As filed with the Securities and Exchange Commission on March 2, 1998
Registration Nos. 2-80348 and 811-3599
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X /
Pre-Effective Amendment No. ______ / /
Post-Effective Amendment No. 45 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 47 /X /
(Check appropriate box or boxes)
THE ROYCE FUND
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(Exact name of Registrant as specified in charter)
1414 Avenue of the Americas, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 355-7311
Charles M. Royce, President
The Royce Fund
1414 Avenue of the Americas, New York, New York 10019
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on Date pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on Date pursuant to paragraph (a)(ii)
/x / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Royce Fund has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Its 24f-2 Notice for its most recent fiscal year will be filed on or
prior to March 31, 1998.
Total number of pages: ___
Index to Exhibits is located on page:
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 of Regulation C)
Item of Form N-1A CAPTION or Location in Prospectus
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Part A
I. Cover Page ................ Cover Page
II. Synopsis............... FUND EXPENSES
III. Condensed Financial Information... *
IV. General Description of Registrant.. INVESTMENT OBJECTIVE,
INVESTMENT POLICIES,
INVESTMENT RISKS,
INVESTMENT LIMITATIONS,
GENERAL INFORMATION
V. Management of the Fund......... MANAGEMENT OF THE TRUST,
GENERAL INFORMATION
V.A. Management's Discussion of
Fund Performance............... *
VI. Capital Stock and Other Securities. GENERAL INFORMATION,
DIVIDENDS, DISTRIBUTIONS AND
TAXES,
IMPORTANT ACCOUNT INFORMATION,
REDEEMING YOUR SHARES,
TRANSFERRING OWNERSHIP,
OTHER SERVICES
VII. Purchase of Securities Being
Offered ........ INVESTMENT POLICIES***,
NET ASSET VALUE PER SHARE,
OPENING AN ACCOUNT AND
PURCHASING SHARES,
OTHER SERVICES
VIII. Redemption or Repurchase.. REDEEMING YOUR SHARES
IX. Pending Legal Proceeding .......... *
<PAGE>
CAPTION or Location in Statement
Item of Form N-1A of Additional Information
- ----------------- ---------------------------------
Part B
- ------
X. Cover Page................. Cover Page
XI. Table of Contents.......... TABLE OF CONTENTS
XII. General Information and History.. *
XIII. Investment Objectives and Policies. INVESTMENT POLICIES AND
LIMITATIONS,
RISK FACTORS AND SPECIAL
CONSIDERATIONS
XIV. Management of the Fund......... MANAGEMENT OF THE TRUST
XV. Control Persons and Principal
Holders of Securities........... MANAGEMENT OF THE TRUST,
PRINCIPAL HOLDERS OF SHARES
XVI. Investment Advisory and Other
Services .......... MANAGEMENT OF THE TRUST,
INVESTMENT ADVISORY SERVICES,
CUSTODIAN,
INDEPENDENT ACCOUNTANTS
XVII. Brokerage Allocation and Other
Practices..................... PORTFOLIO TRANSACTIONS
XVIII. Capital Stock and Other Securities. DESCRIPTION OF THE TRUST
XIX. Purchase, Redemption and Pricing
of Securities Being Offered.... PRICING OF SHARES BEING OFFERED,
REDEMPTIONS IN KIND
XX. Tax Status.................... TAXATION
XXI. Underwriters..................... *
<PAGE>
XXII. Calculation of Performance Data.... PERFORMANCE DATA
XXIII. Financial Statements........... **
* Not applicable.
** Incorporated by reference.
*** Relates only to Royce GiftShares Fund, a series of the Trust.
<PAGE>
[BEGIN RED HERRING]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
[END RED HERRING]
THE ROYCE FUNDS
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ROYCE SPECIAL EQUITY FUND
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PROSPECTUS -- , 1998 (Subject to Completion, dated February 27, 1998)
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NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-800-221-4268
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SHAREHOLDER SERVICES -- 1-800-841-1180
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ROYCE SPECIAL EQUITY FUND'S investment objective is long-
INVESTMENT term capital appreciation. It seeks to achieve this
OBJECTIVE AND objective by investing primarily in common stocks and
POLICIES convertible securities of companies with market
capitalizations of less than $500 million. There can be
no assurance that the Fund will achieve its objective.
The Fund is a no-load series of The Royce Fund (the
"Trust"), a diversified open-end management investment
company.
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ABOUT THIS This Prospectus sets forth concisely the information
PROSPECTUS that you should know about the Fund before you invest.
It should be retained for future reference. A
"Statement of Additional Information" containing further
information about the Fund and the Trust has been filed
with the Securities and Exchange Commission. The
Statement is dated , 1998 and has been
incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Trust
or calling Investor Information.
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TABLE OF CONTENTS
Page Page
Fund Expenses 2 Net Asset Value Per Share 8
Investment Performance and
Volatility 3
Investment Objective 3 SHAREHOLDER GUIDE
Investment Policies 4 Opening an Account and Purchasing
Investment Risks 4 Shares 9
Investment Limitations 5 Choosing a Distribution Option 10
Management of the Trust 6 Important Account Information 10
General Information 7 Redeeming Your Shares 12
Dividends, Distributions and Taxes 7 Transferring Ownership 14
Other Services 14
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND EXPENSES The following table summarizes all expenses and fees
that you would incur as a shareholder of the Fund.
The Fund is Shareholder Transaction Expenses
no-load and has
no 12b-1 fees Sales Load Imposed on Purchases . . . . . . . . .None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee -- on purchases held for one
year or more None
Early Redemption Fee -- on purchases held
for less than one year 1%
Annual Fund Operating Expenses
Management Fees (after waivers) 0.46%
Other Expenses 1.03%
Total Operating Expenses 1.49%
_____
The purpose of the above tables is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund. Management Fees would be 1.00% and Total
Operating Expenses would be 2.03% without the waiver of
management fees by Royce & Associates, Inc. ("Royce"),
the Fund's investment adviser. Royce has committed to
waive its fees to the extent necessary to reduce Total
Operating Expenses to 1.49% through December 31, 1998.
The following examples illustrate the expenses that you
would incur on a $1,000 investment over various periods,
assuming a 5% annual rate of return and redemption at
the end of each period.
1 Year 3 Years
$15 $47
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
The Fund may include in communications to current or
INVESTMENT prospective shareholders figures reflecting Total Return
PERFORMANCE over various time periods. "Total Return" is the rate of
AND return on an amount invested in the Fund from the beginning
VOLATILITY to the end of the stated period. "Average Annual Total
Return" is the annual compounded percentage change in the
Total Return is the value of an amount invested in the Fund from the beginning
change in value until the end of the stated period. Total Returns are
over a given time historical measures of past performance and are not
period, assuming intended to indicate future performance. Total Returns
reinvestment assume the reinvestment of all net investment income
of dividends and dividends and capital gains distributions. The figures do
capital gains not reflect the Fund's early redemption fee because this
distributions fee applies only to redemptions of share purchases held for
less than one year.
Additionally, the performance of the Fund may be compared
to (i) the performance of various indices and investments
for which reliable performance data is available and (ii)
averages, performance rankings or other information
prepared by recognized mutual fund statistical services.
The relative risk of investing in a particular fund should
be considered in addition to the total returns of a fund.
Risk, in terms of how volatile an investor's returns have
been, can be measured in a number of ways, including
standard deviation and beta.
Standard deviation measures the range of performance within
which a fund's total returns have fallen. The lower the
standard deviation of the fund, the less volatile and more
consistent the fund's monthly total returns have been over
that period. When the standard deviation of a fund is
lower than the standard deviation of the S&P 500, the fund
has been less volatile than the index.
BBeta measures a fund's sensitivity to market movements.
The beta for the index chosen to represent the market
(the S&P 500) is 1.00. If the fund has a beta greater than
1.00, it has been more volatile than the index; if its beta
is less than 1.00, it has been less volatile than the index.
Investors evaluating these and other quantitative measures
of risk should understand that the risk profiles of the
Fund's portfolio may change over time. The investment risks
associated with the types of securities in which the Fund
may invest are described below. See "Investment Risks".
INVESTMENT ROYCE SPECIAL EQUITY FUND'S investment objective is long-
OBJECTIVE term capital appreciation. It seeks to achieve this
objective by investing primarily in common stocks and
convertible securities of companies with market
capitalizations of less than $500 million. Since
certain risks are inherent in owning any security, there
can be no assurance that the Fund will achieve its
objective.
This investment objective is fundamental and may not be
changed without the approval of a majority of the Fund's
outstanding voting shares, as that term is defined in
the Investment Company Act of 1940 (the "1940 Act").
<PAGE>
INVESTMENT
POLICIES
The Fund invests
on a value basis
The Fund invests
primarily in small
companies
An intensive value discipline will be used in managing the
Fund's assets. This approach has its roots in the teachings
of Benjamin Graham and Abraham Briloff. Thus, classic value
analysis will be combined with accounting cynicism.
Investments will generally be made in equity securities of
companies which, in Royce's opinion, have one or more of the
following characteristics:
- -Assets whose value is unrecognized or under recognized by the market;
- -Currently earning a low return on equity or assets employed, but have the
potential to earn a higher return by either improving the profitability of
these assets or disposing of them;
- -The ability to operate effectively in an adverse environment;
- -Burdened by an unprofitable subsidiary or business segment, which may have
been reduced or eliminated;
- -Recently experienced a change in management or control (including through
merger or acquisition) and have a potential for a "turnaround" in earnings;
- -Profitability or other financial characteristics that make their
securities undervalued when compared to the market in general or to a
specified industry;
- -Current assets which, less all liabilities, compare favorably to the
aggregate market value of the company's securities;
- -Substantial or growing cash flow;
- -A management whose members, due to their own stockholdings or otherwise,
are committed to managing the company in a way which increases stock values
and enhances stockholder wealth; or
- -Financial reporting policies which, viewed from the outside, appear
conservative.
In summary, Royce will attempt to invest in companies where the market's
perception and, therefore, price is significantly lower than Royce's
assessment of its economic value.
In accordance with its objective of seeking long-term capital appreciation,
the Fund will normally invest at least 80% of its assets in common stocks,
convertible preferred stocks and convertible bonds. At least 65% of these
securities will be issued by companies with stock market capitalizations
under $500,000,000 at the time of investment. The remainder of the Fund's
assets may be invested in securities of companies with higher stock market
capitalizations and non-convertible preferred stocks and debt securities.
INVESTMENT As a mutual fund investing primarily in common stocks
RISKS and/or securities convertible into common stocks, the
Fund is subject to market risk - that is, the
possibility that common stock prices will decline over
short or even extended periods. Because the Fund will
The Fund is focus on the less liquid securities of small and micro-
subject capitalization companies, it may involve considerably
to certain more risk than a mutual fund investing in the more
investment liquid common stocks and convertible securities of
risks larger capitalization companies. The Fund's companies
may have static, cyclical or only moderate growth
prospects and/or limited product lines, markets and
financial resources. They may also lack management
depth and be more vulnerable to adverse business
developments. In addition, these companies may not be
well known to the investment community and
<PAGE>
may be followed by relatively few, if any, securities
analysts, so that there will tend to be less publicly
available information about them, and their securities
may not be widely held or attract significant
institutional ownership. Finally, the securities of the
Fund's companies may have limited trading volumes, wide
spreads between their bid and ask prices, prices that
are subject to more abrupt or erratic market movements
than the securities of larger capitalization companies
or the market averages in general and, in the case of
securities traded in the over-the-counter market, only a
few market makers. Accordingly, Royce's investment
method requires it to have a long-term investment
outlook for the securities in which the Fund invests.
The Fund should not be used by investors with a short-
term investment horizon.
Because the Fund will invest primarily in small and
micro-capitalization securities, it may not be able to
purchase or sell more than a limited number of shares of
a portfolio security at then quoted market prices, and
may require a considerable period of time to acquire or
dispose of its position in the security. This risk will
increase to the extent that other Royce-managed accounts
or other investors are also seeking to purchase or sell
the same security when the Fund is doing so. In
addition, although the Fund may purchase an over-the-
counter security at or near its ask price, it will be
required to value the security at the close of trading
on the day of purchase based on the last reported sale
price or bid price for the security. This could reduce
the net asset value of the Fund's shares if the closing
price is lower than the purchase price. See "Net Asset
Value Per Share".
Although the Fund will be diversified within the meaning
of the 1940 Act, it will normally be invested in a
limited number of securities and may invest up to 25% of
its assets in the securities of one company. The Fund's
relatively limited portfolio will therefore involve even
more risk than a mutual fund vesting in a broadly
diversified portfolio of common stocks of small and
micro-capitalization companies, and the Fund will also
be more vulnerable to any single corporate, market,
economic, political or regulatory event than would a
more widely diversified fund.
INVESTMENT The Fund has adopted certain fundamental limitations,
LIMITATIONS designed to reduce its exposure to specific situations,
which may not be changed without the approval of a
The Fund has majority of its outstanding voting shares, as that term
adopted certain is defined in the 1940 Act. These limitations are set
fundamental forth in the Statement of Additional Information and
limitations provide, among other things, that the Fund will not:
(a) with respect to 75% of its assets, invest more than
5% of its assets in the securities of any one
issuer, excluding obligations of the U.S. Government;
(b) invest more than 25% of its assets in any one
industry; or
(c) invest in companies for the purpose of exercising
control of management.
Other Investment In addition to investing primarily in the equity and
Practices: fixed income securities described above, the Fund may
follow a number of additional investment practices.
