the securities. The
securities of these companies may have more limited trading
volumes and be subject to more abrupt or erratic market
movements than the securities of small-cap companies,
higher priced securities and/or the market averages in
general, and Royce may be required to deal with only a few
market-makers when purchasing and selling these securities.
Companies in which these Funds are likely to invest also
may have limited product lines, markets or financial
resources, may lack management depth and may be more
vulnerable to adverse business or market developments.
Thus, these Funds may involve considerably more risk than a
mutual fund investing in more liquid equity securities.
Royce Low-Priced Stock Fund may invest in securities of
issuers of low-priced stocks which are financially
distressed or involved in bankruptcy, liquidation,
reorganization or recapitalization proceedings.
Specifically because of their lower prices relative to
other companies, low-priced securities may be subject to
even more abrupt or erratic market movements.
Royce Financial Services Fund concentrates its investments
in the financial services industry, which will result in
its being less diversified than other funds investing in a
number of industries, and the Fund's net asset value could,
therefore, experience increased volatility. Financial
services companies are subject to extensive governmental
regulation. This may limit both the amounts and types of
loans and other financial commitments that such companies
are permitted to make, and, in the case of banks and
insurance companies, the interest, fees and premiums they
are permitted to charge. Insurance companies are
particularly subject to rate setting, potential anti-trust
and tax law changes and industry-wide pricing and
competition cycles and may be affected by catastrophes
and/or reinsurance carrier failures. Also, the
10
<PAGE>
profitability of many types of financial services companies
is largely dependent on the availability and cost of
capital funds and may fluctuate significantly when interest
rates change or the rate of inflation increases.
General economic conditions are important to the operation
of most financial services companies, and credit losses
resulting from financial difficulties of borrowers may
negatively impact some of them. Changes in regulations,
broker commission structure and securities market
activities, together with the leverage and trading
strategies employed by broker-dealers and investment banks,
may produce erratic returns for them over time. Finally,
most types of financial services companies are subject to
substantial price and other competition. Prices of the
securities of domestic and foreign financial services
companies may be more volatile than those of more broadly
diversified investments, and the Fund's performance may be
tied to the financial services industry and the United
States and world economies as a whole. The securities of
financial services companies may react similarly to market
conditions and may move together.
Foreign Securities Royce Financial Services Fund has no restrictions on the
amount of its assets that may be invested in foreign
securities. PMF II may invest up to 25% of its assets in
foreign securities, and each of the other Funds may invest
up to 10% of its assets in foreign securities, measured at
the time of purchase.
The Funds may purchase securities of foreign companies in
the form of American Depositary Receipts ("ADRs"). ADRs are
certificates held in trust by a bank or similar financial
institution evidencing ownership of shares of a
foreign-based issuer. Designed for use in U.S. securities
markets, ADRs are alternatives to the purchase of the
underlying foreign securities in their national markets and
currencies.
The Funds do not expect to purchase or sell foreign
currencies to hedge against declines in the U.S. dollar or
to lock in the value of the foreign securities they
purchase, and their foreign investments may be adversely
affected by changes in foreign currency rates.
Consequently, the risks associated with such investments
may be greater than if the Funds did engage in foreign
currency transactions for hedging purposes. Foreign
investments may also be adversely affected by exchange
control regulations, if any, in such foreign markets, and
the Funds' ability to make certain distributions necessary
to maintain eligibility as a regulated investment company
and avoid the imposition of income and excise taxes may to
that extent be limited.
There may be less information available about a foreign
company than a domestic company; foreign companies may not
be subject to accounting, auditing and reporting standards
and requirements comparable to those applicable to domestic
companies; and foreign markets, brokers and issuers are
generally subject to less extensive government regulation
than their domestic counterparts. Foreign securities may be
less liquid and may be subject to greater price volatility
than domestic securities. Foreign brokerage commissions and
custodial fees are generally higher than those in the
United States. Foreign markets also have different
clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to
keep pace with the volume of securities transactions,
thereby making it difficult to conduct such transactions.
Delays or problems with settlements might affect the
liquidity of the Funds' portfolios. Foreign investments may
also be subject to local economic and political risks,
political instability and possible nationalization of
issuers or expropriation of their assets, which might
adversely affect the Funds' ability to realize on their
investment in such securities. Furthermore, some foreign
securities are subject to brokerage taxes levied by foreign
governments, which have the effect of increasing the cost
of such investment and reducing the realized gain or
increasing the realized loss on such securities at the time
of sale.
Income earned or received by the Funds from sources within
foreign countries may be subject to withholding and other
taxes imposed by such countries. Any such taxes paid by the
Funds will reduce their cash available for distribution to
shareholders. The Funds are required to calculate their
distributable income and capital gains for U.S. Federal
income tax purposes by reference to the U.S. dollar.
Fluctuations in applicable foreign currency exchange rates
may
11
<PAGE>
cause a Fund's distributable income and capital gains for
U.S. Federal income tax purposes to differ from the value
of its investments calculated by reference to foreign
currencies. If a Fund invests in stock of a so-called
passive foreign investment company, the Fund may make
certain elections that will affect the calculation of its
net investment income and capital gains.
- --------------------------------------------------------------------------------
INVESTMENT Each of the Funds has adopted certain fundamental
LIMITATIONS limitations, designed to reduce its exposure to specific
situations, which may not be changed without the approval
The Funds have of a majority of its outstanding voting shares, as that
adopted certain term is defined in the 1940 Act. These limitations are set
fundamental forth in the Statement of Additional Information and
limitations provide, among other things, that no Fund will:
(a) as to not less than 75% of its assets, invest more than
5% of its assets in the securities of any one issuer,
excluding U.S. Government obligations;
(b) except for Royce Financial Services Fund, 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 In addition to investing primarily in the equity and fixed
Practices: income securities described above, the Funds may follow
a number of additional investment practices.
Short-term fixed The Funds may invest in short-term fixed income securities
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 a Fund implement a
temporary investment policy, its investment objective may
not be achieved.
Securities lending Each of the Funds may lend up to 25% of its assets to
qualified institutional investors for the purpose of
realizing additional income. Loans of securities of the
Funds will be collateralized by cash or securities issued
or guaranteed by the United States Government or its
agencies or instrumentalities. The collateral will equal at
least 100% of the current market value of the loaned
securities. The risks of securities lending include
possible delays in receiving additional collateral or in
recovery of loaned securities or loss of rights in the
collateral if the borrower defaults or becomes insolvent.
Warrants, rights Each of the Funds other than Pennsylvania Mutual Fund
and options may invest up to 5% of its total assets in warrants,
rights and options.
Lower-rated and Up to 35% of Royce Total Return Fund's assets may be
investment grade invested in non-convertible debt securities in the lowest
debt securities category of investment grade debt. These bonds may have
speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. Each of
the Funds may invest no more than 5% (15% for PMF II) of
its net assets in lower-rated (high-risk) non-convertible
debt securities, which are below investment grade. The
Funds, other than PMF II, do 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 or, if unrated, determined to be of comparable
quality.
PMF II may invest up to 15% of its net assets in
lower-rated (high-risk) non-convertible debt securities.
They may be rated from Ba to Ca by Moody's or from BB to D
by Standard & Poor's or may be unrated. These securities
have poor protection with respect to the payment of
interest and repayment of principal and may be in default
as to the payment of principal or
12
<PAGE>
interest. They are often considered to be speculative and
involve greater risk of loss or price volatility 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. During the fiscal year ended December 31, 1997 none
of PMF II's assets were invested in below investment grade
non-convertible debt securities rated in particular rating
categories by Moody's Investors Service, Inc. or, if
unrated by Moody's, considered by Royce to be of equivalent
quality to such ratings.
The market for lower-rated (high-risk) debt securities may
be thinner and less active than that for higher-rated debt
securities, which can adversely affect the prices at which
the former are sold. If market quotations cease to be
readily available for a lower-rated (high-risk) debt
security in which a Fund has invested, the security will
then be valued in accordance with procedures established by
the Board of Trustees. Judgment plays a greater role in
valuing lower-rated (high-risk) debt securities than is the
case for securities for which more external sources for
quotations and last sale information are available. Adverse
publicity and changing investor perceptions may affect a
Fund's ability to dispose of lower-rated (high-risk) debt
securities.
The Funds may also invest in investment grade
non-convertible debt securities. Such securities include
those rated Aaa by Moody's (which are considered to be of
the highest credit quality and where the capacity to pay
interest and repay principal is extremely strong), those
rated Aa by Moody's (where the capacity to repay principal
is considered very strong, although elements may exists
that make risks appear somewhat larger than expected with
securities rated Aaa), securities rated A by Moody's (which
are considered to possess adequate factors giving security
to principal and interest) and securities rated Baa by
Moody's (which are considered to have an adequate capacity
to pay interest and repay principal, but may have some
speculative characteristics). See Appendix A to the
Statement of Additional Information for a further
description of bond ratings.
Restricted and Royce Financial Services Fund and PMF II may invest up to
illiquid securities 15% of their net assets in illiquid securities, including
those restricted securities that are illiquid. Restricted
securities are securities which, if publicly sold, might
cause the Fund to be deemed an "underwriter" under the
Securities Act of 1933 (the "1933 Act") or which are
subject to contractual restrictions on resale. Restricted
securities which these Funds may purchase include
securities which have not been registered under the 1933
Act, but are eligible for purchase and sale pursuant to
Rule 144A under the 1933 Act. This Rule permits certain
qualified institutional buyers to trade in privately placed
securities even though such securities are not registered
under the 1933 Act. Royce, under criteria established by
the Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to
the 15% limitation. In making this determination, Royce
will consider the frequency of trades and quotes, the
number of dealers and potential purchasers, dealer
undertakings to make a market and the nature of the
security and the market place trades (for example, the time
needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by Royce, and
if, as a result of changed conditions, it is determined
that a Rule 144A security is no longer liquid, the Fund's
holding of illiquid securities will be reviewed to
determine what, if any, action is required in light of the
15% limitation. Investing in Rule 144A securities could
have the effect of increasing the amount of investments in
illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
Portfolio turnover Royce may employ a more aggressive approach to investing
for PMF II, Royce Micro-Cap, Low-Priced Stock and
GiftShares Funds that involves substantially higher than
average portfolio turnover rates. For 1998, these rates may
exceed 100%. Rates which exceed 100% are higher than those
of other funds. A 100% turnover rate occurs, for example,
if all of a Fund's portfolio securities are replaced in one
year. High portfolio activity increases a Fund's
transaction costs, including brokerage commissions.
13
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT The Trust's business and affairs are managed under the
OF THE TRUST direction of its Board of Trustees. Royce & Associates,
Inc., the Funds' investment adviser, is responsible for the
Royce & management of their assets, subject to the authority of the
Associates, Inc. is Board. Charles M. Royce, Royce's President, Chief
responsible Investment Officer and sole voting shareholder since 1972,
for the investment is primarily responsible for managing the Funds' portfolios
management of the other than PMF II. He is assisted by Royce's investment
Funds' assets staff, including W. Whitney George, Senior Portfolio
Manager and Managing Director, Boniface A. Zaino, Senior
Portfolio Manager and Managing Director, and Charles R.
Dreifus, Senior Portfolio Manager and Principal, and by
Jack E. Fockler, Jr., Managing Director. Mr. Zaino is
responsible for managing PMF II's portfolio and his
portfolio decisions are independent from those made for the
other Royce funds. He joined Royce in April 1998 and prior
thereto was Group Managing Director of Trust Company of the
West. Mr. Dreifus joined Royce in February 1998 and prior
thereto was Managing Director (since June 1995) and General
Partner (until June 1995) of Lazard Freres & Co. LLC.
As compensation for its services to the Funds, Royce is
entitled to receive the following annual advisory fees: (i)
1% of the first $50 million of Pennsylvania Mutual Fund's
average net assets, .875% of the next $50 million of its
average net assets and .75% of its average net assets in
excess of $100 million; (ii) 1% of the average net assets
of PMF II, Royce GiftShares, Premier and Total Return
Funds; and (iii) 1.5% of the average net assets of Royce
Micro-Cap, Low-Priced Stock and Financial Services Funds.
For 1997, the fees paid to Royce on average net assets were
1.00%, 1.19%, .78%, .42%, .83%, .86% and .20% (net of
voluntary waivers) for Royce Premier, Micro-Cap,
Pennsylvania Mutual, PMF II, Total Return, Low-Priced Stock
and Financial Services Funds, respectively. The fee for
Royce GiftShares Fund was voluntarily waived by Royce.
Royce selects the brokers who execute the purchases and
sales of the Funds' portfolio securities and may place
orders with brokers who provide brokerage and research
services to Royce. Royce is authorized, in recognition of
the value of brokerage and research services provided, to
pay commissions to a broker in excess of the amount which
another broker might have charged for the same transaction.
Royce Fund Services, Inc. ("RFS"), which is wholly-owned by
Charles M. Royce, acts as distributor of the Funds' shares.
The Trust has adopted a distribution plan for Low-Priced
Stock, GiftShares and Financial Services Funds pursuant to
Rule 12b-1. The plan provides for payment to RFS of .25%
per annum of the average net assets of the Funds, which may
be used for payment of sales commissions and other fees to
those broker-dealers who introduce investors to the Fund
and for various other promotional, sales-related and
servicing costs and expenses. RFS has committed to waive
its fees through April 1999.
- --------------------------------------------------------------------------------
GENERAL The Royce Fund (the "Trust") is a Delaware business trust,
INFORMATION registered with the Securities and Exchange Commission as a
diversified open-end management investment company. The
Trustees have the authority to issue an unlimited number of
shares of beneficial interest, without shareholder
approval, and these shares may be divided into an unlimited
number of series or classes. Shareholders are entitled to
one vote per share. Shares vote by individual series on all
matters, except that shares are voted in the aggregate and
not by individual series when required by the 1940 Act and
that if the Trustees determine that a matter affects only
one series or class, then only shareholders of that series
or class are entitled to vote on that matter.
Meetings of shareholders will not be held except as
required by the 1940 Act or other applicable law. A meeting
will be held to vote on the removal of a Trustee or
Trustees of the Trust if requested in writing by the
holders of not less than 10% of the outstanding shares of
the Trust.
The custodian for securities, cash and other assets of the
Funds is State Street Bank and Trust Company. State Street,
through its agent National Financial Data Services
("NFDS"), also serves as the Funds' transfer agent. Coopers
& Lybrand L.L.P. serves as independent accountants for the
Funds.
14
<PAGE>
Year 2000 Many computer software systems in use today cannot properly
process date-related information from and after January 1,
2000. Should any of the computer systems employed by the
Funds or any of their major service providers fail to
process this type of information properly, that could have
a negative impact on the Funds' operations and the services
provided to the Funds' shareholders. The Royce Funds, Royce
and RFS are reviewing all of their own computer systems
with the goal of modifying or replacing such systems to the
extent necessary to prepare for the Year 2000. In addition,
Royce has been advised by the Funds' major service
providers that they are also in the process of reviewing
their systems with the same goal. As of the date of this
Prospectus, the Trust and Royce have no reason to believe
that these goals will not be achieved.
- --------------------------------------------------------------------------------
ROYCE A Royce GiftShares Fund investment is a unique way to make
GIFTSHARES a gift to a child (minor or adult) or another individual.
FUND (You may not open an account in GiftShares Fund for
INVESTORS yourself or your spouse.) A GiftShares Fund investment is
suitable for making a long-term gift which may qualify in
whole or in part for the Federal annual gift tax exclusion
and which may also be designed to help fund the
beneficiary's college and post-secondary education. To open
a GiftShares Fund account, call Investor Information
(1-800-221-4268) for a GiftShares Information Packet. (A
GiftShares Fund account may also be opened by a trustee for
an individual or organization if the trust has a long-term
duration, the provisions of the trust instrument are
acceptable to the Trust and the trustee has his, her or its
own tax adviser.) The minimum initial investment in
GiftShares Fund is $5,000.
Additional investments may be made in amounts of $100 or
more at any time during the existence of the trust.
The shares in a GiftShares Fund account are held in trust
for the beneficiary by State Street Bank and Trust Company,
as independent trustee, until the termination date you
specify. The duration of the trust may be as long as you
wish, but generally must be at least 10 years from the time
you make the first contribution to the GiftShares Fund
trust or until the beneficiary reaches the age of majority,
whichever is later. The GiftShares Fund trust is
irrevocable, and neither you nor the beneficiary may amend
its terms in any way. When the trust terminates, the
beneficiary will receive the shares in the account. The
beneficiary may then continue to own the shares, but,
except for reinvestment of distributions, may not purchase
additional shares.
Options available to a donor under the Royce GiftShares
Fund trust adoption agreement are:
Withdrawal Option:
This option will be used primarily by a donor to make a
gift that may qualify for the Federal annual gift tax
exclusion or when the donor wants to allow the beneficiary
to make withdrawals from the trust to pay for higher
education and related costs.
o The full amount of the gift may qualify for the Federal
annual gift tax exclusion
o The trust may be designed to permit withdrawals to help
fund the beneficiary's college or post-secondary
education
o The beneficiary will be taxed on all of the trust's
income and capital gains, and the trustee will, if
requested by the beneficiary, redeem Fund shares in order
to allow for withdrawals in order for the beneficiary to
pay these taxes
o The trustee will send an information statement to the
beneficiary each year, showing the amount of income and
capital gains to be reported on his or her income tax
returns for that year
Accumulation Option:
This option should generally be used by a donor who is not
concerned about the Federal annual gift tax exclusion, who
wants to prohibit any access to the trust by the
beneficiary before the
15
<PAGE>
termination date, and who does not want the beneficiary to
be required to pay the taxes on the trust's income or
capital gains or to file tax returns.
o No part of the gift qualifies for the Federal annual gift
tax exclusion
o The trust will be taxed on all income and capital gains
in excess of $100 per year
o The trustee of the trust will prepare and file all
Federal and state income tax returns that are required
each year, and will pay the taxes from the assets of the
trust by redeeming Fund shares
See "Dividends, Distributions and Taxes--Royce GiftShares
Fund" below for further information. A donor should
consider consulting with an attorney or qualified tax
adviser before investing in Royce GiftShares Fund.
- --------------------------------------------------------------------------------
DIVIDENDS, Each of the Funds pays dividends from net investment income
DISTRIBUTIONS (if any) and distributes its net realized capital gains
AND TAXES annually in December. Dividends and distributions will be
automatically reinvested in additional shares of the Fund
unless the shareholder chooses otherwise.
Shareholders receive information annually as to the tax
status of distributions made by each Fund for the calendar
year. For Federal income tax purposes, all distributions by
a Fund are taxable to shareholders when declared, whether
received in cash or reinvested in shares. Distributions
paid from a Fund's net investment income and short-term
capital gains are taxable to shareholders as ordinary
income dividends. A portion of a Fund's dividends may
qualify for the corporate dividends-received deduction,
subject to certain limitations. The portion of a Fund's
dividends qualifying for such deduction is generally
limited to the aggregate taxable dividends received by the
Fund from domestic corporations. Distributions paid from
long-term capital gains of a Fund are treated by a
shareholder for Federal income tax purposes as long-term
capital gains, regardless of how long a 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 of any long-term capital gains
reported by the shareholder with respect to such shares. A
loss realized on a taxable disposition of Fund shares may
be disallowed to the extent that additional Fund shares are
purchased (including by reinvestment of distributions)
within 30 days before or after such distribution.
The redemption of shares is a taxable event, and a
shareholder may realize a capital gain or capital loss.
Each 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, a Fund's net asset
value may reflect undistributed income or capital gains. A
subsequent distribution of these amounts by a Fund will be
taxable to the shareholder even though the distribution
economically is a return of part of the shareholder's
investment.
The Funds are required to withhold 31% of taxable
dividends, capital gain 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. Shareholders may also be subject to state
and local taxes on income and gains from their investment.
Investors should consult their own tax advisers concerning
the tax consequences of an investment in the
16
<PAGE>
Funds. The Statement of Additional Information includes a
more detailed description of Federal income tax aspects
that may be relevant to a shareholder.
Royce GiftShares The creation of a Royce GiftShares Fund trust account
Fund for a beneficiary and any addition to an existing account
will be subject to the reporting requirements of Federal
gift tax law, which requires, in general, that a Federal
gift tax return be filed reporting all gifts made by an
individual during any calendar year, other than gifts of
present interests in property that qualify for, and do not
exceed, the amount of the Federal annual gift tax exclusion
(currently, $10,000). Whether a particular gift of Fund
shares qualifies for the annual exclusion will depend on
the option selected by the donor in the adoption agreement.
A gift of Fund shares may also be subject to state gift tax
reporting requirements under the laws of the state in which
the donor of the gift resides.
See "Royce GiftShares Fund Investors" above and
"Taxation--Royce GiftShares Fund" in the Statement of
Additional Information for more detailed information about
these and other tax matters applicable to an investment in
Royce GiftShares Fund. Due to the complexity of Federal and
state laws pertaining to all gifts in trust, prospective
donors should consider consulting with an attorney or other
qualified tax adviser before investing in Royce GiftShares
Fund.
- --------------------------------------------------------------------------------
NET ASSET Fund shares are purchased and redeemed at their net asset
VALUE value per share next determined after an order is received
PER SHARE by the Funds' transfer agent or an authorized service agent
or sub-agent. Net asset value per share is determined by
dividing the total value of the Fund's investments plus
Net asset value per cash and other assets, less any liabilities, by the number
share (NAV) is of outstanding shares of the Fund. Net asset value per
determined each day share is calculated at the close of regular trading on the
the New York Stock New York Stock Exchange on each day the Exchange is open
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.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
OPENING AN Each Fund's shares are offered through this prospectus on a
ACCOUNT AND no-load basis. To open a new account other than an IRA or
PURCHASING 403(b)(7) account or a Royce GiftShares Fund account,
SHARES either by mail, by telephone or by wire, simply complete
and return an Account Application. If you need assistance
with the Account Application or have any questions about
the Funds, please call Investor Information at
1-800-221-4268. Note: For certain types of account
registrations (e.g., corporations, partnerships,
foundations, associations, other organizations, trusts or
powers of attorney), please call Investor Information to
determine if you need to provide additional forms with your
application.
<TABLE>
<CAPTION>
Type of Account Minimum
--------------- -------
<S> <C>
Minimum Initial Regular Accounts $2,000
Investments IRAs* $ 500
Accounts established with Automatic
Investment Plan or Direct Deposit Plan $ 500
401(k) and 403(b)(7) accounts* None
Royce GiftShares Fund accounts $5,000
</TABLE>
- ------------
*Separate forms must be used for opening IRAs or 403(b)(7) accounts and Royce
GiftShares Fund accounts; please call Investor Information at 1-800-221-4268 if
you need these forms.
17
<PAGE>
Additional Subsequent investments may be made by mail ($50 minimum,
Investments $100 minimum for Royce GiftShares), telephone ($500
minimum), wire ($1,000 minimum) or Express Service (a
system of electronic funds transfer from your bank
account).
-----------------------------------------------------------
NEW ACCOUNT
Purchasing By Mail Please include the amount of your initial
Complete and sign investment on the Account Application, make
the enclosed your check payable to The Royce Fund, and
Account Application mail to:
The Royce Funds
P.O. Box 419012
Kansas City, MO 64141-6012
For express or The Royce Funds
registered mail, c/o National Financial Data Services
send to: 1004 Baltimore, 5th Floor
the Kansas City, MO 64105
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-Mail
remittance form attached to your Fund account confirmation
statements. Please make your check payable to The Royce
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.
-----------------------------------------------------------
NEW ACCOUNT
Purchasing By To open an account by telephone, you should call Investor
Telephone 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.
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
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 Money should be wired to:
Before Wiring State Street Bank and Trust Company
For a new account, ABA 011000028 DDA 9904-712-8
please contact Ref: (Name of Fund)--Investment Class
Investor Information Order Number or Account Number ---------------------
at 1-800-221-4268 Account Name -------------------------------------
To ensure proper receipt, please be sure your bank includes
the name of the Fund and your order number (for telephone
purchases) or account number. If you are opening a new
account, you must call Investor Information to obtain an
order number, and complete the Account Application 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 You can purchase shares automatically or at your discretion
Express through the following options:
Service
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 or, if previously established,
computer online access.
18
<PAGE>
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
or quarterly schedule you select.
To establish the Expedited Purchase Option and/or the
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 by telephone please call
Shareholder Services at 1-800-841-1180 before 4:00 p.m.,
Eastern time. Expedited purchases may also be made through
the automated Royce Infoline (800-78-ROYCE).
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
obtained from Investor Information by calling
1-800-221-4268.
- --------------------------------------------------------------------------------
CHOOSING A You may select one of three distribution options:
DISTRIBUTION
OPTION
1. Automatic Reinvestment Option--Both net investment
income dividends and capital gains distributions will
be reinvested in additional Fund shares. This option
will be selected for you automatically unless you
specify one of the other options.
2. Cash Dividend Option--Your dividends will be paid in
cash and your capital gains distributions will be
reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains
distributions will be paid in cash.
You may change your option by calling Shareholder Services
at 1-800-841-1180. Distribution options available for Royce
GiftShares Fund trust accounts are dependent on the trust
option selected by the donor.
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional services on your
ACCOUNT account is to select the options you desire when you
INFORMATION complete your Account Application. If you want to add or
change shareholder options later, you may need to provide
additional information and a signature guarantee. Please
call Shareholder Services at 1-800-841-1180 for further
assistance.
Signature For our mutual protection, we may require a signature
Guarantees 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, stolen or destroyed, you may
incur an expense to replace it.
