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
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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% (15%, in the case of PMF II) of
its net assets in lower-rated (high-risk) non-convertible
debt securities; or
2. Enter into repurchase agreements with any party other
than the custodian of its assets.
<PAGE>
ROYCE SPECIAL EQUITY FUND MAY NOT, AS A MATTER OF OPERATING POLICY:
1. Invest more than 5% of its assets in the securities of foreign
issuers; or
2. Invest more than 5% of its assets in securities for
which market quotations are not readily available; or
3. Invest more than 5% of its assets in the securities of
other investment companies.
As a matter of operating policy, the Trust is interpreting Fundamental
Policy No. 8 to preclude any Fund from investing more than 10% (15% for
Pennsylvania Mutual Fund, Royce Financial Services Fund, PMF II and Royce
Special Equity Fund) of its net assets in illiquid securities.
PENNSYLVANIA MUTUAL FUND
PMF II
ROYCE SPECIAL EQUITY FUND
Pennsylvania Mutual Fund and PMF II may each invest up to 25%, and Royce
Special Equity Fund may invest up to 5%, of the value of their total assets in
the securities of other investment companies (open or closed-end), including up
to 5% of their total assets in the securities of any one other investment
company, provided that the Funds and all affiliated persons of the Funds do not
invest in more than 3% of the total outstanding stock of any one such investment
company. All such securities must be acquired in the open market, in
transactions involving no commissions or discounts to a sponsor or dealer (other
than customary brokerage commissions). The issuers of such securities are not
required to redeem them from any one Fund in an amount exceeding 1% of such
issuers' total outstanding securities during any period of less than thirty
days, and Pennsylvania Mutual Fund, PMF II and Royce Special Equity Fund will
vote all proxies with respect to such securities in the same proportion as the
vote of all other holders of such securities. Except for cash collateral
received in connection with their securities lending activities and invested in
the money market funds of their custodian bank, neither Pennsylvania Mutual
Fund, PMF II nor Royce Special Equity Fund has any current intention of
investing in the securities of any open-end investment companies.
ROYCE FINANCIAL SERVICES FUND
Financial Services Fund may invest in the securities of a company that is
engaged in securities related activities, such as a broker, a dealer, an
underwriter, an investment adviser registered under the Investment Advisers Act
of 1940 or an investment adviser to an investment company, subject to the
following limitations in the case of a company that, in its most recent fiscal
year, derived more than 15% of its gross revenues from such activities:
(a) The purchase cannot cause more than 5% of the Fund's assets to be
invested in the securities of the company;
(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
<PAG0E>
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
th0e 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
