As filed with the Securities and Exchange Commission on February 22, 1999
Registration Nos. 2-80348 and 811-3599
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X /
Pre-Effective Amendment No. ______ / /
Post-Effective Amendment No. 49 /X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 51 /X /
(Check appropriate box or boxes)
THE ROYCE FUND
(Exact name of Registrant as specified in charter)
1414 Avenue of the Americas, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 355-7311
Charles M. Royce, President
The Royce Fund
1414 Avenue of the Americas, New York, New York 10019
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on Date pursuant to paragraph (b)
/x / 60 days after filing pursuant to paragraph (a)(i)
/ / on Date pursuant to paragraph (a)(ii)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Total number of pages: ___
Index to Exhibits is located on page:
<PAGE>
[front cover]
P R O S P E C T U S
TheRoyceFund
---------------------------------------------------------
VALUE INVESTING IN SMALL COMPANIES FOR MORE THAN 25 YEARS
---------------------------------------------------------
Royce Premier Fund
Royce Micro-Cap Fund
Pennsylvania Mutual Fund
Royce Select Fund
Royce GiftShares Fund
Royce Total Return Fund
Royce Low-Priced Stock Fund
PMF II
Investment Class Shares
PROSPECTUS
Month xx, 1999
As with all mutual funds, the Securities and Exchange Commission
has not determined that the information in this
prospectus is accurate or complete, nor has it judged these
funds for investment merit. It is a crime to represent otherwise.
<PAGE>
P R O S P E C T U S
"At Royce & Associates, Inc. ("Royce"), the Funds' investment adviser, we
attempt to identify and invest in equity securities of small- and micro-cap
companies that are trading significantly below our assessment of their current
worth. We base this assessment on either what we believe a knowledgeable buyer
might pay to acquire the entire company, or what we think the value of the
company should be in the stock market, taking into consideration a number of
relevant factors, including the company's future prospects. We select these
securities using a risk-averse value approach, with the expectation that their
market prices should increase toward our estimate of the current worth and
thereby provide capital appreciation for Fund investors."
--Chuck Royce
<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS
- ----------------------------------------------------------------
Royce Premier Fund 2
- ----------------------------------------------------------------
Royce Micro-Cap Fund 4
- ----------------------------------------------------------------
Pennsylvania Mutual Fund 6
- ----------------------------------------------------------------
Royce Select Fund 8
- ----------------------------------------------------------------
Royce GiftShares Fund 10
- ----------------------------------------------------------------
Royce Total Return Fund 12
- ----------------------------------------------------------------
Royce Low-Priced Stock Fund 14
- ----------------------------------------------------------------
PMF II 16
- ----------------------------------------------------------------
Investing in Small- and Micro-Cap Stocks - A Primer 18
- ----------------------------------------------------------------
Management of the Funds 20
- ----------------------------------------------------------------
Investing in Royce Select Fund 21
- ----------------------------------------------------------------
Investing in Royce GiftShares Fund 23
- ----------------------------------------------------------------
General Shareholder Information 24
- ----------------------------------------------------------------
</TABLE>
This Prospectus relates only to the Investment Class of shares of the above
Funds, which are offered without sales charges or commissions. Shares of other
Fund classes are generally offered only through certain broker-dealers.
- --------------------------------------------------------------------------------
The information on the following pages about each Fund's investment goals
and principal strategies and about the primary risks for a Fund's investors is
based on and should be read in conjunction with the information on pages 18 - 20
of this Prospectus. This section includes information about the investment and
risk characteristics of small and micro-cap companies, the market for their
securities and Royce's risk-averse value approach to investing.
The performance information presented in this Prospectus is current to
December 31, 1998. For more recent information, you can contact The Royce Fund
through any of the methods listed on the back cover of this Prospectus.
The Funds included in this Prospectus may be a suitable investment as part
of your overall investment plan if you want to include a fund or funds that
focuses on small- and/or micro-cap companies.
<PAGE>
Royce Premier Fund
- --------------------------------------------------------------------------------
Investment Goals and Principal Strategies
- --------------------------------------------------------------------------------
Royce Premier Fund's primary investment goal is long-term growth of capital and
its secondary goal is current income. Royce invests the Fund's assets primarily
in a limited number of equity securities issued by small companies with stock
market capitalizations between $300 million and $1.5 billion. 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 low leverage and
are trading significantly below its estimate of their "current worth."
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of such "premier" companies. At least 65% of
these securities will be issued by companies with stock market capitalizations
of less than $1.5 billion at the time of investment and/or will produce income
for the Fund. Royce expects the Fund's portfolio to have a median market cap
below $1 billion.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Premier Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of your
investment in the Fund will go up and down with the market, and you may lose
money over short or even long periods of time.
The prices of small-cap securities are generally more volatile and their
market is less liquid relative to larger-cap securities. Therefore, the Fund may
involve more risk of loss and its returns may differ significantly from funds
investing in larger-cap companies or other asset classes. The Fund's limited
number of portfolio securities may also involve more risk to investors than a
more broadly diversified portfolio of small-cap securities because it may be
more susceptible to any single corporate, economic, political, regulatory or
market event.
In addition, the Fund's ability to achieve its goals will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
current worth of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. Past
performance is not an indication of how the Fund will perform in the future.
[bar chart]
<TABLE>
<CAPTION>
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
<S> <C>
1998 6.74
1997 18.41
1996 18.12
1995 17.82
1994 3.28
1993 19.03
1992 15.80
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- --------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------
From
Inception
1 Year 3 Year 5 Year 12/31/91
<S> <C> <C> <C> <C>
RPR 6.74 14.29 12.68 14.01
- --------------------------------------------------
Russell 2000 -2.58 11.57 11.86 13.76
- --------------------------------------------------
</TABLE>
During the period shown in the bar chart, the
highest return for a calendar quarter was 15.07%
(quarter ended 12/31/98) and the lowest return for
a calendar quarter was -14.51% (quarter ended
9/30/98).
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
- ---------------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases None
- ---------------------------------------------------------------------
Maximum deferred sales charge None
- ---------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- ---------------------------------------------------------------------
Early redemption fee
On purchases held for one year or more None
- ---------------------------------------------------------------------
On purchases held for less than one year 1%
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
- ---------------------------------------------------------------------
<S> <C>
Management fees 1.00%
- ---------------------------------------------------------------------
Distribution (12b-1) fees None
- ---------------------------------------------------------------------
Other expenses 0.23%
- ---------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.23%
</TABLE>
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------
<S> <C> <C> <C>
$ 125 $ 390 $ 676 $ 1,489
- --------------------------------------------
</TABLE>
2 | The Royce Funds Prospectus
<PAGE>
Ticker: RYRPX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISONS
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Three Year Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
RPR 14.3% 12.9 1.11
- -----------------------------------------------------------------------
Russell 2000 11.6% 19.9 0.58
- -----------------------------------------------------------------------
Since Inception (12/31/91)
- -----------------------------------------------------------------------
RPR 14.0% 9.4 1.49
- -----------------------------------------------------------------------
Russell 2000 13.8% 15.5 0.89
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- ---------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- ---------------------------------------------------
Number of Securities 50
- ---------------------------------------------------
Median Market Capitalization $534 Million
- ---------------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
[bar chart]
<TABLE>
<CAPTION>
RPR Russell 2000
--- ------------
<S> <C> <C>
2/12/92 - 0.0 -12.0
7/8/92
3/18/94 - -4.2 -12.3
12/9/94
5/22/96 - -6.4 -15.4
7/24/96
1/22/97 - 0.3 -9.0
4/25/97
10/13/97 - -11.0 -11.3
1/12/98
4/21/98 - -26.9 -36.5
10/8/98
</TABLE>
[end bar chart]
All Russell 2000 downturns of 7.5% or more from the index's prior historical
high since the Fund's inception.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.70 $7.81 $7.12 $6.48 $6.41
- ---------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 0.05 0.09 0.10 0.10 0.06
- ---------------------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 0.53 1.35 1.18 1.05 0.15
- ---------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.58 1.44 1.28 1.15 0.21
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) (0.05) (0.09) (0.10) (0.09) (0.05)
- ---------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.09) (0.46) (0.49) (0.42) (0.09)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.14) (0.55) (0.59) (0.51) (0.14)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.14 $8.70 $7.81 $7.12 $6.48
- ---------------------------------------------------------------------------------------------------------------------
Total Return 6.7% 18.4% 18.1% 17.8% 3.3%
- ---------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $569 $533 $317 $302 $202
- ---------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.23% 1.24% 1.25% 1.25% 1.38%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 0.55% 1.20% 1.25% 1.48% 1.19%
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 18% 34% 39% 38%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets before fee waivers by the
investment adviser for 1996 would have been 1.28%.
The Royce Funds Prospectus | 3
<PAGE>
Royce Micro-Cap Fund
- --------------------------------------------------------------------------------
Investment Goal and Principal Strategies
- --------------------------------------------------------------------------------
Royce Micro-Cap Fund's investment goal is long-term growth of capital.
Royce invests the Fund's assets primarily in a broadly diversified portfolio of
equity securities issued by micro-cap companies (companies with stock market
capitalizations below $300 million). Royce selects these securities from a
universe of more than 6,400 micro-cap companies, generally focusing on companies
that it believes are trading considerably below its estimate of their current
worth.
Normally, the Fund will invest at least 80% of its assets in the common
stocks and convertible securities of small-cap (companies with stock market
capitalizations below $1.5 billion) and micro-cap companies. At least 65% of its
assets will be in micro-cap securities at the time of investment, and Royce
expects the Fund's portfolio to have a median market cap below $300 million.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Micro-Cap Fund
is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will go up and down with the market, and you may lose
money over short or even long periods of time.
The prices of micro-cap securities are generally even more volatile and
their market is even less liquid relative to both small-cap and large-cap
securities. Therefore, the Fund may involve considerably more risk of loss and
its returns may differ significantly from funds investing in small- or
larger-cap companies or other asset classes.
In addition, the Fund's ability to achieve its goal will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
current worth of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000 the Fund's benchmark index. Past
performance is not an indication of how the Fund will perform in the future.
[bar chart]
<TABLE>
<CAPTION>
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
<S> <C>
1998 -3.34
1997 24.69
1996 15.54
1995 19.06
1994 3.55
1993 23.67
1992 29.41
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- ---------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- ---------------------------------------------------------
From Inception
1 Year 3 Year 5 Year 12/31/91
=========================================================
<S> <C> <C> <C> <C>
RMC -3.34 11.67 11.42 15.53
- ---------------------------------------------------------
Russell 2000 -2.58 11.57 11.86 13.76
- ---------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 15.62% (quarter ended 9/30/97) and the lowest return for a calendar
quarter was -20.70% (quarter ended 9/30/98).
FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
=============================================================================
Maximum sales charge (load) imposed on purchases None
- -----------------------------------------------------------------------------
Maximum deferred sales charge None
- -----------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- -----------------------------------------------------------------------------
Early redemption fee
On purchases held for one year or more None
- -----------------------------------------------------------------------------
On purchases held for less than one year 1%
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
- -----------------------------------------------------------------------------
Management fees 1.50%
- -----------------------------------------------------------------------------
Distribution (12b-1) fees None
- -----------------------------------------------------------------------------
Other expenses 0.31%
- -----------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.81%
- -----------------------------------------------------------------------------
Fee Waiver (0.32)%
- -----------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- -----------------------------------------------------------------------------
</TABLE>
Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49% through
December 31, 1999.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
============================================
<S> <C> <C> <C>
$152 $471 $813 $1,779
</TABLE>
4 | The Royce Funds Prospectus
<PAGE>
Ticker: RYOTX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISONS
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Three Year Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
RMC 11.7% 16.4 0.71
- -----------------------------------------------------------------------
Russell 2000 11.6% 19.9 0.58
- -----------------------------------------------------------------------
Since Inception (12/31/91)
- -----------------------------------------------------------------------
RMC 15.5% 12.3 1.26
- -----------------------------------------------------------------------
Russell 2000 13.8% 15.5 0.89
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- ---------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- ---------------------------------------------------
Number of Securities 135
- ---------------------------------------------------
Median Market Capitalization $177 Million
- ---------------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
[bar chart]
<TABLE>
<CAPTION>
RMC Russell 2000
--- ------------
<S> <C> <C>
2/12/92 - -1.5 -12.0
7/8/92
3/18/94 - -4.4 -12.3
12/9/94
5/22/96 - -8.7 -15.4
7/24/96
1/22/97 - -5.1 -9.0
4/25/97
10/13/97 - -7.8 -11.3
1/12/98
4/21/98 - -33.6 -36.5
10/8/98
</TABLE>
[end bar chart]
All Russell 200 downturns of 7.5% or more from the index's prior historical high
since the Fund's inception.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.40 $8.14 $7.53 $6.48 $6.47
- -----------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.05) - (0.01) - -
- -----------------------------------------------------------------------------------------------------------
Net gains (losses) on securities
(both realized and unrealized) (0.29) 2.01 1.17 1.24 0.23
- -----------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.34) 2.01 1.16 1.24 0.23
- -----------------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) (0.01) - - - -
- -----------------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.50) (0.75) (0.55) (0.19) (0.22)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.75) (0.55) (0.19) (0.22)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.55 $9.40 $8.14 $7.53 $6.48
- -----------------------------------------------------------------------------------------------------------
Total Return (3.3)% 24.7% 15.5% 19.1% 3.6%
- -----------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $165 $200 $141 $98 $27
- -----------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.49% 1.49% 1.79% 1.94% 1.99%
- -----------------------------------------------------------------------------------------------------------
Ratio of Net Income (loss) to Average Net Assets (0.57)% 0.04% (0.20)% 0.10% 0.02%
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 56% 38% 70% 25% 54%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets before fee waivers by the
investment adviser for 1998, 1997, 1996, 1995 and 1994 would have been 1.81%,
1.80%, 1.87%, 1.97% and 2.34% respectively.
The Royce Funds Prospectus | 5
<PAGE>
Pennsylvania Mutual Fund
- --------------------------------------------------------------------------------
Investment Goal and Principal Strategies
- --------------------------------------------------------------------------------
Pennsylvania Mutual Fund's investment goal is long-term growth of capital. Royce
invests the Fund's assets primarily in a broadly diversified portfolio of equity
securities issued by both small- and micro-cap companies that it believes are
trading significantly below its estimate of their current worth. In the upper
end of the small-cap range (companies with stock market capitalizations from
$300 million to $1.5 billion), the Fund generally invests in securities of
companies that Royce classifies as premier -- those it believes have excellent
business strengths and/or prospects for growth, high internal rates of return
and low leverage. In the lower end of the range (market capitalizations below
$300 million), the Fund invests in securities selected by Royce from a universe
of more than 6,400 micro-cap companies.
Normally, the Fund will invest at least 65% of its assets in the common
stocks and convertible securities of such small- and micro-cap companies, and
Royce expects the Fund's portfolio to have a median market cap below $1 billion.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Pennsylvania Mutual Fund
is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will go up and down with the market, and you may lose
money over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their market is less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes.
In addition, the Fund's ability to achieve its goal will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
current worth of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year over the
last 10 years and by showing how the Fund's average annual total returns for
various periods compare with those of the Russell 2000, the Fund's benchmark
index. Past performance is not an indication of how the Fund will perform in the
future.
[bar chart]
<TABLE>
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
<S> <C>
1998 4.17
1997 24.96
1996 12.85
1995 18.72
1994 -0.72
1993 11.25
1992 16.19
1991 31.83
1990 -11.54
1989 16.69
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- ----------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- ----------------------------------------------------
1 Year 5 Year 10 Year 20 Year
====================================================
<S> <C> <C> <C> <C>
PMF 4.17 11.60 11.78 15.54
- ----------------------------------------------------
Russell 2000 -2.58 11.86 12.92 14.90
- ----------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.24% (quarter ended 3/31/91) and the lowest return for a calendar
quarter was -16.55% (quarter ended 9/30/90).
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
=============================================================================
Maximum sales charge (load) imposed on purchases None
- -----------------------------------------------------------------------------
Maximum deferred sales charge None
- -----------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- -----------------------------------------------------------------------------
Early redemption fee
On purchases held for one year or more None
- -----------------------------------------------------------------------------
On purchases held for less than one year 1%
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
=============================================================================
Management fees 0.78%
- -----------------------------------------------------------------------------
Distribution (12b-1) fees None
- -----------------------------------------------------------------------------
Other expenses 0.23%
- -----------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.01%
- -----------------------------------------------------------------------------
</TABLE>
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
=============================================
<S> <C> <C> <C>
$103 $322 $558 $1,236
</TABLE>
6 | The Royce Funds Prospectus
<PAGE>
Ticker: PENNX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISONS
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Three Year Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
PMF 13.7% 13.1 1.05
- -----------------------------------------------------------------------
Russell 2000 11.6% 19.9 0.58
- -----------------------------------------------------------------------
Ten Year
- -----------------------------------------------------------------------
PMF 11.8% 10.8 1.09
- -----------------------------------------------------------------------
Russell 2000 12.9% 16.6 0.78
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- -------------------------------------------------
<S> <C>
Number of Securities 220
- -------------------------------------------------
Median Market Capitalization $364 Million
- -------------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
[bar chart]
<TABLE>
<CAPTION>
PMF Russell 2000
----- ------------
<S> <C> <C>
10/9/89 - -20.9 -32.5
10/31/90
2/12/92 - -2.6 -12.0
7/8/92
3/18/94 - -7.6 -12.3
12/9/94
5/22/96 - -6.5 -15.4
7/24/96
1/22/97 - -2.5 -9.0
4/25/97
10/13/97 - -7.5 -11.3
1/12/98
4/21/98 - -25.1 -36.5
10/8/98
</TABLE>
[end bar chart]
All Russell 2000 downturns of 7.5% or more from the index's prior historical
high over the past 10 years.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $7.82 $7.11 $7.71 $7.41 $8.31
- -------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -------------------------------------------------------------------------------------------------------------
Net investment income 0.05 0.07 0.11 0.11 0.12
- -------------------------------------------------------------------------------------------------------------
Net gains (losses) on securities
(both realized and unrealized) 0.24 1.70 0.84 1.27 (0.18)
- -------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.29 1.77 0.95 1.38 (0.06)
- -------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) (0.05) (0.06) (0.11) (0.11) (0.11)
- -------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.71) (1.00) (1.44) (0.97) (0.73)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.76) (1.06) (1.55) (1.08) (0.84)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.35 $7.82 $7.11 $7.71 $7.41
- -------------------------------------------------------------------------------------------------------------
Total Return 4.2% 25.0% 12.8% 18.7% (0.7)%
- -------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $467 $508 $457 $630 $771
- -------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.01% 1.05% 0.99% 0.98% 0.98%
- -------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 0.62% 0.88% 1.05% 1.18% 1.33%
Portfolio Turnover Rate 29% 18% 29% 10% 17%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets before fee waivers by the
investment adviser for 1996 and 1995 would have been 1.03% and 0.99%,
respectively.
The Royce Funds Prospectus | 7
<PAGE>
Royce Select Fund
- --------------------------------------------------------------------------------
Investment Goal and Principal Strategies
- --------------------------------------------------------------------------------
The investment goal of Royce Select Fund, a fund designed for "qualified
clients", is long-term growth of capital. Royce invests the Fund's assets
primarily in a limited number of equity securities issued by small- and
micro-cap companies. Royce selects these securities from a universe of more than
8,000 companies, generally focusing on companies that it believes are trading
significantly below its estimate of their current worth. In its selection
process, Royce puts primary emphasis on balance sheet quality, cash flows and
various internal returns indicative of profitability, and the relationships that
these factors have to the price of a given security.
Normally, the Fund will invest at least 80% of its assets in common stocks
and convertible securities of small-cap (less than $1.5 billion in market
capitalization) and micro-cap (less than $300 million in market capitalization)
companies. Royce expects that the Fund's portfolio will have a median market cap
below $1 billion.
The only ordinary operating expense of the Fund will be a performance fee
paid to Royce equal to 12.5% of the Fund's pre-fee total return. Only persons
who are qualified clients (within the meaning of the Securities and Exchange
rule permitting such a performance fee) may invest in the Fund.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Select Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of an investment
in the Fund will go up and down with the market, and you may lose money over
short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their market is less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes. The Fund's limited portfolio may also involve more risk to investors
than a more broadly diversified portfolio of small- and micro-cap securities
because it may be more susceptible to any single corporate, economic, political,
regulatory or market event.
In addition, the Fund's ability to achieve its goals will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
current worth of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance since its inception and by
showing how the Fund's total return compared with that of the Russell 2000, the
Fund's benchmark index. The Fund's past performance is not an indication of how
the Fund will perform in the future.
