<PAGE>
1999 Semi-Annual Report
Value Investing In Small Companies
For More Than 25 Years
THE
ROYCE
FUNDS
ROYCE FINANCIAL SERVICES FUND
www.roycefunds.com
<PAGE>
SEMI-ANNUAL REPORT REFERENCE GUIDE
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LETTER TO SHAREHOLDERS 2
An Overview of Royce Financial Services Fund Year-to-Date Through
June 30, 1999
PERFORMANCE AND PORTFOLIO REVIEW 4
SCHEDULE OF INVESTMENTS AND OTHER FINANCIAL STATEMENTS 5
[PULL QUOTE]
For more than 25 years, our value approach has focused on evaluating a
company's current worth -- what we believe an enterprise would sell for in a
private transaction between rational and well-informed parties. This
requires a thorough analysis of the financial and operating dynamics of a
business, as though we were purchasing the entire company. The price we will
pay for a security must be significantly lower than our appraisal of its
current worth.
[END PULL QUOTE]
<PAGE>
LETTER TO SHAREHOLDERS
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What an interesting six months! At the end of 1999's first quarter, the best
thing investors could say about the small-cap sector was that it was
analogous to one's brother-in-law - a question mark backed by hope. But
after a poor start in both an absolute and relative sense, small-cap
securities reversed their fortunes in the second quarter by outperforming
their largecompany counterparts for the first time since the third quarter of
1997. Perhaps the attitudes of those who thought portfolio diversification
wasn't necessary were reversed as well. Although small-caps did not quite
catch large-caps on a year-to-date performance basis through June 30, 1999,
the second quarter was as impressive for small-caps as the first quarter was
dismal.
[BAR CHART]
FIRST-QUARTER 1999 SECOND-QUARTER 1999
RUSSELL 2000 -5.4% +15.6%
S&P 500 +5.0% +7.1%
NASDAQ COMPOSITE +12.3% +9.1%
DJ INTERNET COMMERCE +55.9% -2.1%.
[END BAR CHART]
As exciting as small-cap performance was in 1999's second
quarter, it was the rise and fall of Internet stocks during the first six
months that grabbed headlines and held investor attention. With the DJ
Internet Commerce Index up 55.9% in the first quarter alone, a return most
investors would be happy with over three years, there were plenty of Internet
stock market gains despite few "real profits." Although the Internet sector
was still up significantly year-to-date through June 30, 1999, it was only
after the second-quarter downturn (DJ Internet Commerce index was off 22.7%
from its high on 4/13/99 through 6/30/99) that the Monopoly-money mentality
began to subside. Like high school hoops hopefuls bypassing college and going
directly to the NBA, many Internet companies at the close of their first day
of trading skipped small-cap status and went directly to large-cap standing.
One has to wonder about the long-term prospects for many of these companies.
Our approach in the past regarding our performance discussion has been
simple and direct - temper our enthusiasm when things go well and keep our
chins up when they do not. In 1999, we have had opportunities to do both.
Although not restricted in term of market capitalization, we have chosen to
focus primarily on small-cap financial intermediaries and service companies,
an area of the market with which we have considerable investment experience.
Our performance through June 30, 1999 was influenced by the small-cap asset
class, our investment style and our portfolio positions. Royce Financial
Services Fund (RFS) certainly looked like a small-cap fund in the first
quarter - the Fund was down, although it did perform better than its small-
cap benchmark, the Russell 2000 (-4.4% versus -5.4%). RFS did not resemble a
small-cap fund in the second-quarter rally, however, (+7.2% versus +15.6% for
the Russell 2000) attributable primarily to its sector focus. Most financial
companies struggled through the first half of 1999 because of a more than 26%
rise in longterm interest rates. By way of comparison, the Ned Davis
Research Financial Diversified composite,
<PAGE>
which includes small and large-cap
financial companies, was up 8.2% in the second quarter and down 3.6% year-to-
date through June 30, 1999. For a complete review of the Fund results and
risk profile, see page 4.
In spite of the Fund's recent performance disappointments, we are
encouraged by the performance of small-cap since the bottom last October.
Not only did the Russell 2000 outperform the S&P 500 from the October 8, 1998
bottom through June 30, 1999 (+48.9% versus 44.4%); it did so during a period
of rising interest rates.
