<PAGE>
THE ROYCE FUNDS-sm-
ROYCE FINANCIAL SERVICES FUND
PROSPECTUS - January 2, 1998
NEW ACCOUNT AND GENERAL INFORMATION: Investor Information -- 1-800-221-4268
SHAREHOLDER SERVICES -- 1-800-841-1180
INVESTMENT ADVISOR SERVICES -- 1-800-33-ROYCE
INVESTMENT
OBJECTIVE AND
POLICIES
Royce Financial Services Fund (the "Fund") seeks
long-term capital appreciation by investing
primarily in common stocks and convertible
securities of companies principally engaged in the
financial services industry. The Fund's securities
are selected on a value basis. There can be no
assurance that the Fund will achieve its objective.
The Fund is a no-load series of The Royce Fund (the
"Trust"), a diversified open-end management
investment company. The Fund is one of nine series
of the Trust. This Prospectus relates to Royce
Financial Services Fund only.
ABOUT THIS
PROSPECTUS
This Prospectus sets forth concisely the information
that you should know about the Fund before you
invest. It should be retained for future reference.
A "Statement of Additional Information," containing
further information about the Fund and the Trust,
has been filed with the Securities and Exchange
Commission. The Statement is dated January 2, 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. If you are viewing the electronic
version of this Prospectus through an online
computer service, you may request a printed version
free of charge by calling Investor Information. The
E-mail address for The Royce Funds is
[email protected], and the Internet Home Page is
http://www.roycefunds.com.
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TABLE OF CONTENTS
<S> Page <C> Page
Fund Expenses 2 SHAREHOLDER GUIDE
Financial Highlights 3 Opening an Account and Purchasing Shares 9
Investment Performance 3 Choosing a Distribution Option 11
Investment Objective 4 Important Account Information 12
Investment Policies 4 Redeeming Your Shares 13
Investment Risks 4 Exchange Privilege 15
Investment Limitations 6 Transferring Ownership 15
Management of the Trust 7 Other Services 15
General Information 8
Dividends, Distributions
and Taxes 8
Net Asset Value Per Share 9
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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 Fund is
no-load and
no 12b-1 fees
are being
charged
The following table summarizes all expenses and fees that you would
incur as a shareholder of the Fund.
Shareholder Transaction Expenses
--------------------------------
Sales Load Imposed on Purchases. . . . . . . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends . . . . . . . . . None
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . None
Redemption Fee -- on share purchases held for 1 year or more None
Early Redemption Fee -- on share purchases held for less than
1 year . . . . . . . . . . . . . . . . . . . . . . . . . 1%
Annual Fund Operating Expenses
------------------------------
Management Fees (after waivers) .00%
12b-1 Fees (after waivers) .00%
Other Expenses (after reimbursement) 1.39%
Total Operating Expenses 1.39%
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 have been 1.50%,
12b-1 fees would have been .25%, Other Expenses would have been 1.56%
and Total Operating Expenses would have been 3.31% without the waivers
of management fees and reimbursement of other expenses by Royce &
Associates, Inc. ("Royce"), the Fund's investment adviser, and of the
12b-1 fees by Royce Fund Services, Inc. ("RFS"), the Fund's
distributor. Royce and RFS have voluntarily committed to waive their
fees to the extent necessary to maintain annual Total Operating
Expenses at or below 1.39% through April 30, 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 5 Years 10 Years
------ ------- ------- --------
$14 $44 $76 $167
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.
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FINANCIAL
HIGHLIGHTS
(For a share
outstanding
throughout
each period)
The following financial highlights are part of the
Fund's financial statements and have been audited by
Coopers & Lybrand L.L.P., independent accountants.
The Fund's financial statements and attached
schedule of investments are included in the Fund's
Semi-Annual Report for the period ended June 30, 1997
and its Annual Reports to Shareholders and are
incorporated by reference into the Statement of
Additional Information and this Prospectus. Further
information about the Fund's performance is
contained elsewhere in this Prospectus and in the
Fund's Annual and Semi-Annual Reports to Shareholders,
which may be obtained without charge by calling Investor
Information.
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<CAPTION>
Six Months ended
June 30, 1997 Year ended Period ended
(Unaudited) December 31, December 31,
--------------- -------------------- ------------
1996 1995 1994(c)
---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $6.03 $5.68 $5.06 $5.00
INCOME FROM INVESTMENT OPERATIONS ----- ----- ---- -----
- ---------------------------------
Net investment income 0.00 0.01 0.00 0.00
Net realized and unrealized gain (loss)
on investments 0.97 0.81 1.07 0.06
---- ---- ---- ----
Total from Investment Operations 0.97 0.82 1.07 0.06
---- ---- ---- ----
LESS DISTRIBUTIONS
- ------------------
Distributions paid from net realized
gain 0.00 (0.47) (0.45) (0.00)
---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $7.00 $6.03 $5.68 $5.06
===== ==== ==== =====
TOTAL RETURN 16.1% 14.6% 21.2% 1.2%
===== ==== ==== =====
RATIOS/SUPPLEMENTAL DATA
========================
Net assets, End of Period (ooo's) $2,226 $1,948 $1,627 $514
Ratio of expenses to average net
assets (a) 1.69%* 1.56% 1.97% 1.78%*
Ratio of net investment
income to average net assets (0.14%)* 0.17% (0.58%) 0.00%*
Portfolio turnover rate 10% 81% 106% 0%
Average commission rate paid(b) $.0657 $.0591 -- --
(a) Expense ratios before waiver of fees by the investment adviser and distributor
would have been 3.03%, 3.31%, 3.72% and 3.69% for the period ended June 30, 1997, and for 1996,
1995 and 1994, respectively.
(b) Beginning in 1996, the Fund is required to disclose average commission rates paid
per share for purchases and sales of investments.
(c) From inception of the Fund on December 15, 1994.
* Annualized.
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INVESTMENT
PERFORMANCE
Total return is the change in value over a given time period, assuming
reinvestment of any dividends and capital gains distributions
The Fund may include in communications to current or prospective shareholders
figures reflecting total return over various time periods. "Total return" is
the rate of return on an amount invested in the Fund from the beginning to
the end of the stated period. "Average annual total return" is the annual
compounded percentage change in the value of an amount invested in the Fund
from the beginning until the end of the stated period. Total returns are
historical measures of past performance and are not intended to indicate
future performance. Total returns assume the reinvestment of all net
investment income dividends and capital gains distributions. The figures do
not reflect the Fund's early redemption fee because this fee applies only to
redemptions of share purchases held for less than one year.
Additionally, the performance of the Fund may be compared in publications to
i) the performance of various indices and investments for which reliable
performance data is available and ii) averages, performance rankings or other
information prepared by recognized mutual fund statistical services.
INVESTMENT
OBJECTIVE
Royce Financial Services Fund's investment objective is long-term capital
appreciation by investing primarily in common stocks and convertible
securities of companies principally engaged in the financial services
industry. It seeks to achieve this objective primarily through investments
in common stocks and convertible securities of companies principally engaged
in the financial services industry. There can be no assurance that the Fund
will achieve its investment objective.
The Fund's investment objective is fundamental and may not be changed without
the approval of
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a majority of its outstanding voting shares, as that term is
defined in the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT
POLICIES
The Fund invests on a value basis
Royce uses a "value" method in managing the Fund's assets. In its selection
process, Royce puts primary emphasis on the understanding of various internal
returns indicative of profitability, balance sheet quality, cash flows and
the relationships that these factors have to the price of a given security.
Royce's value method is based on its belief that the securities of certain
companies may sell at a discount from its estimate of such companies'
"private worth", that is, what a knowledgeable buyer would pay for the entire
company. Royce attempts to identify and invest in these securities for the
Fund, with the expectation that this "value discount" will narrow over time
and thus provide capital appreciation for the Fund.
The Fund invests primarily in financial services companies
The Fund normally invests at least 65% of its assets in the common stocks,
securities convertible into common stock and warrants of domestic and foreign
companies "principally" engaged in the financial services industry. Examples
of such companies include: commercial and industrial banks, savings and loan
associations, companies engaged in consumer and industrial finance,
insurance, securities brokerage and investment management, other financial
intermediaries and firms that serve the financial services industry. For
these purposes, a company is deemed to be principally engaged in the
financial services industry if at least 50% of its consolidated assets,
revenues or net income are committed to, or are derived from, financial
services-related activities.