Short-term fixed The Fund may invest in short-term fixed income
income securities securities for temporary defensive purposes, to invest
uncommitted cash balances or to maintain liquidity to
meet shareholder redemptions. These securities consist
of United States Treasury bills,
<PAGE>
domestic bank certificates of deposit, high-quality
commercial paper and repurchase agreements
collateralized by U.S. Government securities. In a
repurchase agreement, the Fund's custodian bank sells a
security to the Fund at one price and agrees to
repurchase it at the Fund's cost plus interest within a
specified period of seven or fewer days. In these
transactions, which are, in effect, secured loans by the
Fund, the securities purchased by the Fund will have a
value equal to or in excess of the value of the
repurchase agreement and will be held by the Fund's
custodian bank until repurchased. Should the Fund
implement a temporary investment policy, its investment
objective may not be achieved.
Securities The Fund may lend up to 25% of its assets to qualified
lending institutional investors for the purpose of realizing
additional income. Loans of securities of the Fund will
be collateralized by cash or securities issued or
guaranteed by the United States Government or its
agencies or instrumentalities. The collateral will
equal at least 100% of the current market value of the
loaned securities. The risks of securities lending
include possible delays in receiving additional
collateral or in recovery of loaned securities or loss
of rights in the collateral if the borrower defaults or
becomes insolvent.
Warrants, rights The Fund may invest up to 5% of its total assets in warrants
and options rights and options.
Lower-rated The Fund may invest not more than 5% of its net assets
debt securities in lower-rated (high-risk) non-convertible debt
securities, which are below investment grade. The Fund
does not expect to invest in non-convertible debt
securities that are rated lower than Caa by Moody's
Investors Service, Inc. or CCC by Standard & Poor's
Corp. or, if unrated, determined to be of comparable
quality.
MANAGEMENT The Trust's business and affairs are managed under the
OF THE TRUST direction of its Board of Trustees. Royce & Associates,
Inc. ("Royce"), the Fund's investment adviser, is
responsible for the investment of its assets, subject to
the authority of the Board. Charles M. Royce, Royce's
Royce & President, Chief Investment Officer and sole voting
Associates, Inc. shareholder since 1972, is primarily responsible for
is supervising Royce's investment management activities.
responsible for Charles R. Dreifus, CFA, Senior Portfolio Manager and
management of the Principal of Royce since February 1998, manages the
Fund's portfolio Fund's portfolio. Mr. Dreifus has 29 years of
investment experience, 18 of them as a small and micro-
cap value portfolio manager. From November 1982 to
January 1998, he was a General Partner and Managing
Director and, most recently, a Limited Managing Director
of Lazard Freres & Co., LLC. Mr. Dreifus was also the
Portfolio Manager of Lazard Special Equity Portfolio,
formerly the Lazard Special Equity Fund, and Special
Equity Separate Accounts. From June 1968 to November
1982, he was employed by Oppenheimer & Co. as a Limited
Partner and Oppenheimer Capital as an Executive Vice
President, where he managed the Quest for Value Fund
from May 1980 to November 1982.
Royce is also the investment adviser to Pennsylvania
Mutual Fund, PMF II, Royce Premier, Micro-Cap, Total
Return, Low-Priced Stock, Financial Services and
GiftShares Funds, which are other series of the Trust,
and to other investment and non-investment company
accounts.
<PAGE>
As compensation for its services to the Fund, Royce is
entitled to receive annual advisory fees of 1.00% of the
average net assets of the Fund. Royce has committed to
waive its fee to the extent necessary to maintain the
Fund's total operating expenses at or below 1.99%
through December 31, 1998.
Royce Fund Services, Inc. ("RFS"), which is wholly-owned
by Charles M. Royce, acts as distributor of the Fund's
shares.
Royce selects the brokers who execute the purchases and
sales of the Fund's portfolio securities and may place
orders with brokers who provide brokerage and research
services to Royce. Royce is authorized, in recognition
of the value of brokerage and research services
provided, to pay commissions to a broker in excess of
the amount which another broker might have charged for
the same transaction.
GENERAL The Royce Fund (the "Trust") is a Delaware business
INFORMATION trust, registered with the Securities and Exchange
Commission as an open-end diversified management
investment company. The Trustees have the authority to
issue an unlimited number of shares of beneficial
interest, without shareholder approval, and these shares
may be divided into an unlimited number of series and
classes. Shareholders are entitled to one vote per
share. Shares vote by individual series on all matters,
except that shares are voted in the aggregate and not by
individual series when required by the 1940 Act and that
if the Trustees determine that a matter affects only one
series, then only shareholders of that series are
entitled to vote on that matter.
Meetings of shareholders will not be held except as
required by the 1940 Act or other applicable law. A
meeting will be held to vote on the removal of a Trustee
or Trustees of the Trust if requested in writing by the
holders of not less than 10% of the outstanding shares
of the Trust.
The Trust reserves the right to suspend the offering of
Fund shares to new investors. Royce intends to close
the Fund to new investors when the Fund's assets plus
the assets in Royce's other "Special Equity" product
accounts reach $250 million.
The custodian for securities, cash and other assets of
the Fund is State Street Bank and Trust Company. State
Street, through its agent National Financial Data
Services ("NFDS"), also serves as the Fund's transfer
agent. Coopers & Lybrand, L.L.P. serves as independent
accountants for the Fund.
DIVIDENDS, The Fund pays dividends from net investment income and
DISTRIBUTIONS distributes its net realized capital gains annually in
AND TAXES December. Dividends and distributions will be
automatically reinvested in additional shares of the
The Fund pays Fund unless the shareholder chooses otherwise.
dividends and
capital gains Shareholders receive information annually as to the tax
annually in status of distributions made by the Fund for the
December calendar year. For Federal income tax purposes, all
distributions by the Fund are taxable to shareholders
when declared, whether received in cash or reinvested in
shares. Distributions paid from the Fund's net
investment income and short-term capital gains are
taxable to shareholders as ordinary income dividends. A
portion of the Fund's dividends may qualify for the
corporate dividends received
<PAGE>
deduction, subject to certain limitations. The portion
of the Fund's dividends qualifying for such deduction is
generally limited to the aggregate taxable dividends
received by the Fund from domestic corporations.
Distributions paid from long-term capital gains of the
Fund are treated by a shareholder for Federal income tax
purposes as long-term capital gains, regardless of how
long the shareholder has held Fund shares.
If a shareholder disposes of shares held for six months
or less at a loss, such loss is treated as a long-term
capital loss to the extent of any long-term capital
gains reported by the shareholder with respect to such
shares. A loss realized on a taxable disposition of
Fund shares may be disallowed to the extent that
additional Fund shares are purchased (including by
reinvestment of distributions) within 30 days before or
after such disposition.
The redemption of shares is a taxable event, and a
shareholder may realize a capital gain or capital loss.
The Fund will report to redeeming shareholders the
proceeds of their redemptions. However, because the tax
consequences of a redemption will also depend on the
shareholder's basis in the redeemed shares for tax
purposes, shareholders should retain their account
statements for use in determining their tax liability on
a redemption.
At the time of a shareholder's purchase, the Fund's net
asset value may reflect undistributed income or capital
gains. A subsequent distribution of these amounts by
the Fund will be taxable to the shareholder even though
the distribution economically is a return of part of the
shareholder's investment.
The Fund is required to withhold 31% of taxable
dividends, capital gains distributions and redemptions
paid to non-corporate shareholders who have not complied
with Internal Revenue Service taxpayer identification
regulations. Shareholders may avoid this withholding
requirement by certifying on the Account Application
Form their proper Social Security or Taxpayer
Identification Number and certifying that they are not
subject to backup withholding.
The discussion of Federal income taxes above is for
general information only. The Statement of Additional
Information includes a more detailed description of
Federal income tax aspects that may be relevant to a
shareholder. Shareholders may also be subject to state
and local taxes on income and any gains from their
investment. Investors should consult their own tax
advisers concerning the tax consequences of an
investment in the Fund.
NET ASSET Fund shares are purchased and redeemed at their net asset
VALUE value per share next determined after an order is received
PER SHARE by the Fund's transfer agent or an authorized service
agent or sub-agent. Net asset value per share is determined
by dividing the total value of the Fund's investments plus
cash and other assets, less any liabilities, by the number
Net asset value of outstanding shares of the Fund. Net asset value per share
per share (NAV) is calculated at the close of regular trading on the New York
is determined Stock Exchange on each day the Exchange is open for business.
each day the
New York Stock In determining net asset value, securities listed on an
is open exchange or the Nasdaq National Market System are valued on
the basis of the last reported sale price prior to the
time the valuation is made or, if no sale is reported for
that day, at their bid price for exchange-listed securities
and at the average of their bid and ask prices for Nasdaq
securities. Quotations are taken from the market where the
security is primarily traded. Other over-the-counter
securities for which market quotations are readily available
are valued at their bid price. Securities for which market
quotations are not readily available are valued at their
fair value under procedures established and supervised by
the Board of Trustees. Bonds and other fixed income
securities may bbe valued by reference to other securities
with comparable ratings, interest rates and maturities,
using established independent pricing services.
SHAREHOLDER GUIDE
OPENING AN The Fund's shares are offered on a no-load basis. If
ACCOUNT AND you need assistance with the Account Application or have
PURCHASING any questions about the Fund, please call Investor
SHARES Information at 1-800-221-4268. Note: For certain types
of account registrations (e.g., corporations,
partnerships, foundations, associations, other
organizations, trusts or powers of attorney), please
call Investor Information to determine if you need to
provide additional forms with your application.
Type of Account Minimum
Minimum Initial Regular accounts $50,000
Investment IRAs * 2,000
403(b)(7) accounts * 2,000
The Trust reserves the right to reject any subscription
or waive the minimum initial investment in its sole
discretion.
Additional Subsequent investments ($2,000 minimum) may be made by
Investments mail, telephone, wire or Express Service (a system of
electronic funds transfer from your bank account).
* Separate forms must be used for opening IRAs or
403(b)(7) accounts; please call Investor Information if
you need these forms.
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
Purchasing By Please include the amount Additional investments
Mail of your initial investment should include the Invest-
on the Application Form, by-Mail remittance form
Complete and sign make your check payable to attached to your Fund
the enclosed The Royce Fund, and mail account confirmation
Account to: statements. Please make
Application your check payable to The
The Royce Funds Royce Fund, write your
P.O. Box 419012 account number on your
Kansas City, MO 64141-6012 check and, using the
return envelope provided,
mail to the address
indicated on the Invest-by-
Mail form.
For express or The Royce Funds All written requests
registered mail, c/o National Financial should be mailed to one of
send to: Data Services the addresses indicated
1004 Baltimore, 5th Floor for new accounts.
Kansas City, MO 64105
<PAGE>
Purchasing By Subsequent telephone purchases may be made by calling
Telephone Investor Information. For all telephone purchases,
payment is due within three business days and may be
made by wire or personal, business or bank check,
subject to collection.
Purchasing By Money should be wired to:
Wire: State Street Bank and Trust Company
ABA 011000028 DDA 9904-712-8
Before Wiring: Ref: Royce Special Equity Fund
For a new Order Number or Account Number____________________
account, Account Name ____________________________________
please contact
Investor To ensure proper receipt, please be sure your bank
Information at includes the name of the Fund and your order number (for
1-800-221-4268 telephone purchases) or account number. If you are
opening a new account, you must call Investor
Information to obtain an order number, and complete the
Account Application and mail it to the "New Account"
address above after completing your wire arrangement.
Note: Federal Funds wire purchase orders will be
accepted only when the Fund and its custodian are open
for business.
Purchasing By
Express Expedited Purchase Option permits you, at your
Service discretion, to transfer funds ($100 minimum and $200,000
maximum) from your bank account to purchase shares in
your Royce Fund account by telephone or computer online
access.
To establish the Expedited Purchase Option, please
provide the appropriate information on the Account
Application and attach a voided check. We will send you
a confirmation of Express Service activation. Please
wait three weeks before using the service.
To make an Expedited Purchase, other than through
computer online access, please call Shareholder Services
at 1-800-841-1180 before 4:00 p.m., Eastern time.
CHOOSING A You may select one of three distribution options:
DISTRIBUTION
OPTION
1. Automatic Reinvestment Option--Both net investment
income dividends and capital gains distributions will be
reinvested in additional Fund shares. This option will
be selected for you automatically unless you specify
one of the other options.
2. Cash Dividend Option--Your dividends will be paid in cash and your
capital gains distributions will be reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains distributions will
be paid in cash.
You may change your option by calling Shareholder Services at 1-800-841-
1180.
IMPORTANT The easiest way to establish optional services on your
ACCOUNT account is to select the options you desire when you
INFORMATION complete your Account Application. If you want to add
or change shareholder options later, you may need to
provide additional information and a signature
guarantee. Please call Shareholder Services at 1-800-
841-1180 for further assistance.
<PAGE>
Signature For our mutual protection, we may require a signature
Guarantees guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokerage
firms and any other guarantor that our transfer agent
deems acceptable. A signature guarantee cannot be
provided by a notary public.
Certificates Certificates for whole shares will be issued upon
request. If a certificate is lost, stolen or destroyed,
you may incur an expense to replace it.
Purchases Through If you purchase shares of the Fund through a program of
Service Providers services offered or administered by a broker-dealer,
financial institution or other service provider, you
should read the program materials provided by the
service provider, including information regarding fees
which may be charged, in conjunction with this
Prospectus. Certain shareholder servicing features of
the Fund may not be available or may be modified in
connection with the program of services offered. When
shares of the Fund are purchased in this way, the
service provider, rather than the customer, may be the
shareholder of record of the shares. Royce, RFS and/or
the Fund may pay fees to unaffiliated broker-dealers,
financial institutions or other service providers who
introduce investors to the Fund and/or provide certain
administrative services to those of their customers who
are Fund shareholders.
Telephone and Neither the Fund nor its transfer agent will be liable
Online Access for following instructions communicated by telephone or
Transactions computer online access that are reasonably believed to
be genuine. The transfer agent uses certain procedures
designed to confirm that telephone and computer online
access instructions are genuine, which may include
requiring some form of personal identification prior to
acting on the instructions, providing written
confirmation of the transaction and/or recording
incoming telephone calls, and if it does not follow such
procedures, the Fund or the transfer agent may be liable
for any losses due to unauthorized or fraudulent
transactions.