We are also encouraged by our ability to find what we think are
attractively priced companies, those trading at discounts to their own value
as businesses, not at discounts to other companies in other businesses in
other asset classes. We did some internal research recently that examined
small-cap valuations on an earnings yield basis. The results indicate to us
that, adjusting for interest rates and allowing for the recent small-cap
rally, small-caps are still very attractively valued.
As we enter what we believe will be a relatively low-return period for
the market - possibly for an extended time - our confidence in small-cap
value investing remains as high as ever.
We appreciate your continued support of our work.
Sincerely,
/s/ Charles M. Royce /s/ W. Whitney George /s/ Jack E. Fockler, Jr.
Charles M. Royce W. Whitney George Jack E. Fockler, Jr.
President Vice President Vice President
August 12, 1999
NOTES TO PERFORMANCE AND RISK INFORMATION
Historical market trends are not necessarily indicative of future movements.
All performance information is presented on a total return basis and reflects
the reinvestment of distributions.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed. This report must be preceded or
accompanied by a current prospectus. Royce Financial Services Fund invests in
small- and/or micro-cap companies that may involve considerably more risk
than investments in securities of larger-cap companies (see "Primary Risks"
in the prospectus). Please read the prospectus carefully before investing or
sending money.
The Dow Jones Internet Commerce Index, Russell 2000, Russell 3000 and S&P 500
are unmanaged indices of domestic common stocks. The Ned Davis Research
Financial Diversified composite is an equalweighted composite, whose returns
do not reflect reinvested distributions, consisting of 198 bank stocks and
228 non-bank stocks drawn from the 2,500 largest companies in the Russell
3000 index that have at least one year of price history and coverage by at
least one analyst. Distributor: Royce Fund Services, Inc.
<PAGE>
PERFORMANCE AND PORTFOLIO REVIEW
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WHAT WE DO Royce Financial Services Fund seeks long-term growth of capital.
The Fund uses a value approach to invest primarily in financial services
companies. Royce generally looks to invest in companies that it believes
have excellent business strengths and/or prospects for growth, high internal
rates of return and are trading significantly below our estimate of their
"current worth."
Average Annual Total Returns Through 6/30/99
- --------------------------------------------------
Second Quarter 1999* 7.2%
January - June 1999* 2.5
One-Year 0.7
Three-Year 12.0
Since Inception (12/15/94) 14.6
* Not annualized.
Portfolio Diagnostics
- --------------------------------------------------
Median Market Capitalization $652 million
Weighted Average P/E Ratio 11.1x
Weighted Average P/B Ratio 1.3x
Weighted Average Yield 1.8%
Fund Assets $1.8 million
Number of Holdings 40
[LINE GRAPH]
ROYCE FINANCIAL SERVICES FUND VS. RUSSELL 2000
GROWTH OF A $10,000 INITIAL INVESTMENT,
FROM INCEPTION (12/15/94) THROUGH 6/30/99
Royce Financial Russell
Services Fund 2000
Dec-1994 10,000.00 10,000.00
Dec-1994 10,389.00 10,120.00
Mar-1995 10,868.00 10,860.00
Jun-1995 11,886.00 11,699.00
Sep-1995 13,061.00 12,260.00
Dec-1995 13,344.00 12,268.00
Mar-1996 14,026.00 12,765.00
Jun-1996 14,727.00 13,218.00
Sep-1996 14,777.00 13,304.00
Dec-1996 15,546.00 14,062.00
Mar-1997 14,740.00 14,483.00
Jun-1997 17,131.00 16,325.00
Sep-1997 19,680.00 17,421.00
Dec-1997 19,021.00 16,790.00
Mar-1998 20,933.00 18,304.00
Jun-1998 19,957.00 18,439.00
Sep-1998 15,938.00 16,411.00
Dec-1998 18,537.00 18,125.00
Mar-1999 17,533.00 17,323.00
Jun-1999 20,260.00 18,573.00
[END LINE GRAPH]
Portfolio Composition
- --------------------------------------------------
Top Ten Positions % of Net Assets
Zenith National Insurance 6.2%
Gallagher (Arthur J.) & Co. 5.5
White Mountains Insurance Group 3.9
Fair, Isaac and Co. 3.9
Duff & Phelps Credit Rating 3.7
John Nuveen Company Cl. A 3.6
Trenwick Group 3.4
Navigators Group 3.3
Legg Mason 3.2
Alleghany Corporation 3.2
<PAGE>
SCHEDULE OF INVESTMENTS