Other
securities
The assets of the Fund that are not required to be invested in the equity
securities of domestic and foreign companies principally engaged in the
financial services industry may be invested in the common stocks, securities
convertible into common stocks and warrants of domestic and foreign companies
engaged in other industries and/or in the non-convertible preferred stocks
and debt securities of domestic and foreign companies engaged in service or
non-service industries.
Other
investment
companies
The Fund may also indirectly invest in the securities of domestic and foreign
service and non- service companies by investing up to 20% of its assets in
the securities of other investment companies that invest primarily in such
companies. The other investment companies in which the Fund may invest may
be domestic companies registered under the 1940 Act or foreign companies that
are not so registered or otherwise regulated. They usually have their own
management fees and expenses, and Royce will also earn its fee on Fund
assets invested in such other companies, which would result
in a duplication of fees to the extent of any such investment. However,
Royce will waive its management fee on any Fund assets invested in other
open-end investment companies, and no sales charge will be incurred on such
an investment.
INVESTMENT
RISKS
The Fund is subject to certain investment risks
As a mutual fund investing primarily in common stocks and/or securities
convertible into common stocks, the Fund is subject to market risk -- that
is, the possibility that common stock prices will decline over short or even
extended periods. Because of Royce's value method, the Fund may invest in
securities of companies that have cyclical, static or only moderate growth
prospects. Royce's investment method requires a long-term investment
horizon, and the Fund should not be used to play short-term swings in the
market or as a complete investment program.
Financial
services
industry
concentration
In seeking to achieve its investment objective, the Fund concentrates its
investments by investing more than 25% of its assets in companies principally
engaged in the financial services industry. This fundamental policy of
concentrating in one industry results in the Fund being less diversified than
other funds investing in a number of industries, and the Fund's net asset
value could, therefore, experience increased volatility. The financial
services industry is subject to extensive governmental regulation. This may
limit both the amounts and types of loans and other financial commitments
that banks, broker-dealers and insurance companies are permitted to make,
and, in the case of banks and insurance companies, the interest, fees and
premiums they are permitted to charge. Insurance companies are particularly
subject to rate setting, potential anti-trust and tax law changes and
industry-wide pricing and competition cycles and may be affected by
catastrophes and/or reinsurance carrier failures. Also, the profitability of
many types of financial service companies is largely dependent on the
availability and cost of capital funds and may fluctuate significantly when
interest rates change. General economic conditions are important to the
operation of most financial services companies, and credit losses resulting
from financial difficulties of borrowers may negatively impact some of them.
Changes in regulations, brokerage commission structure and
<PAGE>
securities market activities, together with the leverage and trading
strategies employed by broker-dealers and investment banks, may produce
erratic returns for them over time. Finally, most types of financial
services companies are subject to substantial price and other competition.
Prices of the securities of domestic and foreign financial services companies
may be more volatile than those of more broadly diversified investments, and
the Fund's performance will be tied to the financial services industry in
particular and the United States and world economies as a whole. The
securities of financial services companies may react similarly to market
conditions and may move together. Compared to the broader market, an
individual industry, such as financial services, may be more strongly
affected by changes in the U.S. and/or foreign economies and moves in a
particular dominant stock or regulatory changes.
Foreign
securities
The Fund has no restriction on the amount of its assets that may be invested
in foreign securities and/or American Depositary Receipts ("ADRs"). ADRs
are certificates held in trust by a bank or similar financial institution
evidencing ownership of shares of a foreign-based issuer. Designed for use
in U.S. securities markets, ADRs are alternatives to the purchase of the
underlying foreign securities in their national markets and currencies.
The Fund does not expect to purchase or sell foreign currencies to hedge
against declines in the U.S. dollar or to lock in the value of the foreign
securities it purchases, and its foreign investments may be adversely
affected by changes in foreign currency rates. Consequently, the risks
associated with such investments may be greater than if the Fund did engage
in foreign currency transactions for hedging purposes. Foreign investments
may also be adversely affected by exchange control regulations, if any, in
such foreign markets, and the Fund's ability to make certain distributions
necessary to maintain eligibility as a regulated investment company and avoid
the imposition of income and excise taxes may to that extent be limited.
There may be less information available about a foreign company than a
domestic company; foreign companies may not be subject to accounting,
auditing and reporting standards and requirements comparable to those
applicable to domestic companies; and foreign markets, brokers and issuers
are generally subject to less extensive government regulation than their
domestic counterparts. Foreign securities may be less liquid and may be
subject to greater price volatility than domestic securities. Foreign
brokerage commissions and custodial fees are generally higher than those in
the United States. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, thereby making it difficult to conduct such transactions.
Delays or problems with settlements might affect the liquidity of the Fund's
portfolio. Foreign investments may also be subject to local economic and
political risks, political instability and possible nationalizati on of
issuers or expropriation of their assets, which might adversely affect the
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.
Income earned or received by the Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Any
such taxes paid by the Fund will reduce its cash available for distribution
to shareholders. The Fund is required to calculate its distributable income
and capital gains for U.S. Federal income tax purposes by reference to the
U.S. dollar. Fluctuations in applicable foreign currency exchange rates may
cause the Fund's distributable income and capital gains for U.S. Federal
income tax purposes to differ from the value of its investments calculated by
reference to foreign currencies. If the Fund invests in stock of a so-called
passive foreign investment company, the Fund may make certain elections that
will affect the calculation of its net investment income and capital gains.
INVESTMENT
LIMITATIONS
The Fund has adopted certain fundamental limitations
The Fund has adopted certain fundamental limitations, designed to reduce its
exposure to specific situations, which may not be changed without the
approval of a majority of its outstanding voting shares, as that term is
defined in the 1940 Act. These limitations are set forth in the Statement of
Additional Information and provide, among other things, that the Fund will
not:
(a) as to not less than 75% of its assets, invest
more than 5% of its assets in the securities of any
one issuer, excluding U.S. Government obligations;
<PAGE>
(b) invest more than 25% of its assets in any one
industry other than the financial services
industry; or
(c) invest in companies for the purpose of
exercising control of management.
The 1940 Act contains certain limitations applicable to the Fund's
investments in the securities of a company that is 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. These
limitations are set forth in the Statement of Additional Information.
Other Investment
Practices
In addition to investing primarily in the equity and fixed income securities
described above, the Fund may follow a number of additional investment
practices.
Short-term
fixed income
securities
The Fund may invest in short- term fixed income securities for temporary
defensive purposes, to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These securities consist of
United States Treasury bills, domestic bank certificates of deposit, high-
quality commercial paper and repurchase agreements collateralized by U.S.
Government securities. In a repurchase agreement, a bank sells a security to
the Fund at one price and agreees to repurchase it at the Fund's cost plus
interest within a specifid 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
lending
The Fund may lend up to 25% of its assets to qualified institutional
investors for the purpose of realizing additional income. Loans of
securities of the Fund will be collateralized by cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities . The collateral will equal at least 100% of the current
market value of the loaned securities. The risks of securities lending
include possible delays in receiving additional collateral or in recovery of
loaned securities or loss of rights in the collateral if the borrower
defaults or becomes insolvent.
Warrants, rights
and options
The Fund may invest up to 5% of its total assets in warrants, rights and
options.
Lower-rated
debt securities
The Fund may invest no more than 5% of its net assets in lower-rated
(high-risk) non- convertible debt securites, which are below investment
grade. The Fund does not expect to invest in debt securities that are rated
lower than Caa by Moody's Investors Service, Inc. or CCC by Standard &
Poor's Corp. or, if unrated, determined to be of comparable quality.
Restricted and
illiquid
securities
The Fund will not invest more than 15% of its net assets in illiquid
securities, including those restricted securities that are illiquid.
Restricted securities are securities which, if publicly sold, might cause the
Fund to be deemed an "underwriter" under the Securities Act of 1933 (the
"1933 Act") or which are subject to contractual restrictions on resale.
Restricted securities which the Fund may purchase include securities which
have not been registered under the 1933 Act, but are eligible for purchase
and sale pursuant to Rule 144A under the 1933 Act. This Rule permits certain
qualified institutional buyers to trade in privately placed securities even
though such securities are not registered under the 1933 Act. Royce, under
criteria established by the Trust's Board of Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the 15%
limitation. In making this determination, Royce will consider the frequency
of trades and quotes, the number of dealers and potential purchasers, dealer
undertakings to make a market and the nature of the securities and the market
place trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by Royce, and if, as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Fund's holding of illiquid securities will be reviewed to
determine what, if any, action is required in light of the 15% limitation.