Purchases Through If you purchase shares of a Fund through a program of
Service Providers services offered or administered by a broker-dealer,
financial institution or other service provider, you 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 a Fund may not be
available or may be modified in connection with the program
of services offered. When shares of a
19
<PAGE>
Fund are purchased in this way, the service provider, rather
than the customer, may be the shareholder of record of the
shares. RFS, Royce and/or the Funds may pay fees to
unaffiliated broker-dealers, financial institutions or other
service providers who introduce investors to the Funds and/or
provide certain administrative services to those of their
customers who are Fund shareholders.
Computer You can view your account balance and history through
Online computer online access to our website (www.roycefunds.com)
Access after first requesting authorization through our web site,
by telephone (800-841-1180) or by selecting this option on
the Account Application. You may also purchase, redeem or
exchange shares through the same online access if you have
previously established the Express Service option.
Telephone and Neither the Funds nor their transfer agent will be liable for
Online Access following instructions communicated by telephone or computer
Transactions online access that are reasonably believed to be genuine. The
transfer agent uses certain procedures designed to confirm
that telephone and computer online access instructions are
genuine, which may include requiring some form of personal
identification prior to acting on the instructions, providing
written confirmation of the transaction and/or recording
incoming calls, and if it does not follow such procedures,
the Fund or the transfer agent may be liable for any losses
due to unauthorized or fraudulent transactions.
Nonpayment If your check or wire does not clear, or if payment is not
received for any telephone or computer online access
purchase, the transaction will be 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 Trust as reimbursement
for any loss incurred.
Trade Date for Your trade date is the date on which share purchases are
Purchases credited to your account. If your purchase is made by
telephone, computer online access, 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 Funds 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 You may redeem any portion of your account at any time. You
YOUR may request a redemption in writing or by telephone.
SHARES 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
NFDS, 1004 Baltimore, 5th Floor, Kansas City, MO 64105.)
The redemption price of shares will be their net asset value
next determined after NFDS or an authorized service agent or
sub-agent has received all required documents in Good Order.
Definition of Good Order means that the request includes the following:
Good Order
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.
20
<PAGE>
4. Signature guarantees if the value of the shares being
redeemed exceeds $50,000 or if the payment is to be
sent to an address other than the address of record or
is to be made to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be
required, in the case of retirement plans,
corporations, trusts, estates and certain other
accounts.
If you have any questions about what is required as it
pertains to your request, please call Shareholder Services at
1-800-841-1180.
-------------------------------------------------------------
Redeeming By Shareholders who have not established Express Service may
Telephone or redeem up to $50,000 of their Fund shares by telephone or, if
Computer Online previously established, computer online access, provided the
Access proceeds are mailed to their address of record or transferred
to their bank account. If preapproved, higher minimums may
apply for institutional accounts. To redeem shares by
telephone, you or your pre-authorized representative may call
Shareholder Services at 1-800-841-1180 during normal business
hours or the automated Royce Infoline (800-78-ROYCE) at any
time. Redemption requests received by telephone or on-line
access 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
after the close of regular trading on the Exchange are
processed on the business day following receipt. These
redemption services are 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 and Online Access
Transactions".
-------------------------------------------------------------
Redeeming By If you select the Express Service Automatic Withdrawal option,
Express shares will be automatically redeemed from your Fund account
Service 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 If you are redeeming shares recently purchased by check,
Redemption Express Service, Expedited Purchase or Automatic Investment
Information 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 or online
access 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 telephone and online access redemption
privileges at any time.
The Trust may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the Securities
and Exchange Commission.
Although the Trust will normally make redemptions in cash, it
may cause the Funds to redeem in kind under certain
circumstances.
Early Redemption In order to discourage short-term trading, the Funds assess an
Fee early redemption fee of 1% on redemptions of share purchases
held for less than one year. Redemption fees will be paid to
the Fund, out of the redemption proceeds otherwise payable to
the shareholder.
21
<PAGE>
The Funds will use the "first-in, first-out" (FIFO) method to
determine the one-year holding period. Under this method, the
date of the redemption will be compared with the earliest
purchase date of the share purchases held in the account. If
this holding period is less than one year, the fee will be
assessed. In determining "one year", the Funds will use the
anniversary month of a transaction. Thus, shares purchased in
August 1998, for example, will be subject to the fee if they
are redeemed prior to August 1999. If they are redeemed on or
after August 1, 1999, they will not be subject to the fee.
No redemption fee will be payable on shares acquired through
reinvestment, on an exchange into another Royce Fund or by
shareholders who are (a) employees of the Trust or Royce or
members of their immediate families or employee benefit plans
for them, (b) current participants in an Automatic Investment
Plan or an Automatic Withdrawal Plan, (c) certain
Trust-approved Group Investment Plans and charitable
organizations, (d) profit-sharing trusts, corporations or
other institutional investors who are investment advisory
clients of Royce, (e) omnibus or similar account customers of
certain Trust-approved broker-dealers and other institutions
or (f) shareholders of Royce GiftShares Fund.
Minimum Account Due to the relatively high cost of maintaining smaller
Balance accounts, the Trust reserves the right to involuntarily redeem
Requirement shares in any Fund (except Royce GiftShares 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 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.
Royce GiftShares Until a Royce GiftShares Fund trust terminates, only the
Fund independent trustee, as the legal owner of the shares, may
redeem them. The ability of the trustee to redeem shares, and
of the beneficiary to compel redemption, is subject to the
terms and conditions of the Royce GiftShares Fund Trust
Instrument.
- --------------------------------------------------------------------------------
EXCHANGE Exchanges between series of the Trust (except Royce GiftShares
PRIVILEGE Fund) are permitted by telephone, computer online access 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 class or series 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 You may transfer the ownership of any of your Fund shares to
OWNERSHIP 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.
- --------------------------------------------------------------------------------
STATEMENTS A confirmation statement will be sent to you each time you
AND REPORTS have a transaction in your account, and an account statement
is sent semi-annually. Shareholder reports are 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.
- --------------------------------------------------------------------------------
22
<PAGE>
- ---------------------------------------------
- ---------------------------------------------
The Royce Funds
- ---------------
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
Investment Adviser
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
Distributor
Royce Fund Services, Inc.
1414 Avenue of the Americas
New York, NY 10019
Transfer Agent
State Street Bank and Trust Company
c/o NFDS
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
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The Royce Funds
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Royce Premier Fund
Royce Micro-Cap Fund
Pennsylvania Mutual Fund
PMF II
Royce GiftShares Fund
Royce Total Return Fund
Royce Low-Priced
Stock Fund
Royce Financial Services Fund
Prospectus
April 30, 1998
Investment Class Shares
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[Recycle Logo]
<PAGE>
The Royce Funds
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Royce Micro-Cap Fund
Pennsylvania Mutual Fund
Royce GiftShares Fund
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PROSPECTUS--April 30, 1998
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NEW ACCOUNT AND GENERAL INFORMATION: Investor Information--1-800-221-4268
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SHAREHOLDER SERVICES--1-800-841-1180 FINANCIAL CONSULTANT --1-800-59-ROYCE
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The Funds listed above are series of The Royce Fund (the "Trust"), a diversified
open-end management investment company. The Funds share an investment focus on
small capitalization companies that are selected on a value basis. The Funds are
currently offering two classes of shares. This Prospectus relates only to a
Fund's Consultant Class.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses ................................ 2
Financial Highlights ......................... 3
Investment Performance and Volatility ........ 4
Investment Objective ......................... 5
Investment Policies .......................... 5
Investment Risks ............................. 6
Investment Limitations ....................... 6
Management of the Trust ...................... 7
General Information .......................... 8
Royce GiftShares Fund Investors .............. 8
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Dividends, Distributions and Taxes ........... 9
Net Asset Value Per Share .................... 10
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares ..... 10
Choosing a Distribution Option ............... 13
Important Account Information ................ 13
Redeeming Your Shares ........................ 14
Exchange Privilege ........................... 15
Transferring Ownership ....................... 15
Other Services ............................... 15
</TABLE>
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ABOUT THIS This Prospectus sets forth concisely the information that you
PROSPECTUS should know about the Funds and the Consultant Class of shares
before you invest. It should be retained for future reference. A
Statement of Additional Information dated April 30, 1998,
containing further information about the Funds and the Trust,
has been filed with the Securities and Exchange Commission and
is incorporated by reference into this Prospectus. You may
obtain a copy without charge by writing to the Trust or calling
Investor Information.
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The Securities and Exchange Commission has not approved or disapproved these
securities or passed on the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Consultant Class Shares
<PAGE>
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FUND EXPENSES The following tables summarize the maximum transaction costs
and estimated expenses and fees that you would incur in
connection with an investment in the class of shares offered by
this Prospectus.
Shareholder Transaction Expenses
--------------------------------
<TABLE>
<CAPTION>
Royce Micro-Cap Fund
Pennsylvania Mutual Fund Royce GiftShares Fund
-------------------------- ----------------------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on a
Purchase (as a % of offering price) ......... 0.00% 0.00%
Maximum Sales Charge Imposed on Reinvested
Dividends ................................... None None
Maximum Contingent Deferred Sales Charge
(as a % of offering price) ................ 1.00% 5.00%
Annual Trustee's Fee .......................... None $50
</TABLE>
Annual Fund Operating Expenses
------------------------------
<TABLE>
<CAPTION>
Royce Pennsylvania Royce
Micro-Cap Fund Mutual Fund GiftShares Fund
---------------- -------------- ----------------
<S> <C> <C> <C>
Management Fees (after waivers) ......... 1.19% 0.78% 0.00%
12b-1 Fees (after waivers) .............. 1.00 0.66 1.00
Other Expenses (after
reimbursement) ........................ 0.30 0.22 1.49
---- ---- ----
Total Operating Expenses (after
waivers and reimbursements) ........... 2.49% 1.66% 2.49%
==== ==== ====
</TABLE>
The purpose of the above tables is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an investor in
shares of a Consultant Class of the Funds. Operating expenses for Royce
Micro-Cap and GiftShares Funds are estimated based on the 1997 expenses of the
Investment Class. Management fees would have been 1.50% for Royce Micro-Cap Fund
and 1.00% for Royce GiftShares Fund; 12b-1 Fees would have been 1.00% for
Pennsylvania Mutual Fund; and Total Operating Expenses would have been 2.80%,
2.00% and 4.57% for Royce Micro-Cap, Pennsylvania Mutual and Royce GiftShares
Funds, respectively, without the waiver of fees and, for Royce GiftShares Fund,
without expense reimbursement, by Royce & Associates, Inc. ("Royce"), the Funds'
investment adviser, and the waiver of 12b-1 fees by Royce Fund Services, Inc.
("RFS"), the Funds' distributor. Royce and RFS have committed to waive their
fees to the extent necessary to maintain Total Operating Expenses of Royce
Micro-Cap and GiftShares Funds at or below the percentages set forth in the
above table through 1998 and 2002, respectively.
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.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Royce Micro-Cap Fund ............................. $25 $ 78 $133 $283
Pennsylvania Mutual Fund ......................... 17 52 90 195
Royce GiftShares Fund (10 year minimum investment)* 71 115 150 283
</TABLE>
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.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charge of 6.25% of the amount invested permitted by the Rules of
Fair Practice of NASD Regulation, Inc.
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* Exclusive of Royce GiftShares Fund's $50 annual trustee's fee per account. For
trust accounts opened prior to or during 1998, Royce will pay that portion of
the currently effective trustee's fees for establishing and terminating the
accounts.
2
<PAGE>
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FINANCIAL The following financial highlights are part of the Funds'
HIGHLIGHTS financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The Funds'
(For a share financial statements and Coopers & Lybrand L.L.P.'s reports
outstanding thereon are included in the Funds' Annual Reports to
throughout Shareholders and are incorporated by reference into the
each year) Statement of Additional Information and this Prospectus.
Further information about the Funds' performance is
contained elsewhere in this Prospectus and in the Funds'
Annual Reports to Shareholders for 1997, which may be
obtained without charge by calling Investor Information.
<TABLE>
<CAPTION>
Pennsylvania Mutual Fund Royce GiftShares Fund
Period ended December 31, 1997(a) Period ended December 31, 1997(a)
----------------------------------- ----------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period ..................... $7.90 $7.21
-------- -------
Income from Investment Operations
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Net investment income ................................... 0.02 (0.01)
Net realized and unrealized gain on investments ......... 0.93 0.11
-------- -------
Total from Investment Operations ....................... 0.95 0.10
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Less Distributions
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Dividends paid from net investment income ............... (0.04) (0.00)
Distributions paid from capital gains ................... (1.00) (0.43)
-------- -------
Total Distributions .................................... (1.04) (0.43)
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Net Asset Value, End of Period ........................... $7.81 $6.88
======== =======
Total Return ............................................. 12.0% 1.5%
======== =======
Ratios/Supplemental Data
Net Assets, End of Year (thousands) ..................... $151,948 $107
Ratio of Expenses to Average Net Assets(a) .............. 1.65%* 2.49%*
Ratio of Net Investment Income to Average
Net Assets .............................................. 0.29%* (1.35%)*
Portfolio Turnover Rate ................................. 18% 64%
Average Commission Rate Paid ............................ $0.0629 $0.0558
</TABLE>
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(a) Expense ratios are shown after fee waivers by the investment adviser and
distributor. For the periods ended December 31, 1997, the expense ratio before
waivers would have been 2.00% and 30.28% for Pennsylvania Mutual Fund and Royce
GiftShares Fund, respectively. The Consultant Classes for Pennsylvania Mutual
and Royce GiftShares Funds began June 18, 1997 and September 26, 1997,
respectively.
* Annualized.
3
<PAGE>
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INVESTMENT The Funds may include in communications to current
PERFORMANCE or prospective shareholders figures reflecting
AND VOLATILITY total return over various time periods. "Total
return" is the rate of return on an amount invested
in a Fund from the beginning to the end of the
Total return is the stated period. "Average annual total return" is the
change in value over a annual compounded percentage change in the value of
given time period, an amount invested in a Fund from the beginning
assuming reinvestment until the end of the stated period. Total returns
of dividends and capital are historical measures of past performance and are
gains distributions not intended to indicate future performance. Total
returns assume the reinvestment of all net
investment income dividends and capital gains
distributions and the imposition of contingent
deferred sales charges (if any) applicable to the
time period quoted. Additionally, the performance
of a Fund may be compared in publications to (i)
the performance of various indices and investments
for which reliable performance data is available
and (ii) averages, performance rankings or other
information prepared by recognized mutual fund
statistical services.
Average annual total returns for the periods ended December 31, 1997* were:
<TABLE>
<CAPTION>
10 Years or
1 Year 5 Years Since Inception Fund Inception Date
---------- --------- ----------------- --------------------
<S> <C> <C> <C> <C>
Royce Micro-Cap Fund ............ 24.7% 17.1% 19.0% December 31, 1991
Pennsylvania Mutual Fund ........ 24.5 13.0 13.8 --
Royce GiftShares Fund ........... 21.0 -- 23.9 December 27, 1995
</TABLE>
"Risk" may be The relative risk of investing in a particular fund
viewed as the should be considered in addition to the total
volatility of a fund's returns of a fund. Risk, in terms of how volatile
total returns over time an investor's returns have been, can be measured in
a number of ways, including standard deviation and
beta.
Standard deviation measures the range of performance within which a fund's
monthly total returns have fallen. The lower the standard deviation of the
fund, the less volatile and more consistent the fund's monthly total
returns have been over that period. When the standard deviation of a fund
is lower than the standard deviation of an index such as the S&P 500, the
fund has been less volatile than the index.
Beta measures a fund's sensitivity to market movements. The beta for the
index chosen to represent the stock market (the S&P 500) is 1.00. If the
fund has a beta greater than 1.00, it has been more volatile than the
index; if its beta is less than 1.00, it has been less volatile than the
index.
These measures of risk, which are historical in nature and not necessarily
predictive of future volatility, are more fully described in the Statement of
Additional Information. For the three year period ended December 31, 1997,
standard deviation and beta for Investment Class shares of Royce Micro-Cap and
Pennsylvania Mutual Funds (which would have approximated those of Consultant
Class shares), the Russell 2000, an index representative of small company
stocks, and the S&P 500 were:
<TABLE>
<CAPTION>
Standard
Deviation Beta
----------- ---------
<S> <C> <C>
Royce Micro-Cap Fund ............... 12.75 .48
Pennsylvania Mutual Fund ........... 10.26 .43
Russell 2000 ....................... 18.20 .99
S&P 500 ............................ 13.30 1.00
</TABLE>
Investors evaluating these and other quantitative measures of risk should
understand that the risk profiles of the Funds' portfolio may change over time.
The investment risks associated with the types of securities in which the Funds
may invest are described below--see "Investment Risks."
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* Commencement of sale of Consultant Class shares of Pennsylvania Mutual Fund
and Royce GiftShares Fund took place on June 18, 1997 and September 26, 1997,
respectively. Royce Micro-Cap Fund's Consultant Class had not commenced sales
prior to the date of this Prospectus. Consultant Class returns prior to the
commencement of sales of the Class are those of Investment Class shares, which
have no or substantially reduced, 12b-1 fees. If Consultant Class' 12b-1 fees
had been reflected, total returns prior to such dates would have been lower.
4
<PAGE>
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INVESTMENT Each Fund has different investment objectives and/or its own
OBJECTIVE method of achieving its objectives and is designed to meet
different investor needs. There can be no assurance that any
of the Funds will achieve their investment objectives.
Royce Micro-Cap Fund seeks long-term capital appreciation,
primarily through investments in common stocks and
securities convertible into common stocks of micro-cap
companies. Production of income is incidental to this
objective.
Pennsylvania Mutual Fund seeks long-term capital
appreciation. It does so primarily through investments in
common stocks and convertible securities of small and
micro-cap companies.
Royce GiftShares Fund, a special purpose fund, seeks capital
appreciation, primarily through investments in a limited
portfolio of common stocks and convertible securities of
small and micro-cap companies.
These investment objectives are fundamental and may not be
changed without the approval of a majority of the Fund's
outstanding voting shares.
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INVESTMENT Royce & Associates, Inc. ("Royce"), the Funds' investment
POLICIES adviser, uses a "value" method in managing the Funds'
assets. In its selection process, Royce puts primary
The Funds invest emphasis on the understanding of various internal returns
on a value basis indicative of profitability, balance sheet quality, cash
flows and the relationships that these factors have to the
The Funds invest price of a given security.
primarily in
small and Royce's value method is based on its belief that the
micro-cap securities of certain companies may sell at a discount from
companies its estimate of such companies' "private worth," that is,
what a knowledgeable buyer would pay for the entire company.
Royce attempts to identify and invest in these securities
for the Funds, with the expectation that this "value
discount" will narrow over time and thus provide capital
appreciation for the Funds
Royce Micro-Cap Fund
At least 80% of the assets of Royce Micro-Cap Fund will
normally be invested in common stocks and securities
convertible into common stocks of small and micro-cap
companies, with at least 65% of the Fund's assets normally
issued by companies with stock market capitalizations under
$300 million at the time of investment. The remainder of its
assets may be invested in securities of companies with
higher stock market capitalizations and in non-convertible
preferred stocks and debt securities.
Pennsylvania Mutual Fund
Normally, Pennsylvania Mutual Fund invests at least 65% of
its assets in the common stocks and securities convertible
into common stocks of small and micro-cap companies (stock
market capitalizations below $1 billion). In the upper end
of this range, $300 million to $1 billion in stock market
capitalization, the Fund invests in companies that Royce
believes have superior financial characteristics and/or
unusually attractive business prospects, companies Royce
classifies as "premier." The Fund uses a more diversified
approach to investments in the lower end of the range, below
$300 million, the sector known as "micro-cap." The remainder
of its assets may be invested in securities of companies
with higher stock market capitalizations and in
non-convertible preferred stocks and debt securities.
Royce GiftShares Fund
The Fund normally invests at least 65% of its assets in a
limited number of common stocks and securities convertible
into common stocks. At least 75% of these securities will be
issued by small (under $1 billion in market capitalization)
and micro-cap (under $300 million in market capitalization)
companies. The remainder of its assets may be invested in
securities of companies with higher stock market
capitalizations and in non-convertible preferred stocks and
debt securities.
Investments in Royce GiftShares Fund are suitable for making
long-term gifts which may qualify for the Federal annual
gift tax exclusion and which may also be designed to help
fund the beneficiary's college and post-secondary education.
See "Royce GiftShares Fund Investors" below for further
information.
5
<PAGE>
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INVESTMENT As mutual funds investing primarily in common stocks and/or
RISKS securities convertible into common stocks, the Funds are
subject to market risk, that is, the possibility that common
The Funds are stock prices will decline over short or even extended
subject to certain periods. The Funds invest substantial portions of their
investment risks assets in securities of small and/or micro-cap companies.
Such companies may not be well-known to the investing
public, may not have significant institutional ownership and
may have cyclical, static or only moderate growth prospects.
In addition, the securities of such companies may be more
volatile in price, have wider spreads between their bid and
ask prices and have significantly lower trading volumes than
larger capitalization stocks. Accordingly, Royce's
investment focus requires it to have a long-term investment
outlook for the securities in which it invests. The Funds
should not be used by market timers.
Because the Funds invest in small and/or
micro-capitalization securities, they may not be able to
purchase or sell more than a limited number of shares of a
portfolio security at then quoted market prices, and may
require a considerable period of time to acquire or dispose
of its position in the security. This risk will increase to
the extent other Royce-managed accounts or other investors
are seeking to purchase or sell a portfolio security held by
the Funds.
Finally, the Funds invest in micro-cap securities that are
followed by relatively few securities analysts, with the
result that there tends to be less publicly available
information concerning the securities. The securities of
these companies may have more limited trading volumes and be
subject to more abrupt or erratic market movements than the
securities of small-cap companies, and Royce may be required
to deal with only a few market-makers when purchasing and
selling these securities. Such companies also may have
limited product lines, markets or financial resources, may
lack management depth and may be more vulnerable to adverse
business or market developments. Thus, the Funds may involve
considerably more risk than a mutual fund investing in more
liquid equity securities.
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INVESTMENT The Funds have adopted certain fundamental limitations,
LIMITATIONS designed to reduce their exposure to specific situations,
which may not be changed without the approval of a majority
The Funds have of a Fund's outstanding voting shares, as that term is
adopted certain defined in the 1940 Act. These limitations are set forth in
fundamental the Statement of Additional Information and provide, among
limitations other things, that a Fund will not:
(a) as to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer, fundamental
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 In addition to investing primarily in the equity and fixed
Practices: income securities described above, the Funds may follow a
number of additional investment practices.
Short-term fixed The Funds may invest in short-term fixed income securities
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 a 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 Funds, the securities purchased by the Funds
will have a value equal to or in excess of the value of the
repurchase agreement and will be held by the Funds'
custodian bank until repurchased. Should a Fund implement a
temporary investment policy, its investment objective may
not be achieved.
Securities lending Each of the Funds may lend up to 25% of its assets to
qualified institutional investors for the purpose of
realizing additional income. Loans of securities of a Fund
will be collateralized by cash or securities issued or
guaranteed by the United States Government or its agencies
or instrumentalities. The collateral will equal at least
100% of the current market value of the loaned securities.
The risks of securities lending include possible delays in
receiving additional collateral or in recovery of loaned
securities or loss of rights in the collateral if the
borrower defaults or becomes insolvent.
Warrants, rights Each of the Funds other than Pennsylvania Mutual Fund may
and options invest up to 5% of its total assets in and options warrants,
rights and options.
6
<PAGE>
Lower-rated Each of the Funds may invest no more than 5% of its net
debt securities assets in lower-rated (high-risk) non-convertible debt
securities, which are below investment grade. The Funds do
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 Corp. or, if unrated, determined
to be of comparable quality.
Foreign securities Each of the Funds may invest up to 10% of its assets in
foreign securities, measured at the time of purchase.
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 Funds.
Portfolio turnover Although the Funds generally seek to invest for the long
term, they retain the right to sell securities regardless of
how long they have been held. Royce may employ a more
aggressive approach to investing for Royce Micro-Cap and
GiftShares Funds that involves substantially higher than
average portfolio turnover rates. For 1998, these rates may
exceed 100%. A 100% turnover rate occurs, for example, if
all of a Fund's portfolio securities are replaced in one
year. High portfolio activity increases a Fund's transaction
costs, including brokerage commissions. The Funds' annual
portfolio turnover rates are shown in the "Financial
Highlights."
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MANAGEMENT OF The Trust's business and affairs are managed under the
THE TRUST direction of its Board of Trustees. Royce & Associates,
Inc., the Funds' investment adviser, is responsible for the
Royce & Associates, investment of their assets, subject to the authority of the
Inc. is responsible Board. Charles M. Royce, Royce's President, Chief Investment
for management of Officer and sole voting shareholder since 1972, is primarily
the Funds' responsible for managing the Funds' portfolios. He is
portfolios assisted by Royce's investment staff, including W. Whitney
George, Senior Portfolio Manager and Managing Director,
Boniface A. Zaino, Senior Portfolio Manager and Managing
Director and Charles R. Dreifus, Senior Portfolio Manager
and Principal, and by Jack E. Fockler, Jr., Managing
Director. Mr. Zaino joined Royce in April 1998 and prior
thereto was Group Managing Director of Trust Company of the
West. Mr. Dreifus joined Royce in February 1998 and prior
thereto was Managing Director (since June 1995) and General
Partner (until June 1995) of Lazard Freres & Co. LLC. Royce
is also the investment adviser to other series of the Trust,
and to other investment and non-investment company accounts.