<TABLE>
<CAPTION>
============================================================
TOTAL RETURN Through 12/31/98
RSF Russell 2000
- ------------------------------------------------------------
<S> <C> <C>
Since Inception (11/18/98)* 7.85% 7.76%
- ------------------------------------------------------------
</TABLE>
*Not annualized
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
=============================================================================
<S> <C>
Maximum sales charge (load) imposed on purchases None
- -----------------------------------------------------------------------------
Maximum deferred sales charge None
- -----------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- -----------------------------------------------------------------------------
Early redemption fee
On purchases held for three years or more None
- -----------------------------------------------------------------------------
On purchases held for less than three years 2%
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
- -----------------------------------------------------------------------------
Performance fees* 0.63%
- -----------------------------------------------------------------------------
Distribution (12b-1) fees None
- -----------------------------------------------------------------------------
Other expenses None
- -----------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 0.63%
- -----------------------------------------------------------------------------
</TABLE>
*Performance fees of 12.5% of the Fund's pre-fee total returns are estimates
based on an assumed 5% pre-fee annual rate of return. Other expenses are shown
as "none" because Royce is responsible for paying them. Royce has voluntarily
agreed to waive its fee until the Fund's pre-fee total return, since its
inception, exceeds 15.0%
Example:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $50,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% pre-fee return each year.
Although your actual costs may be higher or lower, based on the assumptions your
costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
=========================================
<S> <C> <C> <C>
$1,363 $1,001 $1,743 $3,901
- -----------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
=========================================
<S> <C> <C> <C>
$319 $1,001 $1,743 $3,901
- -----------------------------------------
</TABLE>
8 | The Royce Funds Prospectus
<PAGE>
Ticker: n/a
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- ---------------------------------------------
<S> <C>
Number of Securities 27
- ---------------------------------------------
Median Market Capitalization $313 Million
- ---------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the period ended December 31, 1998 and reflects
financial results for a single Fund share. The total return in the table
represents the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends). This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, is included in the Fund's 1998 Annual Report to Shareholders, which
is available upon request.
<TABLE>
<CAPTION>
Period Ended December 31, 1998
- --------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $100.00
- --------------------------------------------------------------------------
Income from Investment Operations
- --------------------------------------------------------------------------
Net investment income 0.06
- --------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 7.79
- --------------------------------------------------------------------------
Total from Investment Operations 7.85
- --------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) (0.06)
- --------------------------------------------------------------------------
Total Distributions (0.06)
- --------------------------------------------------------------------------
Net Asset Value, End of Period $107.79
- --------------------------------------------------------------------------
Total Return 7.9%**
- --------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $1
- --------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 0.00%*
- --------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 0.06%*
- --------------------------------------------------------------------------
Portfolio Turnover Rate 27%**
- --------------------------------------------------------------------------
</TABLE>
* The ratio of expenses to average net assets for 1998 before fee waiver by the
investment adviser would have been 1.03%. The Fund commenced operations on
November 18, 1998.
**Not annualized
The Royce Funds Prospectus | 9
<PAGE>
Royce Giftshares Fund
- --------------------------------------------------------------------------------
Investment Goal and Principal Strategies
- --------------------------------------------------------------------------------
The investment goal of Royce GiftShares Fund, a special-purpose fund, is
long-term growth of capital. Royce invests the Fund's assets primarily in a
limited number of equity securities issued by small- and micro-cap companies.
Royce selects these securities from a universe of more than 8,000 companies,
generally focusing on companies that it believes are trading significantly below
its estimate of their current worth.
The Fund is designed to enable investors to make long-term gifts that may
qualify for the Federal annual gift tax exclusion and that may also be used
to help fund the beneficiary's college and other post-secondary education.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities. At least 75% of these securities will be issued by
small-cap (less than $1.5 billion in market capitalization) companies, and Royce
expects that the Fund's portfolio will have a median market cap below $1
billion.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce GiftShares Fund is
subject to market risk -- the possibility that common stock prices will decline
over short or extended periods of time. As a result, the value of an investment
in the Fund will go up and down with the market, and a Fund trust account may
lose money over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their market is less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes. The Fund's limited portfolio may also involve more risk to investors
than a more broadly diversified portfolio of small- and micro-cap securities
because it may be more susceptible to any single corporate, economic, political,
regulatory or market event.
In addition, the Fund's ability to achieve its goals will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
enterprise value of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. Past
performance is not an indication of how the Fund will perform in the future.
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
[bar chart]
<TABLE>
<S> <C>
1998 19.84
1997 26.02
1996 25.55
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------------------------------------------
From Inception
1 Year 3 Year 12/27/95
================================================================================
<S> <C> <C> <C>
RGF 19.48 23.65 23.61
- --------------------------------------------------------------------------------
Russell 2000 -2.58 11.57 11.76
- --------------------------------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.40% (quarter ended 12/31/98) and the lowest return for a calendar
quarter was -17.77% (quarter ended 9/30/98).
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
=============================================================================
<S> <C>
Maximum sales charge (load) imposed on purchases None
- -----------------------------------------------------------------------------
Maximum deferred sales charge None
- -----------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- -----------------------------------------------------------------------------
Redemption fee None
- -----------------------------------------------------------------------------
Annual Trustee's Fee $50
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
=============================================================================
Management fees 1.00%
- -----------------------------------------------------------------------------
Distribution (12b-1) fees 0.25%
- -----------------------------------------------------------------------------
Other expenses 1.20%
- -----------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.45%
- -----------------------------------------------------------------------------
Fee Waiver (0.96)%
- -----------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- -----------------------------------------------------------------------------
</TABLE>
*Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49%
through December 31, 1999.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------
<S> <C> <C> <C>
$152 $471 $813 $1,779
</TABLE>
Exclusive of $50 annual trustee's fee per trust account. For trust accounts
opened prior to or during 1999, Royce will pay that portion of the currently
effective annual trustee's fee in excess of $50 per account and the trustee's
fees for establishing and terminating the trusts.
10 | The Royce Funds Prospectus
<PAGE>
Ticker: RGFAX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISON
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Three Year Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
RGF 23.7% 15.1 1.57
- -----------------------------------------------------------------------
Russell 2000 11.6% 19.9 0.58
- -----------------------------------------------------------------------
Since Inception (12/27/95)
- -----------------------------------------------------------------------
RGF 23.6% 15.1 1.56
- -----------------------------------------------------------------------
Russell 2000 11.8% 19.9 0.59
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- ---------------------------------------------
<S> <C>
Number of Securities 68
- ---------------------------------------------
Median Market Capitalization $302 Million
- ---------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
[bar chart]
<TABLE>
<CAPTION>
Royce RGF Russell 2000
<S> <C> <C>
5/22/96 - -3.5 -15.4
7/24/96
1/22/97 - -0.5 -9.0
4/25/97
10/13/97 - -3.8 -11.3
1/12/98
4/21/98 - -30.7 -36.5
10/8/98
</TABLE>
[end bar chart]
All downturns of 7.5% or more from the index's prior historical high since the
Fund's inception.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception and reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Period Ended December 31, 1998 1997 1996 1995
====================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $6.91 $5.83 $5.01 $5.00
- --------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- --------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.02) (0.01) - -
- --------------------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 1.37 1.52 1.27 0.01
- --------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.35 1.51 1.27 0.01
- --------------------------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) - - - -
- --------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.02) (0.43) (0.45) -
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (0.43) (0.45) -
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.24 $6.91 $5.83 $5.01
- --------------------------------------------------------------------------------------------------------------------
Total Return 19.5% 26.0% 25.6% 0.2%
- --------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $8 $4 $1 $1
- --------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.49% 1.49% 1.49% 0.70%**
- --------------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets (0.35)% (0.32)% (0.05)% 0.00%**
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 153% 64% 93% 0.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets for 1998, 1997, 1996 and 1995
before fee waivers and expense reimbursement by the investment adviser and
distributor would have been 2.45%, 3.82%, 6.53% and 1.95%, respectively. The
Fund commenced operations on December 27, 1995.
**Annualized
The Royce Funds Prospectus | 11
<PAGE>
Royce Total Return Fund
- --------------------------------------------------------------------------------
Investment Goals and Principal Strategies
- --------------------------------------------------------------------------------
The investment goals of Royce Total Return Fund are both long-term growth of
capital and current income. Royce invests the Fund's assets primarily in a
diversified portfolio of dividend-paying securities issued by small- and
micro-cap companies. Royce generally looks for such companies to have excellent
business strengths and/or prospects for growth, high internal rates of return
and low leverage. Of the more than 8,000 small- and micro-cap companies,
approximately 1,700 have above-average common stock dividend yields (1.5% or
greater). Investing in such securities may tend to stabilize the volatility
inherent in the prices of small-cap securities.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities. At least 90% of these securities will produce
dividend or interest income to the Fund, and at least 65% will be issued by
companies with stock market capitalizations of less than $1.5 billion at the
time of investment. Royce expects the Fund's portfolio to have a median market
cap below $1 billion. Royce may also invest up to 35% of the Fund's assets in
non-convertible debt securities.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Total Return Fund
is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will go up and down with the market, and you may lose
money over short or even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their market is less liquid relative to larger-cap securities. Therefore,
the Fund may involve more risk of loss and its returns may differ significantly
from funds investing in larger-cap companies or other asset classes.
In addition, the Fund's ability to achieve its goals will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
current worth of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. Past
performance is not an indication of how the Fund will perform in the future.
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
[bar chart]
<TABLE>
<S> <C>
1998 4.75
1997 23.69
1996 25.48
1995 26.85
1994 5.13
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- ---------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- ---------------------------------------------------------
From Inception
1 Year 3 Year 5 Year 12/15/93
=========================================================
<S> <C> <C> <C> <C>
RTR 4.75 17.59 16.74 16.57
- ---------------------------------------------------------
Russell 2000 -2.58 11.57 11.86 12.52
- ---------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 9.92% (quarter ended 6/30/97) and the lowest return for a calendar
quarter was -10.53% (quarter ended 9/30/98).
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
- -----------------------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases None
- -----------------------------------------------------------------------------
Maximum deferred sales charge None
- -----------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- -----------------------------------------------------------------------------
Early redemption fee
On purchases held for one year or more None
- -----------------------------------------------------------------------------
On purchases held for less than one year 1%
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
=============================================================================
Management fees 1.00%
- -----------------------------------------------------------------------------
Distribution (12b-1) fees None
- -----------------------------------------------------------------------------
Other expenses 0.35%
- -----------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.35%
- -----------------------------------------------------------------------------
Fee Waiver (0.10)%
- -----------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.25%
- -----------------------------------------------------------------------------
</TABLE>
*Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.25%
through December 31, 1999.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
=========================================
<S> <C> <C> <C>
$127 $397 $686 $1,511
</TABLE>
12 | The Royce Funds Prospectus
<PAGE>
Ticker: RYTRX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISONS
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Three Year Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
RTR 17.6% 10.1 1.74
- -----------------------------------------------------------------------
Russell 2000 11.6% 19.9 0.58
- -----------------------------------------------------------------------
Since Inception (12/15/93)
- -----------------------------------------------------------------------
RTR 16.6% 8.6 1.93
- -----------------------------------------------------------------------
Russell 2000 12.5% 16.7 0.75
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- --------------------------------------------------
<S> <C>
Number of Securities 128
- --------------------------------------------------
Median Market Capitalization $399 Million
- --------------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
<TABLE>
<CAPTION>
RTR Russell 2000
<S> <C> <C>
3/18/94 - 1.8 -12.3
12/9/94
5/22/96 - -0.5 -15.4
7/24/96
1/22/97 - 0.2 -9.0
4/25/97
10/13/97 - -2.7 -11.3
1/12/98
4/21/98 -19.0 -36.5
- - 10/8/98
</TABLE>
All Russell 2000 downturns of 7.5% or more from the index's prior historical
high since the Fund's inception.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended on December 31, 1998 1997 1996 1995 1994
=====================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $7.52 $6.29 $5.76 $5.12 $5.12
- -----------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------
Net investment income 0.15 0.11 0.14 0.13 0.02
- -----------------------------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) 0.20 1.38 1.28 1.24 0.24
- -----------------------------------------------------------------------------------------------------
Total from Investment Operations 0.35 1.49 1.42 1.37 0.26
- -----------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) (0.15) (0.11) (0.16) (0.13) (0.02)
- -----------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.16) (0.15) (0.73) (0.60) (0.12)
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.31) (0.26) (0.89) (0.73) (0.14)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.56 $7.52 $6.29 $5.76 $5.12
- -----------------------------------------------------------------------------------------------------
Total Return 4.8% 23.7% 25.5% 26.9% 5.1%
- -----------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $245 $120 $6 $3 $2
- -----------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.25% 1.25% 1.25% 1.67% 1.96%
- -----------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 2.75% 3.15% 2.50% 2.42% 0.49%
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 66% 26% 111% 68% 88%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets for 1998, 1997, 1996, 1995 and 1994
before fee waivers by the investment adviser and distributor would have been
1.35%, 1.67%, 2.23%, 2.38% and 3.21%, respectively.
The Royce Funds Prospectus | 13
<PAGE>
Royce Low-Priced Stock Fund
- --------------------------------------------------------------------------------
Investment Goal and Principal Strategies
- --------------------------------------------------------------------------------
The investment goal of Royce Low-Priced Stock Fund is long-term growth of
capital. Royce invests the Fund's assets primarily in equity securities of
small- and micro-cap companies trading for less than $15 per share.
Institutional investors generally do not make these "low-priced" securities an
area of focus, and there is only limited broker research coverage of such
securities. These conditions create opportunities to find securities trading
significantly below Royce's estimate of their current worth.
Normally, the Fund will invest at least 65% of its assets in the common
stocks and convertible securities of companies whose shares trade for less than
$15 at the time of investment. At least 65% of these securities will be issued
by small- and micro-cap companies with market capitalizations of less than $1.5
billion, and Royce expects the median market cap of the Fund's portfolio will be
below $1 billion.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, Royce Low-Priced Stock
Fund is subject to market risk -- the possibility that common stock prices will
decline over short or extended periods of time. As a result, the value of your
investment in the Fund will go up and down with the market, and you may lose
money over short or even long periods of time.
The prices of low-priced and small- and micro-cap securities are generally
even more volatile and their markets may be even less liquid than for securities
with higher share prices or securities of larger-cap companies. Therefore, the
Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in higher-priced small-caps, larger-cap
companies or other asset classes. Issuers of low-priced securities may be
financially distressed or involved in bankruptcy, liquidation, reorganization or
recapitalization proceedings. Specifically because of their lower prices
relative to other companies, low-priced stocks may be subject to even more
abrupt or erratic market movements.
In addition, the Fund's ability to achieve its goal will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its risk-averse
value approach and on the degree to which the market eventually recognizes the
current worth of these companies.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. Past
performance is not an indication of how the Fund will perform in the future.
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
[bar chart]
<TABLE>
<S> <C>
1998 2.37
1997 19.48
1996 22.80
1995 22.53
1994 2.98
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- -------------------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- -------------------------------------------------------
From Inception
1 Year 3 Year 5 Year 12/15/93
=======================================================
<S> <C> <C> <C> <C>
RLP 2.37 14.52 13.64 13.55
- -------------------------------------------------------
Russell 2000 -2.58 11.57 11.86 12.52
- -------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 14.97% (quarter ended 9/30/97) and the lowest return for a quarter
was -21.50% (quarter ended 9/30/98).
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases None
- -----------------------------------------------------------------------------
Maximum deferred sales charge None
- -----------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- -----------------------------------------------------------------------------
Early redemption fee
On purchases held for one year or more None
- -----------------------------------------------------------------------------
On purchases held for less than one year 1%
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
- -----------------------------------------------------------------------------
Management fees 1.50%
- -----------------------------------------------------------------------------
Distribution (12b-1) fees 0.25%
- -----------------------------------------------------------------------------
Other expenses 0.56%
- -----------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.31%
- -----------------------------------------------------------------------------
Fee Waiver (0.82)%
- -----------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- -----------------------------------------------------------------------------
</TABLE>
Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49% through
December 31, 1999.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
=========================================
<S> <C> <C> <C>
$152 $471 $813 $1,779
</TABLE>
14 | The Royce Funds Prospectus
<PAGE>
Ticker: RYLPX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISONS
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Three Year Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
RLP 14.5% 16.6 0.87
- -----------------------------------------------------------------------
Russell 2000 11.6% 19.9 0.58
- -----------------------------------------------------------------------
Since Inception (12/15/93)
- -----------------------------------------------------------------------
RLP 13.6% 14.5 0.94
- -----------------------------------------------------------------------
Russell 2000 12.5% 16.7 0.75
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- --------------------------------------------------
<S> <C>
Number of Securities 57
- --------------------------------------------------
Median Market Capitalization $232 Million
- --------------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
[bar chart]
<TABLE>
<CAPTION>
RLP Russell 2000
<S> <C> <C>
3/18/94 - -2.7 -12.3
12/9/94
5/22/96 - -10.5 -15.4
7/24/96
1/22/97 - -4.8 -9.0
4/25/97
10/13/97 - -9.9 -11.3
1/12/98
4/21/98 - -31.3 -36.5
10/8/98
</TABLE>
All Russell 2000 downturns of 7.5% or more from the index's prior historical
high since the Fund's inception.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $6.82 $6.30 $5.62 $5.07 $5.01
- --------------------------------------------------------------------------------------------------------
Income from Investment Operations
- --------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.01) (0.03) (0.03) - (0.03)
- --------------------------------------------------------------------------------------------------------
Net gains on securities
(both realized and unrealized) 0.17 1.26 1.31 1.14 0.18
- --------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.16 1.23 1.28 1.14 0.15
- --------------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) - - - - -
- --------------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.03) (0.71) (0.60) (0.59) (0.09)
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.03) (0.71) (0.60) (0.59) (0.09)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $6.95 $6.82 $6.30 $5.62 $5.07
- --------------------------------------------------------------------------------------------------------
Total Return 2.4% 19.5% 22.8% 22.5% 3.0%
- --------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $21 $18 $16 $4 $2
- --------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.49% 1.49% 1.88% 1.97% 1.89%
- --------------------------------------------------------------------------------------------------------
Ratio of Net Income (loss) to Average Net Assets(0.11)% (0.47)% (0.67)% (1.11)% (1.11)%
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 111% 99% 137% 114% 95%
- --------------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets for 1998, 1997, 1996, 1995 and 1994
before fee waivers by the investment adviser and distributor would have been
2.31%, 2.38%, 2.59%, 3.47% and 3.63%, respectively.
The Royce Funds Prospectus | 15
<PAGE>
PMF II
- --------------------------------------------------------------------------------
Investment Goal and Principal Strategies
- --------------------------------------------------------------------------------
PMF II's investment goal is long-term growth of capital. Royce invests the
Fund's assets primarily in a diversified portfolio of equity securities issued
by small- and micro-cap companies in an attempt to take advantage of what it
believes are opportunistic situations -- perhaps temporary in nature -- for
undervalued securities. Although the Fund normally focuses on the securities of
companies with market capitalizations below $1.5 billion, it may, in certain
market environments, invest an equal or greater percentage of its assets in the
securities of larger-cap companies.
Normally, the Fund will invest at least 65% of its assets in common stocks
and convertible securities.
Primary Risks for Fund Investors
- --------------------------------------------------------------------------------
As with any mutual fund that invests in common stocks, PMF II is subject to
market risk -- the possibility that common stock prices will decline over short
or extended periods of time. As a result, the value of your investment in the
Fund will go up and down with the market, and you may lose money over short or
even long periods of time.
The prices of small- and micro-cap securities are generally more volatile
and their market is less liquid relative to larger-cap securities. Therefore,
the Fund may involve considerably more risk of loss and its returns may differ
significantly from funds investing in larger-cap companies or other asset
classes.
In addition, the Fund's ability to achieve its goal will depend largely on
Royce's skill in selecting the Fund's portfolio companies using its
opportunistic approach.
- --------------------------------------------------------------------------------
The following information provides some indication of the past rewards and risks
of investing in the Fund by showing its performance from year to year since its
inception and by showing how the Fund's average annual total returns for various
periods compare with those of the Russell 2000, the Fund's benchmark index. Past
performance is not an indication of how the Fund will perform in the future.
- ------------------------------------------
CALENDAR YEAR RETURNS - in Percentages (%)
- ------------------------------------------
[bar chart]
<TABLE>
<S> <C>
1998 4.91
1997 20.83
</TABLE>
[end bar chart]
<TABLE>
<CAPTION>
- --------------------------------------------
ANNUALIZED RETURNS - in Percentages (%)
- --------------------------------------------
From Inception
1 Year 11/19/96
============================================
<S> <C> <C>
PMF II 4.91 14.58
- --------------------------------------------
Russell 2000 -2.58 11.10
- --------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 22.02% (quarter ended 12/31/98) and the lowest return for a calendar
quarter was -20.09% (quarter ended 9/30/98).