Investing in Rule 144A securities could have the effect of increasing the
amount of investments in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
<PAGE>
MANAGEMENT OF
THE TRUST
Royce & Associates, Inc. is responsible for management of the Fund's assets
The Trust's business and affairs are managed under the direction of its Board
of Trustees. Royce & Associates, Inc. (formerly named Quest Advisory
Corp.), the Fund's investment adviser, is responsible for the management of
their assets, subject to the authority of the Board. Charles M. Royce,
Royce's President, Chief Investment Officer and sole voting shareholder since
1972, is primarily responsible for managing the Funds' portfolios. He is
assisted by Royce's investment staff, including W. Whitney George, Portfolio
Manager and Managing Director, and by Jack E. Fockler, Jr., Managing
Director. Royce is also the investment adviser to Pennsylvania Mutual, Royce
Premier, Micro-Cap, Low-Priced Stock, Total Return and GiftShares Funds and
PMF II, which are other series of the Trust, and to other investment and
non-investment company accounts.
On November 25, 1997, Royce Global Services Fund changed its investment
objective and, in connection therewith, its name to Royce Financial Services
Fund.
As compensation for its services to the Fund, Royce is entitled to receive
annual advisory fees of 1.5% of the average net assets of the Fund. These
fees are payable monthly from the assets of the Fund.
Royce selects the brokers who execute the purchases and sales of the Fund's
portfolio securities and may place orders with brokers who provide brokerage
and research services to Royce. Royce is authorized, in recognition of the
value of brokerage and research services provided, to pay commissions to a
broker in excess of the amount which another broker might have charged for
the same transaction.
Royce Fund Services, Inc. ("RFS"), formerly named Quest Distributors, Inc.,
which is wholly-owned by Charles M. Royce, acts as distributor of the Fund's
shares. The Trust has adopted a distribution plan for the Fund pursuant to
Rule 12b-1. The plan provides for payment to RFS of .25% per annum of the
average net assets of the Fund, which may be used for payment of sales
commissions and other fees to those broker-dealers who introduce investors to
the Fund and for various other promotional, sales- related and servicing
costs and expenses. RFS has voluntarily committed to waive its fees through
April 1998.
GENERAL
INFORMATION
The Royce Fund (the "Trust") is a Delaware business trust, registered with
the Securities and Exchange Commission as a diversified open-end management
investment company. It is the successor to a Massachusetts business trust
established in October 1985 and merged into the Trust in June 1996. The
Trustees have the authority to issue an unlimited number of shares of
beneficial interest, without shareholder approval, and these shares may be
divided into an unlimited number of series and classes. Shareholders are
entitled to one vote per share. Shares vote by individual series on all
matters, except that shares are voted in the aggregate and not by individual
series when required by the 1940 Act and that if the Trustees determine that
a matter affects only one series, then only shareholders of that series are
entitled to vote on that matter.
Meetings of shareholders will not be held except as required by the 1940 Act
or other applicable law. A meeting will be held to vote on the removal of a
Trustee or Trustees of the Trust if requested in writing by the holders of
not less than 10% of the outstanding shares of the Trust.
The custodian for the securities, cash and other assets of the Fund is State
Street Bank and Trust Company. State Street, through its agent National
Financial Data Services ("NFDS"), also serves as the Fund's Transfer Agent.
Coopers & Lybrand, L.L.P. serves as independent accountants for the Fund.
DIVIDENDS,
DISTRIBUTIONS
AND TAXES
The Fund pays dividends and capital gains annually in December
The Fund pays dividends from net investment income (if any) and distributes
its net realized capital gains annually in December. Dividends and
distributions will be automatically reinvested in additional shares of the
Fund unless the shareholder chooses otherwise.
Shareholders receive information annually as to the tax status of
distributions made by the Fund for the calendar year. For Federal income tax
purposes, all distributions by the Fund are taxable to shareholders when
declared, whether received in cash or reinvested in shares. Distributions
paid from the Fund's net investment income and short-term capital gains are
taxable to shareholders as ordinary income dividends. A portion of the
Fund's dividends may qualify for the corporate dividends received deduction,
subject to certain limitations. The portion of the Fund's dividends qualifying
for such deduction is generally limited to the aggregate taxable dividends
received by the Fund from domestic corporations. Capital gains distributions
of the Fund are treated by a
<PAGE>
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 any capital
gains distributions were received by the shareholder with respect to such
shares. A loss realized on a taxable disposition of Fund shares may be
disallowed to the extent that additional Fund shares are purchased (including
by reinvestment of distributions) within 30 days before or after such
disposition.
The redemption of shares is a taxable event, and a shareholder may realize a
capital gain or capital loss. The Fund will report to redeeming shareholders
the proceeds of their redemptions. However, because the tax consequences of
a redemption will also depend on the shareholder's basis in the redeemed
shares for tax purposes, shareholders should retain their account statements
for use in determining their tax liability on a redemption.
At the time of a shareholder's purchase, the Fund's net asset value may
reflect undistributed income or capital gains. A subsequent distribution of
these amounts by the Fund will be taxable to the shareholder even though the
distribution economically is a return of part of the shareholder's
investment.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to non- corporate shareholders who have
not complied with Internal Revenue Service taxpayer identificatio n
regulations. Shareholders may avoid this withholding requirement by
certifying on the Account Application their proper Social Security or
Taxpayer Identificatio n Number and that they are not subject to backup
withholding.
The discussion of Federal income taxes above is for general information only.
The Statement of Additional Information includes a more detailed description
of Federal income tax aspects that may be relevant to a shareholder.
Shareholders may also be subject to state and local taxes on income and any
gains from their investment. Investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.
NET ASSET
VALUE
PER SHARE
Net asset value per share (NAV) is determined each day the New York Stock
Exchange is open
Fund shares are purchased and redeemed at their net asset value per share
next determined after an order is received by the Fund's transfer agent 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 and other
assets, less any liabilities, by the number of outstanding shares of the
Fund. Net asset value per share is calculated at the close of regular
trading on the New York Stock Exchange on each day the Exchange is open for
business.
In determining net asset value, securities listed on an exchange or the
Nasdaq National Market System are valued on the basis of the last reported
sale price prior to the time the valuation is made or, if no sale is reported
for that day, at their bid price for exchange-listed securities and at the
average of their bid and ask prices for Nasdaq securities. Quotations are
taken from the market where the security is primarily traded. Other
over-the- counter securities for which market quotations are readily
available are valued at their bid price. Securities for which market
quotations are not readily available are valued at their fair value under
procedures established and supervised by the Board of Trustees. Bonds and
other fixed income securities may be valued by reference to other securities
with comparable ratings, interest rates and maturities, using established
independent pricing services.
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES
The Fund's shares are offered on a no-load basis. New accounts (other than
IRA or 403(b)(7) accounts) can be opened either by mail, by telephone or by
wire. An Account Application must be completed and returned, regardless of
the method selected. If you need assistance with the Account Application or
have any questions about the Fund, please call Investor Information at
1-800-221-4268. Note: For certain types of account registrations (e.g.,
corporations, partnerships, foundations, associations, other organizations,
trusts or powers of attorney), please call Investor Information to determine
if you need to provide additional forms with your application.
<PAGE>
Type of Account Minimum
- --------------- -------
Regular accounts $2,000
IRAs* 500
Accounts established with Automatic 500
Investment Plan or Direct Deposit Plan
401(k) and 403(b)(7) accounts* None
* Separate forms must be used for opening IRAs or 403(b)(7) accounts; please
call Investor Information if you need these forms.
Subsequent investments may be made by mail ($50 minimum), telephone ($500
minimum), wire ($1,000 minimum) or Express Service (a system of electronic
funds transfer from your bank account).
ADDITIONAL
INVESTMENTS
Purchasing By Mail NEW ACCOUNT TO EXISTING
Complete and sign ACCOUNTS
the enclosed Please include the amount of Additional investments should
Account Application your initial investment on include the Invest-by- Mail
the Account Application, make remittance form attached to
your check payable to The your Fund account
Royce Fund, and mail to: confirmation statements.
Please make your check
The Royce Fund payable to The Royce Fund,
P.O. Box 419012 write your account number on
Kansas City, MO 64141-6012 your check and, using the
return envelope provided,
mail to the address indicated
on the Invest-by-Mail form.
For express The Royce Funds
or c/o National Financial All written requests should
registered Data Services be mailed to one of the
mail, 1004 Baltimore, 5th Floor addresses indicated for new
send to: Kansas City, MO 64105 accounts.