Nonpayment If your check or wire does not clear, or if payment is
not received for any telephone or computer online access
purchase, the transaction will be canceled and you will
be responsible for any loss the Fund incurs. If you are
already a shareholder, the Fund can redeem shares from
any identically registered account with the Trust as
reimbursement for any loss incurred.
Trade Date for
Purchases
Your trade date is the date on which share purchases are
credited to your account. If your purchase is made by
check, Federal Funds wire, telephone, computer online
access or exchange and is received by the close of
regular trading on the New York Stock Exchange
(generally 4:00 p.m., Eastern time), your trade date is
the date of receipt. If your purchase is received after
the close of regular trading on the Exchange, your trade
date is the next business day. Your shares are
purchased at the net asset value determined on your
trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, the Fund will accept
only a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
United States correspondent bank.
<PAGE>
REDEEMING You may redeem any portion of your account at any time.
YOUR SHARES You may request a redemption in writing or by telephone.
Redemption proceeds normally will be sent within two
business days after the receipt of the request in Good
Order.
Redeeming By Redemption requests should be mailed to The Royce Funds,
Mail c/o NFDS, P.O. Box 419012, Kansas City, MO 64141-6012.
(For express or registered mail, send your request to
The Royce Funds, c/o National Financial Data Services,
1004 Baltimore, 5th Floor, Kansas City, MO 64105.)
The redemption price of shares will be their net asset
value next determined after NFDS or an authorized
service agent or sub-agent has received all required
documents in Good Order.
Definition of Good Order means that the request includes the
Good Order following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars
or shares).
3. Signatures of all owners exactly as they are
registered on the account.
4. Signature guarantees if the value of the shares
being redeemed exceeds $50,000 or if the payment is to
be sent to an address other than the address of record
or is to be made to a payee other than the shareholder.
5. Certificates, if any are held.
6. Other supporting legal documentation that might be
required, in the case of retirement plans, corporations,
trusts, estates and certain other accounts.
If you have any questions about what is required as it
pertains to your request, please call Shareholder
Services at 1-800-841-1180.
Redeeming By Shareholders who have not established Express Service
Telephone may redeem up to $50,000 of their Fund shares by
telephone, provided the proceeds are mailed to their
address of record. If preapproved, higher minimums may
apply for institutional accounts. To redeem shares by
telephone, you or your pre-authorized representative may
call Shareholder Services at 1-800-841-1180. Redemption
requests received by telephone prior to the close of
regular trading on the New York Stock Exchange
(generally 4:00 p.m., Eastern time) are processed on the
day of receipt; redemption requests received by
telephone after the close of regular trading on the
Exchange are processed on the business day following
receipt.
Telephone redemption service is not available for Trust-
sponsored retirement plan accounts or if certificates
are held. TELEPHONE REDEMPTIONS WILL NOT BE PERMITTED
FOR A PERIOD OF SIXTY DAYS AFTER A CHANGE IN THE ADDRESS
OF RECORD. See also "Important Account Information -
Telephone and Online Access Transactions".
Redeeming By
Express You redeem up to $50,000 of shares from your Fund
Service account by telephone and transfer the proceeds directly
to your bank account. You may elect Express Service on
the Account Application or call Shareholder Services at
1-800-841-1180 for an Express Service application.
<PAGE>
If you are redeeming shares recently purchased by check
Important or Express Service Expedited Purchase, the proceeds of
Redemption the redemption may not be sent until payment for the
Information purchase is collected, which may take up to fifteen
calendar days. Otherwise, redemption proceeds must be
sent to you within seven days of receipt of your request
in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be processed at the net asset
value next determined after your request has been
received by the transfer agent in Good Order. The Trust
reserves the right to revise or terminate the telephone
redemption privilege at any time.
The Trust may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as
determined by the Securities and Exchange Commission.
Although the Trust will normally make redemptions in
cash, it may cause the Fund to redeem in kind under
certain circumstances.
Early Redemption In order to discourage short-term trading, the Fund
Fee assesses an early redemption fee of 1% on redemptions of
share purchases held for less than one year. Redemption
fees will be paid to the Fund, out of the redemption
proceeds otherwise payable to the shareholder, to help
offset transaction costs.
The Fund will use the "first-in, first-out" (FIFO)
method to determine the holding period. Under this
method, the date of the redemption will be compared with
the earliest purchase date of the share purchases held
in the account. If this holding period is less than one
year, the fee will be assessed. In determining "one
year," the Fund will use the anniversary month of a
transaction. Thus, shares purchased in May 1998, for
example, will be subject to the fee if they are redeemed
prior to May 1999. If they are redeemed on or after May
1, 1999, they will not be subject to the fee.
No redemption fee will be payable on shares acquired
through reinvestment or by shareholders who are (a)
employees of the Trust or Royce or members of their
immediate families or employee benefit plans for them,
(b) certain Trust-approved Group Investment Plans and
charitable organizations, (c) profit-sharing trusts,
corporations or other institutional investors who are
investment advisory clients of Royce or (d) omnibus or
similar account customers of certain Trust-approved
broker-dealers and other institutions.
Minimum Account
Balance Due to the relatively high cost of maintaining smaller
Requirement accounts, the Trust reserves the right to involuntarily
redeem shares in any Fund account that falls below the
minimum initial investment due to redemptions by the
shareholder. If at any time the balance in an account
does not have a value at least equal to the minimum
initial investment, you may be notified that the value
of your account is below the Fund's minimum account
balance requirement. You would then have sixty days to
increase your account balance before the account is
liquidated. Proceeds would be promptly paid to the
shareholder.
<PAGE>
TRANSFERRING You may transfer the ownership of any of your Fund
OWNERSHIP shares to another person by writing to: The Royce
Funds, c/o NFDS, P.O. Box 419012, Kansas City, MO 64141-
6012. The request must be in Good Order (see "Redeeming
Your Shares - Definition of Good Order"). Before
mailing your request, please contact Shareholder
Services (1-800-841-1180) for full instructions.
OTHER For more information about any of these services, please
SERVICES call Investor Information.
Statements and A confirmation statement will be sent to you each time
Reports you have a transaction in your account and semi-
annually. Shareholder reports are mailed semi-annually.
To reduce expenses, only one copy of most shareholder
reports may be mailed to a household. Please call
Investor Information if you need additional copies.
Tax-sheltered Shares of the Fund are available for purchase in
Retirement Plans connection with certain types of tax-sheltered
retirement plans, including Individual Retirement
Accounts (IRA's) for individuals and 403(b)(7) Plans for
employees of certain tax-exempt organizations.
These plans should be established with the Trust only
after an investor has consulted with a tax adviser or
attorney. Information about the plans and the
appropriate forms may be obtained from Investor
Information at 1-800-221-4268.
<PAGE>
THE ROYCE FUNDS
1414 Avenue of the Americas
New York, NY 10019 THE ROYCE
1-800-221-4268 FUNDS
[email protected]
INVESTMENT ADVISER
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
DISTRIBUTOR
Royce Fund Services, Inc.
1414 Avenue of the Americas ROYCE
New York, NY 10019 SPECIAL EQUITY
FUND
TRANSFER AGENT
State Street Bank and Trust Company A No-Load
c/o National Financial Data Services Mutual Fund
P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
OFFICERS
Charles M. Royce, President and Treasurer Prospectus
Jack E. Fockler, Jr., Vice President ,1998
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and
Assistant Secretary
John E. Denneen, Secretary
<PAGE>
[BEGIN RED HERRING]
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes
effective. This statement of additional information does not
constitute a prospectus.
[END RED HERRING]
SUBJECT TO COMPLETION DATED FEBRUARY 27, 1998
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. Two of the ten series, Pennsylvania Mutual
Fund and Royce GiftShares Fund, offer two classes of their
shares, an Investment Class and a Consultant Class. Each series
has distinct investment objectives and/or policies, and a
shareholder's interest is limited to the series in which the
shareholder owns shares. The 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 ________, except for
Royce GiftShares Fund Consultant Class (dated June 15, 1997),
Royce Financial Services Fund (dated January 2, 1998) and Royce
Special Equity Fund (dated _______, 1998). Please retain this
document for future reference. The audited financial statements
and schedules of investments included in the Annual Reports to
Shareholders of such Funds for the fiscal year or period ended
December 31, 1997 are incorporated herein by reference. To
obtain an additional copy of the Prospectus or Annual or Semi-
Annual Reports to Shareholders for any of these Funds, please
call Investor Information at 1-800-221-4268.
Investment Adviser Transfer Agent
Royce & Associates, Inc. ("Royce") State Street Bank and Trust Company
c/o National Financial Data Services
Distributor Custodian
Royce Fund Services, Inc. ("RFS") State Street Bank and Trust Company
___________, 1998
TABLE OF CONTENTS
Page Page
INVESTMENT POLICIES AND INDEPENDENT ACCOUNTANTS.............. 22
LIMITATIONS............... 2 PORTFOLIO TRANSACTIONS............... 22
RISK FACTORS AND SPECIAL CODE OF ETHICS AND RELATED
CONSIDERATIONS............ 6 MATTERS...............................24
MANAGEMENT OF THE TRUST........ 10 PRICING OF SHARES BEING OFFERED.... 25
PRINCIPAL HOLDERS OF SHARES.... 13 REDEMPTIONS IN KIND................. 25
INVESTMENT ADVISORY TAXATION..............................25
SERVICES...................... 17 DESCRIPTION OF THE TRUST............ 31
DISTRIBUTOR.................... 19 PERFORMANCE DATA......................33
CUSTODIAN...................... 21
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following investment policies and limitations supplement those set
forth in the Funds' Prospectuses. Unless otherwise noted, whenever an
investment policy or limitation states a maximum percentage of a Fund's assets
that may be invested in any security or other asset or sets forth a policy
regarding quality standards, the percentage limitation or standard will be
determined immediately after giving effect to the Fund's acquisition of the
security or other asset. Accordingly, any subsequent change in values, net
assets or other circumstances will not be considered in determining whether the
investment complies with the Fund's investment policies and limitations.
A Fund's fundamental investment policies cannot be changed without the
approval of a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of the Fund. Except for the
fundamental investment restrictions set forth below, the investment policies and
limitations described in this Statement of Additional Information are operating
policies and may be changed by the Board of Trustees without shareholder
approval. However, shareholders will be notified prior to a material change in
an operating policy affecting their Fund.
No Fund may, as a matter of fundamental policy:
1. Issue any senior securities;
2. Purchase securities on margin or write call options on its
portfolio securities;
3. Sell securities short;
4. Borrow money, except that each of the Funds may borrow money from
banks as temporary measure for extraordinary or emergency
purposes in an amount not exceeding 5% of such Fund's total
assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its total assets in the securities of
foreign issuers (except for Royce Financial Services Fund, which
is not subject to any such limitation, and for PMF II and Royce
Special Equity Fund, each of which may invest up to 25% of its
total assets in such securities);
7. Invest in restricted securities (except for Royce Financial
Services Fund and PMF II, each of which may invest up to 15% of
its net assets in illiquid securities, including restricted
securities) or in repurchase agreements which mature in more than
seven days;
8. Invest more than 10% (15% for Royce Financial Services Fund, PMF
II and Royce Special Equity Fund) of its assets in securities
without readily available market quotations (i.e., illiquid
securities) (except for Pennsylvania Mutual Fund, which is not
subject to any such limitation);
<PAGE>
9. Invest, with respect to 75% of its total assets, more than 5% of
its assets in the securities of any one issuer (except U.S.
Government securities);
10. Invest more than 25% of its assets in any one industry (except
for Royce Financial Services Fund, which may invest more than 25%
of its assets in the financial services industry);
11. Acquire (own, in the case of Pennsylvania Mutual Fund) more than
10% of the outstanding voting securities of any one issuer;
12. Purchase or sell real estate or real estate mortgage loans or
invest in the securities of real estate companies unless such
securities are publicly-traded;
13. Purchase or sell commodities or commodity contracts;
14. Make loans, except for purchases of portions of issues of
publicly- distributed bonds, debentures and other securities,
whether or not such purchases are made upon the original issuance
of such securities, and except that each Fund may loan up to 25%
of its assets to qualified brokers, dealers or institutions for
their use relating to short sales or other securities
transactions (provided that such loans are fully collateralized
at all times);
15. Invest in companies for the purpose of exercising control of
management;
16. Purchase portfolio securities from or sell such securities
directly to any of the Trust's Trustees, officers, employees or
investment adviser, as principal for their own accounts;
17. Invest in the securities of other investment companies (except
for Pennsylvania Mutual Fund, PMF II and Royce Special Equity
Fund, which may invest in such companies as set forth below, and
except for Royce Financial Services Fund, which may invest in
such companies to the extent permitted by the 1940 Act); or
18. Invest more than 5% of its total assets in warrants, rights and
options (except for Pennsylvania Mutual Fund, which may not
purchase any warrants, rights or options).
No Fund may, as a matter of operating policy:
1. Invest more than 5% 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.
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 as a broker, a dealer, an underwriter,
an investment adviser registered under the Investment Advisers Act of 1940 or an
investment adviser to an investment company, subject to the following
limitations in the case of a company that, in its most recent fiscal year,
derived more than 15% of its gross revenues from such activities:
(a) The purchase cannot cause more than 5% of the Fund's assets to be
invested in the securities of the company;
(b) For an equity security, the purchase cannot result in the Fund owning
more than 5% of the company's outstanding securities of that class; and
(c) For a debt security, the purchase cannot result in the Fund owning more
than 10% of the principal amount of the company's outstanding debt
securities.