Fees and Expenses of the Fund
- --------------------------------------------------------------------------------
The following table presents the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
- ---------------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases None
- ---------------------------------------------------------------------
Maximum deferred sales charge None
- ---------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested dividends None
- ---------------------------------------------------------------------
Redemption fee (as a % of the amount redeemed, if applicable)
On purchases held for one year or more None
- ---------------------------------------------------------------------
On purchases held for less than one year 1%
- ---------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
- ---------------------------------------------------------------------
Management fees 1.00%
- ---------------------------------------------------------------------
Distribution (12b-1) fees None
- ---------------------------------------------------------------------
Other expenses 0.54%
- ---------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.54%
- ---------------------------------------------------------------------
Fee Waiver (0.05)%
- ---------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.49%
- ---------------------------------------------------------------------
</TABLE>
Royce has contractually agreed to waive its fees to the extent necessary to
maintain the Fund's Net Annual Operating Expense ratio at or below 1.49% through
December 31, 1999.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
=========================================
<S> <C> <C> <C>
$152 $471 $813 $1,779
</TABLE>
16 | The Royce Funds Prospectus
<PAGE>
Ticker: RYPNX
- --------------------------------------------------------------------------------
The following tables present information on the Fund's past volatility and
relative performance. This information is not necessarily predictive of future
volatility or relative performance over full market cycles or in down markets.
See page 19 for information about total returns, standard deviation and return
per unit of risk.
- -----------------------------------------------------------------------
RISK/RETURN COMPARISONS
Periods Ended December 31, 1998
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Average Annual Standard Return Per
Total Return Deviation Unit Of Risk
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Since Inception (11/19/96)
- -----------------------------------------------------------------------
PMF II 14.6% 18.6 0.78
- -----------------------------------------------------------------------
Russell 2000 11.1% 21.8 0.50
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
PORTFOLIO DIAGNOSTICS (12/31/98)
- --------------------------------------------
<S> <C>
Number of Securities 139
- --------------------------------------------
Median Market Capitalization $183 Million
- --------------------------------------------
</TABLE>
- -------------------------------------------------------
DOWN MARKET PERFORMANCE COMPARISON
All Down Periods of 7.5% or Greater, in Percentages (%)
- -------------------------------------------------------
<TABLE>
<CAPTION>
PMF II Russell 2000
<S> <C> <C>
1/22/97 - -1.1 -9.0
4/25/97
10/13/97 - -10.1 -11.3
1/12/98
4/21/98 - -33.6 -36.5
10/8/98
</TABLE>
All Russell 2000 downturns of 7.5% or more from the index's prior historical
high since the Fund's inception.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance since inception and reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's 1998 Annual Report to
Shareholders, which is available upon request.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
=========================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $5.92 $5.26 $5.00
- ---------------------------------------------------------------------------------------------------------
Income from Investment Operations
- ---------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.01) 0.07 --
- ---------------------------------------------------------------------------------------------------------
Net gains on securities (both realized and unrealized) 0.29 1.03 0.26
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.28 1.10 0.26
- ---------------------------------------------------------------------------------------------------------
Less Distributions
Dividends (from net investment income) (0.00) (0.08) --
- ---------------------------------------------------------------------------------------------------------
Distributions (from capital gains) (0.18) (0.36) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.18) (0.44) (0.00)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $6.02 $5.92 $5.26
- ---------------------------------------------------------------------------------------------------------
Total Return 4.9% 20.8% 5.2%
- ---------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (millions) $34 $22 $18
- ---------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets* 1.25% 0.99% 0.97%**
- ---------------------------------------------------------------------------------------------------------
Ratio of Net Income (loss) to Average Net Assets (0.16)% 1.23% 0.83%**
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 120% 77% 1%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*The ratio of expenses to average net assets for 1998, 1997 and 1996 before fee
waiver by the investment adviser and distributor would have been 1.54%, 1.56%
and 1.97%, respectively.
**Annualized
The Royce Funds Prospectus | 17
<PAGE>
[sidebar]
Market capitalization is
the number of a
company's outstanding
shares of stock
multiplied by its most
recent closing price per
share.
Small-capitalization
stocks or Small-caps are
stocks with market
capitalizations of $1.5
billion or less.
The Russell 2000 is an
unmanaged index of U.S.
small-company common
stocks that Royce and
others use to benchmark
the performance of
small- and micro-cap
funds. It includes the
smallest 2,000 companies
(based on market
capitalization) among
the largest 3,000
companies tracked by
Frank Russell Company.
[end sidebar]
Investing in Small-Company Stocks -- A Primer
- --------------------------------------------------------------------------------
Small- and Micro-Cap Stocks
Royce views the large and diverse universe of small-cap companies as having two
investment segments or tiers. While small-caps are generally defined as those
companies with market capitalizations of less than $1.5 billion, Royce refers to
the segment of small-cap companies with market capitalizations below $300
million as micro-cap.
Small- and micro-cap companies offer investment opportunities and
additional risks. They may not be well known to the investing public, may not be
significantly owned by institutional investors, and may not have steady earnings
growth. In addition, the securities of such companies may be more volatile in
price, have wider spreads between their bid and ask prices and have
significantly lower trading volumes than larger capitalization stocks. As a
result, the purchase or sale of more than a limited number of shares of a
small-or micro-cap security may affect its market price. Royce may need a
considerable amount of time to purchase or sell its positions in these
securities, particularly when other Royce-managed accounts or other investors
are also seeking to purchase or sell them. Accordingly, Royce's investment focus
on small- and micro-cap securities generally requires it to have a long-term (at
least three years) investment outlook for a portfolio security.
The micro-cap segment consists of more than 6,400 companies with market
caps below $300 million. These companies are followed by relatively few, if any,
securities analysts, and there tends to be less publicly available information
about them. Their securities generally have even more limited trading volumes
and are subject to even more abrupt or erratic market price movements than are
the securities in the upper tier, and Royce may be able to deal with only a few
market-makers when purchasing and selling these securities. Such companies may
also have limited product lines, markets or financial resources, may lack
management depth and may be more vulnerable to adverse business or market
developments. These conditions, which create greater opportunities to find
securities trading well below Royce's estimate of the company's current worth
and involve increased risk, lead Royce to more broadly diversify most of the
Funds investing in the micro-cap tier by holding relatively smaller positions in
more companies.
The upper tier of the small-cap universe of securities consists of
approximately 1,700 companies with market caps between $300 million and $1.5
billion. In this segment, there is a relatively higher level of ownership by
institutional investors and more research coverage by brokers than generally
exists for micro-cap companies. This greater attention makes the market for
these securities more efficient compared to micro-cap securities in that they
have somewhat greater trading volumes and narrower bid/ask spreads. As a result,
Royce normally employs a more concentrated approach when investing in the upper
tier of small-caps, holding relatively larger positions in a relatively limited
number of securities.
18 | The Royce Funds Prospectus
<PAGE>
Value Investing
Royce uses a "value" method in managing the Funds' assets. In selecting
securities for the Funds, Royce evaluates the quality of a company's balance
sheet, the level of its cash flows and various measures of a company's
profitability. Royce then uses these factors to assess the company's current
worth. Royce bases this assessment on either what it believes a knowledgeable
buyer might pay to acquire the entire company or what it thinks the value of the
company should be in the stock market, taking into consideration a number of
relevant factors, including the company's future prospects.
Royce attempts to identify and invest in securities of companies that are
trading significantly below its estimate of the company's current worth, with
the expectation that the market price of its securities should increase over a
three to five year period towards this estimate, and thereby provide capital
appreciation for Fund investors.
Royce's value approach strives to reduce some of the risks of investing in
small and micro-cap securities for each Fund's portfolio taken as a whole. In
addition to focusing on companies trading significantly below its estimate of
their current worth, which should reduce valuation risk, Royce evaluates various
other risk factors in selecting securities for the Funds. Royce attempts to
lessen financial risk by buying companies that combine strong balance sheets
with low leverage. Other than for Royce GiftShares Fund and Royce Select Fund,
which limit the number of securities in their portfolios, Royce attempts to
decrease portfolio risk in the micro-cap segment of the small-cap universe by
broadly diversifying portfolio holdings.
While there can be no assurance that this risk-averse value approach will
be successful, Royce believes that it can reduce some of the risks of investing
in small- and micro-cap companies, which are inherently fragile in nature and
whose securities have substantially greater market price volatility.
Additionally, although Royce's approach to security selection seeks to
reduce downside risk to Fund portfolios during periods of broad securities
market declines, it may also reduce gains in strong up markets.
Performance and Volatility Measurements
Total return is the rate of return on an amount invested in a fund from the
beginning to the end of the stated period. Average annual total return is the
annual compounded change in the value of an amount invested in a fund from the
beginning until the end of the stated period. Total returns, which assume the
reinvestment of all distributions, are historical and are not intended to
indicate future performance.
The volatility of a Fund's total returns may be measured in a number of
ways. Standard deviation measures the range of performance within which a fund's
monthly total returns have fallen. The lower the standard deviation of the fund,
the less volatile and more consistent the fund's monthly total returns have been
over the period. When the standard deviation of a
The Royce Funds Prospectus | 19
<PAGE>
[sidebar]
Royce attempts to
identify and invest in
securities of companies
that are trading
significantly below its
estimate of the
company's current worth,
with the expectation
that the market price of
its securities should
increase over a three to
five year period towards
this estimate, and
thereby provide capital
appreciation for Fund
investors.
[end sidebar]
fund is lower than the standard deviation of the fund's benchmark index, such as
the Russell 2000, the fund has been less volatile than the index. The volatility
of the S&P 500, an index of large-cap stocks, will typically be less than that
of the Russell 2000. Standard deviation measurements are historical in nature
and are not necessarily predictive of future volatility.
Return per unit of risk is the average annual total return of a fund or
index divided by its annualized standard deviation over a stated period.
Temporary Investments
Each of the Funds 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. If a Fund should implement a
temporary investment policy, it may not achieve its investment goal while that
policy is in effect.
Management of the Funds
- --------------------------------------------------------------------------------
[photo: Jack Fockler, Whitney George, Chuck Royce, Charlie Dreifus, Buzz Zaino]
(l-r) Jack Fockler, Whitney George,
Chuck Royce, Charlie Dreifus, Buzz Zaino
Royce & Associates Inc. is the Funds' investment adviser and is responsible for
the management of their assets. Its offices are located at 1414 Avenue of the
Americas, New York, NY 10019. Charles M. Royce has been the firm's President and
Chief Investment Officer for more than 25 years. He is also the primary
portfolio manager of the Funds' portfolios, with the exception of PMF II, which
Boniface A. Zaino manages. Mr. Royce is assisted by Royce's investment staff,
which includes W. Whitney George, Managing Director and Senior Portfolio
Manager, Mr. Zaino, Managing Director and Senior Portfolio Manager and Charles
R. Dreifus, Principal and Senior Portfolio Manager, and by Jack E. Fockler, Jr.,
Managing Director. Mr. George has served in his current capacity since 1997 and
previously was a Vice President and Senior Analyst of Royce. Mr. Zaino joined
Royce in April 1998 and previously was Group Managing Director at Trust Company
of the West. Mr. Dreifus joined Royce in February 1998 and previously was
Managing Director (since June 1995) and General Partner (until June 1995) of
Lazard Freres & Co. LLC.
Royce Fund Services, Inc. ("RFS") distributes the Funds' shares. The Royce Fund
has adopted a distribution plan for Royce Low-Priced Stock Fund and Royce
GiftShares Fund under Rule 12b-1. Under this plan, the Funds would pay an annual
fee to RFS at the annual rate of 0.25% of their average net assets. RFS would
use these fees to cover sales-related and
20 | The Royce Funds Prospectus
<PAGE>
[sidebar]
- --------------------------------------------------------------------------------
Except for Royce Select Fund, Royce receives advisory fees monthly as
compensation for its services to the Funds. (See page 22 for information about
of the performance fees payable to Royce from Royce Select Fund.) The annual
rates of these fees, before any waiver required to cap the expense ratios of
certain Funds at specified levels as shown in the Fees and Expenses tables, are:
[square bullet] 1% of the average net assets of Royce Premier Fund,
Royce GiftShares Fund, Royce Total Return Fund and PMF II.
[square bullet] 1.5% of the average net assets of Royce Micro-Cap Fund
and Royce Low-Priced Stock Fund.
[square bullet] 1% of the first $50 million of Pennsylvania Mutual Fund's
average net assets, 0.875% of the next $50 million of its
average net assets and 0.75% of its average net assets in excess
of $100 million.
For 1998, the non-advisory fees paid to Royce on average net assets were ____%
for Royce Premier Fund, ____% for Royce Micro-Cap Fund, __% for Pennsylvania
Mutual Fund, ____% for Royce GiftShares Fund, ___% for Royce Total Return Fund,
___% for Royce Low-Priced Stock Fund and ___% for PMF II. Royce voluntarily
waived the advisory fees accrued for Royce Select Fund in 1998.
- --------------------------------------------------------------------------------
[end sidebar]
servicing costs and to pay sales commissions and other fees to broker-dealers
who introduce investors to the Funds. RFS has agreed to waive its fees through
December 1999.
State Street Bank & Trust Company is the custodian of the Funds'
securities, cash and other assets. State Street's agent, National Financial Data
Services ("NFDS"), is the Funds' transfer agent. PricewaterhouseCoopers, L.L.P.
serves as the Funds' independent accountants.
Year 2000
Many computer software programs, as originally written, cannot correctly
process date-related data on and after January 1, 2000 because the programs use
two digits instead of four to identify the year ("99" instead of "1999," for
example). Royce and the The Royce Fund are working toward resolving this
problem, often referred to as "Y2K," with their own software programs, and their
service providers have assured Royce that their systems will be Y2K compliant.
If any of the programs that Royce, The Royce Fund or their service providers use
would fail to process this kind of information properly, there may be a negative
impact on the Funds' shareholder operations and services. However, neither Royce
nor The Royce Fund anticipate that any Year 2000 problems will have a material
impact on Royce's ability to provide the Funds with service at current levels.
It is also possible that the Y2K problem could also have a negative impact on
the companies in which the Funds invest and this, in turn, could hurt the Funds'
investment returns.
The Royce Funds Prospectus | 21
<PAGE>
Investing in Royce Select Fund
- --------------------------------------------------------------------------------
Who May Invest in the Fund
Royce Select Fund is designed primarily for clients of registered investment
advisors, and only those who meet the Securities and Exchange Commission's
definition of the term "qualified client" may purchase shares of the Fund. The
term qualified client includes:
(a) an individual who, or a corporation, partnership, trust or other company
that, Royce (and any person acting on its behalf) reasonably believes,
immediately prior to the purchase, has a net worth (together, in the
case of an individual, with assets held jointly with a spouse) of more
than $1,500,000 at the time of the purchase; or
(b) an individual who, or a company that, immediately after the purchase
owns Fund shares having a net asset value of at least $750,000.
The requirement that Fund shares be purchased only by qualified clients
applies to both initial and subsequent investments in the Fund. Qualified
clients (or any persons acting on their behalf) must represent to The Royce Fund
and Royce that they are investing in the Fund for their own accounts and not
with a view to transferring their Fund shares or any interest in them to another
person. The Royce Fund has imposed restrictions on transfers of the Fund's
shares in order to prevent persons who are not qualified clients from purchasing
them.
Performance Fee
As compensation for its services to the Fund and for paying the Fund's
other ordinary operating expenses as set forth below, Royce is entitled to
receive from the Fund a performance fee of 12.5% of the Fund's pre-fee total
return. This fee is calculated daily, based on the value of the Fund's current
assets. For the period from November 18, 1998, the date on which the Fund
commenced operations, through December 31, 1999, the fee will be based on the
Fund's cumulative pre-fee total return for that period, and the accrued fee for
that period will be payable on December 31, 1999. Daily fees accrued during each
calendar month ending after December 31, 1999 will be payable at the end of that
month.
After December 31, 1999, fees will become subject to a high watermark test.
Fund shares will not bear a fee for any day after December 31, 1999 on which the
Fund's pre-fee cumulative total return from November 18, 1998 through that day
does not exceed its pre-fee cumulative total return to the date as of which a
performance fee was last accrued. However, Royce will not reimburse previously
accrued fees because of any negative total returns occurring after their
accrual.
Notwithstanding the above, Royce has voluntarily agreed to waive its fee,
and no fee will be accruable, until the date on which the Fund's cumulative
pre-fee total return, since its November 18, 1998 inception, first exceeds 15.0%
22 | The Royce Funds Prospectus
<PAGE>
Responsibility for Payment of Other Operating Expenses
Royce is responsible for paying all of the Fund's other operating expenses,
except for brokerage commissions, taxes, interest, litigation expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business.
To Invest in Royce Select Fund
To open a new account directly with the Fund, please call Investor
Information at (800)-221-4268 for an Account Application. Investments in the
Fund may also be made through a registered investment advisor, broker-dealer,
trust company or other financial intermediary who has previously established a
relationship with Royce for this Fund. The minimum initial investment is
$50,000. The minimum subsequent investment is $1,000.
Investing in Royce GiftShares Fund
- --------------------------------------------------------------------------------
An investment in Royce GiftShares Fund offers a unique way to make a long-term
gift to a child (minor or adult) or another individual. (You may not open an
account in Royce GiftShares Fund for yourself or your spouse.) A Royce
GiftShares Fund investment may qualify in whole or in part for the Federal
annual gift tax exclusion and may also help fund a beneficiary's college or
other post-secondary education. To receive additional information or to open a
Royce GiftShares Fund account, call Investor Services at (800) 221-4268 for a
free information packet, which includes a trust adoption agreement. (A trustee
for an individual or organization may also open a Royce GiftShares Fund account
if the trust has a long-term duration, the provisions of the trust are
acceptable to The Royce Fund and the trustee has his, her or its own tax
advisor.) The minimum initial investment in Royce GiftShares Fund is $5,000. An
investor may make subsequent investments of $100 or more at any time during the
existence of the trust.
As independent trustee, State Street Bank & Trust Company will hold the
shares in a Royce GiftShares Fund account in trust until the termination date
you, the donor, specify. The duration of the trust may be as long as you wish,
but must be at least 10 years from the time
[sidebar]
- --------------------------------------------------------------------------------
The account options available to a donor under the Royce GiftShares Fund trust
adoption agreement are:
Withdrawal Option (Annual Exclusion):
A donor will use this option primarily to make a gift that may qualify for the
Federal annual gift tax exclusion and/or as a means to fund the beneficiary's
college or other post-secondary education.
[square bullet] The trust may be designed to permit withdrawals to help fund the
beneficiary's college or other post-secondary education; the
trustee will distribute the balance of the assets, if any, to
the beneficiary at the termination of the trust.
[square bullet] The beneficiary will be taxed on all of the trust's income and
capital gains and may request that the trustee redeem Fund
shares necessary to pay any applicable taxes.
[square bullet] The trustee will send an information statement to the
beneficiary annually, which shows the amount of income and
capital gains that must be reported on the beneficiary's tax
returns for that year.
Accumulation Option (Unified Credit):
A donor will use this option primarily to make a gift while restricting access
to the gifted assets. This option does not allow use of the Federal annual gift
tax exclusion, and there can be no distributions, to fund educational expenses
or otherwise, before the trust terminates.
[square bullet] The trustee is responsible for filing all Federal and state
income tax returns and may redeem Fund shares necessary to pay
any applicable taxes; the trust will be taxed on all of its
income and capital gains in excess of $100 per year.
[square bullet] The trustee will distribute assets to the beneficiary at the
termination of the trust.
- --------------------------------------------------------------------------------
[end sidebar]
The Royce Funds Prospectus | 23
<PAGE>
you make the first contribution to the Royce GiftShares Fund trust or until the
beneficiary reaches the age of majority, whichever is later. A Royce GiftShares
Fund trust is irrevocable; neither the donor nor the beneficiary may amend its
terms in any way. When the trust terminates, the beneficiary will receive the
shares in the account. The beneficiary may then continue to own the shares, but
may not purchase additional shares with the exception of reinvested
distributions.
Tax Information
The opening of a Royce GiftShares Fund trust account, as well as any
additional investments made to an existing account, will be subject to the
reporting requirements of Federal gift tax law. In general, the law requires
that an individual file a Federal gift tax return, which reports all gifts made
during the calendar year, except gifts of present interests in property that
qualify for, and do not exceed, the amount of the Federal annual gift tax
exclusion (currently $10,000). The option that the donor selects in the trust
adoption agreement will determine whether or not a particular gift of Fund
shares qualifies for the annual exclusion. A gift of Fund shares may also be
subject to state gift tax reporting under the laws of the state in which the
donor resides.