Purchasing By
Telephone
NEW ACCOUNT
To open an account by telephone, you should call Investor Information
(1-800-221- 4268) before 4:00 p.m., Eastern time. You will be given a
confirming order number for your purchase. This number must be placed on
your completed Account Application before mailing. If a completed and signed
Account Application is not received on an account opened by telephone, the
account may be subject to backup withholding of Federal income taxes.
ADDITIONAL
INVESTMENTS
TO EXISTING ACCOUNTS
Subsequent telephone purchases ($500 minimum) may also be made by calling
Investor Information. For all telephone purchases, payment is due within
three business days and may be made by wire or personal, business or bank
check, subject to collection.
Purchasing By
Wire
Before Wiring: For a new account, please contact Investor Information at
1-800-221- 4268
Money should be wired
to:
State Street Bank and Trust Company
ABA 011000028 DDA 9904-712-8
Ref: Royce Financial Services Fund
Order Number or Account Number____________________
Account Name ____________________________________
To ensure proper receipt, please be sure your bank includes the name of the
Fund and your order number (for 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.
<PAGE>
Purchasing By
Express
Service
You can purchase shares automatically or at your
discretion through the following options:
Expedited Purchase Option permits you, at your
discretion, to transfer funds ($100 minimum and
$200,000 maximum) from your bank account to purchase
shares in your Royce Fund account by telephone or
computer online access.
Automatic Investment Plan allows you to make
regular, automatic transfers ($50 minimum) from your
bank account to purchase shares in your Royce Fund
account on the monthly or quarterly schedule you
select.
To establish the Expedited Purchase Option and/or
Automatic Investment Plan, please provide the
appropriate information on the Account Application
and attach a voided check. We will send you a
confirmation of Express Service activation. Please
wait three weeks before using the service.
To make an Expedited Purchase, other than through
computer online access, please call Shareholder
Services at 1-800-841-1180 before 4:00 p.m., Eastern
time.
Payroll Direct Deposit Plan and Government Direct
Deposit Plan let you have investments ($50 minimum)
made from your net payroll or government check into
your existing Royce Fund account each pay period.
Your employer must have direct deposit capabilities
through ACH (Automated Clearing House) available to
its employees. You may terminate participation in
these programs by giving written notice to your
employer or government agency, as appropriate. The
Fund is not responsible for the efficiency of the
employer or government agency making the payment or
any financial institution transmitting payments.
To initiate a Direct Deposit Plan, you must complete
an Authorization for Direct Deposit form which may
be obtained from Investor Information by calling 1-
800-221-4268.
CHOOSING A
DISTRIBUTION
OPTION
You may select one of three distribution options:
1. Automatic Reinvestment Option--Both net
investment income dividends and capital gains
distributions will be reinvested in additional Fund
shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. Cash Dividend Option--Your dividends will be paid in cash and your capital
gains distributions will be reinvested in additional Fund shares.
3. All Cash Option--Both dividends and capital gains distributions will be
paid in cash.
You may change your option by calling Shareholder Services at 1-800-841-
1180.
IMPORTANT
ACCOUNT
INFORMATION
The easiest way to establish optional services on your account is to select
the options you desire when you complete your Account Application. If you
want to add or change shareholder options later, you may need to provide
additional information and a signature guarantee. Please call Shareholder
Services at 1-800-841-1180 for further assistance.
Signature
Guarantees
For our mutual protection, we may require a signature guarantee on certain
written transaction requests. A signature guarantee verifies the
authenticity of your signature and may be obtained from banks, brokerage
firms and any other guarantor that our transfer agent deems acceptable. A
signature guarantee cannot be provided by a notary public.
Certificates
Certificates for whole shares will be issued upon request. If a certificate
is lost, stolen or destroyed, you may incur an expense to replace it.
Purchases
Through
Service
Providers
If you purchase shares of the Fund through a program of 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. RFS, Royce and/or the Fund may pay fees to
unaffiliated broker- dealers, financial institutions or other service
providers who introduce investors to the Fund and/or provide certain
administrative services to those of their customers who are Fund
shareholders. Investors who purchase shares of the Fund through
broker-dealers may pay a transaction charge they would not have paid if they
purchased shares directly from the Fund.
<PAGE>
Telephone and
Online Access
Transactions
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone or computer online access that are
reasonably believed to be genuine. The transfer agent uses certain
procedures designed to confirm that telephone and computer online access
instructions are genuine, which may include requiring some form of personal
identification prior to acting on the instructions, providing written
confirmation of the transaction and/or recording incoming telephone calls,
and if it does not follow such procedures, the Fund or the transfer agent may
be liable for any losses due to unauthorized or fraudulent transactions.
Nonpayment
If your check or wire does not clear, or if payment is not received for any
telephone or computer online access purchase, the transaction will be
cancelled and you will be responsible for any loss the Fund incurs. If you
are already a shareholder, the Fund can redeem shares from any identically
registered account in the Fund as reimbursement for any loss incurred.
Trade Date for
Purchases
Your trade date is the date on which share purchases are credited to your
account. If your purchase is made by 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.
The Trust reserves the right to suspend the offering of Fund shares to new
investors. The Trust also reserves the right to reject any specific purchase
request.
REDEEMING
YOUR
SHARES
You may redeem any portion of your account at any time. You may request a
redemption in writing or by telephone. Redemption proceeds normally will be
sent within two business days after the receipt of the request in Good Order.
Redeeming By
Mail
Redemption requests should be mailed to The Royce Funds, c/o NFDS, P.O. Box
419012, Kansas City, MO 64141-6012. (For express or registered mail, send
your request to The Royce Funds, c/o NFDS, 1004 Baltimore, 5th Floor, Kansas
City, MO 64105.)
The redemption price of shares will be their net asset value next determined
after NFDS or an authorized service agent or sub-agent has received all
required documents in Good Order.
Definition of
Good Order
Good Order means that the request includes the following:
1.The account number and Fund name.
2.The amount of the transaction (specified in
dollars or shares).
3.Signatures of all owners exactly as they are
registered on the account.
4.Signature guarantees if the value of the
shares being redeemed exceeds $50,000 or if the
payment is to be sent to an address other than the
address of record or is to be made to a payee other
than the shareholder.
5.Certificates, if any are held.
6.Other supporting legal documentation that
might be required, in the case of retirement plans,
corporations, trusts, estates and certain other
accounts.
If you have any questions about what is required as it pertains to your
request, please call Shareholder Services at 1-800-841-1180.
Redeeming By
Telephone
Shareholders who have not established Express Service may redeem up to
$50,000 of their Fund shares by telephone, provided the proceeds are mailed
to their address of record. If pre-approved, higher minimums may apply for
institutional accounts. To redeem shares by telephone, you or your
pre-authorized representative may call Shareholder Services at
1-800-841-1180. Redemption requests received by telephone prior to the close
of regular trading on the New York Stock Exchange (generally 4:00 p.m.,
Eastern time) are processed on the day of receipt; redemption
<PAGE>
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
Service
If you select the Express Service Automatic Withdrawal option, shares will be
automatically redeemed from your Fund account and the proceeds transferred to
your bank account according to the schedule you have selected. You must have
at least $25,000 in your Fund account to establish the Automatic Withdrawal
option.
The Expedited Redemption option lets you redeem up to $50,000 of shares from
your Fund account by telephone and transfer the proceeds directly to your
bank account. You may elect Express Service on the Account Application or
call Shareholder Services at 1-800-841- 1180 for an Express Service
application.
Important
Redemption
Information
If you are redeeming shares recently purchased by check, Express Service
Expedited Purchase or Automatic Investment Plan, the proceeds of the
redemption may not be sent until payment for the purchase is collected, which
may take up to fifteen calendar days. Otherwise, redemption proceeds must be
sent to you within seven days of receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption during periods
of drastic economic or market changes, your redemption request may be made by
regular or express mail. It will be processed at the net asset value next
determined after your request has been received by the transfer agent in Good
Order. The Trust reserves the right to revise or terminate the telephone
redemption privilege at any time.
The Trust may suspend the redemption right or postpone payment at times when
the New York Stock Exchange is closed or under any emergency circumstances as
determined by the Securities and Exchange Commission.
Although the Trust will normally make redemptions in cash, it may cause the
Fund to redeem in kind under certain circumstances .
Early Redemption
Fee
In order to discourage short-term trading, the Fund 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
one-year holding period. Under this method, the date of the redemption will
be compared with the earliest purchase date of the share purchases held in
the account. If this holding period is less than one year, the fee will be
assessed. In determining "one year," the Fund will use the anniversary month
of a transaction. Thus, shares purchased in October 1997, for example, will
be subject to the fee if they are redeemed prior to October 1998. If they are
redeemed on or after October 1, 1998, they will not be subject to the fee.