As compensation for its services to the Funds, Royce is
entitled to receive annual advisory fees as follows: (i)
1.50% of the average net assets of Royce Micro-Cap Fund;
(ii) 1.0% of the first $50 million of Pennsylvania Mutual
Fund's average net assets, 0.875% of the next $50 million of
its average net assets and 0.75% of its average net assets
in excess of $100 million; and (iii) 1.00% of the average
net assets of Royce GiftShares Fund. For 1997, the fees paid
to Royce on average net assets (net of voluntary waivers)
were 1.19%, 0.78% and 0.00% for Royce Micro-Cap Fund,
Pennsylvania Mutual Fund and Royce GiftShares Fund,
respectively.
Royce selects the brokers who execute the purchases and
sales of the Funds' portfolio securities and may place
orders with brokers who provide brokerage and research
services to Royce. Royce is authorized, in recognition of
the value of brokerage and research services provided, to
pay commissions to a broker in excess of the amount which
another broker might have charged for the same transaction.
Royce Fund Services, Inc. ("RFS"), which is wholly-owned by
Charles M. Royce, acts as distributor of the Funds' shares.
Shares of the Consultant Class of the Funds are available
for new investors only through certain broker-dealers having
agreements with RFS. The Trust has adopted distribution
plans for the Funds' Consultant Class pursuant to Rule
12b-1. The plans provide for payment to RFS of fees not to
exceed 1% per annum of the Class's average net assets, which
may be used for payment of sales commissions and other fees
to those broker-dealers who introduce investors to a Fund
and various other promotional, sales-related and servicing
costs and expenses. The fees payable by the Class to RFS
have been allocated between personal service and/or account
maintenance fees and asset-based sales charges, so that not
more than .25% per annum is payable as a personal service
and/or account maintenance fee and not more than .75% per
annum is payable as an asset-based sales charge.
7
<PAGE>
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GENERAL The Royce Fund (the "Trust") is a Delaware business trust,
INFORMATION registered with the Securities and Exchange Commission as a
diversified open-end management investment company. The Trustees
have the authority to issue an unlimited number of shares of
beneficial interest, without shareholder approval, and these
shares may be divided into an unlimited number of series and
classes. Shareholders are entitled to one vote per share. Shares
vote by individual series on all matters, except that shares are
voted in the aggregate and not by individual series or class
when required by the 1940 Act and that if the Trustees determine
that a matter affects only one series or class, then only
shareholders of that series or class are entitled to vote on
that matter.
Meetings of shareholders will not be held except as required by
the 1940 Act or other applicable law. A meeting will be held to
vote on the removal of a Trustee or Trustees of the Trust if
requested in writing by the holders of not less than 10% of the
outstanding shares of the Trust.
The custodian for the securities, cash and other assets of the
Funds is State Street Bank and Trust Company. State Street,
through its agent National Financial Data Services ("NFDS"),
also serves as the Funds' transfer agent. Coopers & Lybrand,
L.L.P. serves as independent accountants for the Funds.
Year 2000 Many computer software systems in use today cannot properly
process date-related information from and after January 1,
2000. Should any of the computer systems employed by the Funds
or any of their major service providers fail to process this
type of information properly, that could have a negative impact
on the Funds' operations and the services provided to the
Funds' shareholders. The Royce Funds, Royce and RFS are
reviewing all of their own computer systems with the goal of
modifying or replacing such systems to the extent necessary to
prepare for the Year 2000. In addition, Royce has been advised
by the Funds' major service providers that they are also in the
process of reviewing their systems with the same goal. As of
the date of this Prospectus, the Trust and Royce have no reason
to believe that these goals will not be achieved.
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ROYCE A Royce GiftShares Fund investment is a unique way to make a
GIFTSHARES gift to a child (minor or adult) or another individual. (You may
FUND not open an account in GiftShares Fund for yourself or your
INVESTORS spouse.) A GiftShares Fund investment is suitable for making a
long-term gift which may qualify in whole or in part for the
Federal annual gift tax exclusion and which may also be designed
to help fund the beneficiary's college and post-secondary
education. To open a GiftShares Fund account, contact your
financial representative or call Investor Information
(1-800-221-4268) for a GiftShares Information Packet. (A
GiftShares Fund account may also be opened by a trustee for an
individual or organization if the trust has a long-term
duration, the provisions of the trust instrument are acceptable
to the Trust and the trustee has his, her or its own tax
adviser.) The minimum initial investment in GiftShares Fund is
$5,000. Additional investments may be made in amounts of $100 or
more at any time during the existence of the trust.
The shares in a GiftShares Fund account are held in trust for
the beneficiary by State Street Bank and Trust Company, as
independent trustee, until the termination date you (the donor)
specify. The duration of the trust may be as long as you wish,
but generally must be at least 10 years from the time you make
the first contribution to the GiftShares Fund trust or until
the beneficiary reaches the age of majority, whichever is
later. The GiftShares Fund trust is irrevocable, and neither
you nor the beneficiary may amend its terms in any way. When
the trust terminates, the beneficiary will receive the shares
in the account. The beneficiary may then continue to own the
shares, but, except for reinvestment of distributions, may not
purchase additional shares.
8
<PAGE>
Options available to a donor under the Royce GiftShares Fund
trust adoption agreement are:
Withdrawal Option:
This option will be used primarily by a donor to make a gift
that may qualify for the Federal annual gift tax exclusion or
when the donor wants to allow the beneficiary to make
withdrawals from the trust to pay for higher education and
related costs.
[bullet] The full amount of the gift may qualify for the
Federal annual gift tax exclusion
[bullet] The trust may be designed to permit withdrawals to
help fund the beneficiary's college or post-secondary
education
[bullet] The beneficiary will be taxed on all of the trust's
income and capital gains, and the trustee will, if
requested by the beneficiary, redeem Fund shares in
order to allow for withdrawals in order for the
beneficiary to pay these taxes
[bullet] The trustee will send an information statement to the
beneficiary each year, showing the amount of income and
capital gains to be reported on his or her income tax
returns for that year
Accumulation Option:
This option should generally be used by a donor who is not
concerned about the Federal annual gift tax exclusion, who
wants to prohibit any access to the trust by the beneficiary
before the termination date, and who does not want the
beneficiary to be required to pay the taxes on the trust's
income or capital gains or to file tax returns.
[bullet] No part of the gift qualifies for the Federal annual
gift tax exclusion
[bullet] The trust will be taxed on all income and capital
gains in excess of $100 per year
[bullet] The trustee of the trust will prepare and file all
Federal and state income tax returns that are required
each year, and will pay the taxes from the assets of
the trust by redeeming Fund shares
See "Dividends, Distributions and Taxes--Royce GiftShares Fund"
below for further information. A donor should consider
consulting with an attorney or qualified tax adviser before
investing in Royce GiftShares Fund.
- --------------------------------------------------------------------------------
DIVIDENDS, Each of the Funds pays dividends from net investment income
DISTRIBUTIONS (if any) and distributes its net realized capital gains
AND TAXES annually in December. Dividends and distributions will be
automatically reinvested in additional shares of the Class
The Funds pay unless the shareholder chooses otherwise.
dividends and
capital gains Shareholders receive information annually as to the tax
annually in status of distributions made by each Fund for the calendar
December year. For Federal income tax purposes, all distributions by
a Fund are taxable to shareholders when declared, whether
received in cash or reinvested in shares. Distributions paid
from a Fund's net investment income and short-term capital
gains are taxable to shareholders as ordinary income
dividends. A portion of a Fund's dividends may qualify for
the corporate dividends received deduction, subject to
certain limitations. The portion of a Fund's dividends
qualifying for such deduction is generally limited to the
aggregate taxable dividends received by the Fund from
domestic corporations. Distributions paid from long-term
capital gains of a Fund are treated by a shareholder for
Federal income tax purposes as long-term capital gains,
regardless of how long the shareholder has held Fund shares.
If a shareholder disposes of shares held for six months or
less at a loss, such loss is treated as a long-term capital
loss to the extent of any long-term capital gains reported
by the shareholder with respect to such shares. A loss
realized on a taxable disposition of Fund shares may be
disallowed to the extent that additional Fund shares are
purchased (including by reinvestment of distributions)
within 30 days before or after such disposition.
The redemption of shares is a taxable event, and a
shareholder may realize a capital gain or capital loss. Each
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.
9
<PAGE>
At the time of a shareholder's purchase, a Fund's net asset
value may reflect undistributed income or capital gains. A
subsequent distribution of these amounts by a Fund will be
taxable to the shareholder even though the distribution
economically is a return of part of the shareholder's
investment.
The Funds are required to withhold 31% of taxable dividends,
capital gains distributions and redemptions paid to
non-corporate shareholders who have not complied with
Internal Revenue Service taxpayer identification
regulations. Shareholders may avoid this withholding
requirement by certifying on the Account Application their
proper Social Security or Taxpayer Identification Number and
that they are not subject to backup withholding.
The discussion of Federal income taxes above is for general
information only. Shareholders may also be subject to state
and local taxes on income and any gains from their
investment. Investors should consult their own tax advisers
concerning the tax consequences of an investment in the
Funds. The Statement of Additional Information includes a
more detailed description of Federal income tax aspects that
may be relevant to a shareholder.
Royce GiftShares The creation of a Royce GiftShares Fund trust account for a
Fund beneficiary and any addition to an Fund existing account
will be subject to the reporting requirements of Federal
gift tax law, which requires, in general, that a Federal
gift tax return be filed reporting all gifts made by an
individual during any calendar year, other than gifts of
present interests in property that qualify for, and do not
exceed, the amount of the Federal annual gift tax exclusion
(currently, $10,000). Whether a particular gift of Fund
shares qualifies for the annual exclusion will depend on the
option selected by the donor in the adoption agreement. A
gift of Fund shares may also be subject to state gift tax
reporting requirements under the laws of the state in which
the donor of the gift resides.
See "Royce GiftShares Fund Investors" above and
"Taxation--Royce GiftShares Fund" in the Statement of
Additional Information for more detailed information about
these and other tax matters applicable to an investment in
Royce GiftShares Fund. Due to the complexity of Federal and
state laws pertaining to all gifts in trust, prospective
donors should consider consulting with an attorney or other
qualified tax adviser before investing in Royce GiftShares
Fund.
- --------------------------------------------------------------------------------
NET ASSET VALUE Shares are purchased and redeemed at their net asset value
PER SHARE per share next determined after an order is received by the
Funds' transfer agent or an authorized agent or sub-agent.
Net asset value Net asset value per share is determined by dividing the
per share (NAV) total value of the Funds' investments plus cash and other
is determined assets, less any liabilities, by the number of outstanding
each daythe shares of the Fund. Net asset value per share is calculated
New York Stock at the close of regular trading on the New York Stock
Exchange is open 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.
10
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
OPENING AN New accounts can be opened through a broker-dealer having an
ACCOUNT AND agreement with RFS. If you have any questions about the
PURCHASING Funds, please call your financial consultant or call
SHARES Investor Information at 1-800-221-4268. Note: For certain
types of account registrations (e.g., corporations,
partnerships, foundations, associations, other
organizations, trusts or powers of attorney), please call
your financial consultant or Investor Information to
determine if you need to provide additional forms with your
application.
Minimum Initial
Investment
<TABLE>
<CAPTION>
Type of Account Minimum
--------------- -------
<S> <C>
Regular accounts $2,000
IRAs* $ 500
Accounts established with Automatic Investment Plan or
Direct Deposit Plan $ 500
401(k) and 403(b)(7) accounts* None
Royce GiftShares Fund accounts $5,000
</TABLE>
Subsequent Subsequent investments may be made by mail ($50 minimum,
Investments $100 for Royce GiftShares), telephone ($500 minimum), wire
($1,000 minimum) or Express Service (a system of electronic
funds transfer from your bank account).
Contingent Deferred Consultant Class shares are offered at net asset value
Sales Charge without an initial sales charge, but subject to a 0.75%
annual asset-based sales charge (after approximately eight
years Royce GiftShares Fund accounts automatically convert
into Investment Class shares that are identical to
Consultant Class shares but that do not bear the sales
charge). Consultant Class shares are also subject to a
declining contingent deferred sales charge if redeemed
within the period after purchase specified below. The
contingent deferred sales charge is a percentage of the
purchase price of the shares being redeemed and is paid to
RFS. As shown below, the amount of the contingent deferred
sales charge depends on the number of years after purchase
that the redemption occurs:
<TABLE>
<CAPTION>
Years After Purchase
--------------------
0-1 1-2 2-3 3-4 4-5 5-6 6-7
--- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Royce Micro-Cap Fund ............. 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pennsylvania Mutual Fund ......... 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Royce GiftShares Fund ............ 5.00% 4.50% 4.00% 3.50% 2.50% 1.50% 0.00%
</TABLE>
0-1 ends on the day before one year after the date on which
the purchase was accepted and so on. Shares issued upon the
reinvestment of distributions are not subject to any
contingent deferred sales charge. The contingent deferred
sales charge will not be applied to redemptions in Royce
GiftShares Fund accounts to pay taxes or trustee fees.
-----------------------------------------------------------
Purchasing Through If you purchase shares of a Fund through a program of
a Broker services offered or administered by a broker-dealer,
financial institution or other service provider, you 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 Funds may not be available or may
be modified in connection with the program of services
offered. When shares of a Fund are purchased in this way,
the service provider, rather than the customer, may be the
shareholder of record of the shares. Certain broker-dealers
and other service providers receive compensation from the
Funds, RFS and/or Royce for providing such services.
- ------------
* Separate forms must be used for opening IRAs or 403(b)(7) accounts and Royce
GiftShares accounts; please call Investor Information if you need these forms.
11
<PAGE>
-----------------------------------------------------------
NEW ACCOUNT
Purchasing By Mail Please include the amount of your initial
Complete and sign investment on the Account Application, make
the enclosed your check payable to The Royce Fund, and
Account Application forward through your financial consultant to:
The Royce Funds
P.O. Box 419012
Kansas City, MO 64141-6012
For express or The Royce Funds
registered mail, c/o National Financial Data Services
send to: 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 account confirmation statements. Please make
your check payable to The Royce 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.
- --------------------------------------------------------------------------------
NEW ACCOUNT
Purchasing By Mail To open an account by telephone, your financial consultant
should call Investor Information (1-800-221-4268) before
4:00 p.m., Eastern time. A confirming order number for the
purchase will be provided. This number must be placed on the
completed Account Application before mailing. If a completed
and signed Account Application is not received on may be
subject to backup withholding of Federal income taxes.
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
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 Money should be wired to:
Before Wiring: State Street Bank and Trust Company
For a new account, ABA 011000028 DDA 9904-712-8
please contact Investor Ref: (Name of Fund)--Consultant Class
Information Order Number or Account Number ------------------
at 1-800-221-4268 Account Name ------------------------------------
To ensure proper receipt, please be sure your bank includes
the name of the Fund and your order number (for telephone
purchases) or account number. If you are opening a new
account, your financial consultant must call Investor
Information to obtain an order number, and complete the
Account Application and mail it to the "New Account" address
above after completing the wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the
Fund and its custodian are open for business.
------------------------------------------------------------
Purchasing By Additional shares can be purchased automatically or at your
Express discretion through the following options:
Service
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 or computer online access.
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 or
quarterly schedule you select.
To establish the Expedited Purchase Option and/or Automatic
Investment Plan, please provide the appropriate information
on the Account Application and attach a voided check. We
will send you a confirmation of Express Service activation.
Please wait three weeks before using the service.
12
<PAGE>
To make an Expedited Purchase by telephone please call
Shareholder Services at 1-800-841-1180 before 4:00 p.m.,
Eastern time. Expedited purchases may also be made through
the automated Royce Infoline (800-78-ROYCE).
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 obtained
from Investor Information by calling 1-800-221-4268.
- --------------------------------------------------------------------------------
CHOOSING A You may select one of three distribution options:
DISTRIBUTION
OPTION 1. Automatic Reinvestment Option--Both net investment
income dividends and capital gains distributions
will be reinvested in additional Fund shares. This
option will be selected for you automatically unless
you specify one of the other options.
2. Cash Dividend Option--Your dividends will be paid in
cash and your capital gains distributions will be
reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains
distributions will be paid in cash.
You may change your option by calling Shareholder Services
at 1-800-841-1180.
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional services on your
ACCOUNT account is to select the options you desire when you
INFORMATION complete your Account Application. If you want to add or
change shareholder options later, you may need to provide
additional information and a signature guarantee. Please
call Shareholder Services at 1-800-841-1180 for further
assistance.
Signature For our mutual protection, we may require a signature
Guarantees 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, stolen or destroyed, you may incur
an expense to replace it.
Telephone and Neither the Funds nor their transfer agent will be liable
Online Access for following instructions communicated by telephone or
Transactions computer online access that are reasonably believed to be
genuine. The transfer agent uses certain procedures designed
to confirm that telephone and computer online access
instructions are genuine, which may include requiring some
form of personal identification prior to acting on the
instructions, providing written confirmation of the
transaction and/or recording incoming telephone calls, and
if it does not follow such procedures, the Funds or the
transfer agent may be liable for any losses due to
unauthorized or fraudulent transactions.
Nonpayment If your check or wire does not clear, or if payment is not
received for any telephone or computer online access
purchase, the transaction will be canceled and you will be
responsible for any loss a Fund incurs. If you are already a
shareholder, a Fund can redeem shares from any identically
registered account in the Trust as reimbursement for any
loss incurred.
Trade Date for Your trade date is the date on which share purchases are
Purchases credited to your account. If your purchase is made by check,
Federal Funds wire, telephone, computer online access or
exchange and is received by the close of regular trading on
the New York Stock Exchange (generally 4:00 p.m., Eastern
time), your trade date is the date of receipt. If your
purchase is received after the close of regular trading on
the Exchange, your trade date is the next business day. Your
shares are purchased at the net asset value determined on
your trade date.
13
<PAGE>
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, the Funds 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 You may redeem any portion of your account at any time. You may
YOUR request a redemption through your financial consultant, or in
SHARES writing or by telephone to the Fund. Redemption proceeds
normally will be sent within two business days after the receipt
of the request by a Fund's transfer agent or sub-agent in Good
Order.
Redeeming Redemption requests should be mailed to The Royce Funds, c/o
By Mail 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.)
Definition of The redemption price of shares will be their net asset value
Good Order next determined after NFDS or an authorized service agent or
sub-agent has received all required documents in Good Order.
Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered on
the account.
4. Signature guarantees if the value of the shares being
redeemed exceeds $50,000 or if the payment is to be sent to
an address other than the address of record or is to be made
to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be required,
in the case of retirement plans, corporations, trusts,
estates and certain other accounts.
If you have any questions about what is required as it pertains
to your request, please call Shareholder Services at
1-800-841-1180.
---------------------------------------------------------------
Redeeming By Shareholders who have not established Express Service may redeem
Telephone up to $50,000 of their shares by telephone, provided the
proceeds are mailed to their address of record. If pre-approved,
higher minimums may apply for institutional accounts. 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
and Online Access Transactions".
---------------------------------------------------------------
Redeeming By If you select the Express Service Automatic Withdrawal option,
Express shares will be automatically redeemed from your Fund account and
Service 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 or call Shareholder Services
at 1-800-841-1180 for an Express Service application.
---------------------------------------------------------------
Important If you are redeeming shares recently purchased by check, Express
Redemption Service Expedited Purchase or Automatic Investment Plan, the
Information 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.
14
<PAGE>
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be processed at the net asset value
next determined after your request has been received by the
transfer agent in Good Order. The Trust reserves the right
to revise or terminate the telephone redemption privilege at
any time.
The Trust may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
Securities and Exchange Commission.
Although the Trust will normally make redemptions in cash,
it may cause a Fund to redeem in kind under certain
circumstances.
-----------------------------------------------------------
Minimum Account Due to the relatively high cost of maintaining smaller
Balance accounts, the Trust reserves the right to involuntarily
Requirement redeem shares in any Fund account that falls below the
minimum initial investment Requirement due to redemptions by
the shareholder. If at any time the balance in an account
does not have a value at least equal to the minimum initial
investment or, if an Automatic Investment Plan is
discontinued before an account reaches the minimum initial
investment that would otherwise be required, you and/or your
financial consultant 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.
Royce GiftShares Until a Royce GiftShares Fund trust terminates, only the
Fund independent trustee, as the legal owner of the shares, may
redeem them. The ability of the trustee to redeem shares,
and of the beneficiary to compel redemption, is subject to
the terms and conditions of the Royce GiftShares Fund Trust
Instrument.
- --------------------------------------------------------------------------------
EXCHANGE Exchanges into the same class of shares of another series of
PRIVILEGE the Trust (except Royce GiftShares Fund) are permitted by
telephone, computer online access or 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 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 You may transfer the ownership of any of your Fund shares to
OWNERSHIP 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 your financial consultant or Investor Information at
1-800-221-4268.
Statements and A confirmation statement will be sent to you each time you
Reports have a transaction in your account, and an account statement
is sent semi-annually. Shareholder reports are 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 Shares of a Fund are available for purchase in connection
Retirement with certain types of tax-sheltered retirement plans,
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.
Information about the plans and the appropriate forms may be
obtained from Investor Information at 1-800-221-4268.
15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Royce Funds
- ---------------
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
Investment Adviser
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
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
Assistant Secretary
John E. Denneen, Secretary
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Recycle Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Royce Funds
- --------------------------------------------------------------------------------
Royce Micro-Cap Fund
Pennsylvania Mutual Fund
Royce GiftShares Fund
Prospectus
April 30, 1998
Consultant Class Shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE ROYCE FUNDS
- ------------------------------------------------------------------------------
PENNSYLVANIA MUTUAL FUND
- ------------------------------------------------------------------------------
PROSPECTUS -- April 30, 1998
- ------------------------------------------------------------------------------
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-800-221-4268
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES -- 1-800-841-1180 INVESTMENT ADVISOR SERVICES -- 1-800-33-
ROYCE
- ------------------------------------------------------------------------------
PENNSYLVANIA MUTUAL FUND (the "Fund") seeks long-
INVESTMENT term capital appreciation by investing primarily in
OBJECTIVE AND common stocks and securities convertible into
POLICIES common stocks of small and micro-cap companies. The
Fund's securities are selected on a value basis.
There can be no assurance that the Fund will
achieve its objective.
The Fund is a series of The Royce Fund (the
"Trust"), a diversified open-end management
investment company. The Fund is currently offering
two classes of its shares. This Prospectus relates
only to the Fund's Investment Class. Shares of the
Fund's other class are generally offered only
through certain broker-dealers.
- ------------------------------------------------------------------------------
ABOUT THIS This Prospectus sets forth concisely the
PROSPECTUS information that you should know about the
Investment Class of Pennsylvania Mutual Fund before
you invest. It should be retained for future
reference. A Statement of Additional Information
dated April 30, 1998, containing further
information about the Fund and the Trust, has been
filed with the Securities and Exchange Commission
and is 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 SHAREHOLDER GUIDE
Financial Highlights 3 Opening an Account and
Investment Performance and Purchasing Shares 10
Volatility 4 Choosing a Distribution Option 13
Investment Objective 5 Important Account Information 13
Investment Policies 5 Redeeming Your Shares 14
Investment Risks 5 Exchange Privilege 16
Investment Limitations 6 Transferring Ownership 16
Management of the Trust 8 Other Services 16
General Information 8
Dividends, Distributions and
Taxes 9
Net Asset Value Per Share 10
- ------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT CLASS SHARES
<PAGE>
- ------------------------------------------------------------------------------
FUND EXPENSES The following tables summarize the maximum
transaction costs and estimated expenses and fees
that you would incur as an Investment Class
shareholder of the Fund. The Fund offers one other
class of shares, generally available through broker-
dealers, which has a different expense structure
than the Investment Class, resulting in different
performance for that class.
Shareholder Transaction Expenses
--------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee -- on share purchases held for 1
year or more None
Early Redemption Fee -- on share purchases held
for less than 1 year 1%
Annual Fund Operating Expenses
------------------------------
Management Fees 0.78%
12b-1 Fees None
Other Expenses 0.27%
Total Operating Expenses 1.05%
The purpose of the above tables is to assist you in
understanding the various costs and expenses that
you would bear directly or indirectly as an
investor in shares of the Investment Class of 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
------ ------- ------- --------
$11 $33 $58 $128
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.