There is additional information about these and other tax matters
applicable to an investment in Royce GiftShares Fund in the Statement of
Additional Information under "Taxation - Royce GiftShares Fund." Due to the
complexity of Federal and state laws pertaining to all gifts in trust,
prospective donors should consider consulting with an attorney or other
qualified tax advisor before investing in Royce GiftShares Fund.
Redemption Information
Until a Royce GiftShares Fund trust terminates, only the independent
trustee, as the legal owner of the shares, may redeem them. The trustee's
capacity and ability to redeem shares, and the beneficiary's right to compel
redemption, are subject to the terms and conditions of the Royce GiftShares Fund
Trust Instrument.
24 | The Royce Funds Prospectus
<PAGE>
General Shareholder Information
- --------------------------------------------------------------------------------
For more detailed discussion of The Royce Fund policies regarding direct
ownership of Fund shares, including information on opening accounts, buying,
redeeming, exchanging and transferring ownership of Fund shares, please refer to
The Royce Fund's Shareholder Guide dated ______________, 1999.
Purchasing Shares
The Funds offered through this Prospectus are no-load, meaning that you pay no
sales fees or commissions to buy shares directly through The Royce Fund. The
Funds do pay management fees and other expenses as outlined in this Prospectus.
If you purchase Fund shares through a third party, such as a mutual fund
supermarket, other broker-dealer, bank or other institution, account minimums,
fees, policies and procedures may differ from those described in this
Prospectus. If you purchase Fund shares through a third party, the shares may be
held in the name of the third party on the Fund's books. RFS, Royce and/or the
Funds may pay fees to broker-dealers, financial institutions and other service
providers who introduce investors to the Funds and/or provide certain
administrative services to their customers who own Fund shares.
Redeeming Shares
Early Redemption Fee (not applicable to Royce GiftShares Fund)
You may redeem shares in your account at any time. In order to discourage
short-term investing, The Royce Fund assesses an early redemption fee of 1% on
redemptions of shares (other than Royce Select Fund) that you held for less than
one year of any Fund. A redemption fee of 2% is assessed on redemptions of any
Royce Select Fund shares held for less than three years. Each fee will be paid
to the Fund out of the proceeds otherwise payable to you.
The "first-in, first-out" (FIFO) method is used to determine the one-year
holding period by comparing the date of the redemption with the earliest dates
of the share purchases in an account. If you are redeeming shares held for less
than one year, you will incur the fee. The anniversary month of an account
determines the one-year holding period, so that if you purchased a Fund's shares
in November 1999, these shares would be subject to the fee if you were to redeem
them prior to November 2000 (November 2002 for Royce Select Fund). If you were
to redeem the shares on or after November 1, 2000 (November 1, 2002 for Royce
Select Fund), they would not be subject to the fee.
You will incur no fee on shares that you acquire through distribution
reinvestment or
[sidebar]
- --------------------------------------------------------------------------------
PURCHASING SHARES
Minimum initial investments for shares purchased directly through The Royce
Fund, other than Royce GiftShares and Royce Select Funds:
Account Type Minimum
- ---------------------------------------------------
Regular Account $ 2,000
- ---------------------------------------------------
IRA 500
- ---------------------------------------------------
Automatic Investment or
Direct Deposit Plan Accounts 500
- ---------------------------------------------------
403(b)(7) or 401(k) Accounts None
- ---------------------------------------------------
The subsequent investment minimum is $50, regardless of account type.
The Royce Fund reserves the right both to suspend the offering of any Fund's
shares to new investors and to reject any specific purchase request.
- --------------------------------------------------------------------------------
[end sidebar]
The Royce Funds Prospectus | 25
<PAGE>
that you exchange into another Royce Fund. The following types of shareholders
and accounts are exempt from the early redemption fee: employees of The Royce
Fund, Royce or RFS or members of their immediate families or employee benefit
plans for them; participants in an Automatic Investment or Withdrawal Plan;
certain pre-approved group investment plans and charitable organizations;
profit-sharing trusts, corporations or other institutional investors who are
investment advisory clients of Royce; omnibus or similar account customers of
certain pre-approved broker-dealers and other institutions; and Royce GiftShares
Fund shareholders.
The Royce Fund may suspend redemption privileges or postpone payment for
the Funds when the New York Stock Exchange is closed or during what the
Securities and Exchange Commission determines are emergency circumstances.
The Funds will normally make redemptions in cash, but The Royce Fund
reserves the right to satisfy a Fund shareholder's redemption request by
delivering selected shares or units of portfolio securities -- redemption in
kind -- under certain circumstances.
The Royce Fund reserves the right to involuntarily redeem Fund shares in
any account that falls below the minimum initial investment due to redemptions
by the shareholder. If at any time the balance in an account does not have a
value at least equal to the minimum initial investment, you may be notified that
the value of your account is below the Fund's minimum account balance
requirement. You would have 60 days to increase your account balance before the
account is liquidated. Proceeds would be paid promptly to the shareholder.
The Royce Fund also reserves the right to revise or suspend the exchange
privilege at any time.
Net Asset Value per Share
The price of shares that you purchase or redeem will be at their net asset
value. The net asset value per share (NAV) for each Fund is calculated at the
close of regular trading on the New York Stock Exchange (generally 4 p.m.
Eastern Time) and is determined every day that the Exchange is open. Net asset
value per share is calculated by dividing the value of a Fund's net assets by
the number of its outstanding shares. Each Fund's investments are valued based
on market value or, if market quotations are not readily available, at their
fair value as determined in good faith by The Royce Fund's Board of Trustees.
The date on which your purchase, redemption or exchange of shares is
processed is the trade date, and the price used for the transaction is based on
the next calculation of net asset value after the order is processed.
Reports
The Royce Fund mails shareholder reports semi-annually and to reduce
expenses may mail only one copy per household. Please call Investor Services at
(800) 221-4268 if you need additional copies.
26 | The Royce Funds Prospectus
<PAGE>
Dividends, Distributions and Taxes
Royce Total Return Fund pays dividends from its net investment income on a
quarterly basis and makes any distributions from net realized capital gains
annually in December. The other Funds pay any dividends from net investment
income and make any distributions from net realized capital gains each year in
December. Unless the shareholder chooses otherwise, dividends and distributions
will be automatically reinvested in additional shares of the Fund.
Selling or exchanging shares is a taxable event, and a shareholder may
realize a taxable gain or loss. Each Fund will report to shareholders the
proceeds of their redemption(s). The tax consequences of a redemption also
depend on the shareholder's cost basis, so shareholders should retain all
account statements for use in determining the tax consequences of redemptions.
The Internal Revenue Service will treat any loss you may have on the
redemption of a Fund's shares held for six months or less as a long-term capital
loss, up to the amount of any capital gain distributions you received from the
Fund during the time you held the shares.
At the time of purchase, a Fund's net asset value may include undistributed
income or capital gains. When the Fund subsequently distributes these amounts,
they are taxable to the shareholder, even though the distribution is
economically a return of part of the shareholder's investment.
The IRS requires that a Fund withhold 31% of taxable dividends, capital
gain distributions and redemptions paid to non-corporate shareholders who have
not complied with IRS taxpayer identification regulations.
Always consult a tax advisor with questions about Federal, state or local
tax consequences. The Statement of Additional Information includes a more
detailed discussion of Federal tax matters that may be relevant to a
shareholder.
[sidebar]
- --------------------------------------------------------------------------------
TAXATION OF DISTRIBUTION
Each year, shareholders receive important tax information about the
calendar-year distributions in their account(s). Unless your account is an IRA
or is otherwise exempt from taxation, all Fund distributions are subject to
Federal income tax regardless of whether you receive them in cash or reinvest
them in shares.
The taxation of distributions is not related to how long you have owned a Fund's
shares. The following table describes in general how distributions are taxed at
the Federal level. Other than Royce Total Return Fund's, the Funds'
distributions normally consist primarily of capital gains:
<TABLE>
<CAPTION>
Rate for 15% Rate for 28% and
Distribution tax bracket higher tax brackets
- ----------------------------------------------------
<S> <C> <C>
Income dividend Ordinary Ordinary
income rate income rate
- ----------------------------------------------------
Short-term Ordinary Ordinary
capital gains income rate income
- ----------------------------------------------------
Long-term
capital gains 10% 20%
- --------------------------------------------------------------------------------
</TABLE>
[end sidebar]
The Royce Funds Prospectus | 27
<PAGE>
[back cover]
For More Information
TheRoyceFund
More information on The Royce Fund is available free upon request, including the
following:
Annual/Semi-annual Reports
Additional information about a Fund's investments, together with a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance, is available in the Funds' annual and semi-annual reports to
shareholders.
Statement of Additional Information ("SAI")
Provides more details about The Royce Fund and its policies. A current SAI is on
file with the Securities and Exchange Commission ("SEC") and is incorporated by
reference (is legally considered part of this prospectus).
To obtain more information:
By telephone
Call (800) 221-4268
By mail
Write to:
The Royce Funds
1414 Avenue of the Americas
New York, NY 10019
By E-mail
Send your request to:
[email protected]
Through the Internet
Prospectuses, applications, IRA forms and additional information are available
through our website at http://www.roycefunds.com
Text only versions of the Funds' prospectus, SAI and other documents filed with
the SEC can be viewed online or downloaded from: http://www.sec.gov
You can also obtain copies of documents filed with the SEC by visiting the SEC's
Public Reference Room in Washington, DC (telephone (800) SEC-0330) or by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009.
A separate Shareholder Guide has been prepared for direct shareholders and is
available free upon request. The Guide contains important shareholder
information, including how to purchase and redeem shares of the Funds.
SEC File # 811-03599
<PAGE>
THE ROYCE FUND
STATEMENT OF ADDITIONAL INFORMATION
THE ROYCE FUND (the "Trust"), a Delaware business trust, is a
diversified open-end registered management investment company, which offers
investors the opportunity to invest in ten portfolios or series. Three of
the ten series, Royce Micro-Cap Fund, Pennsylvania Mutual Fund and Royce
GiftShares Fund, offer two classes of shares, an Investment Class and a
Consultant Class. Unless specifically noted, all references to a particular
series relate to that series' Investment Class. Each series has distinct
investment goals and/or strategies, and a shareholder's interest is limited
to the series in which the shareholder owns shares. The ten series (each, a
"Fund" and collectively, the "Funds") are:
ROYCE PREMIER FUND ROYCE TOTAL RETURN FUND
ROYCE MICRO-CAP FUND ROYCE LOW-PRICED STOCK FUND
PENNSYLVANIA MUTUAL FUND PMF II
ROYCE SELECT FUND ROYCE FINANCIAL SERVICES FUND
ROYCE GIFTSHARES FUND ROYCE SPECIAL EQUITY FUND
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, 1999. Please retain this document for future reference.
The audited financial statements and schedules of investments included in the
Funds' Annual Reports to Shareholders for the fiscal year or period ended
December 31, 1998 are incorporated herein by reference. To obtain an
additional copy of the Prospectus or Annual Report to Shareholders for any
of the Funds, please call Investor Information at 1-800-221-4268.
Investment Adviser Transfer Agent
Royce & Associates, Inc. ("Royce") State Street Bank and Trust Company
c/o National Financial Data Services
Distributor Custodian
Royce Fund Services, Inc. ("RFS") State Street Bank and Trust Company
April 30, 1999
TABLE OF CONTENTS
Page Page
OTHER INVESTMENT STRATEGIES........ 2 CUSTODIAN........................ 23
INVESTMENT POLICIES AND INDEPENDENT ACCOUNTANTS...........23
LIMITATIONS........................2 PORTFOLIO TRANSACTIONS............23
RISK FACTORS AND SPECIAL CODE OF ETHICS AND RELATED
CONSIDERATIONS.....................7 MATTERS...........................25
MANAGEMENT OF THE TRUST............12 PRICING OF SHARES BEING OFFERED...26
PRINCIPAL HOLDERS OF SHARES........15 REDEMPTIONS IN KIND...............26
INVESTMENT ADVISORY TAXATION........................ 26
SERVICES..........................18 DESCRIPTIONOF THE TRUST...........33
DISTRIBUTOR........................21 PERFORMANCE DATA..................35
<PAGE>
OTHER INVESTMENT STRATEGIES
In addition to the principal investment strategies described in their
respective Prospectuses, each Fund may invest the balance of its assets as
described below.
Royce Premier Fund - in securities of companies with stock market
capitalizations above $1.5 billion, non-dividend-paying common stocks and non-
convertible preferred stocks and debt securities.
Royce Micro-Cap Fund - in securities of companies with stock market
capitalizations above $300 million and non-convertible preferred stocks and
debt securities.
Pennsylvania Mutual Fund - in securities of companies with stock market
capitalizations above $1.5 billion and non-convertible preferred stocks and
debt securities.
Royce Select Fund - in stocks of companies with market capitalizations above
$1.5 billion and non-convertible preferred stocks and debt securities.
Royce GiftShares Fund - in securities of companies with market
capitalizations above $1.5 billion and non-convertible preferred stocks and
debt securities.
Royce Total Return Fund - in securities with stock market capitalizations
above $1.5 billion, non-dividend-paying common stocks and non-convertible
securities.
Royce Low-Priced Stock Fund - in stocks of companies with prices higher than
$15 per share or market capitalizations above $1.5 billion and non-
convertible preferred stocks and debt securities.
PMF II - in securities of companies with stock market capitalizations above
$1.5 billion, non-dividend-paying common stocks and non-convertible preferred
stocks and debt securities.
Royce Financial Services Fund - in common stocks and convertible securities
of companies engaged in non-financial services industries and/or non-
convertible preferred stocks and debt securities.
Royce Special Equity Fund - in common stocks and convertible securities of
companies with market capitalizations above $500 million and non-convertible
preferred stocks and debt securities.
INVESTMENT POLICIES AND LIMITATIONS
Listed below are the Funds' fundamental investment policies and
limitations. 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 or at
<PAGE>
the time of 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.
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 a temporary measure for extraordinary or
emergency purposes in an amount not exceeding 5% of such
Fund's total assets;
5. Underwrite the securities of other issuers;
6. Invest more than 10% of its total assets in the securities of
foreign issuers (except for Royce Financial Services Fund,
which is not subject to any such limitation, and for PMF II
and Royce Special Equity Fund, each of which may invest up to
25% of its total assets in such securities);
7. Invest in restricted securities (except for Royce Financial
Services Fund and PMF II, each of which may invest up to 15%
of its net assets in illiquid securities, including restricted
securities) or in repurchase agreements which mature in more
than seven days;
8. Invest more than 10% (15% for Royce Financial Services Fund,
PMF II and Royce Special Equity Fund) of its assets in
securities for which market quotations are not readily
available (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);
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);
<PAGE>
11. Acquire (own, in the case of Pennsylvania Mutual Fund) more
than 10% of the outstanding voting securities of any one
issuer;
12. Purchase or sell real estate or real estate mortgage loans or
invest in the securities of real estate companies unless such
securities are publicly-traded;
13. Purchase or sell commodities or commodity contracts;
14. Make loans, except for purchases of portions of issues of
publicly- distributed bonds, debentures and other securities,
whether or not such purchases are made upon the original
issuance of such securities, and except that each Fund may
loan up to 25% of its assets to qualified brokers, dealers or
institutions for their use relating to short sales or other
securities transactions (provided that such loans are fully
collateralized at all times);
15. Invest in companies for the purpose of exercising control of
management;
16. Purchase portfolio securities from or sell such securities
directly to any of the Trust's Trustees, officers, employees
or investment adviser, as principal for their own accounts;
17. Invest in the securities of other investment companies (except
for Pennsylvania Mutual Fund, PMF II and Royce Special Equity
Fund, which may invest in such companies as set forth below,
and except for Royce Financial Services Fund, which may invest
in such companies to the extent permitted by the 1940 Act); or
18. Invest more than 5% of its total assets in warrants, rights
and options (except for Pennsylvania Mutual Fund, which may
not purchase any warrants, rights or options).
NO FUND MAY, AS A MATTER OF OPERATING POLICY:
1. Invest more than 5% of its net assets in lower-rated
(high-risk) non-convertible debt securities; or
2. Enter into repurchase agreements with any party
other than the custodian of its assets.
NEITHER ROYCE FINANCIAL SERVICES FUND NOR PMF II MAY, AS A MATTER OF
OPERATING POLICY, INVEST MORE THAN 10% OF ITS ASSETS IN THE SECURITIES OF
FOREIGN ISSUERS.
ROYCE SPECIAL EQUITY FUND MAY NOT, AS A MATTER OF OPERATING POLICY:
1. Invest more than 5% of its assets in the securities of
foreign issuers; or
<PAGE>
2. Invest more than 5% of its assets in securities for
which market quotations are not readily available; or
3. Invest more than 5% of its assets in the securities
of other investment companies.
The Trust interprets Fundamental Policy No. 8 to preclude any Fund from
investing more than 10% (15% for Pennsylvania Mutual Fund, Royce Financial
Services Fund, PMF II and Royce Special Equity Fund) of its net assets in
illiquid securities.
Pennsylvania Mutual Fund
PMF II
Royce Special Equity Fund
Pennsylvania Mutual Fund and PMF II may each invest up to 25%, and Royce
Special Equity Fund may invest up to 5%, of the value of its total assets in
the securities of other investment companies (open or closed-end), including
up to 5% of its total assets in the securities of any one other investment
company, provided that the Funds and all affiliated persons of the Funds do
not own, in the aggregate, more than 3% of the total outstanding stock of any
one such investment company. The Funds must acquire such securities in the
open market, in transactions involving no commissions or discounts to a
sponsor or dealer (other than customary brokerage commissions). Under the
1940 Act, the issuers of such securities are not required to redeem them from
any one Fund in an amount exceeding 1% of such issuers' total outstanding
securities during any period of less than thirty days. The Funds will vote
all proxies with respect to such securities in the same proportion as the
vote of all other holders of such securities. Except for cash collateral
received in connection with their securities lending activities and invested
in the money market funds of their custodian bank, neither Pennsylvania
Mutual Fund, PMF II nor Royce Special Equity Fund has any current intention
of investing in the securities of any open-end investment companies.
Royce Financial Services Fund
Royce Financial Services Fund normally invests at least 65% of its
assets in the common stocks and convertible securities of companies
"principally" engaged in the financial services industry. For these
purposes, a company is deemed to be "principally" engaged in the financial
services industry if, as of the end of or for its most recent fiscal year, at
least 50% of its consolidated assets, revenues or net income are committed
to, or are derived from, financial services-related activities.
Royce Financial Services Fund may invest in the securities of a company
that is engaged in securities related activities, such as a broker, a dealer,
an underwriter, an investment adviser registered under the Investment
Advisers Act of 1940 or an investment adviser to an investment company,
subject to the following limitations. In the case of a company that, in its
most recent fiscal year, derived more than 15% of its gross revenue 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;
<PAGE>
(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 revenue test, a company's gross revenue 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 it had exercised such
warrants or conversion privileges.
Royce Financial Services Fund may not 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.
Royce 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 own, in the aggregate, more than 3% of
the total outstanding stock of any one such company and (ii) the Fund does
not offer or sell its shares at a public offering price which includes a
sales load of more than 1 1/2%. (The 20% and 3% limitations do not apply to
securities received as dividends, through offers of exchange or as a result
of a reorganization, consolidation or merger.) Under the 1940 Act, the other
investment company is not obligated to redeem any 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. The Fund will 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.
Royce Financial Services Fund currently does not 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
Royce Financial Services Fund and PMF II may not invest more than 15% of
their net assets in illiquid securities. Illiquid securities include
securities subject to contractual or legal restrictions on resale because
they are not registered under the Securities Act of 1933 (the "Securities
Act") and other securities for which market quotations are not readily
available. Securities which are not registered under the Securities Act are
referred to as private placements
<PAGE>
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 these unregistered
privately placed restricted securities, 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. Notwithstanding the fact that these securities
may be subject to contractual or legal restrictions on resale to the general
public or to certain institutions, unregistered securities that can be sold
in accordance with Rule 144A under the Securities Act will not be considered
illiquid so long as Royce determines that an adequate trading market exists
for the security. Rule 144A allows an institutional trading market for
securities otherwise subject to restriction on resale to the general public.
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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Funds' Rights as Stockholders
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 determines
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 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 organized
<PAGE>
and 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.
The current view of the staff of the Securities and Exchange Commission
is that a Fund may engage in such loan transactions only under the following
conditions: (i) the Fund must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (ii)
the borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (iii) after giving notice, the Fund must be able to terminate the
loan at any time; (iv) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest or other distributions on the securities loaned and to
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) the Fund must be able to vote
proxies on the securities loaned, either by terminating the loan or by
entering into an alternative arrangement with the borrower.