<PAGE>
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 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
<PAGE>
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% of its net assets in lower-rated (high-risk)
non-convertible debt securities. They may be rated from Ba to Ca by Moody's
Investors Service, Inc. or from BB to D by Standard & Poor's Corporation or may
be unrated. These securities have poor protection with respect to the payment
of interest and repayment of principal and may be in default as to the payment
of principal or interest. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated (high-risk) debt
securities may fluctuate more than those of higher-rated debt securities and may
decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates.
While the market for lower-rated (high-risk) corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the 1980s brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of the high-
yield/high-risk bond market, especially during periods of economic recession.
In fact, from 1989 to 1991, the percentage of lower-rated (high-risk) debt
securities that defaulted rose significantly above prior levels.
The market for lower-rated (high-risk) debt securities may be thinner and
less active than that for higher-rated debt securities, which can adversely
affect the prices at which the former are sold. If market quotations cease to
be readily available for a lower-rated (high-risk) debt security in which a Fund
has invested, the security will then be valued in accordance with procedures
established by the Board of Trustees. Judgment plays a greater role in valuing
lower-rated (high-risk) debt securities than is the case for securities for
which more external sources for quotations and last sale information are
available. Adverse publicity and changing investor perceptions may affect a
Fund's ability to dispose of lower-rated (high-risk) debt securities.
Since the risk of default is higher for lower-rated (high-risk) debt
securities, Royce's research and credit analysis may play an important part in
managing securities of this type for the Funds. In considering such investments
for the Funds, Royce will attempt to identify those issuers of lower-rated
(high-risk) debt securities whose financial condition is adequate to meet future
obligations, has improved or is expected to improve in the future. Royce's
analysis may focus on
<PAGE>
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects and the experience and managerial strength of the
issuer.
Foreign Investments
Except for Financial Services Fund, which is not subject to any such
limitation, each Fund may invest up to 10% of its total assets (25% for PMF II
and Royce Special Equity Fund) in the securities of foreign issuers. Foreign
investments involve certain risks which typically are not present in securities
of domestic issuers. There may be less information available about a foreign
company than a domestic company; foreign companies may not be subject to
accounting, auditing and reporting standards and requirements comparable to
those applicable to domestic companies; and foreign markets, brokers and issuers
are generally subject to less extensive government regulation than their
domestic counterparts. Foreign securities may be less liquid and may be subject
to greater price volatility than domestic securities. Foreign brokerage
commissions and custodial fees are generally higher than those in the United
States. Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, thereby
making it difficult to conduct such transactions. Delays or problems with
settlements might affect the liquidity of a Fund's portfolio. Foreign
investments may also be subject to local economic and political risks,
political, economic and social instability, military action or unrest or adverse
diplomatic developments, and possible nationalization of issuers or
expropriation of their assets, which might adversely affect a Fund's ability to
realize on its investment in such securities. There is no assurance that Royce
will be able to anticipate these potential events or counter their effects.
Furthermore, some foreign securities are subject to brokerage taxes levied by
foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale.
Although Fund's foreign investments may be adversely affected by changes in
foreign currency rates, Royce does not expect to purchase or sell foreign
currencies for the Funds to hedge against declines in the U.S. dollar or to lock
in the value of any foreign securities they purchase. Consequently, the risks
associated with such investments may be greater than if the Fund were to engage
in foreign currency transactions for hedging purposes.
The considerations noted above are generally intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities.
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
<PAGE>
the date of exercise, regardless of how long the warrant, right or option was
held. The securities underlying warrants, rights and options could include
shares of common stock of a single company or securities market indices
representing shares of the common stocks of a group of companies, such as the
S&P 600.
Investing in warrants, rights and call options on a given security allows
the Fund to hold an interest in that security without having to commit assets
equal to the market price of the underlying security and, in the case of
securities market indices, to participate in a market without having to purchase
all of the securities comprising the index. Put options, whether on shares of
common stock of a single company or on a securities market index, would permit
the Fund to protect the value of a portfolio security against a decline in its
market price and/or to benefit from an anticipated decline in the market price
of a given security or of a market. Thus, investing in warrants, rights and
options permits the Fund to incur additional risk and/or to hedge against risk.
Portfolio Turnover
For the year ended December 31, 1997 and the period from November 19, 1996
(commencement of operations) through December 31, 1996, PMF II's portfolio
turnover rates were 77% and 1%, respectively. The Fund's portfolio turnover rate
for its start-up period in 1996 was 1% because the Fund was then investing its
initial cash and did no significant selling of portfolio securities during this
period.
* * *
Royce believes that Pennsylvania Mutual, Low-Priced Stock, Micro-Cap,
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 manage-
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
ment investment companies of
which Royce is the investment
adviser; Trustee, President and
Treasurer of Royce Capital Fund
("RCF") (since December 1996),
an open-end diversified
management investment company of
which Royce is the investment
adviser (the Trust, RVT, OTCM,
RGT and RCF collectively, "The
Royce Funds"); Secretary and
sole director and shareholder of
Royce Fund Services, Inc.
("RFS"), formerly named Quest
Distributors, Inc., the
distributor of the Trust's
shares; and managing general
partner of Royce Manage-ment
Company ("RMC"), formerly named
Quest Management Company, a
registered investment adviser,
and its predecessor.
Hubert L. Cafritz Trustee Financial consultant.
(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
Trustee President of The Center for
Stephen L. Isaacs Health and Social Policy since
(58) September 1996; President of
65 Harmon Avenue Stephen L. Isaacs Associates,
Pelham, NY 10803 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
(57) 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 April
Jr.* (39) President 1997) and Vice President (since
1414 Avenue of August 1993) of Royce, having
the been employed by Royce since
Americas October 1989; Vice President of
New York, NY RGT (since October 1996),
10019
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
RCF (since December 1996) and
the other Royce Funds (since
April 1995); Vice President of
RFS (since November 1995); and
general partner of RMC since
July 1993.
W. Whitney Vice Managing Director (since April
George* (39) President 1997) and Vice President (since
1414 Avenue of August 1993) of Royce, having
the been employed by Royce since
Americas October 1991; Trustee and Vice
New York, NY President of RCF (since December
10019 1996); Vice President of RGT
(since October 1996) and of the
other Royce Funds (since April
1995); and general partner of
RMC and its predecessor since
January 1992.
Daniel A. Vice Vice President of Royce (since
O'Byrne* (35) President May 1994), having been employed
1414 Avenue of and by Royce since October 1986; and
the 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
(30) 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
from 1992 to May 1996.
_______________________________________________________________________________
*An "interested person" of the Trust and/or Royce under Section 2(a)(19) of
the 1940 Act.
All of the Trust's trustees (other than 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 auditors of the Funds and for conducting post-audit
reviews of their 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
Name Predecessor Part of Trust Expenses Funds 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 __, 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. [ ] Record [ %]
101 Montgomery Street
San Francisco, CA 94104-4122
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Laird Lorton Trust Company C/F [ ] Record [ %]
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Royce Premier Fund
Charles Schwab & Co., Inc. [ ] Record [ %]
101 Montgomery Street
San Francisco, CA 94104-4122
Wheat First Securities Inc. [ ] Record [ %]
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. [ ] Record [ %]
101 Montgomery Street
San Francisco, CA 94104-4122
Northern Trust TTEE [ ] Record [ %]
FBO Archdiocese of Chicago
P.O. Box 92956
Chicago, IL 60675-2956
Royce Low-Priced Stock Fund
Charles Schwab & Co., Inc. [ ] Record [ %]
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Management Company [ ] Record and [ %]
8 Soundshore Drive Beneficial
Greenwich, CT 06830
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Andrews & Company [ ] Record [ %]
C/O Chase Manhattan Bank NA
1211 Avenue of the Americas
New York, NY 10036
Royce GiftShares Fund
Investment Class
W. Whitney George , Trustee [ ] Record and [ %]
The Royce 1992 GST Trust Beneficial
1414 Avenue of the Americas
New York, NY 10019
Royce GiftShares Fund
Consultant Class
John M. Dalena TR DTD 102497 [ ] Record [ %]
FBO Daniel F. Dalena
State Street Bank and Trust Co.
c/o Bill Sweeney
45 Garfield Avenue
Madison, NJ 07940-2707
John M. Dalena TR DTD 102497 [ ] Record [ %]
FBO Margaret M. Dalena
State Street Bank and Trust Co.
c/o Bill Sweeney
45 Garfield Avenue
Madison, NJ 07940-2707
Arthur Oppenheimer TR [ ] Record [ %]
DTD 102397
FBO Darren Paul Gallsrrin
State Street Bank and Trust Co. TTEE
c/o Arthur Oppenheimer
3411 Irwin Avenue, Apt. 18B
Bronx, NY 10463-3739
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Laurence N. Wakeman TR [ ] Record [ %]
DTD 091997
FBO Jennifer Joyce Wakeman
State Street Bank and Trust Co. TTEE
c/o Larry Wakeman
476 Sylvan Avenue
Mountain View, CA 94041-1661
Laurence N. Wakeman TR [ ] Record [ %]
DTD 091997
FBO Jeffrey Michael Wakeman
State Street Bank and Trust Co. TTEE
c/o Larry Wakeman
476 Sylvan Avenue
Mountain View, CA 94041-1661
Laurence N. Wakeman TR [ ] Record [ %]
DTD 091997
FBO Julie Anne Wakeman
State Street Bank and Trust Co. TTEE
c/o Larry Wakeman
476 Sylvan Avenue
Mountain View, CA 94041-1661
Laurence N. Wakeman TR [ ] Record [ %]
DTD 091997
FBO Jessica Marie Wakeman
State Street Bank and Trust Co. TTEE
c/o Larry Wakeman
476 Sylvan Avenue
Mountain View, CA 94041-1661
Royal Total Return Fund
Charles Schwab & Co. Inc. [ ] Record [ %]
Attn. Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Financial Services Fund
Charles M. Royce [ ] Record and [ %]
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 [ ] Record [ %]
Reed Smith Shaw & McClay PPS
FBO Scott F. Zimmerman
P.O. Box 94777
Cleveland, OH 44101-4777
Bruce Museum Inc. [ ] Record and [ %]
Museum Drive Beneficial
Greenwich, CT 06830
Charles Schwab & Co. Inc. [ ] Record [ %]
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
PMF II
Charles Schwab & Co. Inc. [ ] Record [ %]
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Steven F. Fischer & [ ] Record [ %]
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 __, 1998 all of the trustees and officers of the Trust as a
group beneficially owned less than 1% of the outstanding shares of each of
Pennsylvania Mutual, Royce Premier and Total Return Funds, approximately 1% of
the outstanding shares of Royce Micro-Cap Fund, approximately ____% of the
outstanding shares of Royce Low-Priced Stock Fund, approximately ____% of the
outstanding shares of Royce GiftShares Fund, approximately ____% of the
outstanding shares of Royce Financial Services Fund, approximately ___% 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 Consultant Class
and of Royce GiftShares Fund's Consultant Class, respective average net assets
and .25% per annum (consisting of an asset-based sales charge) of Royce
GiftShares Fund's Investment Class, Royce Low-Priced Stock, Total Return and
Financial Services Funds' respective average net assets. Except to the extent
that they may be waived by RFS, these fees are not subject to any required
reductions. RFS is also entitled to receive the proceeds of any front-end sales
loads that may be imposed on purchases of shares of Pennsylvania Mutual Fund's
Consultant Class and Royce GiftShares Fund's Consultant Class and of any
contingent deferred sales charges that may be imposed on redemptions of such
shares. Currently Royce GiftShares Fund's Consultant Class shares bear a
contingent deferred sales charge which declines from 5% during the first year
after purchase to 1.5% during the sixth year after purchase. No contingent
deferred sales charge is imposed after the sixth year. Pennsylvania Mutual
Fund's Investment Class, Royce Premier, Micro-Cap and GiftShares Funds and PMF
II do not pay any fees to RFS under the Distribution Agreement.
Under the Distribution Agreement, RFS (i) seeks to promote the sale and/or
continued holding of shares of such Funds through a variety of activities,
including advertising, direct marketing and servicing investors and introducing
parties on an on-going basis; (ii) pays sales commissions and other fees to
those broker-dealers, investment advisers and others (excluding banks) who have
introduced investors to such Funds (which commissions and other fees may or may
not be the same amount as or otherwise comparable to the distribution fees
payable to RFS); (iii) pays the cost of preparing, printing and distributing any
advertising or sales literature and the cost of printing and mailing the Funds'
prospectuses to persons other than shareholders of the Funds; and (iv) pays all
other expenses incurred by it in promoting the sale and/or continued holding of
the shares of such Funds and in rendering such services under the Distribution
Agreement. The Trust bears the expense of registering its shares with the
Securities and Exchange Commission and the cost of qualifying and maintaining
the qualification of its shares for sale under the securities laws of the
various states.
The Trust entered into the Distribution Agreement with RFS pursuant to a
Distribution Plan which, among other things, permits each Fund that remains
covered by the Plan to pay the monthly distribution fee out of its net assets.
As required by Rule 12b-1 under the 1940 Act, the Plan has been approved by the
shareholders of each Fund or class of shares that remains covered by the Plan
and by the Trust's Board of Trustees (which also approved the Distribution
Agreement pursuant to which the distribution fees are paid), including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan or
the Distribution Agreement.
In approving the Plan, the Trustees, in accordance with the requirements of
Rule 12b-1, considered various factors (including the amount of the distribution
fees) and determined that there is a reasonable likelihood that the Plan will
benefit each Fund and its shareholders or class of shareholders.
<PAGE>
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 Fund and PMF II.
No trustee of the Trust who was not an interested person of the Trust had
any direct or indirect financial interest in the operation of the Plan or the
Distribution Agreement. Charles M. Royce, an interested person of the Trust,
Royce and RFS, had such an interest.