<PAGE>
- ------------------------------------------------------------------------------
FINANCIAL The following financial highlights are part of the Fund's
HIGHLIGHTS financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The Fund's financial
(For a share statements and Coopers & Lybrand L.L.P.'s reports thereon are
out- included in the Fund's Annual Reports to Shareholders and are
standing incorporated by reference into the Statement of Additional
through- Information and this Prospectus. Further information about
out each the Fund's performance is contained elsewhere in this
year) prospectus and in the Fund's Annual Report to Shareholders
for 1997, which may be obtained without charge by calling
Investor Information.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $7.11 $7.71 $7.41 $8.31 $8.00 $7.29 $5.78 $6.85 $6.41 $5.47
Income from Investment ----- ----- ----- ----- ----- ----- ----- ----- -----
- ----------------------
Operations
- ----------
Net investment income 0.07 0.11 0.11 0.12 0.11 0.11 0.12 0.17 0.21 0.14
Net realized and unrealized
gain (loss) on investments 1.70 0.84 1.27 (0.18) 0.79 1.07 1.72 (0.96) 0.86 1.20
Total from Investment ----- ----- ----- ----- ----- ----- ----- ----- -----
Operations 1.77 0.95 1.38 (0.06) 0.90 1.18 1.84 (0.79) 1.07 1.34
Less Distributions ----- ----- ----- ----- ----- ----- ----- ----- -----
- ------------------
Dividends paid from net
investment income (0.06) (0.11) (0.11) (0.11) (0.11) (0.10) (0.12) (0.16)(0.22) (0.12)
Distributions paid from capital
gains (1.00) (1.44) (0.97) (0.73) (0.48) (0.37) (0.21) (0.12)(0.41) (0.28)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions (1.06) (1.55) (1.08) (0.84) (0.59) (0.47) (0.33) (0.28)(0.63) (0.40)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of Year $7.82 $7.11 $7.71 $7.41 $8.31 $8.00 $7.29 $5.78 $6.85 $6.41
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Return 25.0% 12.8% 18.7% -0.7% 11.3% 16.2% 31.8% -11.5% 16.7% 24.6%
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Year (millions) $508 $457 $630 $771 $1,022 $1,102 $789 $549 $551 $444
Ratio of Expenses to
Average Net Assets (a) 1.05% .99% .98% 0.98% .98% .91% .95% .96% .97% 1.01%
Ratio of Net Investment Income
to Average Net Assets 0.88% 1.05% 1.18% 1.33% 1.23% 1.48% 1.73% 2.62% 2.93% 2.35%
Portfolio Turnover Rate 18% 29% 10% 17% 24% 22% 29% 15% 23% 24%
Average Commission Rate Paid $.0629 $.0588 --- --- --- --- --- --- ---
(a) Expense ratio before waiver of fees by the investment adviser would have
been 1.03% and .99% for the years ended December 31, 1996 and 1995,
respectively.
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
INVESTMENT The Fund may include in communications to current
PERFORMANCE or prospective shareholders figures reflecting
AND total return over various time periods. "Total
VOLATILITY return" is the rate of return on an amount invested
in the Fund from the beginning to the end of the
Total return stated period. "Average annual total return" is
is the the annual compounded percentage change in the
change in value of an amount invested in the Fund from the
value over beginning until the end of the stated period.
a given time Total returns are historical measures of past
period, performance and are not intended to indicate future
assuming performance. Total returns assume the reinvestment
reinvestment of all net investment income dividends and capital
of dividends gains distributions. The figures do not reflect
and capital the Fund's early redemption fee because this fee
gains applies only to redemptions of share purchases held
distributions for less than one year. Additionally, the
performance of the Fund may be compared in
publications to (i) the performance of various
indices and investments for which reliable
performance data is available and (ii) averages,
performance rankings or other information prepared
by recognized mutual fund statistical services.
The Fund's average annual total returns for the
periods ended December 31, 1996 were:
One Three Five Ten Twenty
Year Year Year Year Year
---- ---- ---- ---- ----
25.0% 18.7% 13.1% 13.8% 16.2%
"Risk" may be The relative risk of investing in a particular fund
viewed should be considered in addition to the total
as the returns of a fund. Risk, in terms of how volatile
volatility of an investor's returns have been, can be measured in
a a number of ways, including standard deviation and
fund's total beta.
returns
over time STANDARD DEVIATION measures the range of
performance within which a fund's monthly total
returns have fallen. The lower the standard
deviation of the fund, the less volatile and more
consistent the fund's monthly total returns have
been over that period. When the standard deviation
of a fund is lower than the standard deviation of
an index such as the S&P 500, the fund has been
less volatile than the index.
BETA measures a fund's sensitivity to market
movements. The beta for the index chosen to
represent the stock market (the S&P 500) is 1.00.
If the fund has a beta greater than 1.00, it has
been more volatile than the index; if its beta is
less than 1.00, it has been less volatile than the
index.
These measures of risk, which are historical in
nature and not necessarily predictive of future
volatility, are more fully described in the
Statement of Additional Information. For the three
year period ended December 31, 1997 standard
deviation and beta for the Fund, the Russell 2000,
an index representative of small company stocks,
and the S&P 500 were:
Standard
Deviation Beta
--------- ----
Pennsylvania Mutual Fund 10.3 0.43
Russell 2000 18.2 0.99
S&P 500 13.3 1.00
Investors evaluating these and other quantitative
measures of risk should understand that the risk
profiles
<PAGE>
of the Fund's portfolio may change over time. The
investment risks associated with the types of
securities in which the Fund may invest are
described below -- see "Investment Risks".
- ------------------------------------------------------------------------------
INVESTMENT The investment objective of the Fund is long-term
OBJECTIVE capital appreciation. It seeks to achieve this
objective primarily through investments in common
stocks and securities convertible into common
stocks of small companies. There can be no
assurance that the Fund will achieve its investment
objective.
The Fund's investment objective is fundamental and
may not be changed without the approval of a
majority of its outstanding voting shares.
- ------------------------------------------------------------------------------
INVESTMENT Royce & Associates, Inc. ("Royce"), the Fund's
POLICIES investment adviser, uses a "value" method in
managing the Fund's assets. In its selection
The Fund process, Royce puts primary emphasis on the
invests understanding of various internal returns
on a value indicative of profitability, balance sheet quality,
basis cash flows and the relationships that these factors
have to the price of a given security.
The Fund
invests Royce's value method is based on its belief that
primarily in the securities of certain companies may sell at a
small and discount from its estimate of such companies'
micro-cap "private worth," that is, what a knowledgeable
companies buyer would pay for the entire company. Royce
attempts to identify and invest in these securities
for the Fund, with the expectation that this "value
discount" will narrow over time and thus provide
capital appreciation for the Fund.
The Fund normally invests at least 65% of its
assets in the common stocks and securities
convertible into common stocks. Both small and
micro-cap companies (stock market capitalizations
below $1 billion) are included in the Fund's
portfolio. In the upper end of this range, $300
million to $1 billion in stock market
capitalization, the Fund focuses on companies that
Royce believes have superior financial
characteristics and/or unusually attractive
business prospects, companies Royce classifies as
"premier." The Fund also focuses on companies at
the lower end of the range, below $300 million, the
sector known as "micro-cap."
Other The assets of the Fund that are not invested in the
securities equity securities of small and micro-cap companies
may be invested in securities of companies with
higher stock market capitalizations and in non-
convertible preferred stocks and debt securities.
- ------------------------------------------------------------------------------
INVESTMENT As a mutual fund investing primarily in common
RISKS stocks and/or securities convertible into common
stocks, the Fund is subject to market risk--that
The Fund is is, the possibility that common stock prices will
subject decline over short or even extended periods.
to certain Because the Fund will focus on the less liquid
investment securities of small and micro-capitalization
risks companies, it may involve considerably more risk
than a mutual fund investing in the more liquid
common stocks and convertible securities of larger
capitalization companies. The Fund's companies may
have static, cyclical or only moderate growth
prospects and/or limited product lines, markets and
financial resources. They may also lack management
depth and be more vulnerable to adverse business
developments. In addition, these companies may not
be well known to the investment community and may
be followed by relatively few securities analysts,
so that there will tend to be less publicly
available
<PAGE>
information about them, and their securities may
not be widely held or attract significant
institutional ownership. Finally, the securities
of the Fund's companies may have limited trading
volumes, wide spreads between their bid and ask
prices, prices that are subject to more abrupt or
erratic market movements than the securities of
larger capitalization companies or the market
averages in general and, in the case of securities
traded in the over-the-counter market, only a few
market makers. Accordingly, Royce's investment
method requires it to have a long-term investment
outlook for the securities in which it invests.
The Fund should not be used by market timers.
Because the Fund will invest primarily in small and
micro-capitalization securities, it may not be able
to purchase or sell more than a limited number of
shares of a portfolio security at then quoted
market prices, and may require a considerable
period of time to acquire or dispose of its
position in the security. This risk will increase
to the extent other Royce-managed accounts or other
investors are seeking to purchase or sell a
portfolio security held by the Fund.
- ------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain fundamental
LIMITATIONS limitations, designed to reduce its exposure to
specific situations, which may not be changed
The Fund has without the approval of a majority of its
adopted outstanding voting shares, as that term is defined
certain in the 1940 Act. These limitations are set forth
fundamental in the Statement of Additional Information and
limitations provide, among other things, that the Fund will
not:
(a)as to not less than 75% of its assets, invest
more than 5% of its assets in the securities of any
one issuer, excluding U.S. Government obligations;
(b)invest more than 25% of its assets in any one
industry; or
(c)invest in companies for the purpose of
exercising control of management.
Other In addition to investing primarily in the equity
Investment and fixed income securities described above, the
Practices Fund may follow a number of additional investment
practices.
Short-term The Fund may invest in short-term fixed income
fixed securities for temporary defensive purposes, to
income invest uncommitted cash balances or to maintain
securities liquidity to meet shareholder redemptions. These
securities consist of United States Treasury bills,
domestic bank certificates of deposit, high-quality
commercial paper and repurchase agreements
collateralized by U.S. Government securities. In a
repurchase agreement, a bank sells a security to
the Fund at one price and agrees to repurchase it
at the Fund's cost plus interest within a specified
period of seven or fewer days. In these
transactions, which are, in effect, secured loans
by the Fund, the securities purchased by the Fund
will have a value equal to or in excess of the
value of the repurchase agreement and will be held
by the Fund's custodian bank until repurchased.
Should the Fund implement a temporary investment
policy, its investment objective may not be
achieved.
Securities The Fund may lend up to 25% of its assets to
lending qualified institutional investors for the purpose
of realizing additional income. Loans of
securities of the Fund will be collateralized by
cash or securities issued or guaranteed by the
United States Government or its agencies or
instrumentalities. The collateral will equal at
least 100% of the current market value of the
loaned securities. The risks of securities lending
include possible delays in receiving additional
collateral or in recovery of loaned securities or
loss of rights in the collateral if the borrower
<PAGE>
defaults or becomes insolvent.
Lower-rated The Fund may invest no more than 5% of its net
debt assets in lower-rated (high-risk) non-convertible
securities debt securities, which are below investment grade.
The Fund does not expect to invest in debt
securities that are rated lower than Caa by Moody's
Investors Service, Inc. or CCC by Standard & Poor's
Corp. or, if unrated, determined to be of
comparable quality.
Foreign The Fund may invest up to 10% of its assets in
securities foreign securities, measured at the time of
</R purchase. The Fund may purchase foreign securities
in the form of American Depositary Receipts
("ADRs"). ADRs are certificates held in trust by a
bank or similar financial institution evidencing
ownership of shares of a foreign-based issuer.
Designed for use in U.S. securities markets, ADRs
are alternatives to the purchase of the underlying
foreign securities in their national markets and
currencies.
The Fund does not expect to purchase or sell
foreign currencies to hedge against declines in the
U.S. dollar or to lock in the value of the foreign
securities it purchases, and its foreign
investments may be adversely affected by changes in
foreign currency rates. Consequently, the risks
associated with such investments may be greater
than if the Fund did engage in foreign currency
transactions for hedging purposes. Foreign
investments may also be adversely affected by
exchange control regulations, if any, in such
foreign markets, and the Fund's ability to make
certain distributions necessary to maintain
eligibility as a regulated investment company and
avoid the imposition of income and excise taxes may
to that extent be limited.
There may be less information available about a
foreign company than a domestic company; foreign
companies may not be subject to accounting,
auditing and reporting standards and requirements
comparable to those applicable to domestic
companies; and foreign markets, brokers and issuers
are generally subject to less extensive government
regulation than their domestic counterparts.
Foreign securities may be less liquid and may be
subject to greater price volatility than domestic
securities. Foreign brokerage commissions and
custodial fees are generally higher than those in
the United States. Foreign markets also have
different clearance and settlement procedures, and
in certain markets there have been times when
settlements have been unable to keep pace with the
volume of securities transactions, thereby making
it difficult to conduct such transactions. Delays
or problems with settlements might affect the
liquidity of the Fund's portfolio. Foreign
investments may also be subject to local economic
and political risks, political instability and
possible nationalization of issuers or
expropriation of their assets, which might
adversely affect the Fund's ability to realize on
its investment in such securities. Furthermore,
some foreign securities are subject to brokerage
taxes levied by foreign governments, which have the
effect of increasing the cost of such investment
and reducing the realized gain or increasing the
realized loss on such securities at the time of
sale.
Income earned or received by the Fund from sources
within foreign countries may be subject to
withholding and other taxes imposed by such
countries. Any such taxes paid by the Fund will
reduce its cash available for distribution to
shareholders. The Fund is required to calculate
its distributable income and capital gains for U.S.
Federal income tax purposes by reference to the
U.S. dollar. Fluctuations in applicable foreign
currency exchange rates may cause the Fund's
distributable income and capital gains for U.S.
Federal income tax purposes to differ from the
value of its investments calculated by reference to
foreign currencies. If the Fund invests in stock
of a so-called passive foreign investment company,
the Fund may make certain elections
<PAGE>
that will affect the calculation of its net
investment income and capital gains.
Portfolio Although the Fund generally seeks to invest for the
turnover long term, it retains the right to sell securities
regardless of how long they have been held. The
Fund's annual portfolio turnover rates are shown in
the "Financial Highlights."
- ------------------------------------------------------------------------------
MANAGEMENT OF
The Trust's business and affairs are managed
THE TRUST under the direction of its Board of Trustees.
Royce & Associates, Inc., the Fund's investment
Royce & adviser, is responsible for the investment of their
Associates, assets, subject to the authority of the Board.
Inc. is Charles M. Royce, Royce's President, Chief
responsible Investment Officer and sole voting shareholder
for since 1972, is primarily responsible for managing
management of the Fund's portfolio. He is assisted by Royce's
the investment staff, including W. Whitney George,
Fund's assets Senior Portfolio Manager and Managing Director,
Boniface A. Zaino, Senior Portfolio Manager and
Managing Director and Charles R. Dreifus, Senior
Portfolio Manager and Principal, and by Jack E.
Fockler, Jr., Managing Director. Mr. Zaino joined
Royce in April 1998 and prior thereto was Group
Managing Director of Trust Company of the West.
Mr. Dreifus joined Royce in February 1998 and prior
thereto was Managing Director (since June 1995) and
General Partner (until June 1995) of Lazard Freres
& Co. LLC. Royce is also the investment adviser
to other series of the Trust, and to other
investment and non-investment company accounts.
As compensation for its services to the Fund, Royce
is entitled to receive annual advisory fees as
follows: (i) 1.0% of the first $50 million of the
average net assets of the Fund, (ii) 0.875% of the
next $50 million of average net assets and (iii)
0.75% of average net assets in excess of $100
million. The fees paid by the Fund to Royce for
1997 amounted to 0.78% of average net assets (net
of voluntary waiver).
Royce selects the brokers who execute the purchases
and sales of the Fund's portfolio securities and
may place orders with brokers who provide brokerage
and research services to Royce. Royce is
authorized, in recognition of the value of
brokerage and research services provided, to pay
commissions to a broker in excess of the amount
which another broker might have charged for the
same transaction.
Royce Fund Services, Inc. ("RFS"), which is wholly-
owned by Charles M. Royce, acts as distributor of
the Fund's shares.
- ------------------------------------------------------------------------------
GENERAL The Royce Fund (the "Trust") is a Delaware business
INFORMATION trust, registered with the Securities and Exchange
Commission as a diversified open-end management
investment company. It is the successor to a
Massachusetts business trust established in October
1985 and merged into the Trust in June 1996. The
Trustees have the authority to issue an unlimited
number of shares of beneficial interest, without
shareholder approval, and these shares may be
divided into an unlimited number of series and
classes. Shareholders are entitled to one vote per
share. Shares vote by individual series on all
matters, except that shares are voted in the
aggregate and not by individual series or class
when required by the 1940 Act and that if the
Trustees determine that a matter affects only one
series or class, then only shareholders of that
series or class are entitled to vote on that
matter.
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
<PAGE>
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.
Year 2000 Many computer software systems in use today cannot
properly process date-related information from and
after January 1, 2000. Should any of the computer
systems employed by the Fund or any of its major
service providers fail to process this type of
information properly, that could have a negative
impact on the Fund's operations and the services
provided to the Fund's shareholders. The Royce
Funds, Royce and RFS are reviewing all of their own
computer systems with the goal of modifying or
replacing such systems to the extent necessary to
prepare for the Year 2000. In addition, Royce has
been advised by the Fund's major service providers
that they are also in the process of reviewing
their systems with the same goal. As of the date
of this Prospectus, the Trust and Royce have no
reason to believe that these goals will not be
achieved.
- ------------------------------------------------------------------------------
DIVIDENDS, The Fund pays dividends from net investment income
DISTRIBUTIONS (if any) and distributes its net realized capital
AND TAXES gains annually in December. Dividends and
distributions will be automatically reinvested in
The Fund pays additional shares of the Class unless the
dividends and shareholder chooses otherwise.
capital
gains Shareholders receive information annually as to the
annually in tax status of distributions made by the Fund for
December the calendar year. For Federal income tax
purposes, all distributions by the Fund are taxable
to shareholders when declared, whether received in
cash or reinvested in shares. Distributions paid
from the Fund's net investment income and short-
term capital gains are taxable to shareholders as
ordinary income dividends. A portion of the Fund's
dividends may qualify for the corporate dividends
received deduction, subject to certain limitations.
The portion of the Fund's dividends qualifying for
such deduction is generally limited to the
aggregate taxable dividends received by the Fund
from domestic corporations. Distributions paid
from long-term capital gains of the Fund are
treated by a shareholder for Federal income tax
purposes as long-term capital gains, regardless of
how long the shareholder has held Fund shares.
If a shareholder disposes of shares held for six
months or less at a loss, such loss is treated as a
long-term capital loss to the extent of any long-
term capital gains reported by the shareholder with
respect to such shares. A loss realized on a
taxable disposition of Fund shares may be
disallowed to the extent that additional Fund
shares are purchased (including by reinvestment of
distributions) within 30 days before or after such
disposition.
The redemption of shares is a taxable event, and a
shareholder may realize a capital gain or capital
loss. The Fund will report to redeeming
shareholders the proceeds of their redemptions.
However, because the tax consequences of a
redemption will also depend on the shareholder's
basis in the redeemed shares for tax purposes,
shareholders should retain their account statements
for use in determining their tax liability on a
redemption.
<PAGE>
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 their proper
Social Security or Taxpayer Identification Number
and that they are not subject to backup
withholding.
The discussion of Federal income taxes above is for
general information only. The Statement of
Additional Information includes a more detailed
description of Federal income tax aspects that may
be relevant to a shareholder. Shareholders may
also be subject to state and local taxes on income
and any gains from their investment. Investors
should consult their own tax advisers concerning
the tax consequences of an investment in the Fund
------------------------------------------------------------------------------
NET ASSET Shares are purchased and redeemed at their net
VALUE asset value per share next determined after an
PER SHARE order is received by the Fund's transfer agent or
an authorized service agent or sub-agent. Net
asset value per share is determined by dividing the
Net asset total value of the Fund's investments plus cash and
value per other assets, less any liabilities, by the number
share (NAV) of outstanding shares of the Fund. Net asset value
is per share is calculated at the close of regular
determined trading on the New York Stock Exchange on each day
each day the Exchange is open for business.
the New York
Stock In determining net asset value, securities listed
Exchange is on an exchange or the Nasdaq National Market System
open 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.
- ------------------------------------------------------------------------------
SHAREHOLDER GUIDE
OPENING AN The Fund's shares are offered on a no-load basis.
ACCOUNT AND To open a new account (other than an IRA or
PURCHASING 403(b)(7) account) either by mail, by telephone or
SHARES by wire, simply complete and return an Account
Application. If you need assistance with the
Account Application or have any questions about the
Fund, please call Investor Information at 1-800-221-
4268. Note: For certain types of account
registrations (e.g., corporations, partnerships,
foundations, associations, other organizations,
trusts or powers of attorney), please call Investor
Information to determine if you need to provide
additional forms with your application.
<PAGE>
Minimum Type of Account Minimum
Initial --------------- -------
Investment Regular accounts $2,000
IRAs * 500
Accounts established with Automatic 500
Investment Plan or Direct Deposit Plan
401(k) and 403(b)(7) accounts None
* Separate forms must be used for opening IRAs or
403(b)(7) accounts; please call Investor
Information if you need these forms.
Subsequent Subsequent investments may be made by mail ($50
Investments minimum), telephone ($500 minimum), wire ($1,000
minimum) or Express Service (a system of electronic
funds transfer from your bank account).
---------------------------------------------------
NEW ACCOUNT ADDITIONAL INVESTMENTS
Purchasing By Please include the TO EXISTING ACCOUNTS
Mail amount of your initial
Complete and investment on the
sign the Account Application, Additional investments
enclosed make your check payable should include the
Account to The Royce Fund, and Invest-by-Mail
Application mail to: remittance form attached
The Royce Funds to your Fund account
P.O. Box 419012 confirmation statements.
Kansas City, MO Please make your check
64141-6012 payable to The Royce
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.
For express The Royce Funds All written requests
or c/o National Financial should be mailed to one
registered Data Services of the addresses
mail, 1004 Baltimore, indicated for new
send to: 5th Floor accounts.
Kansas City, MO 64105
- ------------------------------------------------------------------------------
NEW ACCOUNT ADDITIONAL INVESTMENTS
Purchasing By To open an account by TO EXISTING ACCOUNTS
Telephone telephone, you should
call Investor Subsequent telephone
Information (1-800-221- purchases ($500 minimum)
4268) before 4:00 p.m., may also be made by
Eastern time. You will calling Investor
be given a confirming Information. For all
order number for your telephone purchases,
purchase. This number payment is due within
must be placed on your three business days and
completed Account may be made by wire or
Application before personal, business or
mailing. If a completed bank check, subject to
and signed Account collection.
Application is not
received on an account
opened by telephone, the
account may be subject
to backup withholding of
Federal income taxes.
---------------------------------------------------
Purchasing By
Wire Money should be wired to:
State Street Bank and Trust Company
Before ABA 011000028 DDA 9904-712-8
Wiring: Ref: Pennsylvania Mutual Fund - Investment Class
For a new
account,
<PAGE>
please Order Number or Account Number____________________
contact
Investor Account Name ____________________________________
Information To ensure proper receipt, please be sure your bank
at 1-800- includes the name of the Fund and your order number
221-4268 (for telephone purchases) or account number. If
you are opening a new account, your financial
consultant must call Investor Information to obtain
an order number, and complete the Account
Application and mail it to the "New Account"
address above after completing the wire
arrangement. Note: Federal Funds wire purchase
orders will be accepted only when the Fund and its
custodian are open for business.
---------------------------------------------------
Purchasing By
Express Additional shares can be purchased automatically or
Service 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 or computer online access.
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 or quarterly schedule
you select.
To establish the Expedited Purchase Option and/or
Automatic Investment Plan, please provide the
appropriate information on the Account Application
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 by telephone, 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 obtained from Investor Information by
calling 1-800-221-4268.
---------------------------------------------------
Purchasing If you purchase shares of the Fund through a
through program of services offered or administered by a
a Service broker-dealer, financial institution or other
Provider service provider, you 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.
When shares of the Fund are purchased in this way,
the service provider, rather than the customer, may
be the shareholder of record of the shares. RFS,
Royce and/or the Fund may pay fees 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.
<PAGE>
- ------------------------------------------------------------------------------
CHOOSING A You may select one of three distribution options:
DISTRIBUTION
OPTION 1. Automatic Reinvestment Option--Both net
investment income dividends and capital gains
distributions will be reinvested in additional
Fund shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. Cash Dividend Option--Your dividends will be
paid in cash and your capital gains distributions
will be reinvested in additional Investment Class
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 The easiest way to establish optional services on
ACCOUNT your account is to select the options you desire
INFORMATION when you complete your Account Application. If you
want to add or change shareholder options later,
you may need to provide additional information and
a signature guarantee. Please call Shareholder
Services at 1-800-841-1180 for further assistance.
Signature For our mutual protection, we may require a
Guarantees 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, stolen or
destroyed, you may incur an expense to replace it.
Telephone and Neither the Fund nor its transfer agent will be
Online Access liable for following instructions communicated by
Transactions telephone or computer online access that are
reasonably believed to be genuine. The transfer
agent uses certain procedures designed to confirm
that telephone and computer online access
instructions are genuine, which may include
requiring some form of personal identification
prior to acting on the instructions, providing
written confirmation of the transaction and/or
recording incoming telephone calls, and if it does
not follow such procedures, the Fund or the
transfer agent may be liable for any losses due to
unauthorized or fraudulent transactions.
Nonpayment If your check or wire does not clear, or if payment
is not received for any telephone or computer
online access purchase, the transaction will be
canceled and you will be responsible for any loss
the Fund incurs. 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 Your trade date is the date on which share
for purchases are credited to your account. If your
Purchases purchase is made by check, Federal Funds wire,
telephone, computer online access or exchange and
is received by the close of regular trading on the
New York Stock Exchange (generally 4:00 p.m.,
Eastern time), your trade date is the date of
receipt. If your purchase is received after the
close of regular trading on the Exchange, your
trade date is the next business day. Your shares
are purchased at the net asset value determined on
your trade date.
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.
<PAGE> 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 You may redeem any portion of your account at any
YOUR time. You may request a redemption in writing or
SHARES by telephone. Redemption proceeds normally will be
sent within two business days after the receipt of
the request in Good Order.
Redemption requests should be mailed to The Royce
Redeeming By Funds, c/o NFDS, P.O. Box 419012, Kansas City, MO
Mail 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 or an
authorized service agent or sub-agent has received
all required documents in Good Order.