Lower-Rated (High-Risk) and Investment Grade Debt Securities
Each Fund may invest up to 5% (15% for PMF II) of its net assets in
lower-rated (high-risk) non-convertible debt securities. They may be rated
from Ba to Ca by Moody's Investors Service, Inc. or from BB to D by Standard
& Poor's or may be unrated. These securities have poor protection with
respect to the payment of interest and repayment of principal and may be in
default as to the payment of principal or interest. These securities are
often 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.
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.
Each of the Funds may also invest in non-convertible debt securities in
the lowest rated category of investment grade debt. Such securities may have
speculative characteristics, and
<PAGE>
adverse changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade
securities.
The Funds may also invest in investment grade non-convertible debt
securities. Such securities include those rated Aaa by Moody's (which are
considered to be of the highest credit quality and where the capacity to pay
interest and repay principal is extremely strong), those rated Aa by Moody's
(where the capacity to repay principal is considered very strong, although
elements may exist that make risks appear somewhat larger than expected with
securities rated Aaa), securities rated A by Moody's (which are considered to
possess adequate factors giving security to principal and interest) and
securities rated Baa by Moody's (which are considered to have an adequate
capacity to pay interest and repay principal, but may have some speculative
characteristics).
Foreign Investments
Except for Financial Services Fund, which is not subject to any such
limitation, each Fund may invest up to 10% of its total assets (25% for PMF
II and Royce Special Equity Fund) in the securities of foreign issuers.
Foreign investments involve certain risks which typically are not present in
securities of domestic issuers. There may be less information available
about a foreign company than a domestic company; foreign companies may not be
subject to accounting, auditing and reporting standards and requirements
comparable to those applicable to domestic companies; and foreign markets,
brokers and issuers are generally subject to less extensive government
regulation than their domestic counterparts. Markets for foreign securities
may be less liquid and may be subject to greater price volatility than those
for domestic securities. Foreign brokerage commissions and custodial fees
are generally higher than those in the United States. Foreign markets also
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, thereby making it difficult to conduct
such transactions. Delays or problems with settlements might affect the
liquidity of a Fund's portfolio. Foreign investments may also be subject to
local economic and political risks, political, economic and social
instability, military action or unrest or adverse diplomatic developments,
and possible nationalization of issuers or expropriation of their assets,
which might adversely affect a Fund's ability to realize on its investment in
such securities. Royce may not be able to anticipate these potential events
or counter their effects. Furthermore, some foreign securities are subject
to brokerage taxes levied by foreign governments, which have the effect of
increasing the cost of such investment and reducing the realized gain or
increasing the realized loss on such securities at the time of sale.
Although changes in foreign currency rates may adversely affect the
Funds' foreign investments, Royce does not expect to purchase or sell foreign
currencies for the Funds to hedge against declines in the U.S. dollar or to
lock in the value of any foreign securities they purchase. Consequently, the
risks associated with such investments may be greater than if the Funds were
to engage in foreign currency transactions for hedging purposes.
Exchange control regulations in such foreign markets may also adversely
affect the Funds' foreign investments and the Funds' ability to make certain
distributions necessary to
<PAGE>
maintain their eligibility as regulated investment
companies and avoid the imposition of income and excise taxes may, to that
extent, be limited.
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.
The Funds may purchase the securities of foreign companies in the form
of American Depositary Receipts (ADRs). ADRs are certificates held in trust
by a bank or similar financial institution evidencing ownership of 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.
Depositories may establish either unsponsored or sponsored ADR
facilities. 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. Depositories create sponsored ADR
facilities in generally the same manner as unsponsored facilities, except
that the issuer of the deposited securities enters into a deposit agreement
with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will
bear some of the costs relating to the facility (such as deposit and
withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions and to provide shareholder communications and other information
to the ADR holders at the request of the issuer of the deposited securities.
Repurchase Agreements
In a repurchase agreement, a Fund in effect makes a loan by purchasing a
security and simultaneously committing to resell that security to the seller
at an agreed upon price on an agreed upon date within a number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement requires or obligates the seller to pay the agreed upon
price, which obligation is in effect secured by the value (at least equal to
the amount of the agreed upon resale price and marked to market daily) of the
underlying security.
The Funds may engage in repurchase agreements with respect to any U.S.
Government security, provided that such agreements are collateralized by cash
or securities issued by the U.S.
<PAGE>
Government or its agencies. While it does
not presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delays and costs to the Funds 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 a 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 a 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 a 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 a Fund to incur additional risk and/or
to hedge against risk.
Portfolio Turnover
[ ]
* * *
Royce believes that each of the Funds, except Royce Total Return Fund,
are suitable for investment only by persons who can invest without concern
for current income, and that such Funds are suitable only for those investors
who are in a financial position to assume above-average risks in search for
long-term capital appreciation.
<PAGE>
MANAGEMENT OF THE TRUST
The following table sets forth certain information as to each Trustee
and officer of the Trust:
Positions
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,
(59) 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' investment
adviser; Trustee, President and
Treasurer of the Trust;
Director, President and
Treasurer of Royce Value Trust,
Inc. ("RVT"), Royce Micro-Cap
Trust, Inc. ("OTCM") and Royce
Global Trust, Inc. ("RGT")
(since October 1996), closed-end
diversified management
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 of Royce Fund
Services, Inc. ("RFS"), formerly
named Quest Distributors, Inc.,
a wholly-owned subsidiary of
Royce and the distributor of the
Trust's shares; and managing
general partner of Royce
Management Company ("RMC"),
formerly named Quest Management
Company, a registered investment
adviser.
Hubert L. Cafritz Trustee Financial consultant.
(75)
9421 Crosby Road
Silver Spring, MD
20910
Donald R. Dwight Trustee President of Dwight Partners,
(67) Inc.; Chairman (until March
16 Clover Mill 1998) and Chairman Emeritus
Lane (since March 1998) of Newspapers
Lyme, NH 03768 of New England, Inc.
<PAGE>
Positions
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
Richard M. Galkin Trustee Private investor and President
(60) of Richard M. Galkin Associates,
654 Boca Marina Inc., tele-communications
Court consultants.
Boca Raton, FL
33487
Stephen L. Isaacs Trustee President of The Center for
(59) Health and Social Policy since
845 25th Avenue September 1996; President of
San Francisco, CA Stephen L. Isaacs Associates,
94121 Consultants; and Director of
Columbia University Development
Law and Policy Program; and
Professor at Columbia University
until August 1996.
William L. Koke Trustee Registered investment adviser
(64) and financial planner with
73 Pointina Road Shoreline Financial Consultants.
Westbrook, CT
06498
David L. Meister Trustee Consultant to the communications
(59) industry.
1535 Michael Lane
Pacific
Palisades, CA
90272
Jack E. Fockler, Vice Managing Director (since April
Jr.* (40) President 1997) and Vice President of
1414 Avenue of Royce, having been employed by
the Royce since October 1989; Vice
Americas President of RGT (since October
New York, NY 1996), RCF (since December 1996)
10019 and of the other Royce Funds
(since April 1995); Vice
President of RFS (since November
1995); and general partner of
RMC.
W. Whitney Vice Managing Director (since April
George*(40) President 1997) and Vice President of
1414 Avenue of Royce, having been employed by
the Royce since October 1991; Vice
Americas President of RCF (since December
New York, NY 1996); Vice President of RGT
10019 (since October 1996) and of the
other Royce Funds (since April
1995); and general partner of
RMC.
Daniel A. Vice Vice President of Royce (since
O'Byrne* (36) President May 1994), having been employed
1414 Avenue of and by Royce since October 1986; and
the Assistant Vice President of RGT (since
Americas Secretary October 1996), of RCF (since
New York, NY December 1996) and of the other
10019 Royce Funds (since July 1994).
<PAGE>
Positions
Name, Address and Held Principal Occupations During
Age with the Past 5 Years
Trust
- ----------------- -------- ----------------------------
John E. Denneen* Secretary Associate General Counsel of
(32) Royce (since May 1996);
1414 Avenue of Secretary of RGT (since October
the 1996), of RCF (since December
Americas 1996) and of the other Royce
New York, NY Funds (since June 1996); and
10019 Associate of Seward & Kissel
prior to May 1996.
_____________________________________________________________________________
*An "interested person" of the Trust and/or Royce under Section 2(a)(19)
of the 1940 Act.
All of the Trust's trustees (other than Messrs. Cafritz and Koke) are
also directors/trustees of RVT, OTCM and RCF, and all of them (other than
Mr. Cafritz) are also directors of RGT.
The Board of Trustees has an Audit Committee, comprised of Hubert L.
Cafritz, Richard M. Galkin, Stephen L. Isaacs, William L. Koke and David L.
Meister. The Audit Committee is responsible for recommending the selection
and nomination of the Funds' independent accountants and for conducting post-
audit reviews of the Funds' financial conditions with such auditors.
For the year ended December 31, 1998, the following trustees and
affiliated persons of the Trust received compensation from the Trust and/or
the other funds in the group of registered investment companies comprising
The Royce Funds:
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued As from The Royce Funds
Name From Trust Part of Trust Expenses paid to Trustee/Directors
- ---- ---------- ---------------------- -------------------------
Hubert L. Cafritz, $ N/A $
Trustee
Donald R. Dwight, N/A
Trustee
Richard M. Galkin, N/A
Trustee
Stephen L. Isaacs, N/A
Trustee
William L. Koke, N/A
Trustee
<PAGE>
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued As from The Royce Funds
Name From Trust Part of Trust Expenses paid to Trustee/Directors
- ---- ---------- ---------------------- -------------------------
David L. Meister, $ N/A
Trustee
John D. Diederich $ N/A
Director of
Administration
PRINCIPAL HOLDERS OF SHARES
As of December 31, 1998, the following persons were known to the Trust
to be the record or beneficial owners of 5% or more of the outstanding shares
of certain of its Funds:
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Royce Premier Fund
Charles Schwab & Co., Inc. Record
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Micro-Cap Fund
Investment Class
Charles Schwab & Co., Inc. Record
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Micro-Cap Fund
Consultant Class
McDonald & Co. Securities Inc. Record
FBO James M. Varin IRA
2336 Turnberry LN
Ft. Wayne, IN 46804-9355
Donaldson Lufkin Jenrette Record
Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
NFSC Record
FBO Natalie Ross
6 Blind Brook Road
Westport, CT 06880-2908
Pennsylvania Mutual Fund
Investment Class
Charles Schwab & Co., Inc. Record
101 Montgomery Street
San Francisco, CA 94104-4122
Laird Lorton Trust Company C/F Record
Administrative Systems Inc.
Norton Building, 16th Floor
801 Second Avenue
Seattle, WA 98104-1509
Royce Select Fund
Charles M. Royce Record and
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
Royce GiftShares Fund
Investment Class
W. Whitney George , Trustee Record and
The Royce 1992 GST Trust Beneficial
1414 Avenue of the Americas
New York, NY 10019
Royce Total Return Fund
Charles Schwab & Co. Inc. Record
Attn. Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
Royce Low-Priced Stock Fund
Charles Schwab & Co., Inc. Record
101 Montgomery Street
San Francisco, CA 94104-4122
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Charles M. Royce Record and
Royce Management Company Beneficial
8 Soundshore Drive
Greenwich, CT 06830
PMF II
Charles Schwab & Co. Inc. Record
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Charles M. Royce Record and
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
Royce Financial Services Fund
Charles M. Royce Record and
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
Bruce Museum Inc. Record and
Museum Drive Beneficial
Greenwich, CT 06830
Charles Schwab & Co. Inc. Record
Attn. Mutual Fund Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Royce Special Equity Fund
Kinco & Co. FBO 5686 Record
c/o Republic National Bank of NY
One Hanson Place
Brooklyn, NY 11243-2900
Charles R. Dreifus Record and
1414 Avenue of the Americas Beneficial
New York, NY 10019
<PAGE>
Number Type of Percentage of
Fund of Shares Ownership Outstanding Shares
- ---- --------- --------- ------------------
Charles M. Royce Record and
c/o Royce Management Company Beneficial
8 Sound Shore Drive
Greenwich, CT 06830-7242
Daniel B. Strickbergen Record and
30 Petersville Road Beneficial
Mount Kisco, NY 10549-4514
As of December 31, 1998, all of the trustees and officers of the Trust
as a group beneficially owned less than 1% of the outstanding shares of the
Consultant Classes of Royce Micro-Cap and GiftShares Funds, of each class of
Pennsylvania Mutual Fund and of Royce Premier and Total Return Funds,
approximately ___% of the outstanding shares of the Investment Class of Royce
Micro-Cap Fund, approximately ____% of the outstanding shares of Royce Select
Fund, approximately ____% of the outstanding shares of the Investment Class
of Royce GiftShares Fund, approximately ____% of the outstanding shares of
Royce Low-Priced Stock Fund, approximately ____% of the outstanding shares of
PMF II, approximately ____% of the outstanding shares of Royce Financial
Services Fund, and approximately ____% of the outstanding shares of Royce
Special Equity Fund. Charles M. Royce is a controlling shareholder of Royce
Select Fund, Royce Financial Services Fund and Royce Special Equity Fund
because he beneficially owns ___%, ___% and ___% of each Fund's outstanding
shares, respectively. Charles R. Dreifus is a controlling shareholder of
Royce Special Equity Fund because he beneficially owns approximately ___% of
the Fund's outstanding shares.
INVESTMENT ADVISORY SERVICES
Services Provided by Royce
As compensation for its services under the Investment Advisory
Agreements for the Funds listed below, Royce is entitled to receive the
following fees:
Percentage Per Annum
Fund of Fund's Average Net Assets
---- ----------------------------
Royce Premier Fund 1.00
Royce Micro-Cap Fund 1.50
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 GiftShares Fund 1.25
Royce Total Return Fund 1.00
Royce Low-Priced Stock Fund 1.50
<PAGE>
Percentage Per Annum
Fund of Fund's Average Net Assets
---- ----------------------------
PMF II 1.00
Royce Financial Services Fund 1.50
Royce Special Equity Fund 1.00
Such fees are payable monthly from the assets of the Fund involved and, in
the case of Royce Micro-Cap, Pennsylvania Mutual Fund and Royce GiftShares
Funds, are allocated between the Investment and Consultant Classes of their
shares based on their relative net assets.
Under such 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 with respect to the above-
listed Funds, 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.
Under the Investment Advisory Agreement for Royce Select Fund, such Fund
will pay Royce a performance fee. See "Management of the Fund" in Royce
Select Fund's Prospectus for further information concerning this fee and
other material terms of such Investment Advisory Agreement, including Royce's
obligation to pay the Fund's ordinary operating expenses.
For each of the three years ended December 31, 1996, 1997 and 1998, 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
----------------- ---------------
Royce Premier Fund
1996 $2,838,340 $65,000
1997 4,319,656 -
1998
Royce Micro-Cap Fund
1996 1,792,264 96,036
1997 1,937,727 511,724
1998
<PAGE>
Net Advisory Fees Amounts
Received by Royce Waived by Royce
----------------- ---------------
Pennsylvania Mutual Fund
1996 $4,104,694 $198,074
1997 4,379,842 -
1998
Royce Select Fund
1998*
Royce GiftShares Fund
1996 0 7,866
1997 0 19,859
1998
Royce Total Return Fund
1996 12,189 28,758
1997 444,718 93,398
1998
Royce Low-Priced Stock Fund
1996 122,045 51,828
1997 146,709 108,828
1998
PMF II
1996** 0 12,215
1997 84,743 114,508
1998
Royce Financial Services Fund
1996 0 29,185
1997 4,322 28,934
1998
Royce Special Equity Fund
1998***
_________
* November 18, 1998 (commencement of operations) to December 31, 1998
** November 19, 1996 (commencement of operations) to December 31, 1996
*** May 1, 1998 (commencement of operations) to December 31, 1998
<PAGE>
DISTRIBUTOR
RFS, a wholly-owned subsidiary of Royce, is the distributor of each
Fund's shares. RFS 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 Royce Micro-Cap Fund's,
Pennsylvania Mutual Fund's and Royce GiftShares Fund's Consultant Classes
respective average net assets and .25% per annum (consisting of an asset-
based sales charge) of Royce GiftShares Fund's Investment Class and Royce Low-
Priced Stock and Financial Services Funds' respective average net assets.
Except to the extent that they may be waived by RFS, these fees are not
subject to any required reductions. RFS is also entitled to receive the
proceeds of any front-end sales loads that may be imposed on purchases of
shares of Royce Micro-Cap Fund's, Pennsylvania Mutual Fund's and Royce
GiftShares Fund's Consultant Classes and of any contingent deferred sales
charges that may be imposed on redemptions of such shares. Currently, each of
Pennsylvania Mutual Fund's and Royce Micro-Cap Fund's Consultant Class shares
bear a 1% contingent deferred sales charge on shares redeemed within one year
of their purchase, and 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. Royce Premier Fund's,
Royce Micro-Cap Fund's, Pennsylvania Mutual Fund's, Royce Select Fund's,
Royce Total Return Fund's, PMF II's and Royce Special Equity Fund's
Investment Classes are not obligated to 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 filing for sales of its shares 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 shareholders of
each Fund or class of shares that remains covered by the Plan and the Trust's
Board
<PAGE>
of Trustees (which also approved the Distribution Agreement pursuant to
which the distribution fees are paid) approved the Plan, 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.
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 Trustees, including a majority of the non-interested
Trustees, as described above, may amend the Plan.
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 shares 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 to it.
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 shares 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
GiftShares Fund's Investment Class, Royce Low-Priced Stock Fund and Royce
Financial Services Fund.
No trustee of the Trust who was not an interested person of the Trust
had any direct or indirect financial interest in the operation of the Plan or
the Distribution Agreement. Charles M. Royce, an interested person of the
Trust, Royce and RFS, had such an interest.
Under the Rules of Fair Practice of the NASD, the front-end sales loads,
asset-based sales charges and contingent deferred sales charges payable by
any Fund and/or the shareholders thereof to RFS are limited to (i) 6.25% of
total new gross sales occurring after July 7, 1993 plus interest charges on
such amount at the prime rate plus 1% per annum, increased by (ii) 6.25% of
total new gross sales occurring after such Fund first adopted the Plan until
July 7, 1993 plus interest charges on such amount at the prime rate plus 1%
per annum less any front-end, asset-based or deferred sales charges on such
sales or net assets resulting from such sales.
<PAGE>
CUSTODIAN
State Street Bank and Trust Company ("State Street") is the custodian
for the securities, cash and other assets of each Fund and the transfer agent
and dividend disbursing agent for each Fund's shares, but it does not
participate in any Fund's investment decisions. The Trust has authorized
State Street to deposit certain domestic and foreign portfolio securities in
several central depository systems and to use foreign sub-custodians for
certain foreign portfolio securities, as allowed by Federal law. State
Street's main office is at 225 Franklin Street, Boston, Massachusetts 02107.
All mutual fund transfer, dividend disbursing and shareholder service
activities are performed by State Street's agent, National Financial Data
Services, at 1004 Baltimore, Kansas City, Missouri 64105.
State Street is responsible for calculating each Fund's daily net asset
value per share and for maintaining its portfolio and general accounting
records and also provides certain shareholder services.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, whose address is One Post Office Square,
Boston, Massachusetts 02109, are the Trust's independent accountants.
PORTFOLIO TRANSACTIONS
Royce is responsible for selecting the brokers who effect the purchases
and sales of each Fund's portfolio securities. Royce does not select a
broker to effect a securities transaction for a Fund unless Royce believes
such broker is 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 market for 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 research and brokerage services which the broker has
provided to it, including any research relating to the security involved in
the transaction and/or to other securities. Royce may use commission dollars
generated by agency transactions for the Funds and its other client accounts
to pay for such services. Research services that may be paid for in this way
assist Royce in carrying out its investment decision-making responsibilities.
They may include general economic research, market and statistical
information, industry and technical research, strategy and company research,
research related to portfolio company shareholder voting and performance
measurement, and may be written or oral. Brokerage services that may be paid
for in this way include effecting securities transactions and incidental
functions such as clearance and settlement.
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 cause the Funds to pay
<PAGE>
brokerage commissions in excess of those
which another broker might have charged for effecting the same transaction,
in recognition of the value of research and brokerage services provided to
Royce by the broker. Thus, the Funds generally pay higher commissions to
those brokers who provide both such research and brokerage services than
those who provide only execution services. Royce determines the overall
reasonableness of brokerage commissions paid based on prevailing commission
rates for similar transactions and the value it places on the research and/or
brokerage services provided to it by the broker, viewed in terms of either
the particular transaction or Royce's overall responsibilities with respect
to its accounts and those of RMC.
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 Royce may not use all of such services in connection
with the Trust or any one of its Funds. Moreover, Royce's receipt of these
services does not reduce the investment advisory fees payable to Royce, even
though Royce might otherwise be required to purchase some of them for cash.
Royce may, therefore, be viewed as having a conflict of interest relating to
its obtaining such research services with Fund and other client account
commission dollars.