ROYCE FINANCIAL SERVICES FUND June 30, 1999 (unaudited)
- ------------------------------------------------------------------------------
COMMON STOCKS - 89.4%
SHARES VALUE
------ -----
Financial Intermediaries -61.4%
Banking - 0.7%
Barclays ADR+ 100 $ 11,950
--------
Insurance - 49.9%
Alleghany Corporation* 306 56,610
Berkley (W. R.) 2,000 50,000
CNA Surety 2,000 30,625
Chicago Title 1,000 35,688
Commerce Group 2,000 48,750
Fremont General 1,000 18,875
Highlands Insurance Group* 3,000 31,500
Leucadia National* 2,000 50,750
Medical Assurance* 1,864 52,658
NYMAGIC 1,500 23,437
Navigators Group* 4,000 60,000
PICO Holdings* 2,100 53,156
PMA Capital Cl. A 2,300 47,294
PXRE 1,500 27,188
RenaissanceRe Holdings 1,000 37,000
Trenwick Group 2,500 61,641
Wesco Financial 100 31,000
White Mountains
Insurance Group 500 70,500
Zenith National Insurance 4,500 110,812
--------
897,484
--------
Securities Brokers - 10.8%
Bear Stearns Companies (The) 735 34,361
Dain Rauscher 800 43,300
Legg Mason 1,500 57,750
Nomura Securities ADR+ 200 22,750
Raymond James Financial 1,500 35,906
--------
194,067
--------
1,103,501
---------
SHARES VALUE
------ -----
Financial Services - 24.5%
Information and Processing - 8.3%
American Express 100 $ 13,013
Duff & Phelps Credit Rating 1,000 66,875
Fair, Isaac and Co. 2,000 70,125
--------
150,013
--------
Insurance Brokers - 8.5%
Blanch (E.W.) Holdings 800 54,550
Gallagher (Arthur J.) & Co. 2,000 99,000
--------
153,550
--------
Investment Management - 7.7%
Affiliated Managers Group* 800 24,150
Amvescap ADR+ 200 9,300
C.I. Fund Management 2,000 24,923
John Nuveen Company Cl. A 1,500 64,031
Phoenix Investment Partners 1,000 8,625
U.S. Global Investors Cl. A* 5,000 6,406
--------
137,435
--------
440,998
--------
Industrial Services - 0.7%
Printing - 0.7%
Bowne & Co. 1,000 13,000
--------
Miscellaneous - 2.8% 49,325
--------
TOTAL COMMON STOCKS
(Cost $1,503,560) 1,606,824
----------
TOTAL INVESTMENTS - 89.4%
(Cost $1,503,560) 1,606,824
CASH AND OTHER ASSETS
LESS LIABILITIES - 10.6% 189,881
--------
NET ASSETS - 100.0% $ 1,796,705
===========
* Non-income producing.
+ American Depository Receipt.
INCOME TAX INFORMATION: The cost of total investments for Federal income tax
purposes was $1,503,560. At June 30, 1999, net unrealized appreciation for
all securities was $103,264, consisting of aggregate gross unrealized
appreciation of $254,480 and aggregate gross unrealized depreciation of
$151,216.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE FINANCIAL SERVICES FUND
STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1999 (unaudited)
- ------------------------------------------------------------------------------
ASSETS:
Investments at value (identified cost $1,503,560) $1,606,824
Cash 187,399
Receivable for dividends and interest 2,472
Receivable for capital shares sold 1,400
Prepaid expenses and other assets 1,655
- ------------------------------------------------------------------------------
Total Assets 1,799,750
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LIABILITIES:
Payable for investment advisory fee 331
Accrued expenses 2,714
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Total Liabilities 3,045
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Net Assets $ 1,796,705
==============================================================================
ANALYSIS OF NET ASSETS:
Undistributed net investment income $2,269
Accumulated net realized gain on investments 150,523
Net unrealized appreciation on investments 103,264
Capital shares 287
Additional paid-in capital 1,540,362
- ------------------------------------------------------------------------------
Net Assets $ 1,796,705
==============================================================================
SHARES OUTSTANDING:
(unlimited number of $.001 par value shares authorized) 287,301
==============================================================================
NET ASSET VALUE (Net Assets / Shares Outstanding):
(offering and redemption price* per share) $6.25
==============================================================================
* Shares redeemed within one year of purchase are subject to a 1% redemption
fee, payable to the Fund.