No redemption fee will be payable on shares acquired through reinvestment, on
an exchange into another Royce Fund or by shareholders who are (a) employees
of the Trust or Royce or members of their immediate families or employee
benefit plans for them, (b) current participants in an Automatic Investment
Plan or an Automatic Withdrawal Plan, (c) certain Trust- approved Group
Investment Plans and charitable organizations , (d) profit- sharing trusts,
corporations or other institutional investors who are investment advisory
clients of Royce or (e) omnibus or similar account customers of certain
Trust-approved broker-dealers and other institutions.
Minimum
Account
Balance
Requirement
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to involuntarily redeem shares in any Fund account that
falls below the minimum initial investment due to redemptions by the
shareholder. If at any time the balance in an account does not have a value
at least equal to the minimum initial investment or, if an Automatic
Investment Plan is discontinued before an account reaches the minimum initial
investment that would otherwise be
<PAGE>
required, you may be notified that the value of your account is below the
Fund's minimum account balance requirement. You would then have sixty days
to increase your account balance before the account is liquidated. Proceeds
would be promptly paid to the shareholder.
EXCHANGE
PRIVILEGE
Exchanges between series of the Trust and with other open-end Royce funds are
permitted by telephone, computer online access or mail. An exchange is
treated as a redemption and purchase; therefore, you could realize a taxable
gain or loss on the transaction. Exchanges are accepted only if the
registrations and the tax identification numbers of the two accounts are
identical. Minimum investment requirements must be met when opening a new
account by exchange, and exchanges may be made only for shares of a series or
fund then offering its shares for sale in your state of residence. The Trust
reserves the right to revise or terminate the exchange privilege at any time.
TRANSFERRING
OWNERSHIP
You may transfer the ownership of any of your Fund shares to another person
by writing to: The Royce Funds, c/o NFDS, P.O. Box 419012, Kansas City, MO
64141-6012. The request must be in Good Order (see "Redeeming Your Shares -
Definition of Good Order"). Before mailing your request, please contact
Shareholder Services (1-800-841-1180) for full instructions.
OTHER
SERVICES
For more information about any of these services,
please call Investor Information at 1-800-221-4268.
Statements
and
Reports
A confirmation statement will be sent to you each time you have a transaction
in your account, and an account statement is sent semi-annually. Shareholder
reports are mailed semi-annually. To reduce expenses, only one copy of most
shareholder reports may be mailed to a household. Please call Investor
Information if you need additional copies.
<PAGE>
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
1-800-221-4268
[email protected]
Investment Adviser
Royce & Associates, Inc.
1414 Avenue of the Americas
New York, NY 10019
Distributor THE ROYCE FUNDS
Royce Fund Services, Inc.
1414 Avenue of the Americas
New York, NY 10019
Transfer Agent
State Street Bank and Trust Company
c/o NFDS
P.O. Box 419012
Kansas City, MO 64141-6012
1-800-841-1180
ROYCE
FINANCIAL SERVICES
FUND
Custodian
State Street Bank and Trust Company
P.O. Box 1713 A No-Load Mutual Fund
Boston, MA 02105
Officers
Charles M. Royce, President and Treasurer
Jack E. Fockler, Jr., Vice President
W. Whitney George, Vice President
Daniel A. O'Byrne, Vice President and
Assistant Secretary
John E. Denneen, Secretary
Prospectus
January 2, 1998
<PAGE>
THE ROYCE FUND
STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Delaware business trust, is a
professionally-managed open-end registered investment company, which offers
investors the opportunity to invest in nine portfolios or series. Two of the
nine series, Pennsylvania Mutual Fund and Royce GiftShares Fund, offer two
classes of their shares, an Investment Class and a Consultant Class. Each
series has distinct investment objectives and/or policies, and a shareholder's
interest is limited to the series in which the shareholder owns shares. The nine
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 The REvest Growth & Income Fund
Royce GiftShares Fund
This Statement of Additional Information relates to all of the series
other than The REvest Growth & Income Fund (each a "Fund" and collectively the
"Funds"). REvest is covered by its own separate Statement of Additional
Information.
The Trust is designed for long-term investors, including those who wish to
use shares of any Fund (other than Royce GiftShares Fund) as a funding vehicle
for certain tax-deferred retirement plans (including Individual Retirement
Account (IRA) plans), and not for investors who intend to liquidate their
investments after a short period of time.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Trust's current Prospectuses, each of which is
dated April 30, 1997 except for Royce GiftShares Fund Consultant Class (dated
June 15, 1997) and Royce Financial Services Fund (dated January 2, 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,
1996, as well as the unaudited financial statements and schedules of investments
in the Semi-Annual Report to Shareholders for Royce Global Services Fund for
the six-months ended June 30, 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
January 2, 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....24
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, 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 and
PMF II) 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);
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);
<PAGE>
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 and PMF II, 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>
Pennsylvania Mutual Fund
PMF II
Pennsylvania Mutual Fund and PMF II may each invest up to 25% of the value
of their total assets in the securities of other investment companies (open or
closed-end) and up to 5% of their total assets in the securities of any one
other 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 in an amount exceeding 1% of such
issuers' total outstanding securities during any period of less than thirty
days, and Pennsylvania Mutual Fund and PMF II 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 nor PMF II 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.
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
<PAGE>
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 asets 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
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.
<PAGE>
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.
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.
<PAGE>
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 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)
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
<PAGE>
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 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 a 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 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.
<PAGE>
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. While it does not presently appear possible to eliminate
all risks from these transactions (particularly the possibility of a decline in
the market value of the underlying securities, as well as delays and costs to
the Fund in connection with bankruptcy proceedings), it is the policy of the
Trust to enter into repurchase agreements only with its custodian, State Street
Bank and Trust Company, and having a term of seven days or less.
Warrants, Rights and Options
Each Fund, other than Pennsylvania Mutual Fund, may invest up to 5% of its
total assets in warrants, rights and options. A warrant, right or call option
entitles the holder to purchase a given security within a specified period for a
specified price and does not represent an ownership interest. A put option
gives the holder the right to sell a particular security at a specified price
during the term of the option. These securities have no voting rights, pay no
dividends and have no liquidation rights. In addition, their market prices do
not necessarily move parallel to the market prices of the underlying securities.
The sale of warrants, right or options held for more than one year
generally results in a long-term capital gain or loss to the Fund, and the sale
of warrants, rights or options held for one year or less generally results in a
short term capital gain or loss. The holding period for securities acquired
upon exercise of a warrant, right or call option, however, generally begins on
the day after the date of exercise, regardless of how long the warrant, right or
option was held. The securities underlying warrants, rights and options could
include shares of common stock of a single company or securities 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.
<PAGE>
Portfolio Turnover
For the year ended December 31, 1996 and the period from December 27, 1995
(commencement of operations) through December 31, 1995, Royce GiftShares Fund's
portfolio turnover rates were 93% and 0%, respectively. The Fund's portfolio
turnover rate for its start-up period in 1995 was zero because the Fund was then
investing its initial cash and did not sell any portfolio securities during this
period.
* * *
Royce believes that Pennsylvania Mutual, Low-Priced Stock, Micro-Cap,
GiftShares, Financial Services Fund and PMF II 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-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.
<PAGE>
Name, Address and Position
Age Held Principal Occupations During
with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
Hubert L. Cafritz Trustee Financial consultant.
(74)
9421 Crosby Road
Silver Spring, MD
20910
Richard M. Galkin Trustee Private investor and President
(59) of Richard M. Galkin Associates,
5284 Boca Marina Inc., tele-communications
Boca Raton, FL consultants.
33487
Stephen L. Isaacs President of The Center for
Health and Social Policy since
(58) September 1996; President of
60 Haven Street, Stephen L. Isaacs Associates,
Fl. B-2 Consultants; and Director of
New York, NY Columbia University Development
10032 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
August 1993) of Royce, having
1414 Avenue of been employed by Royce since
the Americas October 1989; Vice President of
RGT (since October 1996), RCF
New York, NY (since December 1996) and the
10019 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 Americas been employed by Royce since
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.