Under the Rules of Fair Practice of the NASD, the front-end sales loads,
asset-based sales charges and contingent deferred sales charges payable by any
Fund and/or the shareholders thereof to RFS are limited to (i) 6.25% of total
new gross sales occurring after July 7, 1993 plus interest charges on such
amount at the prime rate plus 1% per annum, increased by (ii) 6.25% of total new
gross sales occurring after such Fund first adopted the Plan until July 7, 1993
plus interest charges on such amount at the prime rate plus 1% per annum less
any front-end, asset-based or deferred sales charges on such sales or net assets
resulting from such sales.
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the custodian for
the securities, cash and other assets of each Fund and the transfer agent and
dividend disbursing agent for the shares of each Fund, but it does not
participate in any Fund's investment decisions. The Trust has
<PAGE>
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.
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.
<PAGE>
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
PMFII - 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
_________________
* For the period from November 19, 1996 (commencement of operations) to
December 31, 1996
CODE OF ETHICS AND RELATED MATTERS
Royce, RFS, RMC and The Royce Funds have adopted a Code of Ethics under
which directors, officers, employees and partners of Royce, RFS and RMC ("Royce-
related persons") and interested trustees/directors, officers and employees of
The Royce Funds are prohibited from personal trading in any security which is
then being purchased or sold or considered for purchase or sale by a Royce Fund
or any other Royce or RMC account. Such persons are permitted to engage in
other personal securities transactions if (i) the securities involved are United
States Government debt securities, municipal debt securities, money market
instruments, shares of affiliated or non-affiliated registered open-end
investment companies or shares acquired from an issuer in a rights offering or
under an automatic dividend reinvestment or employer-sponsored automatic payroll
- -deduction cash purchase plan or (ii) they first obtain permission to trade from
Royce's Compliance Officer and an executive officer of Royce. The Code contains
standards for the granting of such permission, and it is expected that
permission to trade will be granted only in a limited number of instances.
Royce's and RMC's clients include several private investment companies in
which Royce or RMC has (and, therefore, Charles M. Royce, Jack E. Fockler, Jr.
and/or W. Whitney George may be deemed to beneficially own) a share of up to 15%
of the company's realized and unrealized net capital gains from securities
transactions, but less than 5% of the company's equity interests. The Code of
Ethics does not restrict transactions effected by Royce or RMC for such private
investment company accounts. Transactions for such private investment company
accounts are subject to Royce's and RMC's allocation policies and procedures.
See "Portfolio Transactions".
As of March __, 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
approximately $[ ] million, and Royce's and RMC's equity interests in Royce
related private investment companies totalled approximately $[ ] million.
<PAGE>
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is based on the
Fund's current net asset value per share. See "Net Asset Value Per Share" in
the Funds' Prospectuses.
As set forth under "Net Asset Value Per Share", the Funds' custodian
determines the net asset value per share of each Fund at the close of regular
trading on the New York Stock Exchange on each day that the Exchange is open.
The Exchange is open on all weekdays which are not holidays. Thus, it is closed
on Saturdays and Sundays and on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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
<PAGE>
not necessarily correspond to a Fund's distributable income and capital gains
for U.S. Federal income tax purposes as a result of fluctuations in foreign
currency exchange rates. Furthermore, if any exchange control regulations were
to apply to a Fund's investments in foreign securities, such regulations could
restrict that Fund's ability to repatriate investment income or the proceeds of
sales of securities, which may limit the Fund's ability to make sufficient
distributions to satisfy the 90% distribution requirement and avoid the 4%
excise tax.
Income earned or received by a Fund from investments in foreign securities
may be subject to foreign withholding taxes unless a withholding exemption is
provided under an applicable treaty. Any such taxes would reduce that Fund's
cash available for distribution to shareholders. It is currently anticipated
that none of the Funds will be eligible to elect to "pass through" such taxes to
their shareholders for purposes of enabling them to claim foreign tax credits or
other U.S. income tax benefits with respect to such taxes.
If a Fund invests in stock of a so-called passive foreign investment
company ("PFIC"), such Fund may be subject to Federal income tax on a portion of
any "excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The amount so
allocated to any taxable year of the Fund prior to the taxable year in which the
excess distribution or disposition occurs would be taxed to the Fund at the
highest marginal income tax rate in effect for such years, and the tax would be
further increased by an interest charge. The amount allocated to the taxable
year of the distribution or disposition would be included in the Fund's
investment company taxable income and, accordingly, would not be taxable to the
Fund to the extent distributed by the Fund as a dividend to shareholders.
In lieu of being taxable in the manner described above, a Fund may be able
to elect to include annually in income its pro rata share of the ordinary
earnings and net capital gain (whether or not distributed) of the PFIC. In order
to make this election, the Fund would be required to obtain annual information
from the PFICs in which it invests, which in many cases may be difficult to
obtain. Alternatively, if eligible, the Fund may be able to elect to mark to
market its PFIC stock, resulting in the stock being treated as sold at fair
market value on the last business day of each taxable year. 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.
<PAGE>
Back-up Withholding/Withholding Tax
Under the Code, certain non-corporate shareholders may be subject to 31%
withholding on reportable dividends, capital gains distributions and redemption
payments ("back-up withholding"). Generally, shareholders subject to back-up
withholding will be those for whom a taxpayer identification number and certain
required certifications are not on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. In addition, the Trust is
required to withhold from distributions to any shareholder who does not certify
to the Trust that such shareholder is not subject to back-up withholding due to
notification by the Internal Revenue Service that such shareholder has
under-reported interest or dividend income. When establishing an account, an
investor must certify under penalties of perjury that such investor's taxpayer
identification number is correct and that such investor is not subject to or is
exempt from back-up withholding.
Ordinary income distributions paid to shareholders who are non-resident
aliens or which are foreign entities will be subject to 30% United States
withholding tax unless a reduced rate of withholding or a withholding exemption
is provided under an applicable treaty. Non-U.S. shareholders are urged to
consult their own tax advisers concerning the United States tax consequences to
them of investing in a Fund.
Timing of 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% (long-term rate) for shares held for more than 18
months; 28% (mid-term rate) for shares held for more than 12 months but for 18
months or less; and 39.6% (short-term rate) for shares held for 12 months or
less. For regular corporations, the maximum Federal rate on all income is 35%.
A loss will be disallowed to the extent that the shares disposed of are replaced
(including by receiving 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
<PAGE>
to such shares. A shareholder's exchange of shares between Funds will be
treated for tax purposes as a redemption of the Fund shares surrendered in the
exchange, and may result in the shareholder's recognizing a taxable gain or
loss.
* * *
The foregoing relates to Federal income taxation. Distributions, as well
as any gains from a sale, redemption or other taxable disposition of Fund
shares, also may be subject to state and local taxes. Under current law, so
long as each Fund qualifies for the Federal income tax treatment described
above, it is believed that neither the Trust nor any Fund will be liable for any
income or franchise tax imposed by Delaware.
Investors are urged to consult their own tax advisers regarding the
application to them of Federal, state and local tax laws.
Royce GiftShares Fund
Gift Taxes
An investment in Royce GiftShares Fund may be a taxable gift for Federal
tax purposes, depending upon the options selected and other gifts that the Donor
and his or her spouse may make during the year.
If the Donor selects the Withdrawal Option, the entire amount of the gift
will be a "present interest" that qualifies for the Federal annual gift tax
exclusion. In that case, the Donor will be required to file a Federal gift tax
return for the year of the gift only if he or she makes gifts (including the
gift of Fund shares) totaling more than the amount of the Federal annual gift
tax exclusion (currently, $10,000) or, if the Donor elects to have any gifts by
his or her spouse treated as made by him or her, to the same individual during
that year or if he or she makes any gift of a future interest during that year.
The Trustee will notify the Beneficiary of his or her right of withdrawal
promptly following any investment in the Fund under the Withdrawal Option.
If the Donor selects the Accumulation Option, the entire amount of the gift
will be a "future interest" for Federal gift tax purposes, so that none of the
gift will qualify for the Federal annual gift tax exclusion. 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.
<PAGE>
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.
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.
<PAGE>
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.
If the Donor selects the Accumulation Option, the Trust that he or she
creates will be subject to Federal income tax on all income and capital gains
earned by the Trust, less a $100 annual exemption (in lieu of the personal
exemption allowed to individuals). The amount of the tax will be determined
under the tax rate schedule applicable to estates and trusts, which is more
sharply graduated than the rate schedule for individuals, reaching the same
maximum marginal rate for ordinary income (currently, 39.6%), but at a much
lower taxable income level (for 1997, $8,100) than would apply to an individual.
It is anticipated, however, that most of the income generated by Fund shares
will be long-term capital gains, on which the Federal income tax rate is
currently limited to 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
<PAGE>
merged into the Trust, with each Fund of the Predecessor and Pennsylvania Mutual
Fund becoming an identical counterpart series of the Trust, Royce and RE&A
continuing as the Funds' investment advisers under their pre-merger Investment
Advisory Agreements and RFS continuing as the Trust's distributor. A copy of the
Trust's Certificate of Trust is on file with the Secretary of State of Delaware,
and a copy of its Trust Instrument, its principal governing document, is
available for inspection by shareholders at the Trust's office in New York.
The Trust has an unlimited authorized number of shares of beneficial
interest, which may be divided into an unlimited number of series and/or classes
without shareholder approval. (Each Fund, other than Pennsylvania Mutual Fund,
presently has only one class of shares.) All shares of the Trust are entitled
to one vote per share (with proportional voting for fractional shares). Shares
vote by individual series and/or class except as otherwise required by the 1940
Act or when the Trustees determine that the matter affects shareholders of more
than one series and/or class.
Pennsylvania Mutual Fund and Royce GiftShares Fund each have two classes of
shares, an Investment Class and a Consultant Class. The shares of each class
represent a pari passu interest in such Fund's investment portfolio and other
assets and have the same redemption and other rights.
On June 17, 1997, Pennsylvania Mutual Fund and Royce Total Return Fund
acquired all of the assets and assumed all of the liabilities of Royce Value
Fund and Royce Equity Income Fund, respectively. The acquisitions were
accomplished by exchanging shares of Pennsylvania Mutual Fund's Consultant Class
and of Royce Total Return Fund equal in value to the shares of Royce Value Fund
and Royce Equity Income Fund owned by each of their respective shareholders.
On November 25, 1997, Royce Global Services Fund changed its investment
objective and, in connection therewith, its name to Royce Financial Services
Fund.
Each of the Trustees currently in office were elected by the Predecessor's
shareholders. There will normally be no meeting of shareholders for the
election of Trustees until less than a majority of such Trustees remain in
office, at which time the Trustees will call a shareholders meeting for the
election of Trustees. In addition, Trustees may be removed from office by
written consents signed by the holders of a majority of the outstanding shares
of the Trust and filed with the Trust's custodian or by a vote of the holders of
a majority of the outstanding shares of the Trust at a meeting duly called for
this purpose upon the written request of holders of at least 10% of the Trust's
outstanding shares. Upon the written request of 10 or more shareholders of the
Trust, who have been shareholders for at least 6 months and who hold shares
constituting at least 1% of the Trust's outstanding shares, stating that such
shareholders wish to communicate with the Trust's other shareholders for the
purpose of obtaining the necessary signatures to demand a meeting to consider
the removal of a Trustee, the Trust is required (at the expense of the
requesting shareholders) to provide a list of its shareholders or to distribute
appropriate materials. Except as provided above, the Trustees may continue to
hold office and appoint their successors.
The trustee of the Royce GiftShares Fund trusts will send notices of
meetings of Royce GiftShares Fund shareholders, proxy statements and proxies for
such meetings to the trusts' beneficiaries to enable them to attend the meetings
in person or vote by proxies. It will vote all GiftShares Fund shares held by it
which are not present at the meetings and for which no proxies are returned in
the same proportions as GiftShares Fund shares for which proxies are returned.
<PAGE>
Shares are freely transferable, are entitled to distributions as declared
by the Trustees and, in liquidation of the Trust, are entitled to receive net
assets of their series and/or class. Shareholders have no preemptive rights.
The Trust's fiscal year ends on December 31.
Shareholder Liability
Generally, shareholders will not be personally liable for the obligations
of their Fund or of the Trust under Delaware law. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust is entitled to the
same limited liability extended to stockholders of private corporations for
profit organized under the Delaware General Corporation Law. No similar
statutory or other authority limiting business trust shareholder liability
exists in many other states. As a result, to the extent that the Trust or a
shareholder of the Trust is subject to the jurisdiction of courts in those
states, the courts may not apply Delaware law and may thereby subject Trust
shareholders to liability. To guard against this possibility, the Trust
Instrument (i) requires that every written obligation of the Trust contain a
statement that such obligation may be enforced only against the Trust's assets
(however, the omission of this disclaimer will not operate to create personal
liability for any shareholder); and (ii) provides for indemnification out of
Trust property of any Trust shareholder held personally liable for the Trust's
obligations. Thus, the risk of a Trust shareholder incurring financial loss
beyond his investment because of shareholder liability is limited to
circumstances in which: (i) a court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Trust itself
would be unable to meet its obligations. In light of Delaware law, the nature of
the Trust's business and the nature of its assets, management believes that the
risk of personal liability to a Trust shareholder is extremely remote.
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds is historical and is not intended to indicate
future returns. Each Fund's share price and total returns fluctuate in response
to market conditions and other factors, and the value of a Fund's shares when
redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of a Fund's return, including the
effect of reinvesting dividends and capital gain distributions and any change in
the Fund's net asset value per share (NAV) over the period. Average annual
total returns are calculated by determining the growth or decline in value of a
hypothetical historical investment in the Fund over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative return of 100% over ten years would produce
an average annual total return of 7.18%, which is the steady annual rate of
return that would equal 100% growth on a compounded basis in ten years. While
average annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance is not constant
over time, but changes from year to year, and that average annual total returns
represent averaged figures as opposed to the actual year-to-year performance of
the Fund.