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STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
June 30, 1999 Year ended
INVESTMENT OPERATIONS: (unaudited) December 31, 1998
---------------- -----------------
<S> <C> <C>
Net investment income $ 784 $105
Net realized gain on investments 87,392 122,034
Net change in unrealized appreciation on investments (52,047) 24,356
- ---------------------------------------------------------------------------------------------
Net increase in net assets from investment operations 36,129 146,495
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net realized gain on investments -- (201,736)
- ---------------------------------------------------------------------------------------------
Total distributions -- (201,736)
- ---------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Value of shares sold 44,122 600,031
Distributions reinvested -- 190,929
Value of shares redeemed (471,095) (943,867)
- ---------------------------------------------------------------------------------------------
Net decrease in net assets from capital share transactions (426,973) (152,907)
- ---------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS (390,844) (208,148)
NET ASSETS:
Beginning of period 2,187,549 2,395,697
- ---------------------------------------------------------------------------------------------
End of period (includes undistributed net investment
income of $2,269 in 1999 and $1,485 in 1998) $ 1,796,705 $2,187,549
=============================================================================================
CAPITAL SHARE TRANSACTIONS (in shares):
Shares sold 7,364 93,061
Shares issued for reinvestment of distributions -- 32,035
Shares redeemed (78,829) (152,331)
- ---------------------------------------------------------------------------------------------
Net decrease in shares outstanding (71,465) (27,235)
- ---------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ROYCE FINANCIAL SERVICES FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (unaudited)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Dividends $15,047
Interest 177
- -------------------------------------------------------------------------
Total Income 15,224
- -------------------------------------------------------------------------
Expenses:
Investment advisory fees 14,537
Distribution fees 2,423
Registration 4,644
Custodian 3,675
Audit 2,200
Shareholder reports 1,250
Shareholder servicing 608
Administrative and office facilities 541
Trustees' fees 149
Legal 55
Other expenses 2,927
- -------------------------------------------------------------------------
Total Expenses 33,009
Fees Waived by Investment Adviser and Distributor (16,960)
Expenses Reimbursed by Investment Adviser (1,609)
- -------------------------------------------------------------------------
Net Expenses 14,440
- -------------------------------------------------------------------------
Net Investment Income 784
- -------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 87,392
Net change in unrealized appreciation on investments (52,047)
- -------------------------------------------------------------------------
Net realized and unrealized gain on investments 35,345
- -------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS $36,129
=========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
This table is presented to show selected data for a share outstanding
throughout each period, and to assist shareholders in evaluating the Fund's
performance for the periods presented.
===============================================================================
<TABLE>
<CAPTION>
Six months ended Periods ended December 31,
June 30, 1999 ----------------------------------------
(Unaudited) 1998 1997 1996 1995 1994 (a)
-------------- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $6.10 $6.21 $6.03 $5.68 $5.06 $5.00
Investment Operations:
Net investment income (loss) --- --- --- 0.01 (0.03) ---
Net realized and unrealized gain on investments 0.15 0.48 1.16 0.81 1.10 0.06
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 0.15 0.48 1.16 0.82 1.07 0.06
- ----------------------------------------------------------------------------------------------------------
Distributions:
Net investment income --- --- (0.02) --- --- ---
Net realized gain on investments --- (0.59) (0.96) (0.47) (0.45) ---
- ----------------------------------------------------------------------------------------------------------
Total distributions --- (0.59) (0.98) (0.47) (0.45) ---
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $6.25 $6.10 $6.21 $6.03 $5.68 $5.06
==========================================================================================================
Total Return: 2.5% 8.0% 19.4% 14.6% 21.2% 1.2%
Ratios Based on Average Net Assets:
Total expenses (b) 1.49% * 1.49% 1.49% 1.56% 1.97% 1.78% *
Net investment income (loss) 0.08% * 0.00% -0.01% 0.17% -0.58% 0.00% *
Supplemental Data:
Net Assets, End of Period (in thousands) $1,797 $2,188 $2,396 $1,948 $1,627 $514
Portfolio Turnover Rate 15% 62% 66% 81% 106% 0%
</TABLE>
(a) The Fund commenced operations on December 15, 1994.