<PAGE>
Position
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
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 Americas Assistant Vice President of RGT (since
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 Americas Secretary of RGT (since October
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, 1996, the following trustees and affiliated
persons of the Trust received compensation from the Trust and its predecessor
and/or the other funds in the group of registered investment companies
comprising The Royce Funds:
<PAGE>
Aggregate
Compensation
From Trust Pension or Retirement Total Compensation
and its Benefits Accrued As from The Royce Funds
Name Predecessor Part of Trust Expenses paid to Trustee/Directors
- ---- ----------- ---------------------- -------------------------
Hubert L. Cafritz $ 25,750 N/A $25,750
Trustee
Richard M. Galkin, 37,000 N/A 64,000
Trustee
Stephen L. Isaacs, 37,000 N/A 64,000
Trustee
William L. Koke, 25,750 N/A 25,750
Trustee
David L. Meister, 37,000 N/A 64,000
Trustee
John D. Diederich 107,075 $9,448 N/A
Director of
Administration
Howard J. Kashner 71,491 4,731 N/A
General Counsel
PRINCIPAL HOLDERS OF SHARES
As of November 3, 1997, 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. 8,773,187 Record 15.04%
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 3,925,750 Record 6.73%
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Royce Premier Fund
- -------------------------
Charles Schwab & Co., Inc. 21,002,037 Record 36.34%
101 Montgomery Street
San Francisco, CA 94104-4122
Wheat First Securities Inc. 7,539,640 Record 13.05%
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. 5,476,222 Record 28.55%
101 Montgomery Street
San Francisco, CA 94104-4122
Northern Trust TTEE 971,677 Record 5.07%
FBO Archdiocese of Chicago
P.O. Box 92956
Chicago, IL 60675-2956
Royce Low-Priced Stock Fund
- -------------------------
Charles Schwab & Co., Inc. 1,007,079 Record 41.24%
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Management Company 217,944 Record and 8.93%
8 Soundshore Drive Beneficial
Greenwich, CT 06830
Andrews & Company 139,276 Record 5.7%
C/O Chase Manhattan Bank NA
1211 Avenue of the Americas
New York, NY 10036
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Royce GiftShares Fund
Investment Class
- -------------------------
W. Whitney George , Trustee 146,155 Record and 37.18%
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 1,400 Record 22.32%
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 1,400 Record 22.32%
FBO Margaret M. Dalena
State Street Bank and Trust Co.
c/o Bill Sweeney
45 Garfield Avenue
Madison, NJ 07940-2707
Arthur Oppenheimer TR 700 Record 11.16%
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
Laurence N. Wakeman TR 693 Record 11.05%
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
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Laurence N. Wakeman TR 693 Record 11.05%
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 693 Record 11.05%
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 693 Record 11.05%
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. 5,081,263 Record 40.98%
Attn. Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Financial Services Fund
- -------------------------
Charles M. Royce 145,867 Record and 43.63%
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
National City Bank PA CUST 50,362 Record 15.06%
Reed Smith Shaw & McClay PPS
FBO Scott F. Zimmerman
P.O. Box 94777
Cleveland, OH 44101-4777
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Bruce Museum Inc. 43,203 Record and 12.92%
Museum Drive Beneficial
Greenwich, CT 06830
Charles Schwab & Co. Inc. 19,823 Record 5.93%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
PMF II
- -------------------------
Charles Schwab & Co. Inc. 650,981 Record 19.18%
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Steven F. Fischer & 198,066 Record 5.84%
Frederick C. Fisher Co.
TTEES U/A/D 1/1/76
Fischer Special Manufacturing
111 Industrial Road
Cold Spring, KY 41076-9020
As of November 3, 1997, 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 17.5% of the
outstanding shares of Royce Low-Priced Stock Fund, approximately 41.3% of the
outstanding shares of Royce GiftShares Fund, approximately 50.2% of the
outstanding shares of Royce Financial Services Fund and approximately 2.9% of
the outstanding shares of PMF II.
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:
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%
Percentage Per Annum
<PAGE>
Fund of Fund's Average Net Assets
------------------------ ----------------------------
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%
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, 1994, 1995 and 1996, 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
------------------------
1994 $ 6,831,793 $ -
1995 5,361,354 88,173
1996 4,104,694 198,074
Royce Premier Fund
------------------
1994 $ 1,400,394 $ -
1995 2,603,445 6,279
1996 2,838,340 65,000
<PAGE>
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Royce Micro-Cap Fund
--------------------
1994 $ 295,148 $ 20,330
1995 804,905 14,047
1996 1,792,264 96,036
Royce Low-Priced Stock Fund
---------------------------
1994 $ 0 $ 15,727
1995 6,174 31,425
1996 122,045 51,828
Royce GiftShares Fund
---------------------
1995* $ 0 $ 86
1996 0 7,866
Royce Total Return Fund
-----------------------
1994 $ 0 10,506
1995 12,027 9,947
1996 12,189 28,758
Royce Financial Services Fund
-----------------------------
1994** $ 0 $ 367
1995 0 20,261
1996 0 29,185
PMF II
------
1996*** $ 0 $ 12,215
__________
* December 27, 1995 (commencement of operations) to December 31, 1995
** December 15, 1994 (commencement of operations) to December 31, 1994
***November 19, 1996 (commencement of operations) to December 31, 1996
DISTRIBUTOR
RFS, the distributor of the shares of each Fund, has its office at
1414 Avenue of the Americas, New York, New York 10019. It was organized in
November 1982 and is a member of the National Association of Securities Dealers,
Inc. ("NASD").
As compensation for its services and for the expenses payable by it under
the Distribution Agreement with the Trust, RFS is entitled to receive, for and
from the assets of the Fund involved, a monthly fee equal to 1% per annum
(consisting of an asset-based sales charge of .75% and a personal service and/or
account maintenance fee of .25%) of Pennsylvania Mutual Fund's 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
<PAGE>
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.
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.
<PAGE>
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 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, a Baltimore,
Kansas City, Missouri 64105.
State Street is responsible for the calculation of each Fund's daily net
asset value per share and for the maintenance of its portfolio and general
accounting records and also provides certain shareholder services.
<PAGE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., whose address is One Post Office Square, Boston,
Massachusetts 02109, are the independent accountants of the Trust.
PORTFOLIO TRANSACTIONS
Royce is responsible for selecting the brokers who effect the purchases and
sales of each Fund's portfolio securities. No broker is selected to effect a
securities transaction for a Fund unless such broker is believed by Royce to be
capable of obtaining the best price and execution for the security involved in
the transaction. Best price and execution is comprised of several factors,
including the liquidity of the security, the commission charged, the promptness
and reliability of execution, priority accorded the order and other factors
affecting the overall benefit obtained. In addition to considering a broker's
execution capability, Royce generally considers the brokerage and research
services which the broker has provided to it, including any research relating to
the security involved in the transaction and/or to other securities. Such
services may include general economic research, market and statistical
information, industry and technical research, strategy and company research and
performance measurement and may be written or oral. Brokers that provide both
research and execution services are generally paid higher commissions than those
paid to brokers who do not provide such research and execution services. Royce
determines the overall fairness of brokerage commissions paid, after considering
the amount another broker might have charged for effecting the transaction and
the value placed by Royce upon the brokerage and/or research services provided
by such broker, viewed in terms of either that particular transaction or Royce's
overall responsibilities with respect to its accounts.
Royce is authorized, in accordance with Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreements with the
Trust, to pay a brokerage commission in excess of that which another broker
might have charged for effecting the same transaction, in recognition of the
value of brokerage and research services provided by the broker.
Brokerage and research services furnished by brokers through whom a Fund
effects securities transactions may be used by Royce in servicing all of its
accounts and those of RMC, and not all of such services may be used by Royce in
connection with the Trust or any one of its Funds.
Royce may also place a Fund's brokerage business with firms which promote
the sale of the Funds' shares, consistent with achieving the best price and
execution. In no event will a Fund's brokerage business be placed with RFS.