<PAGE>
In addition to average annual total returns, a Fund's unaveraged or
cumulative total returns, reflecting the simple change in value of an investment
over a stated period, may be quoted. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
prices) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns and other performance information
may be quoted numerically or in a table, graph or similar illustration.
Historical Fund Results
The following table shows certain of the Funds' total returns for the
periods indicated. Such total returns reflect all income earned by each Fund,
any appreciation or depreciation of the assets of such Fund and all expenses
incurred by such Fund for the stated periods. The table compares the Funds'
total returns to the records of the Russell 2000 Index (Russell 2000) and
Standard & Poor's 500 Composite Stock Price Index (S&P 500) over the same
periods. The comparison to the Russell 2000 shows how the Funds' total returns
compared to the record of a broad index of small capitalization stocks. The S&P
500 comparison is provided to show how the Funds' total returns compared to the
record of a broad average of common stock prices over the same period. The
Funds have the ability to invest in securities not included in the indices, and
their investment portfolios may or may not be similar in composition to the
indices. Figures for the indices are based on the prices of unmanaged groups of
stocks, and, unlike the Funds, their returns do not include the effect of paying
brokerage commissions and other costs and expenses of investing in a mutual
fund.
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
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 ____% ____% ____%
(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 ____% ____% ____%
(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 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)
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)
PMF II
1 Year Total Return ____% ____% ___%
Average Annual Total Return since _____ ____% ____% ___%
(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 Total Return Fund (12-15-93) 20,698
Royce Financial Services Fund (12-15-94) 16,790
Royce GiftShares Fund (12-27-95) 15,584
PMF II --
------
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:
<PAGE>
Fund Lipper Ranking
---- --------------
Pennsylvania Mutual Fund 163 out of 470 small company growth funds
Royce Premier Fund 298 out of 470 small company growth funds
Royce Micro-Cap Fund 21 out of 34 micro-cap funds
Royce Low-Priced Stock Fund 271 out of 470 small company growth funds
Royce Total Return Fund 186 out of 470 small company growth funds
Royce Financial Services Fund 35 out of 190 global funds
Royce GiftShares Fund 148 out of 470 small company growth funds
PMF II ___ out of ___ 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 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.
<PAGE>
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 $[ ] million.
The Russell 2000, prepared by the Frank Russell Company, tracks the return
of the common stocks of approximately 2,000 of the smallest out of the 3,000
largest publicly traded U.S.-domiciled companies by market capitalization. The
Russell 2000 tracks the return on these stocks based on price appreciation or
depreciation and includes dividends.
U.S. Treasury bonds are securities backed by the credit and taxing power of
the U.S. government and, therefore, present virtually no risk of default.
Although such government securities fluctuate in price, they are highly liquid
and may be purchased and sold with relatively small transaction costs (direct
purchase of U.S. Treasury securities can be made with no transaction costs).
Returns on intermediate-term government bonds are based on a one-bond portfolio
constructed each year, containing a bond that is the shortest non-callable bond
available with a maturity of not less than five years. This bond is held for
the calendar year and returns are recorded. Returns on long-term government
bonds are based on a one-bond portfolio constructed each year, containing a bond
that meets several criteria, including having a term of approximately 20 years.
The bond is held for the calendar year and returns are recorded. Returns on
U.S. Treasury bills are based on a one-bill portfolio constructed each month,
containing the shortest term bill having not less than one month to maturity.
The total return on the bill is the month-end price divided by the previous
month-end price, minus one. Data up to 1976 is from the U.S. Government Bond
file at the University of Chicago's Center for Research in Security Prices; The
Wall Street Journal is the source thereafter. Inflation rates are based on the
Consumer Price Index.
Royce may, from time to time, compare the performance of common stocks,
especially small capitalization stocks, to the performance of other forms of
investment over periods of time.
From time to time, in reports and promotional literature, the Funds'
performances also may be compared to other mutual funds tracked by financial or
business publications and periodicals, such as KIPLINGER's, INDIVIDUAL INVESTOR,
MONEY, FORBES, BUSINESS WEEK, BARRON's,
<PAGE>
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 [ ] domestic equity funds rated by Morningstar with a three-year
history was [ ]; the average risk score for the [ ] small company funds
rated by Morningstar with a three-year history was [ ]; and the average risk
score for the [ ] equity income funds rated by Morningstar with a three-year
history was [ ]. 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 or equity
income funds categories, as applicable, were as follows:
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds Equity Income 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% -
The Funds' performances may also be compared to those of other compilations
or indices.
Advertising for the Funds may contain examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share can be
lower than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
The Funds may be available for purchase through retirement plans or other
programs offering deferral of or exemption from income taxes, which may produce
superior after-tax returns over time. For example, a $2,000 annual investment
earning a taxable return of 8% annually would have an after-tax value of
$177,887 after thirty years, assuming tax was deducted from the return each year
at a 28% rate. An equivalent tax-deferred investment would have a value of
$244,692 after thirty years.
<PAGE>
Risk Measurements
Quantitative measures of "total risk," which quantify the total variability
of a portfolio's returns around or below its average return, may be used in
advertisements and in communications with current and prospective shareholders.
These measures include standard deviation of total return and the Morningstar
risk statistic. Such communications may also include market risk measures, such
as beta, and risk-adjusted measures of performance such as the Sharpe Ratio,
Treynor Ratio, Jensen's Alpha and Morningstar's star rating system.
Standard Deviation. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation of
those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile - i.e., spread out around the fund's average monthly
total return, the fund's monthly total returns have been over the prior period.
Standard deviation of total return can be calculated for funds having different
objectives, ranging from equity funds to fixed income funds, and can be measured
over different time frames. The standard deviation figures presented are
annualized statistics based on the trailing 36 monthly returns. Approximately
68% of the time, the annual total return of a fund will differ from its mean
annual total return by no more than plus or minus the standard deviation figure.
95% of the time, a fund's annual total return will be within a range of plus or
minus 2x the standard deviation from its mean annual total return.
Beta. Beta measures the sensitivity of a security's or portfolio's returns
to the market's returns. It measures the relationship between a fund's excess
return (over 3-month T-bills) and the excess return of the benchmark index (S&P
500 for domestic equity funds). The market's beta is by definition equal to 1.
Portfolios with betas greater than 1 are more volatile than the market, and
portfolios with betas less than 1 are less volatile than the market. For
example, if a portfolio has a beta of 2, a 10% market excess return would be
expected to result in a 20% portfolio excess return, and a 10% market loss would
be expected to result in a 20% portfolio loss (excluding the effects of any
firm-specific risk that has not been eliminated through diversification).
Morningstar Risk. The Morningstar proprietary risk statistic evaluates a
fund's downside volatility relative to that of other funds in its class based on
the underperformances of the fund relative to the riskless T-bill return. It
then compares this statistic to those of other funds in the same broad
investment class.
Sharpe Ratio. Also known as the Reward-to-Variability Ratio, this is the
ratio of a fund's average return in excess of the risk-free rate of return
("average excess return") to the standard deviation of the fund's excess
returns. It measures the returns earned in excess of those that could have been
earned on a riskless investment per unit of total risk assumed.
Treynor Ratio. Also known as the Reward-to-Volatility Ratio, this is the
ratio of a fund's average excess return to the fund's beta. It measures the
returns earned in excess of those that could have been earned on a riskless
investment per unit of market risk assumed. Unlike the Sharpe Ratio, the
Treynor Ratio uses market risk (beta), rather than total risk (standard
deviation), as the measure of risk.
<PAGE>
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>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Financial Statements Included in Prospectuses (Part A):
Financial Highlights of Pennsylvania Mutual Fund's
Investment Class for the ten years ended December 31, 1997
(audited), and Pennsylvania Mutual Fund's Consultant Class for
the period from June 18, 1997 through December 31, 1997
(audited), of Royce Premier Fund for the five years ended
December 31, 1997 (audited), of Royce Micro-Cap Fund for the five
years ended December 31, 1997 (audited), of Royce Low-Priced
Stock Fund and Royce Total Return Fund for the period from
December 15, 1993 through December 31, 1993 (audited) and the
three years ended December 31, 1997 (audited), of Royce
GiftShares Fund's Investment Class for the period from December
27, 1995 through December 31, 1995 (unaudited) and the two years
ended December 31, 1997 (audited), and Royce GiftShares Fund's
Consultant Class for the period from September 26, 1997 through
December 31, 1997 (audited), of Royce Financial Services Fund for
the period from December 15, 1994 through December 31, 1994
(unaudited) and the three years ended December 31, 1997
(audited) and of PMF II for the period from November 19, 1996
through December 31, 1996 (audited) and the year ended December
31, 1997 (audited).
The following audited financial statements, including the schedules of
investments, and accompanying notes of the Registrant are included in the
Registrant's Annual Reports to Shareholders for the fiscal year or period ended
December 31, 1997, filed with the Securities and Exchange Commission under
Section 30(b)(1) of the Investment Company Act of 1940, and have been
incorporated in Part B hereof by reference:
Pennsylvania Mutual Fund -- Schedule of Investments at
December 31, 1997;
Pennsylvania Mutual Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Pennsylvania Mutual Fund -- Statement of Changes in Net
Assets for the years ended December 31, 1997 and 1996;
Pennsylvania Mutual Fund -- Statement of Operations for
the year ended December 31, 1997;
Pennsylvania Mutual Fund -- Financial Highlights for
the years ended December 31, 1997, 1996, 1995, 1994, and 1993 ;
Pennsylvania Mutual Fund -- Notes to Financial
Statements -- Report of Independent Accountants dated February
10, 1998;
Royce Premier Fund -- Schedule of Investments at December 31,
1997;
Royce Premier Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Premier Fund -- Statement of Changes in Net
Assets for the years ended December 31, 1997 and 1996;
Royce Premier Fund -- Statement of Operations for the
year ended December 31, 1997;
Royce Premier Fund -- Financial Highlights for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993;
Royce Premier Fund -- Notes to Financial Statements --
Report of Independent Accountants dated February 10, 1998;
Royce Micro-Cap Fund -- Schedule of Investments at December 31,
1997;
Royce Micro-Cap Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Micro-Cap Fund -- Statement of Changes in Net
Assets for the years ended December 31, 1997 and 1997;
Royce Micro-Cap Fund -- Statement of Operations for the
year ended December 31, 1997;
Royce Micro-Cap Fund -- Financial Highlights for the
years ended December 31, 1997, 1996, 1995 , 1994 and 1993;
Royce Micro-Cap Fund -- Notes to Financial Statements -
- Report of Independent Accountants dated February 10, 1998;
<PAGE>
Royce Low-Priced Stock Fund -- Schedule of Investments
at December 31, 1997;
Royce Low-Priced Stock Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Low-Priced Stock Fund -- Statement of Changes in
Net Assets for the years ended December 31, 1997 and 1996;
Royce Low-Priced Stock Fund -- Statement of Operations
for the year ended December 31, 1997;
Royce Low-Priced Stock Fund -- Financial Highlights for
the years ended December 31, 1997, 1996, 1995, 1994 and for the
period from December 15, 1993 through December 31, 1993;
Royce Low-Priced Stock Fund -- Notes to Financial
Statements -- Report
of Independent Accountants dated February 10, 1998;
Royce Total Return Fund -- Schedule of Investments at
December 31, 1997;
Royce Total Return Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce Total Return Fund -- Statement of Changes in Net Assets for
the year ended December 31, 1997 and 1996;
Royce Total Return Fund -- Statement of Operations for
the year ended December 31, 1997;
Royce Total Return Fund -- Financial Highlights for the
years ended December 31, 1997, 1996, 1995 and 1994 and the period
from December 15, 1993 through December 31, 1993;
Royce Total Return Fund -- Notes to Financial
Statements -- Report of Independent Accountants dated February
10, 1998;
Royce GiftShares Fund -- Schedule of Investments at
December 31, 1997;
Royce GiftShares Fund -- Statement of Assets and
Liabilities at December 31, 1997;
Royce GiftShares Fund -- Statement of Changes in Net Assets for
the years ended December 31, 1997 and 1996;
Royce GiftShares Fund -- Financial Highlights for the
years ended December 31, 1997 and 1996 and the period from
December 27, 1995 through December 31, 1995;
Royce GiftShares Fund -- Notes to Financial Statements
-- Report of Independent Accountants dated February 10, 1998.
Royce Financial Services Fund -- Schedule of
Investments at December 31, 1997;
Royce Financial Services Fund -- Statement of Assets
and Liabilities at December 31, 1997;
Royce Financial Services Fund -- Statement of Changes
in Net Assets for the years ended December 31, 1997 and 1996;
Royce Financial Services Fund -- Statement of
Operations for the year ended December 31, 1997;
Royce Financial Services Fund -- Financial Highlights
for the two years ended December 31, 1997 and the period from
December 15, 1994 through December 31, 1994;
Royce Financial Services Fund -- Notes to Financial
Statements -- Report of Independent Accountants dated February
10, 1998;
PMF II -- Schedule of Investments at December 31, 1997;
PMF II -- Statement of Assets and Liabilities at December 31,
1997;
PMF II -- Statement of Changes in Net Assets for the year ended
December 31, 1997 and for the period from November 19, 1996
through December 31, 1996;
PMF II -- Statement of Operations for the year ended December 31,
1997;
PMF II -- Financial Highlights for the year ended December 31,
1997 and for the period from November 19, 1996 through December
31, 1996;
PMF II -- Notes to Financial Statements -- Report of Independent
Accountants dated February 10, 1998.
Financial statements, schedules and historical information other
than those listed above have been omitted since they are either
inapplicable or are not required.