Firms that provide such research and brokerage services to Royce may
also promote the sale of the Funds' shares, and Royce and/or RFS may
separately compensate them for doing so. RFS does not effect portfolio
security transactions for the Funds or others.
Even though Royce makes investment decisions for each Fund independently
from those for the other Funds and the other accounts managed by Royce and
RMC, Royce frequently purchases, holds or sells securities of the same issuer
for more than one Royce/RMC account because the same security may be suitable
for more than one of them. When Royce is purchasing or selling the same
security for more than one Royce/RMC account managed by the same primary
portfolio manager on the same trading day, Royce generally seeks to average
the transactions as to price and allocate them as to amount in a manner
believed by Royce to be equitable to each. Royce generally effects such
purchases and sales of the same security pursuant to Royce/RMC's Trade
Allocation Guidelines and Procedures. Under such Guidelines and Procedures,
Royce places and executes unallocated orders with broker-dealers during the
trading day and then allocates the securities purchased or sold in such
transactions to one or more of Royce's and RMC's accounts at or shortly
following the close of trading, generally using the average net price
obtained by accounts with the same primary portfolio manager. Royce does such
allocations based on a number of judgmental factors that it 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, 1996, 1997 and 1998,
the Funds paid brokerage commissions as follows:
Fund 1996 1997 1998
- ---- ---- ---- ----
Royce Premier Fund $429,150 $583,759
Royce Micro-Cap Fund 295,737 246,667
Pennsylvania Mutual Fund 935,022 375,095
<PAGE>
Fund 1996 1997 1998
- ---- ---- ---- ----
Royce Select Fund -- -- *
Royce GiftShares Fund 3,555 8,178
Royce Total Return Fund 21,379 127,534
Royce Low-Priced Stock Fund 114,456 100,845
PMF II 29,490** 66,857
Royce Financial Services Fund 6,872 5,511
Royce Special Equity Fund -- -- ***
______________
* For the period from November 18, 1998 (commencement of operations) to
December 31, 1998
** For the period from November 19, 1996 (commencement of operations) to
December 31, 1996
*** For the period from May 1, 1998 (commencement of operations) to December
31, 1998
For the year ended December 31, 1998, 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
- ---- --------------------------- ---------------------
Royce Premier Fund $ $
Royce Micro-Cap Fund
Pennsylvania Mutual Fund
Royce Select Fund
Royce GiftShares Fund
Royce Total Return Fund
Royce Low-Priced Stock Fund
PMF II
Royce Financial Services Fund
Royce Special Equity Fund
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. The Code of Ethics
permits such persons 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 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 permission to trade will usually be granted only in accordance with such
standards.
<PAGE>
Royce's and RMC's clients include several private investment companies
in which Royce or RMC has (and, therefore, Charles M. Royce, Jack E. Fockler,
Jr., W. Whitney George, Boniface A. Zaino and/or other Royce-related persons
may be deemed to beneficially own) a share of up to 15% of the company's
realized and unrealized net capital gains from securities transactions, but
less than 5% of the company's equity interests. The Code of Ethics does not
restrict transactions effected by Royce or RMC for such private investment
company accounts, and transactions for such accounts are subject to Royce's
and RMC's allocation policies and procedures. See "Portfolio Transactions".
As of __________, 1999, Royce-related persons, interested
trustees/directors, officers and employees of The Royce Funds and members of
their immediate families beneficially owned shares of The Royce Funds having
a total value of over $__ million, and Royce's and RMC's equity interests in
Royce-related private investment companies totalled approximately $___
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", State Street determines
each Fund's net asset value per share at the close of regular trading on the
New York Stock Exchange (generally at 4:00 p.m. Eastern Time), on each day
that the Exchange is open. The Exchange is open on all weekdays which are
not holidays. Thus, it is closed on Saturdays and Sundays and on New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
REDEMPTIONS IN KIND
Conditions may arise in the future which would, in the judgment of the
Trust's 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 is
obligated 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. Royce would select the securities delivered in payment
of redemptions, valued at the same value assigned to them in computing the
Fund's 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
<PAGE>
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.
The Internal Revenue Service (the "IRS") will impose a non-deductible 4%
excise tax 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 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"), the Fund may be subject to Federal income tax on a portion
of any "excess distribution" with respect to, or gain from the disposition
of, the stock. The Fund would determine the tax by allocating such
distribution or gain ratably to each day of the Fund's holding period for the
stock. The Fund would be taxed on the amount so allocated to any taxable year
of the Fund prior to the taxable year in which the excess distribution or
disposition occurs, at the highest marginal income tax rate in effect for
such years, and the tax would be further increased by an interest charge.
The Fund would include in the Fund's investment company taxable income the
amount allocated to the taxable year of the distribution or disposition and,
accordingly, it 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 need to obtain annual
<PAGE>
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 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 is 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.
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 the 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 a maximum marginal rate of
20%.
<PAGE>
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 is 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 are 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 Fund's taxable year may be
"spilled back" and treated as paid by the Fund (other than for purposes of
avoiding the 4% excise tax) during such year. Such dividends would be taxable
to the shareholders in the taxable year in which the distribution was
actually made by the Fund.
The Trust will send written notices to shareholders regarding the amount
and Federal income tax status as ordinary income or capital gain of all
distributions made during each calendar year.
Back-up Withholding/Withholding Tax
Under the Code, certain non-corporate shareholders may be subject to 31%
withholding on reportable dividends, capital gains distributions and
redemption payments ("back-up withholding"). Generally, shareholders subject
to back-up withholding are 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
IRS requires the Trust 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 IRS 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 are 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.
<PAGE>
Sales, Redemptions or Exchanges 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. Gains for non-corporate
shareholders will be taxed at a maximum Federal rate of 20% for shares held
for more than 12 months; and 39.6% (ordinary income rate) for shares held for
12 months or less. For regular corporations, the maximum Federal rate on all
income is 35%. The IRS will disallow a loss 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
amount of the disallowed loss will increase the basis of the shares acquired.
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 capital gain distributions received with respect to such
shares. A shareholder's exchange of shares between Funds will be treated for
tax purposes as a sale 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 option selected and other gifts that the
Donor and his or her spouse may make during the year.
If the Donor selects the Withdrawal Option, the entire amount of the
gift will be a "present interest" that qualifies for the Federal annual gift
tax exclusion. In that case, the Donor will be required to file a Federal
gift tax return for the year of the gift only if (i) he or she makes gifts
(including the gift of Fund shares) totaling more than the amount of the
Federal annual gift tax exclusion (currently, $10,000) to the same individual
during that year, (ii) the Donor and his or her spouse elects to have any
gifts by either of them treated as "split gifts" (i.e., treated as having
been made one-half by each of them for gift tax purposes) or (iii) the Donor
makes any gift of a future interest during that year. The Trustee will notify
the Beneficiary of his or her right of withdrawal promptly following any
investment in the Fund under the Withdrawal Option.
<PAGE>
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 $650,000 in 1999, $675,000 in 2000 and
2001 and eventually increasing 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.
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%). The donor must report gifts subject to GST tax,
whether or not covered by the GST tax exemption, 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 option 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
<PAGE>
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 and
long-term capital gains equal to the highest marginal Federal income tax rate
imposed on each type of income (currently, 39.6% and 20%, respectively). If
the Beneficiary selects this option, he or she will receive those fractions
of his or her Trust's income and capital gains annually for the duration of
the Trust.
Under the Withdrawal Option, the Beneficiary will also be able to
require the Trustee to pay his or her tuition, room and board and other
expenses of his or her college or post-graduate education (subject, in
certain instances, to approval by the Beneficiary's Representative), and the
Trustee will raise the cash necessary to fund these distributions by
redeeming Fund shares. Any such redemption will result in the realization of
capital gain or loss on the shares redeemed, which will be reportable by the
Beneficiary on his or her income tax returns for the year in which the shares
are redeemed, as described above.
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 and short-term capital gains
(currently, 39.6%), but at a much lower taxable income level (for 1999,
$8,450) 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 alternate valuation date for Federal estate
tax purposes, if elected).
<PAGE>
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 continuing
as the Funds' investment adviser 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 the Board of Trustees may divide into an unlimited number of
series and/or classes without shareholder approval. (Each Fund, other than
Royce Micro-Cap, Pennsylvania Mutual and Royce GiftShares Funds, presently
has only one class of shares.) Shareholders are entitled to one vote per
share (with proportional voting for fractional shares). Shares vote by
individual series, except that shares are voted in the aggregate and not by
individual series when required by the 1940 Act and that if Trustees
determine that a matter affects shareholders of only one series or class,
then only shareholders of that series or class are entitled to vote on that
matter.
Royce Micro-Cap Fund, Pennsylvania Mutual Fund and Royce GiftShares Fund
each have two classes of shares, an Investment Class and a Consultant Class.
The shares of each class represent a pari passu interest in such Fund's
investment portfolio and other assets and have the same redemption and other
rights.
On June 17, 1997, Pennsylvania Mutual Fund and Royce Total Return Fund
acquired all of the assets and assumed all of the liabilities of Royce Value
Fund and Royce Equity Income Fund, respectively. The acquisitions were
accomplished by exchanging shares of Pennsylvania Mutual Fund's Consultant
Class and of Royce Total Return Fund equal in value to the shares of Royce
Value Fund and Royce Equity Income Fund owned by each of their respective
shareholders.
On November 25, 1997, Royce Global Services Fund changed its investment
objective and, in connection therewith, its name to Royce Financial Services
Fund.
<PAGE>
Each of the Trustees currently in office, other than Mr. Dwight, were
elected by the Predecessor's shareholders. Mr. Dwight was elected by the
Trust's Board of Trustees on June 18, 1998, to serve as a Trustee of the
Trust until his successor has been duly elected. There will normally be no
meeting of shareholders for the election of Trustees until less than a
majority of the shareholder-elected 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 or their series,
are entitled to receive the net assets of their series and/or class.
Shareholders have no preemptive rights. The Trust's fiscal year ends on
December 31.
Shareholder Liability
Generally, shareholders will not be personally liable for the
obligations of their Fund or of the Trust under Delaware law. The Delaware
Business Trust Act provides that a shareholder of a Delaware business trust
is entitled to the same limited liability extended to stockholders of private
corporations for profit organized under the Delaware General Corporation Law.
No similar statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the extent that the
Trust or a shareholder of the Trust is subject to the jurisdiction of courts
in those states, the courts may not apply Delaware law and may thereby
subject Trust shareholders to liability. To guard against this possibility,
the Trust Instrument (i) requires that every written obligation of the Trust
contain a statement that such obligation may be enforced only against the
Trust's assets (however, the omission of this disclaimer will not operate to
create personal liability for any shareholder); and (ii) provides for
indemnification out of Trust property of any Trust shareholder held
personally liable for the Trust's obligations. Thus, the risk of a Trust
shareholder incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which: (i) a court
refuses to apply Delaware law; (ii) no contractual limitation of liability
was in effect; and (iii) the Trust itself would be unable to meet its
obligations. In light of Delaware law, the nature of the Trust's business and
the nature of its assets, management believes that the risk of personal
liability to a Trust shareholder is extremely remote.
<PAGE>
PERFORMANCE DATA
The Funds' performances may be quoted in various ways. All performance
information supplied for the Funds is historical and is not intended to
indicate future returns. Each Fund's share price and total returns fluctuate
in response to market conditions and other factors, and the value of a Fund's
shares when redeemed may be more or less than their original cost.
Total Return Calculations
Total returns quoted reflect all aspects of a Fund's return, including
the effect of reinvesting dividends and capital gain distributions and any
change in the Fund's net asset value per share (NAV) over the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded percentage rate
that would have produced the same result if the rate of growth or decline in
value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual total return of 7.18%,
which is the steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should
realize that a Fund's performance is not constant over time, but changes from
year to year, and that average annual total returns represent averaged
figures as opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, a Fund's cumulative total
returns, reflecting the simple change in value of an investment over a stated
period, may be quoted. Average annual and cumulative total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments or a series of redemptions, over
any time period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share prices) in
order to illustrate the relationship of these factors and their contributions
to total return. Total returns and other performance information may be
quoted numerically or in a table, graph or similar illustration.
Historical Fund Results
The following table shows certain of the Funds' total returns for the
periods indicated. Such total returns reflect all income earned by each Fund,
any appreciation or depreciation of the assets of such Fund and all expenses
incurred by such Fund for the stated periods. The table compares the Funds'
total returns to the records of the Russell 2000 Index (Russell 2000) and
Standard & Poor's 500 Composite Stock Price Index (S&P 500) over the same
periods. The comparison to the Russell 2000 shows how the Funds' total
returns compared to the record of a broad index of small capitalization
stocks. The S&P 500 comparison is provided to show how the Funds' total
returns compared to the record of a broad average of common stock prices over
the same period. The Funds have the ability to invest in securities not
included in the indices, and their investment portfolios may or may not be
similar in composition to the indices. Figures for the indices are based on
the prices of unmanaged groups of stocks, and, unlike the Funds, their
returns do not include the effect of paying brokerage commissions and other
costs and expenses of investing in a mutual fund.
Period Ended
Fund December 31, 1998 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Royce Premier Fund
1 Year Total Return 6.7 % -2.6% 28.5 %
5 Year Average Annual Total Return
Average Annual Total Return since 12-31-91
(commencement of operations)
Royce Micro-Cap Fund
1 Year Total Return -3.3 % -2.6% 28.5%
Year Average Annual Total Return 11.4 11.9 24.1
Average Annual Total Return since 12-31-91 15.5 13.8 19.5
(commencement of operations)
Royce Micro-Cap Fund (Consultant Class)
Total Return since 5-4-98 -14.6% -12.4% 10.7%
(commencement of sale of Consultant Class
shares)
Pennsylvania Mutual Fund (Investment Class)
1 Year Total Return 4.2% -2.6% 28.5%
5 Year Average Annual Total Return 11.6 11.9 24.1
10 year Average Annual Total Return 11.8 12.9 19.2
Pennsylvania Mutual Fund (Consultant Class)
1 Year Total Return 3.4% -2.6% 28.5%
Cumulative Annual Total Return since 6-18-97 10.0 6.1 25.4
(commencement of sale of Consultant Class
shares)
Royce Select Fund
Total Return since 11-18-98 7.9% 7.8% 7.6%
(commencement of operations)
Royce GiftShares Fund (Investment Class)
1 Year Total Return 19.5% -2.6% 28.5%
Average Annual Total Return since 12-27-95 23.6 11.8 28.2
(commencement of operations)
Royce GiftShares Fund (Consultant Class)
1 Year Total Return 18.5% -2.6% 28.5%
Average Annual Total Return since 9-26-97 15.8 -3.8 25.0
(commencement of sale of Consultant Class
shares)
<PAGE>
Period Ended
Fund December 31, 1998 Russell 2000 S&P 500
- ---- ----------------- ------------ -------
Royce Total Return Fund
1 Year Total Return 4.8% -2.6% 28.5%
5 Year Average Annual Total Return 16.7 11.9 24.1
Average Annual Total Return since 12-15-93 15.8 12.5 24.1
(commencement of operations)
Royce Low-Priced Stock Fund
1 Year Total Return 2.4% -2.6% 28.5%
5 Year Average Annual Total Return 13.6 11.9 24.1
Average Annual Total Return since 12-15-93 13.6 12.5 24.1
(commencement of operations)
PMF II
1 Year Total Return 4.9% -2.6% 28.5%
Average Annual Total Return since 11-19-96 14.6 11.1 29.1
(commencement of operations)
Royce Financial Services Fund
1 Year Total Return 8.0% -2.6% 28.5%
Average Annual Total Return since 12-15-94 15.8 16.5 30.4
(commencement of operations)
Royce Special Equity Fund
Total Return since 5-1-98 -6.8% -12.3% 10.8%
(commencement of operations)
During the applicable period ended December 31, 1998, a hypothetical
$10,000 investment in certain of the Funds would have grown as indicated
below, assuming all distributions were reinvested:
Value of
Fund/Period Commencement Date Hypothetical Investment at December 31, 1998
- ----------------------------- --------------------------------------------
Royce Premier Fund (12-31-91) $ 25,037
Royce Micro-Cap Fund (12-31-91) 27,476
Pennsylvania Mutual Fund (12-31-78) 179,731
Royce Select Fund (11-18-98) 10,785
Royce GiftShares Fund (12-27-95) 18,943
Royce Total Return Fund (12-15-93) 21,689
Royce Low-Priced Stock Fund (12-15-93) 18,986
PMF II (11-19-96) 13,335
Royce Financial Services Fund (12-15-94) 18,127
Royce Special Equity Fund (5-1-98) 9,316
<PAGE>
The Funds' performances may be compared in advertisements to the
performance of other mutual funds in general or to the performance of
particular types of mutual funds, especially those with similar investment
objectives. Such comparisons may be expressed as mutual fund rankings
prepared by Lipper Analytical Services, Inc. ("Lipper"), an independent
service that monitors the performance of registered investment companies.
The Funds' rankings by Lipper for the one year period ended December 31,
1998, were:
Fund Lipper Ranking
---- --------------
Royce Premier Fund 137 out of 636 small-cap funds
Royce Micro-Cap Fund 24 out of 45 micro-cap funds
Pennsylvania Mutual Fund 187 out of 636 small-cap funds
Royce GiftShares Fund 33 out of 636 small-cap funds
Royce Total Return Fund 179 out of 636 small-cap funds
Royce Low-Priced Stock Fund 213 out of 636 small-cap funds
PMF II 175 out of 636 small-cap funds
Royce Financial Services Fund 23 out of 48 financial services funds
Money market funds and municipal funds are not included in the Lipper survey.
The Lipper performance analysis ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees payable by shareholders into consideration and is prepared
without regard to tax consequences.
The Lipper General Equity Funds Average can be used to show how the
Funds' performances compare to a broad-based set of equity funds. The Lipper
General Equity Funds Average is an average of the total returns of all equity
funds (excluding international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper. As of December 31,
1998, the average included 278 capital appreciation funds, 1,127 growth
funds, 366 mid-cap funds, 724 small company growth funds, 55 micro-cap funds,
872 growth and income funds, 242 equity income funds and 105 S&P 500
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.
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.
<PAGE>
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
boundary of the NYSE ninth decile. As of November 30, 1998, DFA U.S. 9-10
Small Company Fund contained approximately 2,920 stocks, with a median market
capitalization of about $137 million.
The S&P 500 is an unmanaged index of common stocks frequently used as a
general measure of stock market performance. The Index's performance figures
reflect changes of market prices and quarterly reinvestment of all
distributions.
The S&P SmallCap 600 Index is an unmanaged market-weighted index
consisting of approximately 600 domestic stocks chosen for market size,
liquidity and industry group representation. As of December 31, 1998, the
weighted mean market value of a company in this Index was approximately
$_____ million.
The Russell 2000, prepared by the Frank Russell Company, tracks the
return of the common stocks of approximately 2,000 of the smallest out of the
3,000 largest publicly traded U.S.-domiciled companies by market
capitalization. The Russell 2000 tracks the return on these stocks based on
price appreciation or depreciation and includes dividends.
U.S. Treasury bonds are securities backed by the credit and taxing power
of the U.S. government and, therefore, present virtually no risk of default.
Although such government securities fluctuate in price, they are highly
liquid and may be purchased and sold with relatively small transaction costs
(direct purchase of U.S. Treasury securities can be made with no transaction
costs). Returns on intermediate-term government bonds are based on a one-
bond portfolio constructed each year, containing a bond that is the shortest
non-callable bond available with a maturity of not less than five years.
This bond is held for the calendar year and returns are recorded. Returns on
long-term government bonds are based on a one-bond portfolio constructed each
year, containing a bond that meets several criteria, including having a term
of approximately 20 years. The bond is held for the calendar year and
returns are recorded. Returns on U.S. Treasury bills are based on a one-bill
portfolio constructed each month, containing the shortest term bill having
not less than one month to maturity. The total return on the bill is the
month-end price divided by the previous month-end price, minus one. Data up
to 1976 is from the U.S. Government Bond file at the University of Chicago's
Center for Research in Security Prices; The Wall Street Journal is the source
thereafter. Inflation rates are based on the Consumer Price Index.
<PAGE>
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. In addition, Royce may compare the
performance of one or more of the Funds over various time periods and/or
market cycles to the record of one or more indices or funds described above.