Even though investment decisions for each Fund are made independently from
those for the other Funds and the other accounts managed by Royce and RMC,
securities of the same issuer are frequently purchased, held or sold by more
than one Royce/RMC account because the same security may be suitable for all of
them. When the same security is being purchased or sold for more than one
Royce/RMC account on the same trading day, Royce seeks to average the
transactions as to price and allocate them as to amount in a manner believed to
be equitable to each. Such purchases and sales of the same security are
generally effected pursuant to Royce/RMC's 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
<PAGE>
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, 1994, 1995 and 1996, the
Funds paid brokerage commissions as follows:
Fund 1994 1995 1996
- ---- ---- ---- ----
Pennsylvania Mutual Fund $797,686 $683,334 $ 935,022
Royce Premier Fund 465,986 419,040 429,150
Royce Micro-Cap Fund 41,497 117,909 295,737
Royce Low-Priced Stock Fund 12,946 22,645 114,456
Royce GiftShares Fund - 760* 3,555
Royce Total Return Fund 6,231 6,117 21,379
Royce Financial Services Fund 382** 6,199 6,872
PMF II - - 29,490***
_________________
* For the period from December 27, 1995 (commencement of operations) to
December 31, 1995
** For the period from December 15, 1994 (commencement of operations) to
December 31, 1994
***For the period from November 19, 1996 (commencement of operations) to
December 31, 1996
For the year ended December 31, 1996, the aggregate amount of brokerage
transactions of each Fund having a research component and the amount of
commissions paid by each Fund for
such transactions were as follows:
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
Pennsylvania Mutual Fund $ 94,132,403 $ 307,755
Royce Premier Fund 49,849,078 140,207
Royce Micro-Cap Fund 11,407,913 56,499
Royce Low-Priced Stock Fund 2,510,264 15,390
Royce GiftShares Fund 239,455 957
<PAGE>
Aggregate Amount of
Brokerage Transactions Commissions Paid
Fund Having a Research Component For Such Transactions
- ---- --------------------------- ---------------------
Royce Total Return Fund 927,710 3,075
Royce Financial Services Fund 501,800 1,696
PMF II* -0- -0-
_________________
* 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 September 30, 1997, 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 $34.1 million, and Royce's and RMC's equity
interests in Royce related private investment companies totalled approximately
$3.5 million.
PRICING OF SHARES BEING OFFERED
The purchase and redemption price of each Fund's shares is based on the
Fund's current net asset value per share. See "Net Asset Value Per Share" in
the Funds' Prospectuses.
As set forth under "Net Asset Value Per Share", the Funds' custodian
determines the net asset value per share of each Fund at the close of regular
trading on the New York Stock Exchange on each day that the Exchange is open.
The Exchange is open on all weekdays which are not
<PAGE>
holidays. Thus, it is closed on Saturdays and Sundays and on New Year's Day,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which would, in the
judgment of the Board of Trustees or management, make it undesirable for a Fund
to pay for all redemptions in cash. In such cases, payment may be made in
portfolio securities or other property of the Fund. However, the Trust has
obligated itself under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder up to $250,000 (or 1% of the Trust's net
assets if that is less) in any 90-day period. Securities delivered in payment of
redemptions would be selected by Royce and valued at the same value assigned to
them in computing the net asset value per share for purposes of such redemption.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
TAXATION
Each Fund has qualified and intends to remain qualified each year for the
tax treatment applicable to a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, a
Fund must comply with certain requirements of the Code relating to, among other
things, the source of its income and the diversification of its assets.
By so qualifying, a Fund will not be subject to Federal income taxes to the
extent that its net investment income and capital gain net income are
distributed, so long as the Fund distributes, as ordinary income dividends, at
least 90% of its investment company taxable income.
A non-deductible 4% excise tax will be imposed on a Fund to the extent that
the Fund does not distribute (including by declaration of certain dividends),
during each calendar year, (i) 98% of its ordinary income for such calendar
year, (ii) 98% of its capital gain net income for the one-year period ending
October 31 of such calendar year (or the Fund's actual taxable year ending
December 31, if elected) and (iii) certain other amounts not distributed in
previous years. To avoid the application of this tax, each Fund intends to
distribute substantially all of its net investment income and capital gain net
income at least annually to its shareholders.
Each Fund maintains accounts and calculates income by reference to the U.S.
dollar for U.S. Federal income tax purposes. Investments calculated by reference
to foreign currencies will not necessarily correspond to a Fund's distributable
income and capital gains for U.S. Federal income tax purposes as a result of
fluctuations in foreign currency exchange rates. Furthermore, if any exchange
control regulations were to apply to a Fund's investments in foreign securities,
such regulations could restrict that Fund's ability to repatriate investment
income or the proceeds of 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
<PAGE>
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 to such shares. A shareholder's
exchange of shares between Funds will be treated for tax purposes
<PAGE>
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, $600,000; increases to $625,000 in 1998, $650,000
in 1999 and eventually in uneven stages, to $1,000,000 in 2006). Any gift of
Fund shares that does not qualify as a present interest will reduce the amount
of the Federal gift and estate tax exemption that would otherwise be available
for future gifts or to the Donor's estate. All gifts of Fund shares qualify for
"gift splitting" with the Donor's spouse, meaning that the Donor and his or her
spouse may elect to treat the gift as having been made one-half by each of them.
The Donor's gift of Fund shares may also have to be reported for state gift
tax purposes, if the state in which the Donor resides imposes a gift tax. Many
states do not impose such a tax. Some of those that do, follow the Federal rules
concerning the types of transfers subject to tax and the availability of the
annual exclusion.
<PAGE>
Generation-Skipping Transfer Taxes
If the Beneficiary of a gift of Royce GiftShares Fund shares is a
grandchild or more remote descendant of the Donor or is assigned, under Federal
tax law, to the generation level of the Donor's grandchildren or more remote
descendants, any part of the gift that does not qualify for the Federal annual
gift tax exclusion will be a taxable transfer for purposes of the Federal
generation-skipping transfer tax ("GST tax"). The Donor may protect these gifts
from the GST tax by allocating his or her GST exemption until his or her
cumulative gifts (other than certain gifts qualifying for the annual exclusion
or other exclusions) to individuals assigned, under Federal tax law, to the
generation level of the Donor's grandchildren or more remote descendants exceed
the GST tax exemption (currently, $1,000,000). The tax rate on transfers
subject to GST tax is the maximum Federal estate tax rate (currently, 55%).
Gifts subject to GST tax, whether or not covered by the GST tax exemption, must
be reported on the Donor's Federal gift tax return. Whether, and the extent to
which, an investment in Royce GiftShares Fund will qualify for the Federal
annual gift tax exclusion will depend upon the options selected and other gifts
that the Donor and his or her spouse may have made during the year. See "Gift
Taxes" above.
Income Taxes
The Internal Revenue Service has taken the position in recent rulings that
a trust beneficiary who is given a power of withdrawal over contributions to the
trust should be treated as the "owner" of the portion of the trust that was
subject to the power for Federal income tax purposes. Accordingly, if the Donor
selects the Withdrawal Option, the Beneficiary may be treated as the "owner" of
all of the Fund shares in the account for Federal income tax purposes, and will
be required to report all of the income and capital gains earned in the Trust on
his or her personal Federal income tax return. The Trust will not pay Federal
income taxes on any of the Trust's income or capital gains. The Trustee will
prepare and file the Federal income tax information returns that are required
each year (and any state income tax returns that may be required), and will send
the Beneficiary a statement following each year showing the amounts (if any)
that the Beneficiary must report on his or her income tax returns for that year.
If the Beneficiary is under fourteen years of age, these amounts may be subject
to Federal income taxation at the marginal rate applicable to the Beneficiary's
parents. The Beneficiary will have the option to require the Trustee to pay him
or her a portion of the Trust's income and capital gains annually to provide
funds with which to pay any resulting income taxes, which the Trustee will do by
redeeming Fund shares. The amount distributed will be a fraction of the Trust's
ordinary income and short-term capital gains "intermediate term" (12 to 18 month
holding period) capital gains and long-term capital gains equal to the highest
marginal Federal income tax rate imposed on each type of income (currently,
39.6%, 28% and 20%, respectively). If the Beneficiary selects this option, he
or she will receive those fractions of his or her Trust's income and capital
gains annually for the duration of the Trust.
<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 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
<PAGE>
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 Fund.
Each of the Trustees currently in office were elected by the Predecessor's
shareholders. There will normally be no meeting of shareholders for the
election of Trustees until less than a majority of such Trustees remain in
office, at which time the Trustees will call a shareholders meeting for the
election of Trustees. In addition, Trustees may be removed from office by
written consents signed by the holders of a majority of the outstanding shares
of the Trust and filed with the Trust's custodian or by a vote of the holders of
a majority of the outstanding shares of the Trust at a meeting duly called for
this purpose upon the written request of holders of at least 10% of the Trust's
outstanding shares. Upon the written request of 10 or more shareholders of the
Trust, who have been shareholders for at least 6 months and who hold shares
constituting at least 1% of the Trust's outstanding shares, stating that such
shareholders wish to communicate with the Trust's other shareholders for the
purpose of obtaining the necessary signatures to demand a meeting to consider
the removal of a Trustee, the Trust is required (at the expense of the
requesting shareholders) to provide a list of its shareholders or to distribute
appropriate materials. Except as provided above, the Trustees may continue to
hold office and appoint their successors.