<PAGE>
b. Exhibits:
The exhibits required by Items (1) through (3), (6), (7), (9)
through (12) and (14) through (16), to the extent applicable to the
Registrant, have been filed with Registrant's initial Registration
Statement (No. 2-80348) and Post-Effective Amendment Nos. 4, 5, 6, 8,
9, 11, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 26, 27, 28, 29, 30,
31, 32, 33, 34, 35, 38, 40, 41, 42 and 43 thereto and, with respect
to Pennsylvania Mutual Fund, its initial Registration Statement (No.2-
19995) and Post-Effective Amendment Nos. 43, 45, 46, 47, 48, 49, 51,
52, 53, 56, and 58, and are incorporated by reference herein.
(4) Specimen Certificate of Royce Special Equity Fund.
(5) Form of Investment Advisiory Agreement between The Royce Fund
(Royce Special Equity Fund) and Royce & Associates, Inc.
(8) Form of State Street Bank and Trust Company Custodian Fee
Schedule for Royce Special Equity Fund.
(11) Consent of Coopers & Lybrand L.L.P. relating to The Royce Fund.
(13) Form of Letter Agreement between the Registrant and Charles M.
Royce relating to the initial purchase of shares of Royce Special
Equity Fund, a series of the Registrant.
Item 25. Persons Controlled by or Under Common Control With Registrant
There are no persons directly or indirectly controlled by or under
common control with the Registrant.
Item 26. Number of Holders of Securities
As of February 11, 1998, the number of record holders of shares of
each Fund of the Registrant was as follows:
Title of Fund Number of Record Holders
Pennsylvania Mutual Fund 21,156
Royce Premier Fund 13,501
Royce Micro-Cap Fund 7,306
Royce Low-Priced Stock Fund 931
Royce Total Return Fund 4,581
Royce Financial Services Fund 71
The REvest Growth and Income Fund 416
Royce GiftShares Fund 523
PMF II 1,012
Item 27. Indemnification
(a) Article IX of the Trust Instrument of the Registrant provides as
follows:
<PAGE>
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons contracting with or
having any claim against the Trust or a particular Series shall look
only to the assets of the Trust or such Series for payment under such
contract or claim; and neither the Trustees nor any other Trust's
officers, employees or agents, whether past, present or future, shall
be personally liable therefor. Every written instrument or obligation
on behalf of the Trust or any Series shall contain a statement to the
foregoing effect, but the absence of such statement shall not operate
to make any Trustee or officers of the trust liable thereunder. None
of the Trustees or officers of the Trust shall be responsible or
liable for any act or omission or for neglect or wrongdoing by him or
any agent, employee, investment adviser or independent contractor of
the Trust, but nothing contained in this Trust Instrument or in the
Delaware Act shall protect any Trustee or officer of the Trust against
liability to the Trust or to Shareholders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his or her office.
INDEMNIFICATION
Section 2.
(a) Subject to the exceptions and limitations contained in
Section 2(b) below:
(i) Every person who is, or has been, a Trustee or
officer of the Trust (including persons who serve at the Trust's
request as directors, officers or trustees of another entity in which
the Trust has any interest as a shareholder, creditor or otherwise)
(hereinafter referred to as a "Covered Person") shall be indemnified
by the appropriate Fund to the fullest extent not prohibited by law
against liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof; and
(ii) The words "claim", "action", "suit" or
"proceeding" shall apply to all claims, actions, suits or proceedings (civil,
criminal, administrative, investigatory or other, including appeals), actual or
threatened, while in office or thereafter, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) Who shall, in respect of the matter or
matters involved, have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to
the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence in the performance
of his duties or reckless disregard of the obligations and
duties involved in the conduct of his office or (B) not to
have acted in the belief that his action was in the best
interest of the Trust; or
(ii) In the event of a settlement, unless there has
been a determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office,
(A) By the court or other body approving the
settlement;
(B) By a majority of those Trustees who are
neither Interested Persons of the Trust nor are parties to the matter,
based upon a review of readily available facts (as opposed to a full
trial-type inquiry); or
<PAGE>
(C) By written opinion of independent legal
counsel, based upon a review of readily available facts (as opposed to
a full trial-type inquiry).
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other rights to
which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer
and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall
affect any rights to indemnification to which Trust personnel, other
than Trustees and officers, and other persons may be entitled by
contract or otherwise under law.
(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of the type
described in subsection (a) of this Section 2 may be paid by the applicable Fund
from time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will be paid
over by him to the applicable Fund if and when it is ultimately determined that
he is not entitled to indemnification under this Section 2; provided, however,
that either (i) such Covered Person shall have provided appropriate security for
such undertaking, (ii) the Trust is insured against losses arising out of any
such advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 2."
(b)(1) Paragraph 8 of the Investment Advisory Agreements by
and between the Registrant and Royce & Associates, Inc. (formerly named
Quest Advisory Corp.) provides as follows:
"8. Protection of the Adviser. The Adviser shall not be liable
to the Fund or to any portfolio series thereof for any action taken or omitted
to be taken by the Adviser in connection with the performance of any of its
duties or obligations under this Agreement or otherwise as an investment adviser
of the Fund or such series, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the Adviser and hold it harmless
from and against all damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement) incurred
by the Adviser in or by reason of any pending, threatened or completed action,
suit, investigation or other proceeding (including an action or suit by or in
the right of the Fund or any portfolio series thereof or its security holders)
arising out of or otherwise based upon any action actually or allegedly taken or
omitted to be taken by the Adviser in connection with the performance of any of
its duties or obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the preceding sentence of
this Paragraph 8 to the contrary, nothing contained herein shall protect or be
deemed to protect the Adviser against or entitle or be deemed to entitle the
Adviser to indemnification in respect of, any liability to the Fund or to any
portfolio series thereof or its security holders to which the Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its duties and obligations under this Agreement.
Determinations of whether and the extent to which the Adviser is
entitled to indemnification hereunder shall be made by reasonable and fair
means, including (a) a final decision on the merits by a court or other body
before whom the action, suit or other proceeding was brought that the Adviser
was not liable by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the Adviser was
not liable by reason of such misconduct by (i) the vote of a majority of a
quorum of the Trustees of the Fund who are neither "interested persons" of
the Fund (as defined in Section 2(a)(19) of the Investment Company Act of 1940)
nor parties to the action, suit or other proceeding or (ii) an independent legal
counsel in a written opinion."
(b)(2) Paragraph 8 of the Investment Advisory Agreement by and
between the Registrant and Royce, Ebright & Associates, Inc. provides as
follows:
"8. Protection of the Adviser. The Adviser shall not be
liable to the Fund or to any portfolio series thereof for any action
taken or omitted to be taken by the Adviser in connection with the
performance of any of its duties or obligations under this Agreement
or
<PAGE>
otherwise as an investment adviser of the Fund or such series, and the
Fund or each portfolio series thereof involved, as the case may be,
shall indemnify the Adviser and hold it harmless from and against all
damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by
the Adviser in or by reason of any pending, threatened or completed
action, suit, investigation or other proceeding (including an action
or suit by or in the right of the Fund or any portfolio series thereof
or its security holders) arising out of or otherwise based upon any
action actually or allegedly taken or omitted to be taken by the
Adviser in connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment adviser
of the Fund or such series. Notwithstanding the preceding sentence of
this Paragraph 8 to the contrary, nothing contained herein shall
protect or be deemed to protect the Adviser against or entitle or be
deemed to entitle the Adviser to indemnification in respect of, any
liability to the Fund or to any portfolio series thereof or its
security holders to which the Adviser would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of
its duties and obligations under this Agreement.
Determinations of whether and the extent to which the Adviser is
entitled to indemnification hereunder shall be made by reasonable and
fair means, including (a) a final decision on the merits by a court or
other body before whom the action, suit or other proceeding was
brought that the Adviser was not liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
duties or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Adviser was
not liable by reason of such misconduct by (i) the vote of a majority
of a quorum of the Trustees of the Fund who are neither "interested
persons" of the Fund (as defined in Section 2(a)(19) of the Investment
Company Act of 1940) nor parties to the action, suit or other
proceeding or (ii) an independent legal counsel in a written opinion."
(c) Paragraph 9 of the Distribution Agreement made October 31,
1985 by and between the Registrant and Royce Fund Services, Inc. (formerly
named Quest Distributors, Inc.) provides as follows:
"9. Protection of the Distributor. The Distributor shall
not be liable to the Fund or to any series thereof for any action
taken or omitted to be taken by the Distributor in connection with the
performance of any of its duties or obligations under this Agreement
or otherwise as an underwriter of the Shares, and the Fund or each
portfolio series thereof involved, as the case may be, shall indemnify
the Distributor and hold it harmless from and against all damages,
liabilities, costs and expenses (including reasonable attorneys' fees
and amounts reasonably paid in settlement) incurred by the Distributor
in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or
in the right of the Fund or any series thereof or its security
holders) arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by the Distributor in
connection with the performance of any of its duties or obligations
under this Agreement or otherwise as an underwriter of the Shares.
Notwithstanding the preceding sentences of this Paragraph 9 to the
contrary, nothing contained herein shall protect or be deemed to
protect the Distributor against, or entitle or be deemed to entitle
the Distributor to indemnification in respect of, any liability to the
Fund or to any portfolio series thereof or its security holders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its duties and
obligations under this Agreement.
Determinations of whether and to the extent to which the
Distributor is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or other
proceeding was brought that the Distributor was not liable by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the
Distributor was not liable by reason of such misconduct by (a) the
vote of a majority of a quorum of the Trustees of the Fund who are
neither "interested persons" of the Fund (as defined in Section
2(a)(19) of the 1940 Act) nor parties to the action, suit or other
proceeding or (b) an independent legal counsel in a written opinion."
<PAGE>
Item 28. Business and Other Connections of Investment Advisers
Reference is made to the filings on Schedule D to the
Applications on Form ADV, as amended, of Royce & Associates, Inc. and
Royce, Ebright & Associates, Inc. for Registration as Investment Advisers
under the Investment Advisers Act of 1940.
Item 29. Principal Underwriters
Inapplicable. The Registrant does not have any principal
underwriters.
Item 30. Location of Accounts and Records
The accounts, books and other documents required to be maintained
by the Registrant pursuant to the Investment Company Act of 1940, are
maintained at the following locations:
The Royce Fund
1414 Avenue of the Americas
10th Floor
New York, New York 10019
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
Item 31. Management Services
State Street Bank and Trust Company, a Massachusetts trust
company ("State Street"), provides certain management-related services to
the Registrant pursuant to a Custodian Contract made as of December 31,
1985 between the Registrant and State Street. Under such Custodian
Contract, State Street, among other things, has contracted with the
Registrant to keep books of accounts and render such statements as agreed
to in the then current mutually-executed Fee Schedule or copies thereof
from time to time as requested by the Registrant, and to assist generally
in the preparation of reports to holders of shares of the Registrant, to
the Securities and Exchange Commission and to others, in the auditing of
accounts and in other ministerial matters of like nature as agreed to
between the Registrant and State Street. All of these services are
rendered pursuant to instructions received by State Street from the
Registrant in the ordinary course of business.
Registrant paid the following fees to State Street for services
rendered pursuant to the Custodian Contract, as amended, for each of the
three (3) fiscal years ended December 31:
1997: $462,684
1996: $468,735
1995: $335,180
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus for any series of the Registrant is delivered with a copy of the
latest annual report including schedule of investments to shareholders of
such series upon request and without charge.
<PAGE>
Registrant hereby undertakes to call a special meeting of the
Registrant's shareholders upon the written request of shareholders owning
at least 10% of the outstanding shares of the Registrant for the purpose of
voting upon the question of the removal of a trustee or trustees and, upon
the written request of 10 or more shareholders of the Registrant who have
been such for at least 6 months and who own at least 1% of the outstanding
shares of the Registrant, to provide a list of shareholders or to
disseminate appropriate materials at the expense of the requesting
shareholders.
EXHIBIT (4)
NUMBER SHARES
[Box] [Box]
ROYCE SPECIAL EQUITY FUND
A SERIES OF THE ROYCE FUND, A DELAWARE BUSINESS TRUST
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
fully paid and non-assessable shares of beneficial interest - $.001 par value
of Royce Special Equity Fund transferable on the books of the Trust by the
holder hereof in person, or by duly authorized attorney, upon surrender of
this certificate properly endorsed.
COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES
SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY
P.O. BOX 419733, KANSAS CITY, MO 64141-8012
BY
VOID
AUTHORIZED OFFICER
[Seal -
THE ROYCE FUND
STATE OF DELAWARE
TRUST SEAL 1996]
Dated
/s/ John E. Denneen Charles M. Royce
SECRETARY PRESIDENT
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to appplicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants in the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ________ Custodian ________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ____________________
(State)
Additional abbreviations may also be used though not in the
above list.
For value received, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[Box]
[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE]
Shares of beneficial interest represented by the within
Certificate, and do hereby irrevocably constitute and appoint
Attorney to transfer the said shares of benficial interest on the books of
the within-named Association with full power of substitution in the premises.
Dated,
Owner
NOTICE: THE SIGNATURE
TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE
NAME AS WRITTEN UPON
THE FACE OF THE CERTIFI-
CATE IN EVERY PARTICULAR,
WITHOUT ALTERATION
OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST
BE GUARANTEED BY A COM-
MERCIAL BANK OR TRUST
COMPANY LOCATED OR
HAVING A CORRESPON-
DENT IN NEW YORK CITY,
OR BY A MEMBER FIRM OF
THE NEW YORK, AMERICAN,
MIDWEST OR PACIFIC COAST
STOCK EXCHANGES, WHOSE
SIGNATURE(S) IS KNOWN
TO THE TRANSFER AGENT
OF THE COMPANY.
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH NOTICE PRINTED ABOVE
Signature(s) guaranteed by:
<PAGE>
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE ROYCE FUND
(ROYCE SPECIAL EQUITY FUND)
AND
ROYCE & ASSOCIATES, INC.