Definition of GOOD ORDER means that the request includes the
Good Order following:
1. The account number and Fund name.
2. The amount of the transaction (specified in
dollars or shares).
3. Signatures of all owners exactly as they are
registered on the account.
4. Signature guarantees if the value of the
shares being redeemed exceeds $50,000 or if the
payment is to be sent to an address other than the
address of record or is to be made to a payee other
than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that
might be required, in the case of retirement plans,
corporations, trusts, estates and certain other
accounts.
If you have any questions about what is required as
it pertains to your request, please call
Shareholder Services at 1-800-841-1180.
---------------------------------------------------
Redeeming By
Telephone Shareholders who have not established Express
Service may redeem up to $50,000 of their shares by
telephone, provided the proceeds are mailed to
their address of record. If pre-approved, higher
minimums may apply for institutional accounts. 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 and
Online Access Transactions."
---------------------------------------------------
Redeeming By
Express If you select the Express Service AUTOMATIC
Service 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.
<PAGE>
Important The EXPEDITED REDEMPTION option lets you redeem up
Redemption to $50,000 of shares from your Fund account by
Information telephone and transfer the proceeds directly to
your bank account. You may elect Express Service on
the Account Application or call Shareholder
Services at 1-800-841-1180 for an Express Service
application.
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 the Trust will normally make redemptions
in cash, it may cause the Fund to redeem in kind
under certain circumstances.
---------------------------------------------------
Early In order to discourage short-term trading, the
Redemption Fund assesses an early redemption fee of 1% on
Fee redemptions of share purchases held for less than
one year. Redemption fees will be paid to the
Fund, out of the redemption proceeds otherwise
payable to the shareholder, to help offset
transaction costs.
The Fund will use the "first-in, first-out" (FIFO)
method to determine the one-year holding period.
Under this method, the date of the redemption will
be compared with the earliest purchase date of the
share purchases held in the account. If this
holding period is less than one year, the fee will
be assessed. In determining "one year," the Fund
will use the anniversary month of a transaction.
Thus, shares purchased in October 1997, for
example, will be subject to the fee if they are
redeemed prior to October 1998. If they are
redeemed on or after October 1, 1998, they will not
be subject to the fee.
No redemption fee will be payable on shares
acquired through reinvestment, on an exchange into
another Royce Fund or by shareholders who are (a)
employees of the Trust or Royce or members of their
immediate families or employee benefit plans for
them; (b) current participants in an Automatic
Investment Plan or an Automatic Withdrawal Plan;
(c) certain Trust-approved Group Investment Plans
and charitable organizations; (d) profit-sharing
trusts, corporations or other institutional
investors who are investment advisory clients of
Royce; or (e) omnibus and other similar account
customers of certain Trust-approved broker-dealers
and other institutions.
---------------------------------------------------
Minimum
Account Due to the relatively high cost of maintaining
Balance smaller accounts, the Trust reserves the right to
Requirement 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 not have a value at
least equal to the minimum initial investment or,
if an Automatic Investment Plan is
<PAGE>
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 Exchanges between series of the Trust are permitted
PRIVILEGE by telephone, computer online access or 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 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 You may transfer the ownership of any of your Fund
OWNERSHIP 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 For more information about any of these services,
SERVICES please call Investor Information at 1-800-221-4268.
Statements A confirmation statement will be sent to you each
and time you have a transaction in your account, and an
Reports account statement is sent semi-annually.
Shareholder reports are 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 Shares of the Fund are available for purchase in
Retirement connection with certain types of tax-sheltered
Plans 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. Information about the plans
and the appropriate forms may be obtained from
Investor Information at 1-800-221-4268.
<PAGE>
============================== ==============================
THE ROYCE FUNDS THE ROYCE FUNDS
- --------------- ---------------
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
INVESTMENT ADVISER
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
DISTRIBUTOR PENNSYLVANIA
Royce Fund Services, Inc. MUTUAL FUND
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 PROSPECTUS
Jack E. Fockler, Jr., Vice President APRIL 30, 1998
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and
Assistant Secretary
John E. Denneen, Secretary
INVESTMENT CLASS SHARES
============================== ==============================
<PAGE>
THE ROYCE FUND
STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Delaware business trust, is a
professionally-managed open-end registered investment company, which offers
investors the opportunity to invest in ten portfolios or series. Three of the
ten series, Pennsylvania Mutual Fund, Royce Micro-Cap Fund and Royce GiftShares
Fund, offer two classes of shares, an Investment Class and a Consultant Class.
Unless specifically noted, all references to a particular series relate to that
series' Investment Class. Each series has distinct investment objectives and/or
policies, and a shareholder's interest is limited to the series in which the
shareholder owns shares. The ten series are:
PENNSYLVANIA MUTUAL FUND ROYCE TOTAL RETURN FUND
ROYCE PREMIER FUND ROYCE FINANCIAL SERVICES FUND
ROYCE MICRO-CAP FUND PMF II
ROYCE LOW-PRICED STOCK FUND ROYCE SPECIAL EQUITY FUND
ROYCE GIFTSHARES FUND THE REVEST GROWTH & INCOME FUND
This Statement of Additional Information relates to all of the series
other than The REvest Growth & Income Fund (each a "Fund" and collectively the
"Funds"). REvest is covered by its own separate Statement of Additional
Information.
The Trust is designed for long-term investors, including those who wish to
use shares of any Fund (other than Royce GiftShares Fund) as a funding vehicle
for certain tax-deferred retirement plans (including Individual Retirement
Account (IRA) plans), and not for investors who intend to liquidate their
investments after a short period of time.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Trust's current Prospectuses, each of which is
dated April 30, 1998. Please retain this document for future reference. The
audited financial statements and schedules of investments included in the Annual
Reports to Shareholders of such Funds for the fiscal year or period ended
December 31, 1997 are incorporated herein by reference. To obtain an additional
copy of the Prospectus or Annual or Semi-Annual Reports to Shareholders for any
of these Funds, please call Investor Information at 1-800-221-4268.
INVESTMENT ADVISER TRANSFER AGENT
Royce & Associates, Inc. ("Royce") State Street Bank and Trust Company
c/o National Financial Data Services
DISTRIBUTOR CUSTODIAN
Royce Fund Services, Inc. ("RFS") State Street Bank and Trust Company
APRIL 30, 1998
-------------------------------------------
TABLE OF CONTENTS
Page Page
INVESTMENT POLICIES AND INDEPENDENT ACCOUNTANTS.............. 21
LIMITATIONS.................... 2 PORTFOLIO TRANSACTIONS................ 21
RISK FACTORS AND SPECIAL CODE OF ETHICS AND RELATED
CONSIDERATIONS................. 6 MATTERS............................. 23
MANAGEMENT OF THE TRUST........ 10 PRICING OF SHARES BEING OFFERED...... 23
PRINCIPAL HOLDERS OF SHARES..... 13 REDEMPTIONS IN KIND................... 23
INVESTMENT ADVISORY TAXATION.............................. 24
SERVICES...................... 16 DESCRIPTION OF THE TRUST.............. 30
DISTRIBUTOR..................... 18 PERFORMANCE DATA...................... 32
CUSTODIAN....................... 21
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement those set
forth in the Funds' Prospectuses. Unless otherwise noted, whenever an
investment policy or limitation states a maximum percentage of a Fund's assets
that may be invested in any security or other asset or sets forth a policy
regarding quality standards, the percentage limitation or standard will be
determined immediately after giving effect to the Fund's acquisition of the
security or other asset. Accordingly, any subsequent change in values, net
assets or other circumstances will not be considered in determining whether the
investment complies with the Fund's investment policies and limitations.
A Fund's fundamental investment policies cannot be changed without the
approval of a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of the Fund. Except for the
fundamental investment restrictions set forth below, the investment policies and
limitations described in this Statement of Additional Information are operating
policies and may be changed by the Board of Trustees without shareholder
approval. However, shareholders will be notified prior to a material change in
an operating policy affecting their Fund.
NO FUND MAY, AS A MATTER OF FUNDAMENTAL POLICY:
1. Issue any senior securities;
2. Purchase securities on margin or write call options on its
portfolio securities;
3. Sell securities short;
4. Borrow money, except that each of the Funds may borrow money from
banks as temporary measure for extraordinary or emergency
purposes in an amount not exceeding 5% of such Fund's total
assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its total assets in the securities of
foreign issuers (except for Royce Financial Services Fund, which
is not subject to any such limitation, and for PMF II and Royce
Special Equity Fund, each of which may invest up to 25% of its
total assets in such securities);
7. Invest in restricted securities (except for Royce Financial
Services Fund and PMF II, each of which may invest up to 15% of
its net assets in illiquid securities, including restricted
securities) or in repurchase agreements which mature in more than
seven days;
8. Invest more than 10% (15% for Royce Financial Services Fund, PMF
II and Royce Special Equity Fund) of its assets in securities
without readily available market quotations (i.e., illiquid
securities) (except for Pennsylvania Mutual Fund, which is not
subject to any such limitation);
<PAGE>
9. Invest, with respect to 75% of its total assets, more than 5% of
its assets in the securities of any one issuer (except U.S.
Government securities);
10. Invest more than 25% of its assets in any one industry (except
for Royce Financial Services Fund, which may invest more than 25%
of its assets in the financial services industry);
11. Acquire (own, in the case of Pennsylvania Mutual Fund) more than
10% of the outstanding voting securities of any one issuer;
12. Purchase or sell real estate or real estate mortgage loans or
invest in the securities of real estate companies unless such
securities are publicly-traded;
13. Purchase or sell commodities or commodity contracts;
14. Make loans, except for purchases of portions of issues of
publicly- distributed bonds, debentures and other securities,
whether or not such purchases are made upon the original issuance
of such securities, and except that each Fund may loan up to 25%
of its assets to qualified brokers, dealers or institutions for
their use relating to short sales or other securities
transactions (provided that such loans are fully collateralized
at all times);
15. Invest in companies for the purpose of exercising control of
management;
16. Purchase portfolio securities from or sell such securities
directly to any of the Trust's Trustees, officers, employees or
investment adviser, as principal for their own accounts;
17. Invest in the securities of other investment companies (except
for Pennsylvania Mutual Fund, PMF II and Royce Special Equity
Fund, which may invest in such companies as set forth below, and
except for Royce Financial Services Fund, which may invest in
such companies to the extent permitted by the 1940 Act); or
18. Invest more than 5% of its total assets in warrants, rights and
options (except for Pennsylvania Mutual Fund, which may not
purchase any warrants, rights or options).
NO FUND MAY, AS A MATTER OF OPERATING POLICY:
1. Invest more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities; or
2. Enter into repurchase agreements with any party other
than the custodian of its assets.
<PAGE>
ROYCE SPECIAL EQUITY FUND MAY NOT, AS A MATTER OF OPERATING POLICY:
1. Invest more than 5% of its assets in the securities of foreign
issuers; or
2. Invest more than 5% of its assets in securities for
which market quotations are not readily available; or
3. Invest more than 5% of its assets in the securities of
other investment companies.
As a matter of operating policy, the Trust is interpreting Fundamental
Policy No. 8 to preclude any Fund from investing more than 10% (15% for
Pennsylvania Mutual Fund, Royce Financial Services Fund, PMF II and Royce
Special Equity Fund) of its net assets in illiquid securities.
PENNSYLVANIA MUTUAL FUND
PMF II
ROYCE SPECIAL EQUITY FUND
Pennsylvania Mutual Fund and PMF II may each invest up to 25%, and Royce
Special Equity Fund may invest up to 5%, of the value of their total assets in
the securities of other investment companies (open or closed-end), including up
to 5% of their total assets in the securities of any one other investment
company, provided that the Funds and all affiliated persons of the Funds do not
invest in more than 3% of the total outstanding stock of any one such investment
company. All such securities must be acquired in the open market, in
transactions involving no commissions or discounts to a sponsor or dealer (other
than customary brokerage commissions). The issuers of such securities are not
required to redeem them from any one Fund in an amount exceeding 1% of such
issuers' total outstanding securities during any period of less than thirty
days, and Pennsylvania Mutual Fund, PMF II and Royce Special Equity Fund will
vote all proxies with respect to such securities in the same proportion as the
vote of all other holders of such securities. Except for cash collateral
received in connection with their securities lending activities and invested in
the money market funds of their custodian bank, neither Pennsylvania Mutual
Fund, PMF II nor Royce Special Equity Fund has any current intention of
investing in the securities of any open-end investment companies.
ROYCE FINANCIAL SERVICES FUND
Financial Services Fund may invest in the securities of a company that is
engaged in securities related activities, such as a broker, a dealer, an
underwriter, an investment adviser registered under the Investment Advisers Act
of 1940 or an investment adviser to an investment company, subject to the
following limitations in the case of a company that, in its most recent fiscal
year, derived more than 15% of its gross revenues from such activities:
(a) The purchase cannot cause more than 5% of the Fund's assets to be
invested in the securities of the company;
(b) For an equity security, the purchase cannot result in the Fund owning
more than 5% of the company's outstanding securities of that class; and
<PAGE>
(c) For a debt security, the purchase cannot result in the Fund owning more
than 10% of the principal amount of the company's outstanding debt
securities.
In applying the gross revenues test, a company's gross revenues from its
own securities related activities and from its ratable share of the securities
related activities of enterprises of which it owns 20% or more of the voting or
equity interest are considered in determining the degree to which the company is
engaged in securities related activities. The limitations apply only at the time
of the Fund's purchase of the securities of such a company. When Royce is
considering purchasing or has purchased warrants or convertible securities of a
securities related business for the Fund, the required determination is made as
though such warrants or conversion privileges had been exercised.
Financial Services Fund is not permitted to acquire a general partnership
interest or a security issued by its investment adviser or principal underwriter
or any affiliated person of its investment adviser or principal underwriter.
Financial Services Fund may invest up to 20% of its assets in the
securities of other investment companies, provided that (i) the Fund and all
affiliated persons of the Fund do not invest in more than 3% of the total
outstanding stock of any one such company and (ii) the Fund does not offer or
sell its shares at a public offering price which includes a sales load of more
than 1 1/2%. (The 20% and 3% limitations do not apply to securities received as
dividends, through offers of exchange or as a result of a reorganization,
consolidation or merger.) The other investment company is not obligated to
redeem those of its securities held by the Fund in an amount exceeding 1% of its
total outstanding securities during any period of less than thirty days, and the
Fund will be obligated to exercise voting rights with respect to any such
security by voting the securities held by it in the same proportion as the vote
of all other holders of the security.
Financial Services Fund does not currently intend to invest more than 5% of
its assets in the securities of any one other investment company, to purchase
securities of other investment companies (except in the open market where no
commission other than the ordinary broker's commission is paid) or to purchase
or hold securities issued by other open-end investment companies (except for
cash collateral received in connection with its securities lending activities
and invested in the money market funds of its custodian bank).
ROYCE FINANCIAL SERVICES FUND
PMF II
Financial Services Fund and PMF II will not invest more than 15% of their
net assets in illiquid securities, including those restricted securities that
are illiquid. Illiquid securities include securities subject to contractual or
legal restrictions on resale because they have not been registered under the
Securities Act of 1933 (the "Securities Act") and other securities for which
market quotations are not readily available. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer, a control
person of the issuer or another investor holding such securities.
A large institutional market has developed for certain securities that are
not registered under the Securities Act, including foreign securities.
Institutional investors depend on an
<PAGE>
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows an institutional trading market
for securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. An insufficient number of qualified institutional buyers interested in
purchasing certain restricted securities held by the Funds, however, could
adversely affect the marketability of such portfolio securities, and the Funds
might be unable to dispose of such securities promptly or at reasonable prices.
Rule 144A produces enhanced liquidity for many restricted securities, and market
liquidity for such securities may continue to expand as a result of this
regulation.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Funds' Rights as Stockholders
As noted above, no Fund may invest in a company for the purpose of
exercising control of management. However, a Fund may exercise its rights as a
stockholder and communicate its views on important matters of policy to
management, the board of directors and/or stockholders if Royce or the Board of
Trustees determine that such matters could have a significant effect on the
value of the Fund's investment in the company. The activities that a Fund may
engage in, either individually or in conjunction with others, may include, among
others, supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's board of
directors or management; seeking changes in a company's direction or policies;
seeking the sale or reorganization of a company or a portion of its assets; or
supporting or opposing third party takeover attempts. This area of corporate
activity is prone to litigation, and it is possible that a Fund could be
involved in lawsuits related to such activities. Royce will monitor such
activities with a view to mitigating, to the extent possible, the risk of
litigation against the Funds and the risk of actual liability if a Fund is
involved in litigation. However, no guarantee can be made that litigation
against a Fund will not be undertaken or liabilities incurred.
A Fund may, at its expense or in conjunction with others, pursue litigation
or otherwise exercise its rights as a security holder to seek to protect the
interests of security holders if Royce and the Trust's Board of Trustees
determine this to be in the best interests of a Fund's shareholders.
Securities Lending
Each Fund may lend up to 25% of its assets to brokers, dealers and other
financial institutions. Securities lending allows the Fund to retain ownership
of the securities loaned and, at the same time, to earn additional income.
Since there may be delays in the recovery of loaned securities or even a loss of
rights in collateral supplied should the borrower fail financially, loans will
be made only to parties that participate in a Global Securities Lending Program
monitored by the Funds' custodian and who are deemed by it to be of good
standing. Furthermore, such loans will be made only if, in Royce's judgment,
the consideration to be earned from such loans would justify the risk.
<PAGE>
Royce understands that it is the current view of the staff of the
Securities and Exchange Commission that a Fund may engage in such loan
transactions only under the following conditions: (i) the Fund must receive 100%
collateral in the form of cash or cash equivalents (e.g., U.S. Treasury bills or
notes) from the borrower; (ii) the borrower must increase the collateral
whenever the market value of the securities loaned (determined on a daily basis)
rises above the value of the collateral; (iii) after giving notice, the Fund
must be able to terminate the loan at any time; (iv) the Fund must receive
reasonable interest on the loan or a flat fee from the borrower, as well as
amounts equivalent to any dividends, interest or other distributions on the
securities loaned and to any increase in market value; (v) the Fund may pay only
reasonable custodian fees in connection with the loan; and (vi) the Fund must be
able to vote proxies on the securities loaned, either by terminating the loan or
by entering into an alternative arrangement with the borrower.
Lower-Rated (High-Risk) Debt Securities
Each Fund may invest up to 5% (15% for PMF II) of its net assets in lower-
rated (high-risk) non-convertible debt securities. They may be rated from Ba to
Ca by Moody's Investors Service, Inc. or from BB to D by Standard & Poor's or
may be unrated. These securities have poor protection with respect to the
payment of interest and repayment of principal and may be in default as to the
payment of principal or interest. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated (high-risk) debt
securities may fluctuate more than those of higher-rated debt securities and may
decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates.
While the market for lower-rated (high-risk) corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the 1980s brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of the high-
yield/high-risk bond market, especially during periods of economic recession.
In fact, from 1989 to 1991, the percentage of lower-rated (high-risk) debt
securities that defaulted rose significantly above prior levels.
The market for lower-rated (high-risk) debt securities may be thinner and
less active than that for higher-rated debt securities, which can adversely
affect the prices at which the former are sold. If market quotations cease to
be readily available for a lower-rated (high-risk) debt security in which a Fund
has invested, the security will then be valued in accordance with procedures
established by the Board of Trustees. Judgment plays a greater role in valuing
lower-rated (high-risk) debt securities than is the case for securities for
which more external sources for quotations and last sale information are
available. Adverse publicity and changing investor perceptions may affect a
Fund's ability to dispose of lower-rated (high-risk) debt securities.
Since the risk of default is higher for lower-rated (high-risk) debt
securities, Royce's research and credit analysis may play an important part in
managing securities of this type for the Funds. In considering such investments
for the Funds, Royce will attempt to identify those issuers of lower-rated
(high-risk) debt securities whose financial condition is adequate to meet future
obligations, has improved or is expected to improve in the future. Royce's
analysis may focus on relative values based
<PAGE>
on such factors as interest or dividend coverage, asset coverage, earnings
prospects and the experience and managerial strength of the issuer.
Foreign Investments
Except for Financial Services Fund, which is not subject to any such
limitation, each Fund may invest up to 10% of its total assets (25% for PMF II
and Royce Special Equity Fund) in the securities of foreign issuers. Foreign
investments involve certain risks which typically are not present in securities
of domestic issuers. There may be less information available about a foreign
company than a domestic company; foreign companies may not be subject to
accounting, auditing and reporting standards and requirements comparable to
those applicable to domestic companies; and foreign markets, brokers and issuers
are generally subject to less extensive government regulation than their
domestic counterparts. Foreign securities may be less liquid and may be subject
to greater price volatility than domestic securities. Foreign brokerage
commissions and custodial fees are generally higher than those in the United
States. Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, thereby
making it difficult to conduct such transactions. Delays or problems with
settlements might affect the liquidity of a Fund's portfolio. Foreign
investments may also be subject to local economic and political risks,
political, economic and social instability, military action or unrest or adverse
diplomatic developments, and possible nationalization of issuers or
expropriation of their assets, which might adversely affect a Fund's ability to
realize on its investment in such securities. There is no assurance that Royce
will be able to anticipate these potential events or counter their effects.
Furthermore, some foreign securities are subject to brokerage taxes levied by
foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale.
Although Fund's foreign investments may be adversely affected by changes in
foreign currency rates, Royce does not expect to purchase or sell foreign
currencies for the Funds to hedge against declines in the U.S. dollar or to lock
in the value of any foreign securities they purchase. Consequently, the risks
associated with such investments may be greater than if the Fund were to engage
in foreign currency transactions for hedging purposes.
The considerations noted above are generally intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities.
American Depositary Receipts (ADRs) are certificates held in trust by a
bank or similar financial institution evidencing ownership of securities of a
foreign-based issuer. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying foreign securities in their
national markets and currencies.
ADR facilities may be established as either unsponsored or sponsored.
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of
<PAGE>
unsponsored ADRs generally bear all the costs of such facilities. The
depository usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as deposit
and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities.
Repurchase Agreements
In a repurchase agreement, a Fund in effect makes a loan by purchasing a
security and simultaneously committing to resell that security to the seller at
an agreed upon price on an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon incremental amount which is unrelated to the
coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed upon resale price and marked to market daily) of the underlying
security.
The Funds may engage in repurchase agreements with respect to any U.S.
Government security, provided that such agreements are collateralized by cash or
securities issued by the U.S. Government or its agencies. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the underlying
securities, as well as delays and costs to the Fund in connection with
bankruptcy proceedings), it is the policy of the Trust to enter into repurchase
agreements only with its custodian, State Street Bank and Trust Company, and
having a term of seven days or less.
Warrants, Rights and Options
Each Fund, other than Pennsylvania Mutual Fund, may invest up to 5% of its
total assets in warrants, rights and options. A warrant, right or call option
entitles the holder to purchase a given security within a specified period for a
specified price and does not represent an ownership interest. A put option
gives the holder the right to sell a particular security at a specified price
during the term of the option. These securities have no voting rights, pay no
dividends and have no liquidation rights. In addition, their market prices do
not necessarily move parallel to the market prices of the underlying securities.
The sale of warrants, right or options held for more than one year
generally results in a long-term capital gain or loss to the Fund, and the sale
of warrants, rights or options held for one year or less generally results in a
short term capital gain or loss. The holding period for securities acquired
upon exercise of a warrant, right or call option, however, generally begins on
the day after the date of exercise, regardless of how long the warrant, right or
option was held. The securities underlying warrants, rights and options could
include shares of common stock of a single company or securities
<PAGE>
market indices representing shares of the common stocks of a group of companies,
such as the S&P 600.
Investing in warrants, rights and call options on a given security allows
the Fund to hold an interest in that security without having to commit assets
equal to the market price of the underlying security and, in the case of
securities market indices, to participate in a market without having to purchase
all of the securities comprising the index. Put options, whether on shares of
common stock of a single company or on a securities market index, would permit
the Fund to protect the value of a portfolio security against a decline in its
market price and/or to benefit from an anticipated decline in the market price
of a given security or of a market. Thus, investing in warrants, rights and
options permits the Fund to incur additional risk and/or to hedge against risk.
Portfolio Turnover
For the year ended December 31, 1997 and the period from November 19, 1996
(commencement of operations) through December 31, 1996, PMF II's portfolio
turnover rates were 77% and 1%, respectively. The Fund's portfolio turnover rate
for its start-up period in 1996 was 1% because the Fund was then investing its
initial cash and did no significant selling of portfolio securities during this
period.
* * *
Royce believes that Pennsylvania Mutual, Micro-Cap, Low-Priced Stock,
GiftShares and Financial Services Funds, PMF II and Royce Special Equity Fund
are suitable for investment only by persons who can invest without concern for
current income, and that such Funds and Royce Premier Fund are suitable only for
those who are in a financial position to assume above-average investment risks
in search for long-term capital appreciation.
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to each Trustee and
officer of the Trust:
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
President, Managing Director
Charles M. Royce* Trustee, (since April 1997), Secretary,
(58) President Treasurer, sole director and
1414 Avenue of and sole voting shareholder of
the Treasurer Royce & Associates, Inc.