From time to time, in reports and promotional literature, the Funds'
performances also may be compared to other mutual funds in 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 Fund sales
and/or advertising materials. For the three years ended December 31, 1998,
the average risk score for the 1,990 domestic equity funds rated by
Morningstar with a three-year history was 1.09 and the average risk score for
the 397 small company funds rated by Morningstar with a three-year history
was 1.47. For the three years ended December 31, 1998, the risk scores for
the Funds with a three-year history, and their ranks within Morningstar's
equity funds category and its small company category were as follows:
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Premier 0.78 Within highest 18% Within highest 5%
Micro-Cap 1.06 Within highest 62% Within highest 21%
(Investment
Class)
Pennsylvania 0.77 Within highest 16% Within highest 4%
Mutual (In-
vestment
Class)
GiftShares 0.68 Within highest 6% Within highest 2%
Investment
Class)
Total Return 0.47 Within highest 1% Within highest 1%
<PAGE>
Morningstar Rating within Morningstar Category of
Fund Risk Score Equity Funds Small Company Funds
- ---- ---------- ------------ -------------------
Low-Priced 1.05 Within highest 61% Within highest 19%
Stock
Financial Ser- .74 Within highest 12% N/A
vices
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 were purchased at
the same intervals. In evaluating such a plan, investors should consider
their ability to continue purchasing shares during periods of declining 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 can be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile - i.e., spread out around the fund's average
monthly total return, the fund's monthly total returns have been over the
prior period.
Return Per Unit of Risk. This is a measure of a fund's risk adjusted
return and is calculated by dividing a fund's average annual total return by
its annualized standard deviation over a designated time period.
<PAGE>
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.
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 would
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 would have been earned on a
riskless investment per unit of market risk assumed. Unlike the Sharpe
Ratio, the Treynor Ratio uses market risk (beta), rather than total risk
(standard deviation), as the measure of risk.
Jensen's Alpha. This is the difference between a fund's actual returns
and those that would have been earned on a benchmark portfolio with the same
amount of risk - i.e., the same beta, as the portfolio. Jensen's Alpha
measures the ability of active management to increase returns above those
that are purely a reward for bearing market risk.
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted performance.
Ratings may change monthly. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars (highest).
Morningstar ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are adjusted for fees
and sales loads. Ten percent of the funds in an investment category receive
five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive
two stars and the bottom 10% receive one star.
None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
<PAGE>
PART C -- OTHER INFORMATION
Item 23. Exhibits:
The exhibits required by Items (a) through (f), (h)
through (m) and (o), to the extent applicable to the
Registrant, have been filed with Registrant's initial
Registration Statement (No. 2-80348) and Post-Effective
Amendment Nos. 4, 5, 6, 8, 9, 11, 14, 15, 16, 17, 18, 19,
20, 21, 22, 23, 24, 26, 27, 28, 29, 30, 31, 32, 33, 34,
35, 38, 40, 41, 42, 43, 46, 47 and 48 thereto and, with
respect to Pennsylvania Mutual Fund, its initial
Registration Statement (No. 2-19995) and Post-Effective
Amendment Nos. 43, 45, 46, 47, 48, 49, 51, 52, 53, 56,
and 58, and are incorporated by reference herein.
(c) Form of Revised Royce GiftShares Trust Instrument and related
Adoption Agreement.
(d) Investment Advisory Fee Waiver Agreements for Royce Micro-Cap
Fund (Investment Class), Royce Micro-Cap Fund (Consultant Class),
Royce Total Return Fund (Investment Class), Royce Low-Priced Stock
Fund (Investment Class), Royce Financial Services Fund (Investment
Class), Royce GiftShares Fund (Investment Class), Royce GiftShares
Fund (Consultant Class), Royce Special Equity Fund (Investment
Class) and PMF II (Investment Class), dated December 16, 1998.
(e) Distribution Fee Waiver Agreements for Royce Low-Priced Stock
Fund (Investment Class), Royce Financial Services Fund (Investment
Class), Royce GiftShares Fund (Investment Class) and Pennsylvania
Mutual Fund (Consultant Class), dated December 16, 1998.
(f) Form of Deferred Fee Agreement for Trustees, dated December
31, 1998.
(h) Amendment No. 1 to Transfer Agency and Service Agreement,
dated November 18, 1998.
(i) Consent of PriceWaterhouseCoopers LLP, dated
February 19, 1999.
(l) Investment representation letter for Royce Select Fund, dated
November 17, 1998.
Item 24. Persons Controlled by or Under Common Control With
Registrant
There are no persons directly or indirectly controlled by
or under common control with the Registrant.
Item 25. Indemnification
(a) Article IX of the Trust Instrument of the Registrant
provides as follows:
"ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons
contracting with or having any claim against the Trust or
a particular Series shall look only to the assets of the
Trust or such Series for payment under such contract or
claim; and neither the Trustees nor any other Trust's
officers, employees or agents, whether past, present or
future, shall be personally liable therefor. Every
written instrument or obligation on behalf of the Trust
or any Series shall contain a statement to the foregoing
effect, but the absence of such statement shall not
operate to make any Trustee or officers of the trust
liable thereunder. None of the Trustees or officers of
the Trust shall be responsible or liable for any act or
omission or for neglect or wrongdoing by him or any
agent, employee, investment adviser or
<PAGE>
independent
contractor of the Trust, but nothing contained in this
Trust Instrument or in the Delaware Act shall protect any
Trustee or officer of the Trust against liability to the
Trust or to Shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
INDEMNIFICATION
Section 2.
(a) Subject to the exceptions and limitations
contained in Section 2(b) below:
(i) Every person who is, or has been, a
Trustee or officer of the Trust (including persons who
serve at the Trust's request as directors, officers or
trustees of another entity in which the Trust has any
interest as a shareholder, creditor or otherwise)
(hereinafter referred to as a "Covered Person") shall be
indemnified by the appropriate Fund to the fullest extent
not prohibited by law against liability and against all
expenses reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement
thereof; and
(ii) The words "claim", "action", "suit"
or "proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative, investigatory or
other, including appeals), actual or threatened, while in office or
thereafter, and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts paid
in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Covered Person:
(i) Who shall, in respect of
the matter or matters involved, have been
adjudicated by a court or body before which the
proceeding was brought (A) to be liable to the
Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence in the
performance of his duties or reckless disregard
of the obligations and duties involved in the
conduct of his office or (B) not to have acted
in the belief that his action was in the best
interest of the Trust; or
(ii) In the event of a settlement, unless
there has been a determination that such Trustee or
officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties
involved in the conduct of his office,
(A) By the court or other body
approving the settlement;
(B) By a majority of those Trustees
who are neither Interested Persons of the Trust nor are
parties to the matter, based upon a review of readily
available facts (as opposed to a full trial-type
inquiry); or
(C) By written opinion of
independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial-type
inquiry).
(c) The rights of indemnification herein
provided may be insured against by policies maintained by
the Trust, shall be severable, shall not be exclusive of
or affect any other rights to which any Covered Person
may now or hereafter be entitled, shall continue as to a
person who has ceased to be such Trustee or officer and
shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained
herein shall affect any rights to indemnification to
which Trust personnel, other than Trustees and officers,
and other persons may be entitled by contract or
otherwise under law.
<PAGE>
(d) Expenses in connection with the preparation
and presentation of a defense to any claim, action, suit or
proceeding of the type described in subsection (a) of this Section
2 may be paid by the applicable Fund from time to time prior to
final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by
him to the applicable Fund if and when it is ultimately determined
that he is not entitled to indemnification under this Section 2;
provided, however, that either (i) such Covered Person shall have
provided appropriate security for such undertaking, (ii) the Trust
is insured against losses arising out of any such advance payments
or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or
independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as
opposed to a trial-type inquiry or full investigation), that there
is reason to believe that such Covered Person will be found
entitled to indemnification under this Section 2."
(b)(1) Paragraph 8 of the Investment Advisory
Agreements by and between the Registrant and Royce &
Associates, Inc. (formerly named Quest Advisory Corp.)
provides as follows:
"8. Protection of the Adviser. The Adviser shall
not be liable to the Fund or to any portfolio series thereof for
any action taken or omitted to be taken by the Adviser in
connection with the performance of any of its duties or obligations
under this Agreement or otherwise as an investment adviser of the
Fund or such series, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the Adviser and hold
it harmless from and against all damages, liabilities, costs and
expenses (including reasonable attorneys' fees and amounts
reasonably paid in settlement) incurred by the Adviser in or by
reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by
or in the right of the Fund or any portfolio series thereof or its
security holders) arising out of or otherwise based upon any action
actually or allegedly taken or omitted to be taken by the Adviser
in connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment
adviser of the Fund or such series. Notwithstanding the preceding
sentence of this Paragraph 8 to the contrary, nothing contained
herein shall protect or be deemed to protect the Adviser against or
entitle or be deemed to entitle the Adviser to indemnification in
respect of, any liability to the Fund or to any portfolio series
thereof or its security holders to which the Adviser would
otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of
its reckless disregard of its duties and obligations under this
Agreement.
Determinations of whether and the extent to which the
Adviser is entitled to indemnification hereunder shall be made by
reasonable and fair means, including (a) a final decision on the
merits by a court or other body before whom the action, suit or
other proceeding was brought that the Adviser was not liable by
reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence of such a
decision, a reasonable determination, based upon a review of the
facts, that the Adviser was not liable by reason of such
misconduct by (i) the vote of a majority of a quorum of the
Trustees of the Fund who are neither "interested persons" of the
Fund (as defined in Section 2(a)(19) of the Investment Company Act
of 1940) nor parties to the action, suit or other proceeding or
(ii) an independent legal counsel in a written opinion."
(c) Paragraph 9 of the Distribution Agreement made
October 31, 1985 by and between the Registrant and Royce Fund
Services, Inc. (formerly named Quest Distributors, Inc.)
provides as follows:
"9. Protection of the Distributor. The
Distributor shall not be liable to the Fund or to any
series thereof for any action taken or omitted to be
taken by the Distributor in connection with the
performance of any of its duties or obligations under
this Agreement or otherwise as an underwriter of the
Shares, and the Fund or each portfolio series thereof
involved, as the case may be, shall indemnify the
Distributor and hold it harmless from and against all
damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in
settlement) incurred by the Distributor in or by reason
of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or
suit by or in the right of the Fund or any series thereof
or its security holders) arising out of or otherwise
based upon any action actually or allegedly taken or
omitted to be taken by the Distributor in connection with
the performance of any of its duties or obligations under
this Agreement or otherwise as an underwriter of the
Shares. Notwithstanding the preceding sentences of this
Paragraph 9 to the contrary, nothing contained herein
shall protect or be deemed to protect the Distributor
against, or entitle or be deemed to entitle the
Distributor to indemnification in respect of, any
liability to the Fund or to any portfolio
<PAGE>
series thereof
or its security holders to which the Distributor would
otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its
duties and obligations under this Agreement.
Determinations of whether and to the extent to which
the Distributor is entitled to indemnification hereunder
shall be made by reasonable and fair means, including
(a) a final decision on the merits by a court or other
body before whom the action, suit or other proceeding was
brought that the Distributor was not liable by reason of
willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties or (b) in the absence of
such a decision, a reasonable determination, based upon a
review of the facts, that the Distributor was not liable
by reason of such misconduct by (a) the vote of a
majority of a quorum of the Trustees of the Fund who are
neither "interested persons" of the Fund (as defined in
Section 2(a)(19) of the 1940 Act) nor parties to the
action, suit or other proceeding or (b) an independent
legal counsel in a written opinion."
Item 26. Business and Other Connections of Investment Advisers
Reference is made to the filings on Schedule D to
the Form ADV, as amended, of Royce & Associates, Inc. for
Registration as Investment Adviser under the Investment
Advisers Act of 1940.
Item 27. Principal Underwriters
Royce Fund Services, Inc. is the Registrant's principal
underwriter in connection with the sale of shares of the
Registrant. The following are the directors and officers of Royce
Fund Services, Inc., the principal place of business of which is
1414 Avenue of the Americas, New York, New York 10019.
Positions and Positions and
Offices Offices
Name with Underwriter with Fund
---- ---------------- ---------
Charles M. Royce Director, Secretary President
John D. Diederich President Director of
Administration
Jack E. Fockler, Jr. Vice President Vice President
Item 28. Location of Accounts and Records
The accounts, books and other documents required to
be maintained by the Registrant pursuant to the Investment
Company Act of 1940, are maintained at the following
locations:
The Royce Fund
1414 Avenue of the Americas
10th Floor
New York, New York 10019
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
Item 29. Management Services
State Street Bank and Trust Company, a Massachusetts
trust company ("State Street"), provides certain
management-related services to the Registrant pursuant to a
Custodian Contract made as of December 31, 1985 between the
Registrant and State Street. Under such Custodian Contract,
State Street, among other things, has contracted with the
Registrant to keep books of accounts and render such
statements
<PAGE>
as agreed to in the then current mutually-executed
Fee Schedule or copies thereof from time to time as requested
by the Registrant, and to assist generally in the preparation
of reports to holders of shares of the Registrant, to the
Securities and Exchange Commission and to others, in the
auditing of accounts and in other ministerial matters of like
nature as agreed to between the Registrant and State Street.
All of these services are rendered pursuant to instructions
received by State Street from the Registrant in the ordinary
course of business.
Registrant paid the following fees to State Street for
services rendered pursuant to the Custodian Contract, as amended,
for each of the three (3) fiscal years ended December 31:
1998: $
1997: $462,684
1996: $468,735
Item 30. Undertakings
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of New York on
the 22nd day of February, 1999.
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Charles M. Royce President, Treasurer and 2/22/99
Charles M. Royce Trustee
(Principal Executive,
Financial and Accounting
Officer)
/s/ Hubert L. Cafritz Trustee 2/22/99
Hubert L. Cafritz
/s/ Donald R. Dwight Trustee 2/22/99
Donald R. Dwight
/s/ Richard M. Galkin Trustee 2/22/99
Richard M. Galkin
/s/ Stephen L. Isaacs Trustee 2/22/99
Stephen L. Isaacs
/s/ William L. Koke Trustee 2/22/99
William L. Koke
/s/ David L. Meister Trustee 2/22/99
David L. Meister
NOTICE
A copy of the Trust Instrument of The Royce Fund is available for
inspection at the office of the Registrant, and notice is hereby given that
this instrument is executed on behalf of the Registrant by an officer of the
Registrant as an officer and not individually and that the obligations of or
arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property
of the Registrant.
<PAGE>
PREAMBLE
This Trust is irrevocable. Your gift cannot be canceled or returned to you.
You cannot revoke the Trust or change its terms in any way. You should
contribute only an amount of money that you will never want back.
Creating this Trust may require the filing of a Federal Gift Tax Return (IRS
Form 709) and a State Gift Tax Return, even if the amount of the gift is less
than $10,000. Whether a Federal Gift Tax Return or a State Gift Tax Return is
required will depend upon the options that you select in the Adoption
Agreement, the amount of other gifts that you have made and the laws of the
State or other jurisdiction in which you reside. See the Prospectus and the
Statement of Additional Information for details.
This Trust Instrument is provided as a convenience to you and your attorney.
Neither The Royce Fund nor Royce & Associates, Inc. can advise you whether
the Trust is appropriate for your circumstances. Please consult with your
attorney before signing the Adoption Agreement.
<PAGE>
ROYCE GIFTSHARES FUND TRUST
This Instrument has been provided by The Royce Fund (including its
successors, "TRF"), with State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110-2804, as trustee, to enable individuals
to make irrevocable gifts that will be held in trust for others. Each
individual making a gift under this Instrument (the "Donor") shall complete
and execute a separate instrument (the "Adoption Agreement") specifying the
individual for whom the gift is made (the "Beneficiary"), the amount of the
gift (the "Initial Contribution") and the Donor's choices as to the payment
or accumulation of income and other options, and shall deliver the same to
State Street Bank and Trust Company or its successor in office from time to
time (the "Trustee").
Upon receipt and acceptance of a properly completed and executed Adoption
Agreement and collection of the Initial Contribution (the "Receipt Date"),
the Trustee shall hold the Initial Contribution, together with all additions
thereto, all gains thereon and all accrued, accumulated and undistributed
income (collectively, the "trust fund"), in a trust (the "Trust") for the
Beneficiary upon the terms and subject to the conditions of this Instrument
and the Adoption Agreement.
1. Trust Investments - (a) The Trustee shall invest the trust fund in
Consultant Class or Investment Class shares (as indicated by the Adoption
Agreement) of Royce GiftShares Fund (including its successors, "RGF"), a
series of TRF.
(b) The Trustee shall reinvest all net investment income dividends
and capital gains distributions that are not required to be distributed
currently to the Beneficiary in additional shares of RGF, of the same class
as the shares with respect to which the dividend or distribution was made,
except as otherwise provided in paragraph "(c)" of this Section.
(c) If Consultant Class shares of RGF should ever become
unavailable, the Trustee shall invest the trust fund in Investment Class
shares. If Investment Class shares of RGF should ever become unavailable,
the Trustee may invest the trust fund in a comparable investment, to be
selected by the Trustee in its sole and absolute discretion.
(d) The Trustee shall not be liable or responsible for any loss
resulting to the trust fund or to any present or future beneficiary of the
Trust by reason of the investment in shares of RGF or any investment
substituted for that fund pursuant to this paragraph.
2. Withdrawal Rights - If the Donor selects the "Withdrawal Option" in
the Adoption Agreement:
(a) Within 30 days after receipt and collection by the Trustee of
the Initial Contribution or any subsequent addition to the Trust, the
Beneficiary shall have the right to either (i) withdraw all of the shares of
RGF acquired by the Trustee with the Initial Contribution
<PAGE>
or such subsequent
addition, as the case may be, or (ii) direct the Trustee to redeem such
shares of RGF and distribute the net proceeds of such redemption to the
Beneficiary. The Trustee shall notify the Beneficiary of this right of
withdrawal promptly after receipt of the Initial Contribution or any
additional contribution.
(b) The Beneficiary shall have the power, at any time, to direct
the Trustee to make tax equalization distributions. In the event of such
direction, the Trustee shall pay the amount of such tax equalization
distribution to the Beneficiary within 90 days after the end of the calendar
year in which such direction is made and each calendar year thereafter prior
to the calendar year in which the termination of the Trust occurs. The
amount of the tax equalization distribution for any calendar year shall be
determined by multiplying each class of income earned by the Trust for that
calendar year (ordinary income or capital gains) by the highest marginal
Federal tax rate for unmarried individuals for that calendar year applicable
to that class of income. Any direction made pursuant to this paragraph shall
be irrevocable.
3. Education Expenses - (a) If the Donor selects the "Withdrawal
Option" in the Adoption Agreement and the Donor has so authorized in the
Adoption Agreement, the Beneficiary may direct the Trustee to pay the
expenses of the Beneficiary's post-secondary education at any college or
other post-secondary institution (the "Post-Secondary Institution") that the
Beneficiary attends. For purposes of this Section:
(i) the term "college or other post-secondary
education" means (a) a college or post-graduate degree program at
an accredited college or university or (b) with the written consent
of the Representative (as defined below), any other post-secondary
program at a technical, vocational or religious post-secondary
school; and
(ii) the term "expenses of the Beneficiary's post-
secondary education" means (a) the charges of the Post-Secondary
Institution for tuition, room and board and such other fees and
expenses (such as laboratory fees and student activity fees) as are
required by the Post-Secondary Institution in connection with such
education ("Institutional Charges") and (b) with the written
consent of the Representative, charges for books, off-campus living
expenses, travel sponsored by the Post-Secondary Institution or
Post-Secondary Institution-related organizations and other non-
mandatory activity fees ("Personal Charges").
The Trustee, in its sole and absolute discretion, shall determine whether a
particular institution is a Post-Secondary Institution within the meaning of
this paragraph.
(b) The Beneficiary shall submit to the Trustee any bill or statement
from the Post-Secondary Institution for the Beneficiary's Institutional
Charges and, upon receipt of that bill or
<PAGE>
statement, the Trustee shall pay
the amount of such bill or statement to the Beneficiary and the Post-
Secondary Institution as joint payees. Alternatively, the Trustee may, in
its sole and absolute discretion, make such payments directly to the Post-
Secondary Institution for the Beneficiary's Institutional Charges pursuant to
any direct deposit expense payment plan that the Trustee deems acceptable.
The Trustee may rely, without further investigation, upon any bill or
statement of such institution that appears to the Trustee to be genuine.
(c) The Beneficiary shall submit to the Trustee a statement signed
by the Beneficiary and the Representative, in such form and with such
acknowledgment or guaranty of such signatures as the Trustee shall require,
for the Beneficiary's Personal Charges and, upon receipt of that statement,
the Trustee shall pay the amount of such statement to the Beneficiary and
deliver a Notice of such payment to the Representative. The Trustee may
rely, without further investigation, upon any such statement that appears to
the Trustee to be genuine.
(d) The Trustee may charge a reasonable fee for the services
provided in this Section, in addition to any other fees that it may collect
for its services as Trustee.
4. Tax Withholding - Notwithstanding any other provision of this
Instrument, the Trustee is authorized to withhold from any distribution
required under this Instrument any Federal, state or local taxes that may be
required to be withheld with respect to the payment of such distribution
under applicable Federal, state or local law, and to pay the amounts withheld
to the appropriate taxing authorities.