Agreement made this day of 1998, by and between
THE ROYCE FUND, a Deleware business trust (the "Fund"), and ROYCE
& ASSOCIATES, INC., a New York corporation (the "Adviser").
The Fund and the Adviser hereby agree as follows in respect
of ROYCE SPECIAL EQUITY FUND, a series of the Fund (the
"Series"):
1. Duties of the Adviser. The Adviser shall, during the
term and subject to the provisions of this Agreement, (a)
determine the composition of the portfolio of the Series, the
nature and timing of the changes therein and the manner of
implementing such changes, and (b) provide the Series with such
investment advisory, research and related services as the Series
may, from time to time, reasonably require for the investment of
its funds. The Adviser shall perform such duties in accordance
with the applicable provisions of the Fund's Declaration of
Trust, By-Laws and current prospectus and any directions it may
receive from the Fund's Trustees.
2. Expenses Payable by the Series. Except as otherwise
provided in Paragraphs 1 and 3 hereof, the Fund shall be responsi
ble for effecting sales and redemptions of the Series' shares,
for determining the net asset value thereof and for all of the
Series' other operations and shall cause the Series to pay all
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 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.
3. Expenses Payable by the Adviser. The Adviser shall
furnish, without expense to the Fund or to the Series, the
services of those of its executive officers and full-time
employees who may be duly elected executive officers or Trustees
of the Fund, subject to their individual consent to serve and to
any limitations imposed by law, and shall pay all the
compensation and expenses of such persons. For
<PAGE>
purposes of this Agreement, only a president, a treasurer or a
vice-president in charge of a principal business function shall
be deemed to be an executive officer. The Adviser shall also pay
all expenses which it may incur in performing its duties under
Paragraph 1 hereof and shall reimburse the Fund for any space
leased by the Fund and occupied by the Adviser. In the event the
Fund shall qualify shares of the Series for sale in any
jurisdiction, the applicable statutes or regulations of which
expressly limit the amount of the Series' total annual expenses,
the Adviser agrees to reduce its annual investment advisory fee
for the Series, to the extent that such total annual expenses
(other than brokerage commissions and other capital items,
interest, taxes, distribution fees, extraordinary items and other
excludable items, charges, costs and expenses) exceed the
limitations imposed on the Series by the most stringent
regulations of any such jurisdiction.
4. Compensation of the Adviser. The Fund agrees to cause the Series to
pay to the Adviser, and the Adviser agrees to accept as compensation for the
services provided by the Adviser hereunder, a fee equal to 1.00% per annum of
the average net assets of the Series at the close of business on each day that
the value of its net assets is computed during the year. However, the Fund and
the Adviser may agree in writing to temporarily or permanently reduce such fee.
Such compensation shall be accrued on the Series' books at the close of business
on each day that the value of its net assets is computed during each year and
shall be payable to the Adviser monthly, on the last day of each month, and
adjusted as of year-end if required.
5. Excess Brokerage Commissions. The Adviser is hereby authorized, to the
fullest extent now or hereafter permitted by law, to cause the Series to pay a
member of a national securities exchange, broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission another member of such exchange, broker or dealer would have charged
for effecting that transaction, if the Adviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and/or research services provided by such member, broker or dealer,
viewed in terms of either that particular transaction or its overall
responsibilities with respect to all portfolio series of the Fund and/or the
Series.
6. Limitations on the Employment of the Adviser. The services of the
Adviser to the Series shall not be deemed exclusive, and the Adviser may engage
in any other business or render similar or different services to others so long
as its services to the Series hereunder are not impaired thereby, and nothing in
this Agreement shall limit or restrict the right of any director, officer or
employee of the Adviser to engage in any other business or to devote his time
and attention in part to any other business, whether of a similar or dissimilar
nature. So long as this Agreement or any extension, renewal or amendment
remains in effect, the Adviser shall be the only investment adviser for the
Series, subject to the Adviser's right to enter into sub-advisory agreements.
The Adviser assumes no responsibility under this Agreement other than to render
the services called for hereunder, and shall not be responsible for any action
of or directed by the Fund's Trustees, or any committee thereof, unless such
action has been caused by the Adviser's gross negligence, willful malfeasance,
bad faith or reckless disregard of its obligations and duties under this
Agreement.
<PAGE>
7. Responsibility of Dual Directors, Officers and/or Employees. If any
person who is a director, officer or employee of the Adviser is or becomes a
Trustee, officer and/or employee of the Fund and acts as such in any business of
the Fund pursuant to this Agreement, then such director, officer and/or employee
of the Adviser shall be deemed to be acting in such capacity solely for the
Fund, and not as a director, officer or employee of the Adviser or under the
control or direction of the Adviser, although paid by the Adviser.
8. Protection of the Adviser. The Adviser shall not be liable to the
Fund or to any portfolio series thereof for any action taken or omitted to be
taken by the Adviser in connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment adviser of the
Fund or such series, and the Fund or each portfolio series thereof involved, as
the case may be, shall indemnify the Adviser and hold it harmless from and
against all damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by the
Adviser in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or in the
right of the Fund or any portfolio series thereof or its security holders)
arising out of or otherwise based upon any action actually or allegedly taken or
omitted to be taken by the Adviser in connection with the performance of any of
its duties or obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the preceding sentence of
this Paragraph 8 to the contrary, nothing contained herein shall protect or be
deemed to protect the Adviser against or entitle or be deemed to entitle the
Adviser to indemnification in respect of, any liability to the Fund or to any
portfolio series thereof or its security holders to which the Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its duties and obligations under this Agreement.
Determinations of whether and the extent to which the Adviser is entitled
to indemnification hereunder shall be made by reasonable and fair means,
including (a) a final decision on the merits by a court or other body before
whom the action, suit or other proceeding was brought that the Adviser was not
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties, or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Adviser was not liable
by reason of such misconduct by (i) the vote of a majority of a quorum of the
Trustees of the Fund who are neither "interested persons" of the Fund (as
defined in Section 2(a)(19) of the Investment Company Act of 1940) nor parties
to the action, suit or other proceeding, or (ii) an independent legal counsel in
a written opinion.
9. Effectiveness, Duration and Termination of Agreement. This Agreement
shall become effective immediately upon approval by a majority of the
outstanding voting securities of the Series, and the Investment Advisory
Agreement made September 24, 1992 by and between the Fund and the Adviser shall
not apply as to the Series. This Agreement shall remain in effect until April
30, 1999, and thereafter shall continue automatically for successive annual
periods, provided that such continuance is specifically approved at least
annually by (a) the vote of the Fund's Trustees, including a majority of such
Trustees who are not parties to this Agreement or "interested persons" (as such
term is defined in Section 2(a)(19) of the Investment Company Act of 1940) of
any such party, cast in person at a
<PAGE>
meeting called for the purpose of voting on such approval, or (b) the vote of a
majority of the outstanding voting securities of the Series and the vote of the
Fund's Trustees, including a majority of such Trustees who are not parties to
this Agreement or "interested persons" (as so defined) of any such party. This
Agreement may be terminated at any time, without the payment of any penalty, on
60 days' written notice by the vote of a majority of the outstanding voting
securities of the Series, or by the vote of a majority of the Fund's Trustees or
by the Adviser, and will automatically terminate in the event of its
"assignment" (as such term is defined for purposes of Section 15(a)(4) of the
Investment Company Act of 1940); provided, however, that the provisions of
Paragraph 8 of this Agreement shall remain in full force and effect, and the
Adviser shall remain entitled to the benefits thereof, notwithstanding any such
termination. The Adviser or Charles M. Royce may, upon termination of this
Agreement, require the Fund to refrain from using the name "Royce" in any form
or combination in its name or in its business, and the Fund shall, as soon as
practicable following its receipt of any such request from the Adviser or
Charles M. Royce, so refrain from using such name.
Any notice under this Agreement shall be given in writing, addressed and
delivered or mailed, postage prepaid, to the other party at its principal
office.
10. Shareholder Liability. Notice is hereby given that this Agreement is
entered into on the Fund's behalf by an officer of the Fund in his capacity as
an officer and not individually and that the obligations of or arising out of
this Agreement are not binding upon any of the Fund's Trustees, officers,
employees, agents or shareholders individually, but are binding only upon the
assets and property of the Series.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
THE ROYCE FUND
By: _______________________________
Charles M. Royce, President
ROYCE & ASSOCIATES, INC.
By: _______________________________
Charles M. Royce, President
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
ROYCE SPECIAL EQUITY FUND
_____________________________________________________________________
I. A. INTERNATIONAL PORTFOLIO AND FUND ACCOUNTING
Includes: Maintaining multicurrency investment ledgers, and providing
position and income reports.
Maintaining general ledger and capital stock accounts in compliance
with GAAP (FAS 52).
Preparing daily trial balances. Calculating net asset values daily.
Providing selected general ledger reports. Securities yield or market
value quotations will be provided to State Street by
the fund or via State Street's pricing service (See Section III).
(The fee is calculated using basis
points per portfolio per annum: 1 basis point = 0.01%).
First $ 50 Million (Net Asset Value) 5 bpts
Next $ 50 Million 3 bpts
Over $100 Million 1/2 bpt
B. DOMESTIC PORTFOLIO AND FUND ACCOUNTING
First $20 Million 1/ 15 of 1%
Next $80 Million 1/ 30 of 1%
Excess 1/100 of 1%
II. GLOBAL CUSTODY
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell
fails. Determine and collect portfolio income. Make cash disbursements
and report cash
transactions in local and base currency. Withhold foreign taxes. File
foreign tax reclaims.
Monitor corporate actions. Report portfolio positions.
A. Country Grouping
Group A Group B Group C Group D
------- ------- ------- -------
Australia Austria Botswana Argentina
Canada Belgium Brazil Bangladesh
Denmark Finland China Bolivia *
Euroclear Hong Kong Czech Republic Chile
France Indonesia Ecuador * Colombia
Germany Ireland Egypt Cyprus
Italy Malaysia Ghana Greece
Japan Mexico Israel Hungary
New Zealand Netherlands Kenya India
Spain Norway Luxembourg Jamaica *
Switzerland Philippines Morocco Jordan
U.K. Portugal South Africa Mauritus
Singapore Sri Lanka Namibia
Sweden Taiwan Pakistan
Thailand Trinidad and Tobago * Peru
Turkey Poland
Zambia Slovakia
Zimbabwe South Korea
Tunisia
Uruguay
* 17f-5 Ineligible at this time Venezuela
<PAGE>
B. Transaction Charges
Group A Group B Group C Group D
State Street Bank $25 $50 $100 $150
Repos or Euros - $7.00
C. Holding Charges in Basis Points (Annual Fee)
Group A Group B Group C Group D Group E
1.5 5.0 15.0 40 50
* Excludes: agent, depository and local auditing fees
** Transaction charges waived if brokerage provided by National Securities
Company.
UNITED STATES - for each line item processed
State Street Bank Repos $ 0
DTC or Fed Book Entry $ 12.00
New York Physical $ 25.00
PTC Buy/Sell $ 20.00
All other Trades $ 16.00
Maturity Collections $ 8.00
Option charge for each option written or closing
contract, per issue, per broker $ 25.00
Option expiration/Option exercised $ 15.00
Interest Rate Futures -- no security movement $ 8.00
Monitoring for calls and processing coupons --
for each coupon issue held - monthly charge $ 5.00
Holdings Charge per Security $ 0
Principal Reduction Payments Per Paydown $ 10.00
Dividend Charges (For items held at the Request
of Traders over record date in street form) $ 50.00
III. PRICING SERVICE
Monthly Base Fee per portfolio $ 200.00
Monthly Quote Charge: (based on the average number of positions in
portfolio)
- Foreign Equities and Bonds $ 6.00
- Listed Equities, OTC Equities, and Bonds $ 3.00
<PAGE>
IV. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations,
extraordinary security shipments and the preparation of special reports
will be subject to
negotiation. Fees for tax accounting/recordkeeping for options, financial
futures, standardized yield calculation, securities lending and other
special items will be negotiated separately.
V. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include,
but are not limited to the following:
Telephone/Telexes
Wire Charges
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Transfer Fees
Sub-custodian Out-of-Pocket Charges
(e.g., Stamp Duties, Registration, etc.)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer -- $15.00 each
ROYCE SPECIAL EQUITY FUND STATE STREET BANK & TRUST CO.
By: ________________________ By: ____________________________
Title: ________________________ Title: ____________________________
Date: ________________________ Date: ____________________________
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of The Royce Fund
We consent to the reference to our Firm under the headings "General Information"
in the Prospectus and "Independent Accountants" in the Statement of Additional
Information in Post-Effective Amendment No. 45 to the Registration Statement of
The Royce Fund on Form N-1A (File No. 2-80348) under the Securities Act of 1933
and Amendment No. 47 under the Investment Company Act of 1940 (File No. 811-
3599). We further consent to the use of our opinion dated February 10, 1998
relating to the audited financial statements of The Royce Fund for the year
ended December 31, 1997, which have been incorporated by reference.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
THE ROYCE FUND
1414 Avenue of the Americas
New York, New York 10019
March , 1998
Mr. Charles M. Royce
1414 Avenue of the Americas
New York, New York 10019
Dear Mr. Royce:
The Royce Fund (the "Trust") hereby accepts your offer to purchase 200
shares of beneficial interest of the Royce Special Equity Fund, a series of the
Trust, at $5.00 per share, for an aggregate purchase price of $1,000.00, subject
to the understanding that you have no present intention of redeeming or selling
the shares so acquired.
Sincerely,
THE ROYCE FUND
By: __________________________
Charles M. Royce
President
Agreed:
I, Charles M. Royce, hereby agree to purchase the shares of beneficial
interest covered under the above letter agreement. I acknowledge that I have no
present intention of redeeming or selling any of the 200 shares of the Royce
Special Equity Fund covered by such letter agreement.
__________________________
Charles M. Royce