Americas ("Royce"), formerly named Quest
New York, NY Advisory Corp., the Trust's and
10019 its predecessors' principal
investment adviser; Trustee,
President and Treasurer of the
Trust and its predecessors;
Director, President and
Treasurer of Royce Value Trust,
Inc. ("RVT"), Royce Micro-Cap
Trust, Inc. ("OTCM") (since
September 1993) and, Royce
Global Trust, Inc. ("RGT")
(since October 1996), closed-end
diversified management
investment
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
companies of which Royce is the
investment adviser; Trustee,
President and Treasurer of Royce
Capital Fund ("RCF") (since
December 1996), an open-end
diversified management
investment company of which
Royce is the investment adviser
(the Trust, RVT, OTCM, RGT and
RCF collectively, "The Royce
Funds"); Secretary and sole
director and shareholder of
Royce Fund Services, Inc.
("RFS"), formerly named Quest
Distributors, Inc., the
distributor of the Trust's
shares; and managing general
partner of Royce Manage-ment
Company ("RMC"), formerly named
Quest Management Company, a
registered investment adviser,
and its predecessor.
Hubert L. Cafritz Trustee Financial consultant.
(74)
9421 Crosby Road
Silver Spring, MD
20910
Richard M. Galkin Trustee Private investor and President
(59) of Richard M. Galkin Associates,
5284 Boca Marina Inc., tele-communications
Boca Raton, FL consultants.
33487
Stephen L. Isaacs Trustee President of The Center for
(58) Health and Social Policy since
65 Harmon Avenue September 1996; President of
Pelham, NY 10803 Stephen L. Isaacs Associates,
Consultants; and Director of
Columbia University Development
Law and Policy Program;
Professor at Columbia University
until August 1996.
William L. Koke Trustee Registered investment adviser
(63) and financial planner with
73 Pointina Road Shoreline Financial Consultants.
Westbrook, CT
06498
David L. Meister Trustee Consultant to the communications
(58) industry since January 1993; and
111 Marquez Place Executive officer of Digital
Pacific Planet Inc. from April 1991 to
Palisades, CA December 1992.
90272
Jack E. Fockler, Vice Managing Director (since
Jr.* (39) President April 1997) and Vice President
1414 Avenue of (since August 1993) of Royce,
the having been employed by Royce
Americas since October 1989; Vice
New York, NY President of RGT (since October
10019 1996), RCF
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
(since December 1996) and the
other Royce Funds (since April
1995); Vice President of RFS
(since November 1995); and
general partner of RMC since
July 1993.
W. Whitney Vice Managing Director (since April
George* (39) President 1997) and Vice President (since
1414 Avenue of August 1993) of Royce, having
the been employed by Royce since
Americas October 1991; Vice President of
New York, NY RCF (since December 1996); Vice
10019 President of RGT (since October
1996) and of the other Royce
Funds (since April 1995); and
general partner of RMC and its
predecessor since January 1992.
Daniel A. Vice Vice President of Royce (since
O'Byrne* (36) President May 1994), having been employed
1414 Avenue of and by Royce since October 1986; and
the Assistant Vice President of RGT (since
Americas Secretary October 1996), of RCF (since
New York, NY December 1996) and of the other
10019 Royce Funds (since July 1994).
John E. Denneen* Secretary Associate General Counsel and
(31) Chief Compliance Officer of
1414 Avenue of Royce (since May 1996);
the Secretary of RGT (since October
Americas 1996), of RCF (since December
New York, NY 1996) and of the other Royce
10019 Funds (since June 1996); and
Associate of Seward & Kissel
prior to May 1996.
_______________________________________________________________________________
*An "interested person" of the Trust and/or Royce under Section 2(a)(19) of
the 1940 Act.
All of the Trust's trustees (other than Messrs. Cafritz and Koke) are also
directors/trustees of RVT, OTCM and RCF, and all of them (other than Mr.
Cafritz) are also directors of RGT.
The Board of Trustees has an Audit Committee, comprised of Hubert L.
Cafritz, Richard M. Galkin, Stephen L. Isaacs, William L. Koke and David L.
Meister. The Audit Committee is responsible for recommending the selection and
nomination of independent accountants of the Funds and for conducting post-audit
reviews of the Funds' financial conditions with such auditors.
For the year ended December 31, 1997, the following trustees and affiliated
persons of the Trust received compensation from the Trust and its predecessor
and/or the other funds in the group of registered investment companies
comprising The Royce Funds:
<PAGE>
Aggregate
Compensation
From Trust Pension or Retirement Total Compensation
and its Benefits Accrued As from The Royce Funds
Name Predecessor Part of Trust Expenses paid to Trustee/Directors
- ---- ----------- ---------------------- -------------------------
Hubert L. Cafritz $37,000 N/A $37,000
Trustee
Richard M. Galkin, 37,000 N/A 65,000
Trustee
Stephen L. Isaacs, 37,000 N/A 65,000
Trustee
William L. Koke, 37,000 N/A 38,125
Trustee
David L. Meister, 37,000 N/A 65,000
Trustee
John D. Diederich 106,590 $10,032 N/A
Director of
Administration
PRINCIPAL HOLDERS OF SHARES
As of March 31, 1998, the following persons were known to the Trust to be
the record or beneficial owners of 5% or more of the outstanding shares of
certain of its Funds:
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Pennsylvania Mutual Fund
Investment Class
- ------------------------
Charles Schwab & Co., Inc. 11,021,158 Record 17.19%
101 Montgomery Street
San Francisco, CA 94104-4122
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Laird Lorton Trust Company C/F 4,367,524 Record 6.81%
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Royce Premier Fund
- ------------------
Charles Schwab & Co., Inc. 22,221,952 Record 36.48%
101 Montgomery Street
San Francisco, CA 94104-4122
Wheat First Securities Inc. 8,294,249 Record 13.62%
Special Custody Account
FBO Fundsource
Attn. No Load Unit
P.O. Box 4798
Glen Allen, VA 23058-4798
Royce Micro-Cap Fund
- --------------------
Charles Schwab & Co., Inc. 6,581,853 Record 31.80%
101 Montgomery Street
San Francisco, CA 94104-4122
Northern Trust TTEE 1,049,205 Record 5.07%
FBO Archdiocese of Chicago
P.O. Box 92956
Chicago, IL 60675-2956
Royce Low-Priced Stock Fund
- ---------------------------
Charles Schwab & Co., Inc. 1,106,208 Record 39.39%
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Management Company 240,535 Record and 8.57%
8 Soundshore Drive Beneficial
Greenwich, CT 06830
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Royce GiftShares Fund
Investment Class
- ---------------------
W. Whitney George , Trustee 155,411 Record and 23.25%
The Royce 1992 GST Trust Beneficial
1414 Avenue of the Americas
New York, NY 10019
Royce GiftShares Fund
Consultant Class
- ---------------------
GV and RL Saxton TR DTD 012698 4,385 Record 6.95%
FBO Douglas James Nassman
State Street Bank and Trust Co. TTEE
15611 157th Ave. SE
Renton, WA 98058-6343
GV and RL Saxton TR DTD 012698 4,385 Record 6.95%
FBO Derek J. Nassman
State Street Bank and Trust Co. TTEE
310 110th PL SE
Bellevue, WA 98004-6311
GV and RL Saxton TR DTD 012698 4,385 Record 6.95%
FBO Damon L. Nassman
State Street Bank and Trust Co. TTEE
14430 SE 79th DR
Newcastle, WA 98059-9208
Royal Total Return Fund
- -----------------------
Charles Schwab & Co. Inc. 7,032,390 Record 39.52%
Attn. Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Financial Services Fund
- ------------------------------
Charles M. Royce 169,111 Record and 42.60%
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
National City Bank PA CUST 58,388 Record 14.71%
Reed Smith Shaw & McClay PPS
FBO Scott F. Zimmerman
P.O. Box 94777
Cleveland, OH 44101-4777
Bruce Museum Inc. 50,088 Record and 12.62%
Museum Drive Beneficial
Greenwich, CT 06830
Charles Schwab & Co. Inc. 47,153 Record 11.88%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
PMF II
- ------
Charles Schwab & Co. Inc. 695,970 Record 18.69%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Steven F. Fischer & 212,640 Record 5.71%
Frederick C. Fisher Co.
TTEES U/A/D 1/1/76
Fischer Special Manufacturing
111 Industrial Road
Cold Spring, KY 41076-9020
As of March 31, 1998 all of the trustees and officers of the Trust as a
group beneficially owned less than 1% of the outstanding shares of each of
Pennsylvania Mutual, Royce Premier and Total Return Funds, approximately 1% of
the outstanding shares of Royce Micro-Cap Fund, approximately 15.0% of the
outstanding shares of Royce Low-Priced Stock Fund, approximately 23.3% of the
outstanding shares of Royce GiftShares Fund, approximately 49.2% of the
outstanding shares of Royce Financial Services Fund, approximately 2.9% of the
outstanding shares of PMF II and 100% of the outstanding shares of Royce Special
Equity Fund.
INVESTMENT ADVISORY SERVICES
Services Provided by Royce
As compensation for its services under the Investment Advisory Agreements
with the Funds, Royce is entitled to receive the following fees:
<PAGE>
Percentage Per Annum
Fund of Fund's Average Net Assets
---- ----------------------------
Pennsylvania Mutual Fund 1.00% of first $50,000,000,
.875% of next $50,000,000 and
.75% of any additional average net assets
Royce Premier Fund 1.00%
Royce Micro-Cap Fund 1.50%
Royce Low-Priced Stock Fund 1.50%
Royce GiftShares Fund 1.25%
Royce Total Return Fund 1.00%
Royce Financial Services Fund 1.50%
PMF II 1.00%
Royce Special Equity Fund 1.00%
Such fees are payable monthly from the assets of the Fund involved and, in the
case of Pennsylvania Mutual Fund and Royce GiftShares Fund, are allocated
between the Investment and Consultant Classes of their shares based on their
relative net assets.
Under the Investment Advisory Agreements, Royce (i) determines the
composition of each Fund's portfolio, the nature and timing of the changes in it
and the manner of implementing such changes, subject to any directions it may
receive from the Trust's Board of Trustees; (ii) provides each Fund with
investment advisory, research and related services for the investment of its
assets; (iii) furnishes, without expense to the Trust, the services of certain
of its executive officers and full-time employees; and (iv) pays such persons'
salaries and executive expenses and all expenses incurred in performing its
investment advisory duties under the Investment Advisory Agreements.
The Trust pays all administrative and other costs and expenses attributable
to its operations and transactions, including, without limitation, transfer
agent and custodian fees; legal, administrative and clerical services; rent for
its office space and facilities; auditing; preparation, printing and
distribution of its prospectuses, proxy statements, shareholders reports and
notices; supplies and postage; Federal and state registration fees; Federal,
state and local taxes; non-affiliated trustees' fees; and brokerage commissions.
For each of the three years ended December 31, 1995, 1996 and 1997, as
applicable, Royce received advisory fees from the Funds (net of any amounts
waived by Royce) and waived advisory fees payable to it, as follows:
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Pennsylvania Mutual Fund
1995 $5,361,354 88,173
1996 4,104,694 198,074
1997 4,379,842 -
<PAGE>
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Royce Premier Fund
1995 $2,603,445 6,279
1996 2,838,340 65,000
1997 4,319,656 -
Royce Micro-Cap Fund
1995 $ 804,905 14,047
1996 1,792,264 96,036
1997 1,937,727 511,724
Royce Low-Priced Stock Fund
1995 $ 6,174 31,425
1996 122,045 51,828
1997 146,709 108,828
Royce GiftShares Fund
1995* $ 0 $ 86
1996 0 7,866
1997 0 19,859
Royce Total Return Fund
1995 $ 12,027 9,947
1996 12,189 28,758
1997 444,718 93,398
Royce Financial Services Fund
1995 $ 0 20,261
1996 0 29,185
1997 4,322 28,934
PMF II
1996** $ 0 $ 12,215
1997 84,743 114,508
__________
* December 27, 1995 (commencement of operations) to December 31, 1995
** November 19, 1996 (commencement of operations) to December 31, 1996
DISTRIBUTOR
RFS, the distributor of the shares of each Fund, has its office at
1414 Avenue of the Americas, New York, New York 10019. It was organized in
November 1982 and is a member of the National Association of Securities Dealers,
Inc. ("NASD").
<PAGE>
As compensation for its services and for the expenses payable by it under
the Distribution Agreement with the Trust, RFS is entitled to receive, for and
from the assets of the Fund involved, a monthly fee equal to 1% per annum
(consisting of an asset-based sales charge of .75% and a personal service and/or
account maintenance fee of .25%) of Pennsylvania Mutual Fund's, Royce Micro-Cap
Fund's and Royce GiftShares Fund's Consultant Classes, respective average net
assets and .25% per annum (consisting of an asset-based sales charge) of Royce
GiftShares Fund's Investment Class, Royce Low-Priced Stock and Financial
Services Funds' respective average net assets. Except to the extent that they
may be waived by RFS, these fees are not subject to any required reductions.
RFS is also entitled to receive the proceeds of any front-end sales loads that
may be imposed on purchases of shares of Pennsylvania Mutual Fund's, Royce
Micro-Cap Fund's and Royce GiftShares Fund's Consultant Classes and of any
contingent deferred sales charges that may be imposed on redemptions of such
shares. Currently each of Pennsylvania Mutual Fund's and Royce Micro-Cap Fund's
Consultant Class shares bear a 1% contingent deferred sales charge on shares
redeemed within one year of their purchase. Currently Royce GiftShares Fund's
Consultant Class shares bear a contingent deferred sales charge which declines
from 5% during the first year after purchase to 1.5% during the sixth year after
purchase. No contingent deferred sales charge is imposed after the sixth year.
Pennsylvania Mutual Fund's Investment Class, Royce Premier Fund, Royce Micro-Cap
Fund's and Royce GiftShares Fund's Investment Classes and PMF II do not pay any
fees to RFS under the Distribution Agreement.
Under the Distribution Agreement, RFS (i) seeks to promote the sale and/or
continued holding of shares of such Funds through a variety of activities,
including advertising, direct marketing and servicing investors and introducing
parties on an on-going basis; (ii) pays sales commissions and other fees to
those broker-dealers, investment advisers and others (excluding banks) who have
introduced investors to such Funds (which commissions and other fees may or may
not be the same amount as or otherwise comparable to the distribution fees
payable to RFS); (iii) pays the cost of preparing, printing and distributing any
advertising or sales literature and the cost of printing and mailing the Funds'
prospectuses to persons other than shareholders of the Funds; and (iv) pays all
other expenses incurred by it in promoting the sale and/or continued holding of
the shares of such Funds and in rendering such services under the Distribution
Agreement. The Trust bears the expense of registering its shares with the
Securities and Exchange Commission and the cost of qualifying and maintaining
the qualification of its shares for sale under the securities laws of the
various states.
The Trust entered into the Distribution Agreement with RFS pursuant to a
Distribution Plan which, among other things, permits each Fund that remains
covered by the Plan to pay the monthly distribution fee out of its net assets.
As required by Rule 12b-1 under the 1940 Act, the Plan has been approved by the
shareholders of each Fund or class of shares that remains covered by the Plan
and by the Trust's Board of Trustees (which also approved the Distribution
Agreement pursuant to which the distribution fees are paid), including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan or
the Distribution Agreement.
In approving the Plan, the Trustees, in accordance with the requirements of
Rule 12b-1, considered various factors (including the amount of the distribution
fees) and determined that
<PAGE>
there is a reasonable likelihood that the Plan will benefit each Fund and its
shareholders or class of shareholders.
The Plan may be terminated as to any Fund or class of shares by vote of a
majority of the non-interested Trustees who have no direct or indirect financial
interest in the Plan or in the Distribution Agreement or by vote of a majority
of the outstanding voting securities of such Fund or class. Any change in the
Plan that would materially increase the distribution cost to a Fund or class of
shares requires approval by the shareholders of such Fund or class; otherwise,
the Plan may be amended by the Trustees, including a majority of the
non-interested Trustees, as described above.
The Distribution Agreement may be terminated as to any Fund or class of
shares at any time on 60 days' written notice and without payment of any penalty
by RFS, by the vote of a majority of the outstanding voting securities of such
Fund or class or by the vote of a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related thereto.
The Distribution Agreement and the Plan, if not sooner terminated in
accordance with their terms, will continue in effect for successive one-year
periods, provided that each such continuance is specifically approved (i) by the
vote of a majority of the Trustees who are not parties to the Agreement or
interested persons of any such party and who have no direct or indirect
financial interest in the Plan or the Agreement and (ii) either by the vote of a
majority of the outstanding voting securities of the Fund or class of shares
involved or by the vote of a majority of the entire Board of Trustees.
While the Plan is in effect, the selection and nomination of those Trustees
who are not interested persons of the Trust will be committed to the discretion
of the Trustees who are not interested persons.
RFS has temporarily waived the distribution fees payable to it by Royce
Low-Priced Stock, Total Return and Financial Services Funds and PMF II.
No trustee of the Trust who was not an interested person of the Trust had
any direct or indirect financial interest in the operation of the Plan or the
Distribution Agreement. Charles M. Royce, an interested person of the Trust,
Royce and RFS, had such an interest.
Under the Rules of Fair Practice of the NASD, the front-end sales loads,
asset-based sales charges and contingent deferred sales charges payable by any
Fund and/or the shareholders thereof to RFS are limited to (i) 6.25% of total
new gross sales occurring after July 7, 1993 plus interest charges on such
amount at the prime rate plus 1% per annum, increased by (ii) 6.25% of total new
gross sales occurring after such Fund first adopted the Plan until July 7, 1993
plus interest charges on such amount at the prime rate plus 1% per annum less
any front-end, asset-based or deferred sales charges on such sales or net assets
resulting from such sales.
<PAGE>
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the custodian for
the securities, cash and other assets of each Fund and the transfer agent and
dividend disbursing agent for the shares of each Fund, but it does not
participate in any Fund's investment decisions. The Trust has authorized State
Street to deposit certain domestic and foreign portfolio securities in several
central depository systems and to use foreign sub-custodians for certain foreign
portfolio securities, as allowed by Federal law. State Street's main office is
at 225 Franklin Street, Boston, Massachusetts 02107. All mutual fund transfer,
dividend disbursing and shareholder service activities are performed by State
Street's agent, National Financial Data Services, at 1004 Baltimore, Kansas
City, Missouri 64105.
State Street is responsible for the calculation of each Fund's daily net
asset value per share and for the maintenance of its portfolio and general
accounting records and also provides certain shareholder services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., whose address is One Post Office Square, Boston,
Massachusetts 02109, are the independent accountants of the Trust.
PORTFOLIO TRANSACTIONS
Royce is responsible for selecting the brokers who effect the purchases and
sales of each Fund's portfolio securities. No broker is selected to effect a
securities transaction for a Fund unless such broker is believed by Royce to be
capable of obtaining the best price and execution for the security involved in
the transaction. Best price and execution is comprised of several factors,
including the liquidity of the security, the commission charged, the promptness
and reliability of execution, priority accorded the order and other factors
affecting the overall benefit obtained. In addition to considering a broker's
execution capability, Royce generally considers the brokerage and research
services which the broker has provided to it, including any research relating to
the security involved in the transaction and/or to other securities. Such
services may include general economic research, market and statistical
information, industry and technical research, strategy and company research and
performance measurement and may be written or oral. Brokers that provide both
research and execution services are generally paid higher commissions than those
paid to brokers who do not provide such research and execution services. Royce
determines the overall fairness of brokerage commissions paid, after considering
the amount another broker might have charged for effecting the transaction and
the value placed by Royce upon the brokerage and/or research services provided
by such broker, viewed in terms of either that particular transaction or Royce's
overall responsibilities with respect to its accounts.
Royce is authorized, in accordance with Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreements with the
Trust, to pay a brokerage commission in excess of that which another broker
might have charged for effecting the same transaction, in recognition of the
value of brokerage and research services provided by the broker.
<PAGE>
Brokerage and research services furnished by brokers through whom a Fund
effects securities transactions may be used by Royce in servicing all of its
accounts and those of RMC, and not all of such services may be used by Royce in
connection with the Trust or any one of its Funds.
Royce may also place a Fund's brokerage business with firms which promote
the sale of the Funds' shares, consistent with achieving the best price and
execution. In no event will a Fund's brokerage business be placed with RFS.
Even though investment decisions for each Fund are made independently from
those for the other Funds and the other accounts managed by Royce and RMC,
securities of the same issuer are frequently purchased, held or sold by more
than one Royce/RMC account because the same security may be suitable for all of
them. When the same security is being purchased or sold for more than one
Royce/RMC account on the same trading day, Royce seeks to average the
transactions as to price and allocate them as to amount in a manner believed to
be equitable to each. Such purchases and sales of the same security are
generally effected pursuant to Royce/RMC's Trade Allocation Guidelines and
Procedures. Under such Guidelines and Procedures, unallocated orders are placed
with and executed by broker-dealers during the trading day. The securities
purchased or sold in such transactions are then allocated to one or more of
Royce's and RMC's accounts at or shortly following the close of trading, using
the average net price obtained. Such allocations are done based on a number of
judgmental factors that Royce and RMC believe should result in fair and
equitable treatment to those of their accounts for which the securities may be
deemed suitable. In some cases, this procedure may adversely affect the price
paid or received by a Fund or the size of the position obtained for a Fund.
During each of the three years ended December 31, 1995, 1996 and 1997, the
Funds paid brokerage commissions as follows:
Fund 1995 1996 1997
- ---- ---- ---- ----
Pennsylvania Mutual Fund $683,334 $ 935,022 $375,095
Royce Premier Fund 419,040 429,150 583,759
Royce Micro-Cap Fund 117,909 295,737 246,667
Royce Low-Priced Stock Fund 22,645 114,456 100,845
Royce GiftShares Fund 760* 3,555 8,178
Royce Total Return Fund 6,117 21,379 127,534
Royce Financial Services Fund 6,199 6,872 5,511
PMF II - 29,490** 66,857
______________
* For the period from December 27, 1995 (commencement of operations) to
December 31, 1995
** For the period from November 19, 1996 (commencement of operations) to
December 31, 1996
For the year ended December 31, 1997, the aggregate amount of brokerage
transactions of each Fund having a research component and the amount of
commissions paid by each Fund for such transactions were as follows:
<PAGE>
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
Pennsylvania Mutual Fund $ 49,578,098 $ 152,535
Royce Premier Fund 68,332,674 214,659
Royce Micro-Cap Fund 15,195,902 63,715
Royce Low-Priced Stock Fund 3,306,908 20,800
Royce GiftShares Fund 553,720 1,871
Royce Total Return Fund 16,634,611 51,345
Royce Financial Services Fund 932,935 2,381
PMF II 5,566,684 19,318
CODE OF ETHICS AND RELATED MATTERS
Royce, RFS, RMC and The Royce Funds have adopted a Code of Ethics under
which directors, officers, employees and partners of Royce, RFS and RMC ("Royce-
related persons") and interested trustees/directors, officers and employees of
The Royce Funds are prohibited from personal trading in any security which is
then being purchased or sold or considered for purchase or sale by a Royce Fund
or any other Royce or RMC account. Such persons are permitted to engage in
other personal securities transactions if (i) the securities involved are United
States Government debt securities, municipal debt securities, money market
instruments, shares of affiliated or non-affiliated registered open-end
investment companies or shares acquired from an issuer in a rights offering or
under an automatic dividend reinvestment or employer-sponsored automatic
payroll-deduction cash purchase plan or (ii) they first obtain permission to
trade from Royce's Compliance Officer and an executive officer of Royce. The
Code contains standards for the granting of such permission, and it is expected
that permission to trade will be granted only in a limited number of instances.
Royce's and RMC's clients include several private investment companies in
which Royce or RMC has (and, therefore, Charles M. Royce, Jack E. Fockler, Jr.,
W. Whitney George, Boniface A. Zaino and/or other Royce-related persons may be
deemed to beneficially own) a share of up to 15% of the company's realized and
unrealized net capital gains from securities transactions, but less than 5% of
the company's equity interests. The Code of Ethics does not restrict
transactions effected by Royce or RMC for such private investment company
accounts. Transactions for such private investment company accounts are subject
to Royce's and RMC's allocation policies and procedures. See "Portfolio
Transactions".
As of March 31, 1998, Royce-related persons, interested trustees/directors,
officers and employees of The Royce Funds and members of their immediate
families beneficially owned shares of The Royce Funds having a total value of
over $37 million, and Royce's and RMC's equity interests in Royce related
private investment companies totalled approximately $3.1 million.
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is based on the
Fund's current net asset value per share. See "Net Asset Value Per Share" in
the Funds' Prospectuses.
<PAGE>
As set forth under "Net Asset Value Per Share", the Funds' custodian
determines the net asset value per share of each Fund at the close of regular
trading on the New York Stock Exchange on each day that the Exchange is open.
The Exchange is open on all weekdays which are not holidays. Thus, it is closed
on Saturdays and Sundays and on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which would, in the
judgment of the Board of Trustees or management, make it undesirable for a Fund
to pay for all redemptions in cash. In such cases, payment may be made in
portfolio securities or other property of the Fund. However, the Trust has
obligated itself under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder up to $250,000 (or 1% of the Trust's net
assets if that is less) in any 90-day period. Securities delivered in payment of
redemptions would be selected by Royce and valued at the same value assigned to
them in computing the net asset value per share for purposes of such redemption.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
TAXATION
Each Fund has qualified and intends to remain qualified each year for the
tax treatment applicable to a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, a
Fund must comply with certain requirements of the Code relating to, among other
things, the source of its income and the diversification of its assets.
By so qualifying, a Fund will not be subject to Federal income taxes to the
extent that its net investment income and capital gain net income are
distributed, so long as the Fund distributes, as ordinary income dividends, at
least 90% of its investment company taxable income.