The trustee of the Royce GiftShares Fund trusts will send notices of
meetings of Royce GiftShares Fund shareholders, proxy statements and proxies for
such meetings to the trusts' beneficiaries to enable them to attend the meetings
in person or vote by proxies. It will vote all GiftShares Fund shares held by it
which are not present at the meetings and for which no proxies are returned in
the same proportions as GiftShares Fund shares for which proxies are returned.
Shares are freely transferable, are entitled to distributions as declared
by the Trustees and, in liquidation of the Trust, are entitled to receive net
assets of their series and/or class. Shareholders have no preemptive rights.
The Trust's fiscal year ends on December 31.
<PAGE>
Shareholder Liability
Generally, shareholders will not be personally liable for the obligations
of their Fund or of the Trust under Delaware law. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust is entitled to the
same limited liability extended to stockholders of private corporations for
profit organized under the Delaware General Corporation Law. No similar
statutory or other authority limiting business trust shareholder liability
exists in many other states. As a result, to the extent that the Trust or a
shareholder of the Trust is subject to the jurisdiction of courts in those
states, the courts may not apply Delaware law and may thereby subject Trust
shareholders to liability. To guard against this possibility, the Trust
Instrument (i) requires that every written obligation of the Trust contain a
statement that such obligation may be enforced only against the Trust's assets
(however, the omission of this disclaimer will not operate to create personal
liability for any shareholder); and (ii) provides for indemnification out of
Trust property of any Trust shareholder held personally liable for the Trust's
obligations. Thus, the risk of a Trust shareholder incurring financial loss
beyond his investment because of shareholder liability is limited to
circumstances in which: (i) a court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Trust itself
would be unable to meet its obligations. In light of Delaware law, the nature of
the Trust's business and the nature of its assets, management believes that the
risk of personal liability to a Trust shareholder is extremely remote.
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds is historical and is not intended to indicate
future returns. Each Fund's share price and total returns fluctuate in response
to market conditions and other factors, and the value of a Fund's shares when
redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of a Fund's return, including the
effect of reinvesting dividends and capital gain distributions and any change in
the Fund's net asset value per share (NAV) over the period. Average annual
total returns are calculated by determining the growth or decline in value of a
hypothetical historical investment in the Fund over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative return of 100% over ten years would produce
an average annual total return of 7.18%, which is the steady annual rate of
return that would equal 100% growth on a compounded basis in ten years. While
average annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance is not constant
over time, but changes from year to year, and that average annual total returns
represent averaged figures as opposed to the actual year-to-year performance of
the Fund.
In addition to average annual total returns, a Fund's 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
<PAGE>
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, 1996 Russell 2000 S&P500
- ---- ----------------- ------------ ------
Pennsylvania Mutual Fund (Investment Class)
1 Year Total Return 12.8% 16.5% 23.3%
5 Year Average Annual Total Return 11.5 15.7 15.3
10 year Average Annual Total Return 11.4 12.4 15.3
Royce Premier Fund
1 Year Total Return 18.1% 16.5% 23.3%
5 Year Average Annual Total Return 14.7 15.7 15.3
Royce Micro-Cap Fund
1 Year Total Return 15.5% 16.5% 23.3%
5 Year Average Annual Total Return 17.9 15.7 15.3
Royce Low-Priced Stock Fund
1 Year Total Return 22.8% 16.5% 23.3%
Average Annual Total Return since 12-15-93 15.5 14.8 19.8
(commencement of operations)
Period Ended
Fund December 31, 1996 Russell 2000 S&P500
- ---- ----------------- ------------ ------
Royce Total Return Fund
1 Year Total Return 25.5% 16.5% 23.3%
Average Annual Total Return since 12-15-93 18.4 14.8 19.8
(commencement of operations)
<PAGE>
Royce Financial Services Fund
1 Year Total Return 14.6% 16.5% 23.3%
Average Annual Total Return since 12-15-94 18.1 24.0 30.0
(commencement of operations)
Royce GiftShares Fund (Investment Class)
1 Year Total Return 25.6% 16.5% 23.3%
Average Annual Total Return since 12-27-95 25.3 17.0 23.2
(commencement of operations)
During the applicable period ended December 31, 1996, 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, 1996
- ----------------------------- --------------------------------------------
Pennsylvania Mutual Fund (12-31-75) $ 296,457
Royce Premier Fund (12-31-91) 19,813
Royce Micro-Cap Fund (12-31-91) 22,798
Royce Low-Priced Stock Fund (12-15-93) 15,524
Royce Total Return Fund (12-15-93) 16,738
Royce Financial Services Fund (12-15-94) 14,064
Royce GiftShares Fund (12-27-95) 12,580
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, 1996 were:
Fund Lipper Ranking
---- --------------
Pennsylvania Mutual Fund 310 out of 388 small company growth funds
Royce Premier Fund 219 out of 388 small company growth funds
Royce Micro-Cap Fund 258 out of 388 small company growth funds
Royce Low-Priced Stock Fund 132 out of 388 small company growth funds
Royce Total Return Fund 70 out of 523 growth and income funds
Fund Lipper Ranking
---- --------------
Royce Financial Services Fund 98 out of 159 global funds
Royce GiftShares Fund 97 out of 388 small company growth 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.
<PAGE>
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,
1996, the average included 229 capital appreciation funds, 777 growth funds, 192
mid-cap funds, 452 small company growth funds, 597 growth and income funds, 187
equity income funds and 60 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.
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 December 31, 1996, DFA U.S. 9-10 Small Company Fund
contained approximately 2,675 stocks, with a median market capitalization of
about $121 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
<PAGE>
representation. As of December 31, 1996, the weighted mean
market value of a company in this Index was approximately $790 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, 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, 1996, the average risk score
for the 1,826 domestic equity funds rated by Morningstar with a three-year
history was 1.00; the average risk score for the 242 small company funds rated
by Morningstar with a three-year history was 1.29; and the average risk score
for the 91 equity income funds rated by Morningstar with a three-year history
was .71. For the three years ended December 31, 1996, 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:
<PAGE>
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds Equity Income Funds
- ---- ----------- ------------ ------------------- -------------------
Pennsylvania 0.75 Within lowest 35% Within lowest 10% -
Mutual (In-
vestment
Class)
Premier 0.56 Within lowest 10% Within lowest 5% -
Micro-Cap 0.83 Within lowest 50% Within lowest 20% -
Low-Priced
Stock 0.96 Within lowest 65% Within lowest 30% -
Total Return 0.27 Within lowest 56% Lowest risk score -
The Funds' performances may also be compared to those of other compilations
or indices.
Advertising for the Funds may contain examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share can be
lower than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
The Funds may be available for purchase through retirement plans or other
programs offering deferral of or exemption from income taxes, which may produce
superior after-tax returns over time. For example, a $2,000 annual investment
earning a taxable return of 8% annually would have an after-tax value of
$177,887 after thirty years, assuming tax was deducted from the return each year
at a 28% rate. An equivalent tax-deferred investment would have a value of
$244,692 after thirty years.
Risk Measurements
Quantitative measures of "total risk," which quantify the total variability
of a portfolio's returns around or below its average return, may be used in
advertisements and in communications with current and prospective shareholders.
These measures include standard deviation of total return and the Morningstar
risk statistic. Such communications may also include market risk measures, such
as beta, and risk-adjusted measures of performance such as the Sharpe Ratio,
Treynor Ratio, Jensen's Alpha and Morningstar's star rating system.
Standard Deviation. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation of
those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns
<PAGE>
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.
Jensen's Alpha. This is the difference between a fund's actual returns and
thosethat could have been earned on a benchmark portfolio with the same amount
of risk - i.e., the same beta, as the portfolio. Jensen's Alpha measures the
ability of active management to increase returns above those that are purely a
reward for bearing market risk.
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund rating service
that rates mutual funds on the basis of risk-adjusted performance. Ratings may
change monthly. Funds with at least three years of performance history are
assigned ratings from one star (lowest) to five stars (highest). Morningstar
ratings are calculated from the funds' three-, five- and ten-year average annual
returns (when available). Funds' returns are adjusted for fees and sales loads.
Ten percent of the funds in an investment category receive five stars, 22.5%
receive four stars, 35% receive three stars, 22.5% receive two stars and the
bottom 10% receive one star.
<PAGE>
None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