(b) Expense ratios are shown after fee waivers and expense reimbursements
by the investment adviser and distributor. For the periods ended June 30, 1999
and December 31, 1998,1997, 1996, 1995 and 1994, the expense ratios before the
waivers and reimbursements would have been 3.41%, 3.20%, 3.04%, 3.31%, 3.72%
and 3.69%, respectively.
* Annualized.
<PAGE>
Royce Financial Services Fund
Notes to Financial Statements (unaudited)
- -------------------------------------------------------------------------------
Summary of Significant Accounting Policies:
Royce Financial Services Fund (the "Fund") is a series of The Royce Fund
(the "Trust"), a diversified open-end management investment company organized
as a Delaware business trust. The Fund commenced operations on December 15,
1994 as Royce Global Services Fund and changed its name, investment objective
and policies on November 25, 1997 to concentrate its investments in the
financial services industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Valuation of investments:
Securities listed on an exchange or on the Nasdaq National Market System
are valued on the basis of the last reported sale prior to the time the
valuation is made or, if no sale is reported for such day, at their bid price
for exchange-listed securities and at the average of their bid and asked
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 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.
Investment transactions and related investment income:
Investment transactions are accounted for on the trade date. Dividend
income is recorded on the ex-dividend date and any non-cash dividend income
is recorded at the fair market value of the securities received. Interest
income is recorded on the accrual basis. Realized gains and losses from
investment transactions are determined on the basis of identified cost for
book and tax purposes.
Expenses:
The Fund incurs direct and indirect expenses. Expenses directly
attributable to the Fund are charged to the Fund's operations, while expenses
applicable to more than one series of the Trust are allocated in an equitable
manner. Allocated personnel and occupancy costs related to The Royce Funds
are included in administrative and office facilities expenses.
Taxes:
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for its fiscal
year. The Schedule of Investments includes information regarding income
taxes under the caption "Income Tax Information".
<PAGE>
Royce Financial Services Fund
Notes to Financial Statements (unaudited) (continued)
- -------------------------------------------------------------------------------
Distributions:
Any dividend and capital gain distributions are recorded on the ex-
dividend date and paid annually in December. These distributions are
determined in accordance with income tax regulations that may differ from
generally accepted accounting principles. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications within the capital accounts. Undistributed net investment
income may include temporary book and tax basis differences, which will
reverse in a subsequent period. Any taxable income or gain remaining
undistributed at fiscal year end is distributed in the following year.
Repurchase agreements:
The Fund enters into repurchase agreements with respect to portfolio
securities solely with State Street Bank and Trust Company ("SSB&T"), the
custodian of the Fund's assets. The Fund restricts repurchase agreements to
maturities of no more than seven days. Securities pledged as collateral for
repurchase agreements, which are held by SSB&T until maturity of the
repurchase agreements, are marked-to-market daily and maintained at a value
at least equal to the principal amount of the repurchase agreement (including
accrued interest). Repurchase agreements could involve certain risks in the
event of default or insolvency of SSB&T, including possible delays or
restrictions upon the ability of the Fund to dispose of its underlying
securities.
Investment Adviser and Distributor:
Under the Trust's investment advisory agreements with Royce &
Associates, Inc. ("Royce"), Royce is entitled to receive management fees,
which are computed daily and payable monthly, at an annual rate of 1.5% of
the average net assets of the Fund. Royce has contractually agreed to waive
its fees and reimburse expenses to the extent necessary to maintain a net
annual operating expense ratio of expenses to average net assets at or below
1.49% through December 31, 1999. For the period ended June 30, 1999, Royce
waived advisory fees of $14,537.
Royce Fund Services, Inc. ("RFS"), the distributor of the Trust's
shares, is an affiliate of Royce. RFS voluntarily waived distribution fees
for the Fund of $2,423 for the period ended June 30, 1999. The 12b-1
distribution plan provides for maximum fees at an annual rate of 0.25% of the
average net assets of the Fund.
Purchases and Sales of Investment Securities:
For the period ended June 30, 1999, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
securities, were $237,399 and $367,154, respectively.