A non-deductible 4% excise tax will be imposed on a Fund to the extent that
the Fund does not distribute (including by declaration of certain dividends),
during each calendar year, (i) 98% of its ordinary income for such calendar
year, (ii) 98% of its capital gain net income for the one-year period ending
October 31 of such calendar year (or the Fund's actual taxable year ending
December 31, if elected) and (iii) certain other amounts not distributed in
previous years. To avoid the application of this tax, each Fund intends to
distribute substantially all of its net investment income and capital gain net
income at least annually to its shareholders.
Each Fund maintains accounts and calculates income by reference to the U.S.
dollar for U.S. Federal income tax purposes. Investments calculated by reference
to foreign currencies will not necessarily correspond to a Fund's distributable
income and capital gains for U.S. Federal income tax purposes as a result of
fluctuations in foreign currency exchange rates. Furthermore, if any exchange
control regulations were to apply to a Fund's investments in foreign securities,
such regulations could restrict that Fund's ability to repatriate investment
income or the proceeds of
<PAGE>
sales of securities, which may limit the Fund's ability to make sufficient
distributions to satisfy the 90% distribution requirement and avoid the 4%
excise tax.
Income earned or received by a Fund from investments in foreign securities
may be subject to foreign withholding taxes unless a withholding exemption is
provided under an applicable treaty. Any such taxes would reduce that Fund's
cash available for distribution to shareholders. It is currently anticipated
that none of the Funds will be eligible to elect to "pass through" such taxes to
their shareholders for purposes of enabling them to claim foreign tax credits or
other U.S. income tax benefits with respect to such taxes.
If a Fund invests in stock of a so-called passive foreign investment
company ("PFIC"), such Fund may be subject to Federal income tax on a portion of
any "excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The amount so
allocated to any taxable year of the Fund prior to the taxable year in which the
excess distribution or disposition occurs would be taxed to the Fund at the
highest marginal income tax rate in effect for such years, and the tax would be
further increased by an interest charge. The amount allocated to the taxable
year of the distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be taxable to the
Fund to the extent distributed by the Fund as a dividend to shareholders.
In lieu of being taxable in the manner described above, a Fund may be able
to elect to include annually in income its pro rata share of the ordinary
earnings and net capital gain (whether or not distributed) of the PFIC. In order
to make this election, the Fund would be required to obtain annual information
from the PFICs in which it invests, which in many cases may be difficult to
obtain. Alternatively, if eligible, the Fund may be able to elect to mark to
market its PFIC stock, resulting in the stock being treated as sold at fair
market value on the last business day of each taxable year. In the event that
the Fund makes a mark to market election for the current taxable year, then any
resulting gain would be reported as ordinary income, and any resulting loss
would not be recognized. However, if such election is made for any taxable year
beginning after December 31, 1997, then any resulting gain or loss is
reportable as ordinary income or loss. The Fund may make either of these
elections with respect to its investments (if any) in PFICs.
Investments of a Fund in securities issued at a discount or providing for
deferred interest payments or payments of interest in kind (which investments
are subject to special tax rules under the Code) will affect the amount, timing
and character of distributions to shareholders. For example, a Fund which
acquires securities issued at a discount will be required to accrue as ordinary
income each year a portion of the discount (even though the Fund may not have
received cash interest payments equal to the amount included in income) and to
distribute such income each year in order to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
<PAGE>
Distributions
For Federal income tax purposes, distributions by each Fund from net
investment income and from any net realized short-term capital gain are taxable
to shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Ordinary income generally cannot be offset by capital
losses. For corporate shareholders, distributions of net investment income (but
not distributions of short-term capital gains) may qualify in part for the 70%
dividends received deduction for purposes of determining their regular taxable
income. (However, the 70% dividends received deduction is not allowable in
determining a corporate shareholder's alternative minimum taxable income.) The
amount qualifying for the dividends received deduction generally will be limited
to the aggregate dividends received by the Fund from domestic corporations. The
dividends received deduction for corporate shareholders may be further reduced
or eliminated if the shares with respect to which dividends are received by the
Fund are treated as debt-financed or are deemed to have been held for fewer than
46 days, during a 90 day period beginning 45 days before and ending 45 days
after the Fund is entitled to receive such dividends, or under other generally
applicable statutory limitations.
So long as a Fund qualifies as a regulated investment company and satisfies
the 90% distribution requirement, distributions by such Fund from net capital
gains will be taxable, whether received in cash or reinvested in Fund shares and
regardless of how long a shareholder has held his or its Fund shares. Such
distributions are not eligible for the dividends received deduction. Capital
gain distributions by the Fund, although fully includible in income currently
are taxed at a lower maximum marginal Federal income tax rate than ordinary
income in the case of non-corporate shareholders. Such long term capital gains
are generally taxed at maximum marginal rates of either 28% or 20% depending, in
part, on the holding period and the date of sale of the Fund's investments which
generated the related gains.
Distributions by a Fund in excess of its current and accumulated earnings
and profits will reduce a shareholder's basis in Fund shares (but, to that
extent, will not be taxable) and, to the extent such distributions exceed the
shareholder's basis, will be taxable as capital gain assuming the shareholder
holds Fund shares as capital assets.
A distribution will be treated as paid during a calendar year if it is
declared in October, November or December of the year to shareholders of record
in such month and paid by January 31 of the following year. Such distributions
will be taxable to such shareholders as if received by them on December 31, even
if not paid to them until January. In addition, certain other distributions made
after the close of a taxable year of a Fund may be "spilled back" and treated as
paid by the Fund (other than for purposes of avoiding the 4% excise tax) during
such year. Such dividends would be taxable to the shareholders in the taxable
year in which the distribution was actually made by the Fund.
The Trust will send written notices to shareholders regarding the amount
and Federal income tax status as ordinary income or capital gain of all
distributions made during each calendar year.
Back-up Withholding/Withholding Tax
Under the Code, certain non-corporate shareholders may be subject to 31%
withholding on reportable dividends, capital gains distributions and redemption
payments ("back-up withholding").
<PAGE>
Generally, shareholders subject to back-up withholding will be those for whom a
taxpayer identification number and certain required certifications are not on
file with the Trust or who, to the Trust's knowledge, have furnished an
incorrect number. In addition, the Trust is required to withhold from
distributions to any shareholder who does not certify to the Trust that such
shareholder is not subject to back-up withholding due to notification by the
Internal Revenue Service that such shareholder has under-reported interest or
dividend income. When establishing an account, an investor must certify under
penalties of perjury that such investor's taxpayer identification number is
correct and that such investor is not subject to or is exempt from back-up
withholding.
Ordinary income distributions paid to shareholders who are non-resident
aliens or which are foreign entities will be subject to 30% United States
withholding tax unless a reduced rate of withholding or a withholding exemption
is provided under an applicable treaty. Non-U.S. shareholders are urged to
consult their own tax advisers concerning the United States tax consequences to
them of investing in a Fund.
Timing of Purchases and Distributions
At the time of an investor's purchase, a Fund's net asset value may reflect
undistributed income or capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to the investor of such
amounts, although it may in effect constitute a return of his or its investment
in an economic sense, would be taxable to the shareholder as ordinary income or
capital gain as described above. Investors should carefully consider the tax
consequences of purchasing Fund shares just prior to a distribution, as they
will receive a distribution that is taxable to them.
Sales or Redemptions of Shares
Gain or loss recognized by a shareholder upon the sale, redemption or other
taxable disposition of Fund shares (provided that such shares are held by the
shareholder as a capital asset) will be treated as capital gain or loss,
measured by the difference between the adjusted basis of the shares and the
amount realized on the sale or exchange. For taxable dispositions of shares
after July 28, 1997, gains for noncorporate shareholders will be taxed at a
maximum Federal rate of 20% (20% rate gain) for shares held for more than 18
months; 28% (28% rate gain) for shares held for more than 12 months but for 18
months or less; and 39.6% (ordinary income rate) for shares held for 12 months
or less. For regular corporations, the maximum Federal rate on all income is
35%. A loss will be disallowed to the extent that the shares disposed of are
replaced (including by receiving Fund shares upon the reinvestment of
distributions) within a period of 61 days, beginning 30 days before and ending
30 days after the sale of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. A loss recognized
upon the sale, redemption or other taxable disposition of shares held for 6
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received with respect to such shares. A
shareholder's exchange of shares between Funds will be treated for tax purposes
as a redemption of the Fund shares surrendered in the exchange, and may result
in the shareholder's recognizing a taxable gain or loss.
* * *
The foregoing relates to Federal income taxation. Distributions, as well
as any gains from a sale, redemption or other taxable disposition of Fund
shares, also may be subject to state and local
<PAGE>
taxes. Under current law, so long as each Fund qualifies for the Federal
income tax treatment described above, it is believed that neither the Trust nor
any Fund will be liable for any income or franchise tax imposed by Delaware.
Investors are urged to consult their own tax advisers regarding the
application to them of Federal, state and local tax laws.
Royce GiftShares Fund
Gift Taxes
An investment in Royce GiftShares Fund may be a taxable gift for Federal
tax purposes, depending upon the options selected and other gifts that the Donor
and his or her spouse may make during the year.
If the Donor selects the Withdrawal Option, the entire amount of the gift
will be a "present interest" that qualifies for the Federal annual gift tax
exclusion. In that case, the Donor will be required to file a Federal gift tax
return for the year of the gift only if (i) he or she makes gifts (including the
gift of Fund shares) totaling more than the amount of the Federal annual gift
tax exclusion (currently, $10,000) to the same individual during that year or,
(ii) the Donor and his or her spouse elects to have any gifts by either of them
treated as "split gifts" (i.e. treated as having been made one-half by each of
them for gift tax purposes) or (iii) the Donor makes any gift of a future
interest during that year. The Trustee will notify the Beneficiary of his or her
right of withdrawal promptly following any investment in the Fund under the
Withdrawal Option.
If the Donor selects the Accumulation Option, the entire amount of the gift
will be a "future interest" for Federal gift tax purposes, so that none of the
gift will qualify for the Federal annual gift tax exclusion. Consequently, the
Donor will have to file a Federal gift tax return IRS (Form 709) reporting the
entire amount of the gift, even if the gift is less than $10,000.
No Federal gift tax will be payable by the Donor until his or her
cumulative taxable gifts (i.e., gifts other than those qualifying for the annual
exclusion or other exclusions) exceed the Federal gift and estate tax applicable
exclusion amount (currently $625,000 in 1998, $650,000 in 1999 and eventually in
uneven stages, to $1,000,000 in 2006). Any gift of Fund shares that does not
qualify as a present interest will reduce the amount of the Federal gift and
estate tax exemption that would otherwise be available for future gifts or to
the Donor's estate. All gifts of Fund shares qualify for "gift splitting" with
the Donor's spouse, meaning that the Donor and his or her spouse may elect to
treat the gift as having been made one-half by each of them.
The Donor's gift of Fund shares may also have to be reported for state gift
tax purposes, if the state in which the Donor resides imposes a gift tax. Many
states do not impose such a tax. Some of those that do follow the Federal rules
concerning the types of transfers subject to tax and the availability of the
annual exclusion.
<PAGE>
Generation-Skipping Transfer Taxes
If the Beneficiary of a gift of Royce GiftShares Fund shares is a
grandchild or more remote descendant of the Donor or is assigned, under Federal
tax law, to the generation level of the Donor's grandchildren or more remote
descendants, any part of the gift that does not qualify for the Federal annual
gift tax exclusion will be a taxable transfer for purposes of the Federal
generation-skipping transfer tax ("GST tax"). The Donor may protect these gifts
from the GST tax by allocating his or her GST exemption until his or her
cumulative gifts (other than certain gifts qualifying for the annual exclusion
or other exclusions) to individuals assigned, under Federal tax law, to the
generation level of the Donor's grandchildren or more remote descendants exceed
the GST tax exemption (currently, $1,000,000). The tax rate on transfers
subject to GST tax is the maximum Federal estate tax rate (currently, 55%).
Gifts subject to GST tax, whether or not covered by the GST tax exemption, must
be reported on the Donor's Federal gift tax return. Whether, and the extent to
which, an investment in Royce GiftShares Fund will qualify for the Federal
annual gift tax exclusion will depend upon the options selected and other gifts
that the Donor and his or her spouse may have made during the year. See "Gift
Taxes" above.
Income Taxes
The Internal Revenue Service has taken the position in recent rulings that
a trust beneficiary who is given a power of withdrawal over contributions to the
trust should be treated as the "owner" of the portion of the trust that was
subject to the power for Federal income tax purposes. Accordingly, if the Donor
selects the Withdrawal Option, the Beneficiary may be treated as the "owner" of
all of the Fund shares in the account for Federal income tax purposes, and will
be required to report all of the income and capital gains earned in the Trust on
his or her personal Federal income tax return. The Trust will not pay Federal
income taxes on any of the Trust's income or capital gains. The Trustee will
prepare and file the Federal income tax information returns that are required
each year (and any state income tax returns that may be required), and will send
the Beneficiary a statement following each year showing the amounts (if any)
that the Beneficiary must report on his or her income tax returns for that year.
If the Beneficiary is under fourteen years of age, these amounts may be subject
to Federal income taxation at the marginal rate applicable to the Beneficiary's
parents. The Beneficiary will have the option to require the Trustee to pay him
or her a portion of the Trust's income and capital gains annually to provide
funds with which to pay any resulting income taxes, which the Trustee will do by
redeeming Fund shares. The amount distributed will be a fraction of the Trust's
ordinary income and short-term capital gains "intermediate term" (12 to 18 month
holding period) capital gains and long-term capital gains equal to the highest
marginal Federal income tax rate imposed on each type of income (currently,
39.6%, 28% and 20%, respectively). If the Beneficiary selects this option, he
or she will receive those fractions of his or her Trust's income and capital
gains annually for the duration of the Trust.
Under the Withdrawal Option, the Beneficiary will also be able to require
the Trustee to pay his or her tuition, room and board and other expenses of his
or her college or post-graduate education (subject, in certain instances, to
approval by the Beneficiary's Representative), and the Trustee will raise the
cash necessary to fund these distributions by redeeming Fund shares. Any such
redemption will result in the realization of capital gain or loss on the shares
redeemed, which will be reportable by the Beneficiary on his or her income tax
returns for the year in which the shares are redeemed, as described above.
<PAGE>
If the Donor selects the Accumulation Option, the Trust that he or she
creates will be subject to Federal income tax on all income and capital gains
earned by the Trust, less a $100 annual exemption (in lieu of the personal
exemption allowed to individuals). The amount of the tax will be determined
under the tax rate schedule applicable to estates and trusts, which is more
sharply graduated than the rate schedule for individuals, reaching the same
maximum marginal rate for ordinary income (currently, 39.6%), but at a much
lower taxable income level (for 1997, $8,350) than would apply to an individual.
It is anticipated, however, that most of the income generated by Fund shares
will be long-term capital gains, on which the Federal income tax rate is
currently limited to 20%. The Trustee will raise the cash necessary to pay any
Federal or state income taxes by redeeming Fund shares. The Beneficiary will
not pay Federal income taxes on any of the Trust's income or capital gains,
except those earned in the year when the Trust terminates. The Trustee will
prepare and file all Federal and state income tax returns that are required each
year, and will send the Beneficiary an information statement for the year in
which the Trust terminates showing the amounts (if any) that the Beneficiary
must report on his or her Federal and state income tax returns for that year.
When the Trust terminates, the distribution of the remaining Fund shares
held in the Trust to the Beneficiary will not be treated as a taxable
disposition, and no capital gain or loss will be realized by the Beneficiary
(or, if he or she has died, by his or her estate) at that time. Any Fund shares
received by the Beneficiary will have the same cost basis as they had in the
Trust at the time of termination. Any Fund shares received by the Beneficiary's
estate will have a basis equal to the value of the shares at the Beneficiary's
death (or the alternative valuation date for Federal estate tax purposes, if
elected).
Consultation With Qualified Tax Adviser
Due to the complexity of Federal and state gift, GST and income tax laws
pertaining to all gifts in trust, prospective Donors should consider consulting
with an attorney or other qualified tax adviser before investing in Royce
GiftShares Fund.
DESCRIPTION OF THE TRUST
Trust Organization
The Trust was organized in April 1996 as a Delaware business trust. It is
the successor by mergers to The Royce Fund, a Massachusetts business trust (the
"Predecessor"), and Pennsylvania Mutual Fund, a Delaware business trust. The
mergers were effected on June 28, 1996, under an Agreement and Plan of Merger
pursuant to which the Predecessor and Pennsylvania Mutual Fund merged into the
Trust, with each Fund of the Predecessor and Pennsylvania Mutual Fund becoming
an identical counterpart series of the Trust, Royce and RE&A continuing as the
Funds' investment advisers under their pre-merger Investment Advisory Agreements
and RFS continuing as the Trust's distributor. A copy of the Trust's Certificate
of Trust is on file with the Secretary of State of Delaware, and a copy of its
Trust Instrument, its principal governing document, is available for inspection
by shareholders at the Trust's office in New York.
The Trust has an unlimited authorized number of shares of beneficial
interest, which may be divided into an unlimited number of series and/or classes
without shareholder approval. (Each Fund,
<PAGE>
other than Pennsylvania Mutual Fund, presently has only one class of shares.)
All shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares). Shares vote by individual series and/or class
except as otherwise required by the 1940 Act or when the Trustees determine that
the matter affects shareholders of more than one series and/or class.
Pennsylvania Mutual Fund, Royce Micro-Cap Fund, and Royce GiftShares Fund
each have two classes of shares, an Investment Class and a Consultant Class.
The shares of each class represent a pari passu interest in such Fund's
investment portfolio and other assets and have the same redemption and other
rights.
On June 17, 1997, Pennsylvania Mutual Fund and Royce Total Return Fund
acquired all of the assets and assumed all of the liabilities of Royce Value
Fund and Royce Equity Income Fund, respectively. The acquisitions were
accomplished by exchanging shares of Pennsylvania Mutual Fund's Consultant Class
and of Royce Total Return Fund equal in value to the shares of Royce Value Fund
and Royce Equity Income Fund owned by each of their respective shareholders.
On November 25, 1997, Royce Global Services Fund changed its investment
objective and, in connection therewith, its name to Royce Financial Services
Fund.
Each of the Trustees currently in office were elected by the Predecessor's
shareholders. There will normally be no meeting of shareholders for the
election of Trustees until less than a majority of such Trustees remain in
office, at which time the Trustees will call a shareholders meeting for the
election of Trustees. In addition, Trustees may be removed from office by
written consents signed by the holders of a majority of the outstanding shares
of the Trust and filed with the Trust's custodian or by a vote of the holders of
a majority of the outstanding shares of the Trust at a meeting duly called for
this purpose upon the written request of holders of at least 10% of the Trust's
outstanding shares. Upon the written request of 10 or more shareholders of the
Trust, who have been shareholders for at least 6 months and who hold shares
constituting at least 1% of the Trust's outstanding shares, stating that such
shareholders wish to communicate with the Trust's other shareholders for the
purpose of obtaining the necessary signatures to demand a meeting to consider
the removal of a Trustee, the Trust is required (at the expense of the
requesting shareholders) to provide a list of its shareholders or to distribute
appropriate materials. Except as provided above, the Trustees may continue to
hold office and appoint their successors.
The trustee of the Royce GiftShares Fund trusts will send notices of
meetings of Royce GiftShares Fund shareholders, proxy statements and proxies for
such meetings to the trusts' beneficiaries to enable them to attend the meetings
in person or vote by proxies. It will vote all GiftShares Fund shares held by it
which are not present at the meetings and for which no proxies are returned in
the same proportions as GiftShares Fund shares for which proxies are returned.
Shares are freely transferable, are entitled to distributions as declared
by the Trustees and, in liquidation of the Trust, are entitled to receive net
assets of their series and/or class. Shareholders have no preemptive rights.
The Trust's fiscal year ends on December 31.
<PAGE>
Shareholder Liability
Generally, shareholders will not be personally liable for the obligations
of their Fund or of the Trust under Delaware law. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust is entitled to the
same limited liability extended to stockholders of private corporations for
profit organized under the Delaware General Corporation Law. No similar
statutory or other authority limiting business trust shareholder liability
exists in many other states. As a result, to the extent that the Trust or a
shareholder of the Trust is subject to the jurisdiction of courts in those
states, the courts may not apply Delaware law and may thereby subject Trust
shareholders to liability. To guard against this possibility, the Trust
Instrument (i) requires that every written obligation of the Trust contain a
statement that such obligation may be enforced only against the Trust's assets
(however, the omission of this disclaimer will not operate to create personal
liability for any shareholder); and (ii) provides for indemnification out of
Trust property of any Trust shareholder held personally liable for the Trust's
obligations. Thus, the risk of a Trust shareholder incurring financial loss
beyond his investment because of shareholder liability is limited to
circumstances in which: (i) a court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Trust itself
would be unable to meet its obligations. In light of Delaware law, the nature of
the Trust's business and the nature of its assets, management believes that the
risk of personal liability to a Trust shareholder is extremely remote.
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds is historical and is not intended to indicate
future returns. Each Fund's share price and total returns fluctuate in response
to market conditions and other factors, and the value of a Fund's shares when
redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of a Fund's return, including the
effect of reinvesting dividends and capital gain distributions and any change in
the Fund's net asset value per share (NAV) over the period. Average annual
total returns are calculated by determining the growth or decline in value of a
hypothetical historical investment in the Fund over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative return of 100% over ten years would produce
an average annual total return of 7.18%, which is the steady annual rate of
return that would equal 100% growth on a compounded basis in ten years. While
average annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance is not constant
over time, but changes from year to year, and that average annual total returns
represent averaged figures as opposed to the actual year-to-year performance of
the Fund.
In addition to average annual total returns, a Fund's cumulative total
returns, reflecting the simple change in value of an investment over a stated
period, may be quoted. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments or a series of redemptions, over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and
<PAGE>
changes in share prices) in order to illustrate the relationship of these
factors and their contributions to total return. Total returns and other
performance information may be quoted numerically or in a table, graph or
similar illustration.
Historical Fund Results
The following table shows certain of the Funds' total returns for the
periods indicated. Such total returns reflect all income earned by each Fund,
any appreciation or depreciation of the assets of such Fund and all expenses
incurred by such Fund for the stated periods. The table compares the Funds'
total returns to the records of the Russell 2000 Index (Russell 2000) and
Standard & Poor's 500 Composite Stock Price Index (S&P 500) over the same
periods. The comparison to the Russell 2000 shows how the Funds' total returns
compared to the record of a broad index of small capitalization stocks. The S&P
500 comparison is provided to show how the Funds' total returns compared to the
record of a broad average of common stock prices over the same period. The
Funds have the ability to invest in securities not included in the indices, and
their investment portfolios may or may not be similar in composition to the
indices. Figures for the indices are based on the prices of unmanaged groups of
stocks, and, unlike the Funds, their returns do not include the effect of paying
brokerage commissions and other costs and expenses of investing in a mutual
fund.
Period Ended
Fund December 31, 1997 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Pennsylvania Mutual Fund (Investment Class)
1 Year Total Return 25.0% 22.4% 33.4%
5 Year Average Annual Total Return 13.1 16.4 20.3
10 year Average Annual Total Return 13.8 15.8 18.1
Pennsylvania Mutual Fund (Consultant Class)
Cumulative Annual Total Return since 6-18-97 12.0% 12.2% 9.5%
(commencement of sale of Consultant Class
shares)
Royce Premier Fund
1 Year Total Return 18.4% 22.4% 33.4%
5 Year Average Annual Total Return 15.2 16.4 20.3
Average Annual Total Return since 12-31-91 15.3 16.7 18.1
(commencement of operations)
Royce Micro-Cap Fund
1 Year Total Return 24.7% 22.4% 33.4%
5 Year Average Annual Total Return 17.1 16.4 20.3
Average Annual Total Return since 12-31-91 19.0 16.7 18.1
(commencement of operations)
<PAGE>
Period Ended
Fund December 31, 1997 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Royce Low-Priced Stock Fund
1 Year Total Return 19.5% 22.4% 33.4%
Average Annual Total Return since 12-15-93 16.5 16.6 23.0
(commencement of operations)
Royce GiftShares Fund (Investment Class)
1 Year Total Return 26.0% 22.4% 33.4%
Average Annual Total Return since 12-27-95 25.7 19.8 28.1
(commencement of operations)
Royce GiftShares Fund (Consultant Class)
Cumulative Annual Total Return since 9-26-97 1.5% -2.3% 3.9%
(commencement of sale of Consultant Class
shares)
Royce Total Return Fund
1 Year Total Return 23.7% 22.4% 33.4%
Average Annual Total Return since 12-15-93 19.7 16.6 23.0
(commencement of operations)
Royce Financial Services Fund
1 Year Total Return 19.4% 22.4% 33.4%
Average Annual Total Return since 12-15-94 18.6 23.5 31.1
(commencement of operations)
PMF II
1 Year Total Return 20.8% 22.4% 33.4%
Average Annual Total Return since 11-19-96 24.0 25.0 29.5
(commencement of operations)
During the applicable period ended December 31, 1997, a hypothetical
$10,000 investment in certain of the Funds would have grown as indicated below,
assuming all distributions were reinvested:
Fund/Period Commencement Date Hypothetical Investment at December 31, 1997
- ----------------------------- --------------------------------------------
Pennsylvania Mutual Fund (12-31-77) $200,856
Royce Premier Fund (12-31-91) 23,461
Royce Micro-Cap Fund (12-31-91) 28,426
Royce Low-Priced Stock Fund (12-15-93) 18,551
Royce GiftShares Fund (12-27-95) 15,584
Royce Total Return Fund (12-15-93) 20,698
Royce Financial Services Fund (12-15-94) 16,790
PMF II (11-19-96) 12,795
<PAGE>
The Funds' performances may be compared in advertisements to the
performance of other mutual funds in general or to the performance of particular
types of mutual funds, especially those with similar investment objectives.
Such comparisons may be expressed as mutual fund rankings prepared by Lipper
Analytical Services, Inc. ("Lipper"), an independent service that monitors the
performance of registered investment companies. The Funds' rankings by Lipper
for the one year period ended December 31, 1997 were:
Fund Lipper Ranking
----- --------------
Pennsylvania Mutual Fund 163 out of 470 small-cap funds
Royce Premier Fund 298 out of 470 small-cap funds
Royce Micro-Cap Fund 21 out of 34 micro-cap funds
Royce Low-Priced Stock Fund 271 out of 470 small-cap funds
Royce GiftShares Fund 148 out of 470 small-cap funds
Royce Total Return Fund 186 out of 470 small-cap funds
Royce Financial Services Fund 35 out of 190 global funds
PMF II 239 out of 470 small-cap funds
Money market funds and municipal funds are not included in the Lipper survey.
The Lipper performance analysis ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees payable by shareholders into consideration and is prepared
without regard to tax consequences.
The Lipper General Equity Funds Average can be used to show how the Funds'
performances compare to a broad-based set of equity funds. The Lipper General
Equity Funds Average is an average of the total returns of all equity funds
(excluding international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper. As of December 31,
1997, the average included 248 capital appreciation funds, 944 growth funds, 284
mid-cap funds, 566 small company growth funds, 43 micro-cap funds, 710 growth
and income funds, 208 equity income funds and 85 S&P Index objective funds.
Capital appreciation, growth and small company growth funds usually invest
principally in common stocks, with long-term growth as a primary goal. Growth
and income and equity income funds tend to be more conservative in nature and
usually invest in a combination of common stocks, bonds, preferred stocks and
other income-producing securities. Growth and income and equity income funds
generally seek to provide their shareholders with current income as well as
growth of capital, unlike growth funds which may not produce income. S&P 500
Index objective funds seek to replicate the performance of the S&P 500.
The Lipper Growth & Income Fund Index can be used to show how the Total
Return Fund's performance compares to a set of growth and income funds. The
Lipper Growth & Income Fund Index is an equally-weighted
<PAGE>
performance index, adjusted for capital gains distributions and income
dividends, of the 30 largest qualifying funds within Lipper's growth and income
investment objective category.
The Lipper Global Fund Index can be used to show how the Global Services
Fund's performance compares to a set of global funds. The Lipper Global Fund
Index is an equally-weighted performance index, adjusted for capital gains
distributions and income dividends, of the 30 largest qualifying funds in
Lipper's global investment objective category.
Ibbotson Associates (Ibbotson) provides historical returns of the capital
markets in the United States. The Funds' performance may be compared to the
long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or U.S. Treasury securities. Ibbotson calculates total
returns in the same manner as the Funds.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, U.S. Treasury bills and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P 500 is used. For small capitalization
stocks, return is based on the return achieved by Dimensional Fund Advisors
(DFA) U.S. 9-10 Small Company Fund. This fund is a market-value-weighted index
of the ninth and tenth deciles of the New York Stock Exchange (NYSE), plus
stocks listed on the American Stock Exchange (AMEX) and over-the-counter (OTC)
with the same or less capitalization as the upper bound of the NYSE ninth
decile. As of November 30, 1997, DFA U.S. 9-10 Small Company Fund contained
approximately 2,881 stocks, with a median market capitalization of about $142
million.
The S&P 500 is an unmanaged index of common stocks frequently used as a
general measure of stock market performance. The Index's performance figures
reflect changes of market prices and quarterly reinvestment of all
distributions.
The S&P SmallCap 600 Index is an unmanaged market-weighted index consisting
of approximately 600 domestic stocks chosen for market size, liquidity and
industry group representation. As of December 31, 1997, the weighted mean market
value of a company in this Index was approximately $923.5 million.
The Russell 2000, prepared by the Frank Russell Company, tracks the return
of the common stocks of approximately 2,000 of the smallest out of the 3,000
largest publicly traded U.S.-domiciled companies by market capitalization. The
Russell 2000 tracks the return on these stocks based on price appreciation or
depreciation and includes dividends.
U.S. Treasury bonds are securities backed by the credit and taxing power of
the U.S. government and, therefore, present virtually no risk of default.
Although such government securities fluctuate in price, they are highly liquid
and may be purchased and sold with relatively small transaction costs (direct
purchase of U.S. Treasury securities can be made with no transaction costs).
Returns on intermediate-term government bonds are based on a one-bond portfolio
constructed each year, containing a bond that is the shortest non-callable bond
available with a maturity of not less than five years. This bond is held for
the calendar year and returns are recorded. Returns on long-term government
bonds are based on a one-bond portfolio constructed each year, containing a bond
that meets several criteria, including having a term of approximately 20 years.
The bond is held for the calendar year and returns are recorded. Returns on
U.S. Treasury bills are based on a one-bill portfolio constructed each month,
containing the shortest term bill having not less than one month to maturity.
The total return on the bill is the month-end price divided by the previous
month-end price, minus one.
<PAGE>
Data up to 1976 is from the U.S. Government Bond file at the University of
Chicago's Center for Research in Security Prices; The Wall Street Journal is the
source thereafter. Inflation rates are based on the Consumer Price Index.
Royce may, from time to time, compare the performance of common stocks,
especially small capitalization stocks, to the performance of other forms of
investment over periods of time.
From time to time, in reports and promotional literature, the Funds'
performances also may be compared to other mutual funds tracked by financial or
business publications and periodicals, such as KIPLINGER's, INDIVIDUAL INVESTOR,
MONEY, FORBES, BUSINESS WEEK, BARRON's, FINANCIAL TIMES, FORTUNE, MUTUAL FUNDS
MAGAZINE and THE WALL STREET JOURNAL. In addition, financial or business
publications and periodicals, as they relate to fund management, investment
philosophy and investment techniques, may be quoted.
Morningstar, Inc.'s proprietary risk ratings may be quoted in advertising
materials. For the three years ended December 31, 1997, the average risk score
for the 1,646 domestic equity funds rated by Morningstar with a three-year
history was 1.08; the average risk score for the 324 small company funds rated
by Morningstar with a three-year history was 1.49. For the three years ended
December 31, 1997, the risk scores for the Funds with a three-year history, and
their ranks within Morningstar's equity funds category and either its small
company category were as follows:
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Pennsylvania 0.70 Within lowest 22% Within lowest 11%
Mutual (In-
vestment
Class)
Premier 0.67 Within lowest 16% Within lowest 10%
Micro-Cap 0.97 Within lowest 57% Within lowest 26%
Low-Priced
Stock 1.24 Within lowest 72% Within lowest 42%
Total Return 0.20 Within top 1%
Financial Ser-
vices 0.86 Within lowest 49%
The Funds' performances may also be compared to those of other compilations
or indices.
Advertising for the Funds may contain examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more
<PAGE>
shares when prices are low. While such a strategy does not assure a profit or
guard against loss in a declining market, the investor's average cost per share
can be lower than if fixed numbers of shares are purchased at the same
intervals. In evaluating such a plan, investors should consider their ability
to continue purchasing shares during periods of low price levels.
The Funds may be available for purchase through retirement plans or other
programs offering deferral of or exemption from income taxes, which may produce
superior after-tax returns over time. For example, a $2,000 annual investment
earning a taxable return of 8% annually would have an after-tax value of
$177,887 after thirty years, assuming tax was deducted from the return each year
at a 28% rate. An equivalent tax-deferred investment would have a value of
$244,692 after thirty years.
Risk Measurements
Quantitative measures of "total risk," which quantify the total variability
of a portfolio's returns around or below its average return, may be used in
advertisements and in communications with current and prospective shareholders.
These measures include standard deviation of total return and the Morningstar
risk statistic. Such communications may also include market risk measures, such
as beta, and risk-adjusted measures of performance such as the Sharpe Ratio,
Treynor Ratio, Jensen's Alpha and Morningstar's star rating system.
STANDARD DEVIATION. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation of
those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile - i.e., spread out around the fund's average monthly
total return, the fund's monthly total returns have been over the prior period.
Standard deviation of total return can be calculated for funds having different
objectives, ranging from equity funds to fixed income funds, and can be measured
over different time frames. The standard deviation figures presented are
annualized statistics based on the trailing 36 monthly returns. Approximately
68% of the time, the annual total return of a fund will differ from its mean
annual total return by no more than plus or minus the standard deviation figure.
95% of the time, a fund's annual total return will be within a range of plus or
minus 2x the standard deviation from its mean annual total return.
RETURN PER UNIT OF RISK. This is a measure of a fund's risk adjusted
return and is calculated by dividing a fund's average annual total return by its
annualized standard deviation over a designated time period.
BETA. Beta measures the sensitivity of a security's or portfolio's returns
to the market's returns. It measures the relationship between a fund's excess
return (over 3-month T-bills) and the excess return of the benchmark index (S&P
500 for domestic equity funds). The market's beta is by definition equal to 1.
Portfolios with betas greater than 1 are more volatile than the market, and
portfolios with betas less than 1 are less volatile than the market. For
example, if a portfolio has a beta of 2, a 10% market excess return would be
expected to result in a 20% portfolio excess return, and a 10% market loss would
be expected to result in a 20% portfolio loss (excluding the effects of any
firm-specific risk that has not been eliminated through diversification).
MORNINGSTAR RISK. The Morningstar proprietary risk statistic evaluates a
fund's downside volatility relative to that of other funds in its class based on
the underperformances of the fund relative to the riskless T-bill return. It
then compares this statistic to those of other funds in the same broad
investment class.
SHARPE RATIO. Also known as the Reward-to-Variability Ratio, this is the
ratio of a fund's average return in excess of the risk-free rate of return
("average excess return") to the standard deviation of the fund's excess
returns. It measures the returns earned in excess of those that could have been
earned on a riskless investment per unit of total risk assumed.
TREYNOR RATIO. Also known as the Reward-to-Volatility Ratio, this is the
ratio of a fund's average excess return to the fund's beta. It measures the
returns earned in excess of those that could have been earned on a riskless
investment per unit of market risk assumed. Unlike the Sharpe Ratio, the
Treynor Ratio uses market risk (beta), rather than total risk (standard
deviation), as the measure of risk.
JENSEN'S ALPHA. This is the difference between a fund's actual returns and
those that could have been earned on a benchmark portfolio with the same amount
of risk - i.e., the same beta, as the portfolio. Jensen's Alpha measures the
ability of active management to increase returns above those that are purely a
reward for bearing market risk.
MORNINGSTAR STAR RATINGS. Morningstar, Inc. is a mutual fund rating service
that rates mutual funds on the basis of risk-adjusted performance. Ratings may
change monthly. Funds with at least three years of performance history are
assigned ratings from one star (lowest) to five stars (highest). Morningstar
ratings are calculated from the funds' three-, five- and ten-year average annual
returns (when available). Funds' returns are adjusted for fees and sales loads.
Ten percent of the funds in an investment category receive five stars, 22.5%
receive four stars, 35% receive three stars, 22.5% receive two stars and the
bottom 10% receive one star.
None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
<PAGE>
APPENDIX A: BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in the Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated BA are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: When no rating has been assigned or when a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating for not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
The modifier 1 indicates that the bond ranks in the higher end of its
generic category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its rating category.
STANDARD & POOR'S
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated AA have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and
<PAGE>
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C: The C rating is reserved for income bonds on which no interest is
being paid.
D: Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of bond as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from AA to B may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS PROVIDED IN ITEM 22
------------------------------------------
This Schedule illustrates the growth of a $1,000 initial investment in each
Fund of the Trust by applying the "Annual Total Return" and the "Average Annual
Total Return" percentages set forth in this Registration Statement in response
to Item 22 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.
Royce Premier 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+ .184)(1) = $1,184 ERV
(b) 5 Year ERV of a $1,000 investment for the
five year period ended December 31, 1997:
$1,000 (1+ .152)(5) = $2,026 ERV
Royce Micro-Cap 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+ .247)(1) = $1,247 ERV
(b) 5 Year ERV of a $1,000 investment for the
five year ended December 31, 1997:
$1,000 (1+ .171)(5) = $2,197 ERV
<PAGE>
(c) ERV of a $1,000 investment for the period
from the Fund's inception on December 31, 1991 through
December 31, 1997:
$1,000 (1+ .190)(6) = $2,843 ERV
Royce Low-Price Stock 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+ .195)(1) = $1,195 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on December 15, 1993 through
December 31, 1997:
$1,000 (1+ .165)(4.04) = $1,855 ERV
Royce Total Return 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+ .237)(1) = $1,237 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on December 15, 1993 through
December 31, 1997:
$1,000 (1+ .197)(4.04) = $2,070 ERV
Royce Financial Services 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+ .194)(1) = $1,194 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on December 15, 1994 through
December 31, 1997:
$1,000 (1+ .186)(3.04) = $1,678 ERV
<PAGE>
Pennsylvania Mutual Fund
- ------------------------
(Investment Class)
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .250)(1) = $1,250 ERV
(b) 5 Year ERV of a $1,000 investment for the
five (5) year period ended December 31, 1997:
$1,000 (1+ .131)(5) = $1,850 ERV
(c) 10 Year ERV of a $1,000 investment for the
ten (10) year period ended December 31, 1997:
$1,000 (1+ .138)(10) = $3,646 ERV
Pennsylvania Mutual Fund
- ------------------------
(Consultant Class)
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .234)(0.54) = $1,120 ERV
Royce GiftShares Fund
- ---------------------
(Investment Class)
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .260)(1) = $1,260 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on December 27, 1995 through
December 31, 1997:
$1,000 (1+ .257)(2.014) = $1,586 ERV
<PAGE>
Royce GiftShares Fund
- ---------------------
(Consultant Class)
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .058)(0.266) = $1,015 ERV
PMF II
- ------
(a) 1 Year Ending Redeemable Value ("ERV") of a
$1,000 investment for the one year period ended December 31,
1997:
$1,000 (1+ .208)(1) = $1,208 ERV
(b) ERV of a $1,000 investment for the period
from the Fund's inception on November 17, 1996 through
December 31, 1997:
$1,000 (1+ .239)(1.118) = $1,271 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.
(27) Financial Data Schedules.
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 March 31, 1998, the number of record holders of shares of each Fund
of the Registrant was as follows:
Title of Fund Number of Record Holders
------------- ------------------------
Pennsylvania Mutual Fund 26,867
Royce Premier Fund 13,883
Royce Micro-Cap Fund 10,596
Royce Low-Priced Stock Fund 938
Royce Total Return Fund 6,512
Royce Financial Services Fund 164
The REvest Growth and Income Fund 956
Royce GiftShares Fund 638
PMF II 1,231
Item 27. Indemnification
(a) Article IX of the Trust Instrument of the Registrant provides as
follows:
<PAGE>
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons contracting with or
having any claim against the Trust or a particular Series shall look
only to the assets of the Trust or such Series for payment under such
contract or claim; and neither the Trustees nor any other Trust's
officers, employees or agents, whether past, present or future, shall
be personally liable therefor. Every written instrument or obligation
on behalf of the Trust or any Series shall contain a statement to the
foregoing effect, but the absence of such statement shall not operate
to make any Trustee or officers of the trust liable thereunder. None
of the Trustees or officers of the Trust shall be responsible or
liable for any act or omission or for neglect or wrongdoing by him or
any agent, employee, investment adviser or independent contractor of
the Trust, but nothing contained in this Trust Instrument or in the
Delaware Act shall protect any Trustee or officer of the Trust against
liability to the Trust or to Shareholders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his or her office.
INDEMNIFICATION
Section 2.
(a) Subject to the exceptions and limitations contained in
Section 2(b) below:
(i) Every person who is, or has been, a Trustee or
officer of the Trust (including persons who serve at the Trust's
request as directors, officers or trustees of another entity in which
the Trust has any interest as a shareholder, creditor or otherwise)
(hereinafter referred to as a "Covered Person") shall be indemnified
by the appropriate Fund to the fullest extent not prohibited by law
against liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof; and
(ii) The words "claim", "action", "suit" or
"proceeding" shall apply to all claims, actions, suits or proceedings (civil,
criminal, administrative, investigatory or other, including appeals), actual or
threatened, while in office or thereafter, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) Who shall, in respect of the matter or
matters involved, have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to
the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence in the performance
of his duties or reckless disregard of the obligations and
duties involved in the conduct of his office or (B) not to
have acted in the belief that his action was in the best
interest of the Trust; or
(ii) In the event of a settlement, unless there has
been a determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office,
(A) By the court or other body approving the
settlement;
(B) By a majority of those Trustees who are
neither Interested Persons of the Trust nor are parties to the matter,
based upon a review of readily available facts (as opposed to a full
trial-type inquiry); or
<PAGE>
(C) By written opinion of independent legal
counsel, based upon a review of readily available facts (as opposed to
a full trial-type inquiry).
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other rights to
which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer
and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall
affect any rights to indemnification to which Trust personnel, other
than Trustees and officers, and other persons may be entitled by
contract or otherwise under law.
(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of the type
described in subsection (a) of this Section 2 may be paid by the applicable Fund
from time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will be paid
over by him to the applicable Fund if and when it is ultimately determined that
he is not entitled to indemnification under this Section 2; provided, however,
that either (i) such Covered Person shall have provided appropriate security for
such undertaking, (ii) the Trust is insured against losses arising out of any
such advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 2."
(b)(1) Paragraph 8 of the Investment Advisory Agreements by
and between the Registrant and Royce & Associates, Inc. (formerly named
Quest Advisory Corp.) provides as follows:
"8. Protection of the Adviser. The Adviser shall not be liable
to the Fund or to any portfolio series thereof for any action taken or omitted
to be taken by the Adviser in connection with the performance of any of its
duties or obligations under this Agreement or otherwise as an investment adviser
of the Fund or such series, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the Adviser and hold it harmless
from and against all damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement) incurred
by the Adviser in or by reason of any pending, threatened or completed action,
suit, investigation or other proceeding (including an action or suit by or in
the right of the Fund or any portfolio series thereof or its security holders)
arising out of or otherwise based upon any action actually or allegedly taken or
omitted to be taken by the Adviser in connection with the performance of any of
its duties or obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the preceding sentence of
this Paragraph 8 to the contrary, nothing contained herein shall protect or be
deemed to protect the Adviser against or entitle or be deemed to entitle the
Adviser to indemnification in respect of, any liability to the Fund or to any
portfolio series thereof or its security holders to which the Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its duties and obligations under this Agreement.
Determinations of whether and the extent to which the Adviser is
entitled to indemnification hereunder shall be made by reasonable and fair
means, including (a) a final decision on the merits by a court or other body
before whom the action, suit or other proceeding was brought that the Adviser
was not liable by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the Adviser was
not liable by reason of such misconduct by (i) the vote of a majority of a
quorum of the Trustees of the Fund who are neither "interested persons" of
the Fund (as defined in Section 2(a)(19) of the Investment Company Act of 1940)
nor parties to the action, suit or other proceeding or (ii) an independent legal
counsel in a written opinion."
(b)(2) Paragraph 8 of the Investment Advisory Agreement by and
between the Registrant and Royce, Ebright & Associates, Inc. provides as
follows:
"8. Protection of the Adviser. The Adviser shall not be
liable to the Fund or to any portfolio series thereof for any action
taken or omitted to be taken by the Adviser in 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
<PAGE>
the case may be, shall indemnify the Adviser and hold it harmless from
and against all damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement)
incurred by the Adviser in or by reason of any pending, threatened or
completed action, suit, investigation or other proceeding (including
an action or suit by or in the right of the Fund or any portfolio
series thereof or its security holders) arising out of or otherwise
based upon any action actually or allegedly taken or omitted to be
taken by the Adviser in connection with the performance of any of its
duties or obligations under this Agreement or otherwise as an
investment adviser of the Fund or such series. Notwithstanding the
preceding sentence of this Paragraph 8 to the contrary, nothing
contained herein shall protect or be deemed to protect the Adviser
against or entitle or be deemed to entitle the Adviser to
indemnification in respect of, any liability to the Fund or to any
portfolio series thereof or its security holders to which the Adviser
would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of
its reckless disregard of its duties and obligations under this
Agreement.
Determinations of whether and the extent to which the Adviser is
entitled to indemnification hereunder shall be made by reasonable and
fair means, including (a) a final decision on the merits by a court or
other body before whom the action, suit or other proceeding was
brought that the Adviser was not liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
duties or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Adviser was
not liable by reason of such misconduct by (i) the vote of a majority
of a quorum of the Trustees of the Fund who are neither "interested
persons" of the Fund (as defined in Section 2(a)(19) of the Investment
Company Act of 1940) nor parties to the action, suit or other
proceeding or (ii) an independent legal counsel in a written opinion."
(c) Paragraph 9 of the Distribution Agreement made October 31,
1985 by and between the Registrant and Royce Fund Services, Inc. (formerly
named Quest Distributors, Inc.) provides as follows:
"9. Protection of the Distributor. The Distributor shall
not be liable to the Fund or to any series thereof for any action
taken or omitted to be taken by the Distributor in connection with the
performance of any of its duties or obligations under this Agreement
or otherwise as an underwriter of the Shares, and the Fund or each
portfolio series thereof involved, as the case may be, shall indemnify
the Distributor and hold it harmless from and against all damages,
liabilities, costs and expenses (including reasonable attorneys' fees
and amounts reasonably paid in settlement) incurred by the Distributor
in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or
in the right of the Fund or any series thereof or its security
holders) arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the Distributor in
connection with the performance of any of its duties or obligations
under this Agreement or otherwise as an underwriter of the Shares.
Notwithstanding the preceding sentences of this Paragraph 9 to the
contrary, nothing contained herein shall protect or be deemed to
protect the Distributor against, or entitle or be deemed to entitle
the Distributor to indemnification in respect of, any liability to the
Fund or to any portfolio series thereof or its security holders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its duties and
obligations under this Agreement.
Determinations of whether and to the extent to which the
Distributor is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or other
proceeding was brought that the Distributor was not liable by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the
Distributor was not liable by reason of such misconduct by (a) the
vote of a majority of a quorum of the Trustees of the Fund who are
neither "interested persons" of the Fund (as defined in Section
2(a)(19) of the 1940 Act) nor parties to the action, suit or other
proceeding or (b) an independent legal counsel in a written opinion."
<PAGE>
Item 28. Business and Other Connections of Investment Advisers
Reference is made to the filings on Schedule D to the
Applications on Form ADV, as amended, of Royce & Associates, Inc. and
Royce, Ebright & Associates, Inc. for Registration as Investment Advisers
under the Investment Advisers Act of 1940.
Item 29. Principal Underwriters
Inapplicable. The Registrant does not have any principal
underwriters.
Item 30. Location of Accounts and Records
The accounts, books and other documents required to be maintained
by the Registrant pursuant to the Investment Company Act of 1940, are
maintained at the following locations:
The Royce Fund
1414 Avenue of the Americas
10th Floor
New York, New York 10019
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
Item 31. Management Services
State Street Bank and Trust Company, a Massachusetts trust
company ("State Street"), provides certain management-related services to
the Registrant pursuant to a Custodian Contract made as of December 31,
1985 between the Registrant and State Street. Under such Custodian
Contract, State Street, among other things, has contracted with the
Registrant to keep books of accounts and render such statements as agreed
to in the then current mutually-executed Fee Schedule or copies thereof
from time to time as requested by the Registrant, and to assist generally
in the preparation of reports to holders of shares of the Registrant, to
the Securities and Exchange Commission and to others, in the auditing of
accounts and in other ministerial matters of like nature as agreed to
between the Registrant and State Street. All of these services are
rendered pursuant to instructions received by State Street from the
Registrant in the ordinary course of business.
Registrant paid the following fees to State Street for services
rendered pursuant to the Custodian Contract, as amended, for each of the
three (3) fiscal years ended December 31:
1997: $462,684
1996: $468,735
1995: $335,180
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus for any series of the Registrant is delivered with a copy of the
latest annual report including schedule of investments to shareholders of
such series upon request and without charge.
<PAGE>
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 30th of April, 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 4/30/98
Charles M. Royce Trustee
(Principal Executive,
Accounting
and Financial Officer)
/s/ Hubert L. Cafritz Trustee 4/30/98
Hubert L. Cafritz
/s/ Richard M. Galkin Trustee 4/30/98
Richard M. Galkin
/s/ Stephen L. Isaacs Trustee 4/30/98
Stephen L. Isaacs
/s/ Stephen L. Isaacs Trustee 4/30/98
William L. Koke
/s/ David L. Meister Trustee 4/30/98
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 Royce Premier
Fund, Royce Micro-Cap Fund, Pennsylvania Mutual Fund, PMF II, Royce GiftShares
Fund, Royce Total Return Fund, Royce Low Priced Stock Fund, Royce Financial
Services Fund, The REvest Growth & Income Fund and Royce Special Equity Fund:
We consent to the reference to our Firm under the headings "Financial
Highlights" and "General Information" in Post-Effective Amendment No. 47 to the
Registration Statement of The Royce Fund on Form N-1A (File No. 2-80348) under
the Securities Act of 1933 and Post-Effective Amendment No. 49 (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.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 27, 1998
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