5. Trust Termination - (a) Except as otherwise provided in
paragraph "(b)" of this Section, the Trust shall terminate on the last to
occur of (i) the termination date specified by the Donor in the Adoption
Agreement, (ii) the tenth (10th) anniversary of the Receipt Date, and
(iii) the Beneficiary's twenty-first (21st) birthday. Upon termination of
the Trust pursuant to this paragraph, the Trustee shall distribute the entire
trust fund to the Beneficiary.
(b) If the Beneficiary dies before the termination date specified
in paragraph "(a)" above, the Trust shall thereupon terminate and the trust
fund shall be distributed (i) to or among such persons, corporations or
entities, including the Beneficiary's estate, the Beneficiary's creditors or
the creditors of the Beneficiary's estate, outright or in trust and upon such
terms and conditions as the Beneficiary shall appoint by his or her last will
and testament, duly admitted to probate, which makes specific reference to
this provision, or (ii) if (or to the extent that) the Beneficiary fails to
exercise this general power of appointment effectively, to the person or
persons specified in the Adoption Agreement as the "Secondary Beneficiaries"
(in equal shares, if more than one), or (iii) if no Secondary Beneficiary is
specified in the Adoption Agreement, to the executors or administrators of
the Beneficiary's estate.
6. Additional Contributions - Any person (other than the
Beneficiary, the Beneficiary's spouse, the Representative, or the
Representative's spouse) may add property to the
<PAGE>
Trust by delivery of the
same to the Trustee, which shall in all respects be subject to this
Instrument, as supplemented by the Adoption Agreement. (Such additional
gifts may require the filing of a Federal and state gift tax return.)
7. Beneficiaries Younger Than 21 - (a) If and for so long
as the Beneficiary is under the age of eighteen (18) years, (i) except as
otherwise provided in Section 0 and in paragraph "(b)" of this Section, all
distributions required to be made to the Beneficiary under this Instrument
shall be paid to the Representative (as defined below), (ii) all of the
rights and powers given to the Beneficiary by this Instrument shall be
exercisable by the Representative and (iii) all notices, statements, proxies
and other communications required to be sent to the Beneficiary under this
Instrument shall be sent to the Representative.
(b) If the Donor so specifies in the Adoption Agreement, all
distributions required to be made to the Beneficiary under this Instrument
before the Beneficiary's twenty-first (21st) birthday shall be paid to the
Representative, as custodian for the Beneficiary under the Uniform Transfers
to Minors Act of any jurisdiction, except as otherwise provided in Section 0.
8. The Representative - The "Representative" shall be the individual
(other than the Donor or the Donor's spouse) specified in the Adoption
Agreement to serve in that capacity. The Representative shall be authorized
to appoint another individual (other than the Donor or the Donor's spouse) to
serve as successor Representative. If the Representative dies or becomes
disabled without having appointed a successor Representative, his or her
guardian, conservator or committee or the executors or administrators of his
or her estate shall appoint a successor Representative. The Trustee may
rely, and shall be protected in acting upon, any request, consent or election
made by the Representative on behalf of the Beneficiary.
9. Assignment or Invasion of the Trust Fund Prohibited - The
Beneficiary shall have no power to assign, transfer, encumber or otherwise
dispose of any interest in the trust fund, and all sums payable to the
Beneficiary hereunder shall be free and clear of the Beneficiary's
liabilities, debts, contracts and assignments and from levies, attachments or
similar proceedings of any kind, including claims for alimony, child support
or similar obligations, and free from the control of his or her spouse. No
provision of law that would otherwise authorize a court to direct that the
trust fund be invaded for any purpose shall apply to the Trust.
10. Trustee Powers - In addition to and not in limitation of any powers
conferred upon fiduciaries by law, the Trustee is expressly authorized, in
its sole and absolute discretion:
(a) To appoint agents, accountants, experts and counsel, including
individuals and entities affiliated with the Trustee, TRF or RGF's investment
adviser, and to authorize any one or more of them to perform the Trustee's
ministerial acts hereunder, including but not limited to
<PAGE>
the acceptance of
investments, maintenance of financial and other records, collection and
remittance of fees and expenses, if any, issuance of reports and accountings
to beneficiaries, distribution of the trust fund at the termination of the
Trust and preparation, execution and filing of tax returns and payment of
taxes shown to be due on such returns.
(b) To pay from the trust fund any and all expenses, costs, fees,
taxes, penalties or other charges, including compensation to any agents,
accountants, experts and counsel whose services may be required in the
administration of the Trust.
(c) To hold property in its own name, unregistered, in the name of
a nominee, in such form as will pass by delivery or in book-entry form.
(d) To pay reasonable annual and other fees to itself comparable
to the fees for such services charged by others.
(e) 1To determine the form of any notices required in connection
with any rights or powers exercisable by the Beneficiary under this
Instrument and any reasonable conditions on the exercise of such rights or
powers that the Trustee finds necessary or convenient for the efficient
administration of the Trust.
11. Voting of RGF Shares - The Trustee shall deliver, or arrange for
delivery of, notices of meetings of RGF shareholders, RGF proxy statements
and RGF proxies in sufficient time to enable the Beneficiary to attend such
meeting in person or vote by proxy. The Trustee shall vote all shares of RGF
for which no proxies are returned (and which are not present in person at the
meeting) in the same proportion as RGF shares for which proxies are returned.
12. Accounting Reports - (a) The Trustee is authorized to send to the
Beneficiary (or to the executors or administrators of the Beneficiary's
estate, if the Beneficiary has died), annually or more frequently as the
Trustee shall determine, a written account of its administration of the Trust
(which may be or include a periodic statement of the Trust's account with
RGF) setting forth (i) all investments, receipts and disbursements and other
transactions effected during the period from the Receipt Date, or from the
close of any preceding period covered by such an account, to the closing date
of such account selected by the Trustee, (ii) all cash, securities and other
property held at the close of such period and the current value thereof and
(iii) such other information as may be required of the Trustee under
applicable law. The Trustee shall also send copies of such accounts to the
Donor upon his or her written request. The written approval of such account
by the Beneficiary (or the executors or administrators of the Beneficiary's
estate, if the Beneficiary has died) shall make such account binding and
conclusive upon all persons
<PAGE>
(whether or not in being) then or thereafter
interested in the Trust. The failure of the Beneficiary (or the executors or
administrators of his or her estate) to object to any such account within 60
days after receipt of a copy of such account shall be deemed to be written
approval of such account.
(b) Nothing contained in this Section shall be construed as a
limitation upon or prohibition against the Trustee's right to have its
accounting judicially settled.
13. Liability of Trustees and Agents - (a) No Trustee or agent of the
Trust shall be subject to any personal liability whatsoever, in tort, contract
or otherwise, to any person in connection with the trust fund or the affairs of
this Trust, except for his, her or its own acts constituting bad faith,
willful misconduct or gross negligence, and all such persons shall look
solely to the trust fund for satisfaction of claims of any nature arising in
connection with affairs of the Trust. Without limiting the generality of the
foregoing (and except as to acts of the Trustee constituting bad faith,
willful misconduct or gross negligence):
(b) The Trustee shall not be liable except for the performance of
such duties and obligations as are specifically set forth in this Instrument,
and no implied covenants or obligations shall be read into this Instrument
against the Trustee.
(c) The Trustee shall not be liable for any action taken in good
faith in reliance upon the advice or opinion of any legal counsel, accountant
or other expert or professional, and such advice or opinion shall be full and
complete personal protection to the Trustee and agents of the Trust in
respect of any action taken or suffered by it in good faith and in reliance
on, or in accordance with, such advice or opinion.
(d) The Trustee may rely and shall be protected in acting upon any
notice, request, consent, order or other paper or document reasonably
believed by the Trustee to be genuine and to have been signed or presented by
the proper party or parties.
(e) The Trustee shall not be liable for any error of judgment made
in good faith.
14. Indemnification of Trustee - (a) The Trustee and each of its
agents shall be indemnified by and receive reimbursement from the trust fund
against and from any and all loss, liability, damage or expense that the
Trustee or any of its agents may incur or sustain for or by reason of (i) any
change in the Beneficiary's domicile without written notice to the Trustee or
any of its agents, (ii) failure of the Beneficiary's executors,
administrators or heirs to provide timely written notice to the Trustee or
any of its agents of the Beneficiary's death, (iii) failure of the Donor to
file any Federal or state gift or generation-skipping transfer tax return or
to pay any Federal or state gift or generation-skipping transfer tax or
(iv) failure of the Beneficiary to file any Federal or state estate or income
tax return or pay any Federal or state estate or income tax. The Trustee may
receive advance payments in connection with the indemnification provided
<PAGE>
under this Section, subject to the Trustee's obligation to repay any amount
advanced to it that is subsequently determined to be in excess of the amount
to which it is entitled.
(b) The rights accruing to the Trustee and its agents by reason of
the foregoing shall not be deemed to exclude any other right to which it or
they may legally be entitled, nor shall anything else contained herein
restrict the right of the Trustee or any of its agents to contribution under
applicable law.
15. Resignation, Removal and Replacement of the Trustee - (a) Any
Trustee may resign at any time upon 60 days notice in writing to TRF,
whereupon a majority of those directors/trustees of TRF who are not
interested persons of TRF or RGF's investment adviser, as defined in the
Investment Company Act of 1940, as it may from time to time be amended, or
any Act enacted in lieu thereof, shall select a successor Trustee in the
manner provided in paragraph "c" below.
(b) A majority of those directors/trustees of TRF who are not
interested persons of TRF or RGF's investment adviser, may, upon 10 days
notice in writing to the Trustee and RGF's investment adviser, remove any
Trustee at any time acting hereunder.
(c) Whenever any Trustee shall cease to act for any reason, its
successor shall be such individual or entity as may be selected by a majority
of those directors/trustees of TRF who are not interested persons of TRF or
RGF's investment adviser. When the successor Trustee assumes office, notice
thereof shall be sent to the Beneficiary.
(d) No successor Trustee shall be liable or responsible for any
act or default of any predecessor Trustee, nor shall any successor Trustee be
required to inquire into or take any notice of the prior administration of
the trust fund.
16. Amendment - This Instrument may be amended by the Trustee, with the
consent of a majority of those directors/trustees of TRF who are not
interested persons of TRF or RGF's investment adviser, at any time or from
time to time, to promote the prompt and efficient administration of the
Trusts under this Instrument or to carry out the purposes of the Trust;
provided, however, that no such amendment may (i) adversely affect the rights
of the Beneficiary in any significant respect, (ii) affect any election or
option selected by the Donor, (iii) result in the return of any interest in
or power over the Trust to the Donor or the Donor's spouse, (iv) expand the
amendment powers of the Trustee under this paragraph or (v) violate any
applicable statute or rule of law. Any such amendment shall apply to every
Trust created under this Instrument and shall become effective only after 30
days prior written notice to the Beneficiary of every Trust created under
this Instrument.
17. Governing Law - This Instrument shall be construed and enforced, to
the extent possible, according to the laws of the State of Massachusetts and
all provisions hereof shall be administered according to the laws of said
State.
<PAGE>
18. Severability - If any provision of this Instrument is found to be
invalid, illegal or unenforceable in any respect, such provision shall be
deemed to have been excised, and the balance of this Instrument shall remain
in effect and shall be construed without regard to such provision, and each
provision of this Instrument shall be valid and enforced to the fullest
extent permitted by law.
<PAGE>
ADOPTION AGREEMENT (1/98)
DONOR(S) ___________________________________________________________
Name Soc. Security No.
___________________________________________________________
Name Soc. Security No.
___________________________________________________________
No. and Street Apt. No.
______________________________________(___)________________
City State Zip Telephone
I (We), the Donor(s) named above, hereby adopt the terms of
the Royce GiftShares Fund Trust and agree that the gift
described in this Adoption Agreement shall be governed by
the terms and conditions of the Royce GiftShares Fund
Trust, subject to the options that I (we) have selected in
this Adoption Agreement. I (WE) UNDERSTAND THAT THIS GIFT
IS IRREVOCABLE AND CANNOT BE RETURNED TO ME (US), AND THAT
I (WE) WILL HAVE NO CONTROL OVER THE TRUST THAT I (WE) HAVE
CREATED.
BENEFICIARY ___________________________________________________________
(Must be a Name Soc. Security No.
citizen or
permanent ___________________________________________________________
resident of the No. and Street Apt. No.
United States)
______________________________________(___)________________
City State Zip Telephone
__________________ _____________________________________
Date of Birth Relationship to Donor
AMOUNT OF GIFT ___________________________________________________________
(Minimum $5,000) Make Check Payable to Royce GiftShares Fund
TRUST OPTIONS
(Refer to the
brochure
Select only one) / /
Withdrawal Option - I (we) want the gift to
qualify for the $10,000 Federal annual
gift tax exclusion, and/or, if selected below,
I (we) want to to give the beneficiary the
opportunity make withdrawals from the Trust
to pay for higher education and related costs.
/ /
Accumulation Option - I (we) are not concerned
about the Federal annual gift tax exclusion, and
I (we) want the Trustee to file necessary Federal
and state income tax returns.
TERMINATION This Trust will terminate on: __________________________
DATE (month/day/year) (Date must be at least 10 years from
the date of your gift or the age of majority, whichever
is longer)
<PAGE>
HIGHER EDUCATION
EXPENSE PAYMENT / /
(For Withdrawal The Beneficiary is authorized to withdraw funds for the
Option only) expenses of his or her college, post-graduate or (with the
consent of the Representative) other post-secondary
education.
SECONDARY ___________________________________________________________
BENEFICIARIES Name/Relationshp
(See Trust
Agreement) ___________________________________________________________
Name/Relationship
___________________________________________________________
Name/Relationship
BENEFICIARY'S The following individual is appointed to serve as the
REPRESENTATIVE Beneficiary's "Representative," as defined in the Trust
(Complete if Agreement, and is authorized to receive distributions,
Beneficiary is a notices, proxies and other communications while the
minor or has not Beneficiary is under the age of 18, and to approve certain
completed his or educational expenses:
her education)
___________________________________________________________
Name (Other than Donor or Donor's spouse)
___________________________________________________________
No. and Street Apt. No.
______________________________________(___)________________
City State Zip Telephone
DISTRIBUTIONS
BEFORE AGE 21 / /
Pay all distributions made before the Beneficiary's 21st
birthday to the Representative named above as Custodian for
the Beneficiary under the Uniform Transfers to Minors Act
I (WE) HAVE RECEIVED AND READ THE CURRENT PROSPECTUS FOR THE CONSULTANT CLASS
OR INVESTMENT CLASS SHARES OF ROYCE GIFTSHARES FUND ("RGF") AND THE SECTION
OF THE ROYCE FUND'S CURRENT STATEMENT OF ADDITIONAL INFORMATION CONCERNING
FEDERAL GIFT, GENERATION-SKIPPING TRANSFER AND INCOME TAX MATTERS RELATING TO
RGF. I (WE) UNDERSTAND THAT I (WE) MAY BE REQUIRED TO FILE A GIFT TAX
RETURN REPORTING THIS GIFT, AND THAT IT IS MY (OUR) RESPONSIBILITY TO
DETERMINE WHETHER A GIFT TAX RETURN WILL BE REQUIRED.
_____________________________________ ______________________
Signature of Donor Date
_____________________________________ ______________________
Signature of Donor Date
/ / Duplicate statements to Financial Advisor:
Name_________________________________________________
Company: ___________________________
Address: ____________________________________________
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Micro-Cap Fund
(Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated April 28,
1993 (the "Agreement") by and between The Royce Fund (the "Fund") on behalf
of Royce Micro-Cap Fund (the "Series") and Royce & Associates, Inc. (the
"Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Micro-Cap Fund
(Consultant Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated April 28,
1993 (the "Agreement") by and between The Royce Fund (the "Fund") on behalf
of Royce Micro-Cap Fund (the "Series") and Royce & Associates, Inc. (the
"Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Consultant Class of shares (the
"Class") are not more than 2.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 2.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Total Return Fund
(Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated December
15, 1993 (the "Agreement") by and between The Royce Fund (the "Fund") on
behalf of Royce Total Return Fund (the "Series") and Royce & Associates,
Inc. (the "Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.25% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.25% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Low-Priced Stock Fund
(Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated December
15, 1993 (the "Agreement") by and between The Royce Fund (the "Fund") on
behalf of Royce Low-Priced Stock Fund (the "Series") and Royce &
Associates, Inc. (the "Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Financial Services Fund
(Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated November
1, 1996 (the "Agreement") by and between The Royce Fund (the "Fund") on
behalf of Royce Financial Services Fund (the "Series") and Royce &
Associates, Inc. (the "Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Giftshares Fund
(Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated December
22, 1995 and amended May 28, 1997 (the "Agreement") by and between The
Royce Fund (the "Fund") on behalf of Royce GiftShares Fund (the "Series")
and Royce & Associates, Inc. (the "Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce GiftShares Fund
(Consultant Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated December
15, 1995 and amended May 28, 1997 (the "Agreement") by and between The
Royce Fund (the "Fund") on behalf of Royce GiftShares Fund (the "Series")
and Royce & Associates, Inc. (the "Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Consultant Class of shares (the
"Class") are not more than 2.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 2.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - Royce Special Equity Fund
(Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated April 30,
1998 (the "Agreement") by and between The Royce Fund (the "Fund") on behalf
of Royce Special Equity Fund (the "Series") and Royce & Associates, Inc.
(the "Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Fee Waiver and Expense Reimbursement - PMF II (Investment Class)
Gentlemen:
Reference is made to the Investment Advisory Agreement dated November
1, 1996 (the "Agreement") by and between The Royce Fund (the "Fund") on
behalf of PMF II (the "Series") and Royce & Associates, Inc. (the
"Adviser").
Notwithstanding the provisions of Section 4 (Compensation of the
Adviser) of the Agreement, the Adviser hereby waives compensation for
services provided by it under the Agreement for the calendar year ending
December 31, 1999 in an amount, if any, necessary so that the Series'
"Annual Operating Expenses" for its Investment Class of shares (the
"Class") are not more than 1.49% of the Classes' average net assets for
such calendar year. If, after giving effect to the provisions of the
preceding sentence, the Adviser is not entitled to receive any compensation
for such calendar year with respect to the Class, then the Adviser will
reimburse the Series with respect to the Class to the extent necessary to
cause the Series' Annual Operating Expenses for the Class to be not more
than 1.49% of the Classes' average net assets for such calendar year. This
Waiver and Expense Reimbursement will also be effective for the calendar
year or years ending after December 31, 1999, unless the Adviser notifies
the Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver and Expense Reimbursement will cease to be
effective for the next and any and all subsequent calendar years. However,
the Adviser's obligation to reimburse the Series with respect to the Class
under this Waiver and Expense Reimbursement will not apply for any period
when the Adviser is not rendering services to the Series under the
Agreement.
The Series' "Annual Operating Expenses" for the Class means and will
consist only of the following operating expenses of the Series for the
Class that are, under generally accepted accounting principles, accruable
and deductible from the Series' assets with respect to the Class for the
calendar year involved: (i) investment advisory fees, if any; (ii) Rule
12b-1 distribution fees, if any; and (iii) custodian fees, shareholder
servicing fees, administrative and office facilities expenses, professional
fees, trustees' fees and any other operating expenses of the Series with
respect to the Class that are recorded or includable in the Series'
statement of operations in accordance with generally accepted accounting
principles. Notwithstanding the provisions of the immediately preceding
sentence, the Series' "Annual Operating Expenses" for the Class do not
include interest and dividends on securities sold short, amortization of
organization expenses, taxes, brokerage commissions, litigation and
indemnification expenses or any costs or expenses of or for the Series with
respect to the Class that are "extraordinary" as determined under generally
accepted accounting principles (see Accounting Principles Board Opinion No.
30).
Very truly yours,
ROYCE & ASSOCIATES, INC.
By: /s/ Charles M. Royce
Charles M. Royce,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Distribution Fee Waiver - Royce Low-Priced Stock Fund (Investment Class)
Gentlemen:
Reference is made to the Distribution Fee Agreement dated as of November
30, 1993 (the "Agreement") by and between The Royce Fund (the "Fund") on
behalf of Royce Low-Priced Stock Fund's (the "Series") Investment Class of
shares (the "Class") and Royce Fund Services, Inc. (the "Distributor").
Notwithstanding the provisions of the Agreement, the Distributor hereby
waives compensation for services provided by it under the Agreement for the
calendar year ending December 31, 1999. This Waiver will also be effective
for the calendar year or years ending after December 31, 1999, unless the
Distributor notifies the Fund in writing at least 10 days prior to the end of
the then current calendar year that this Waiver will cease to be effective
for the next and any and all subsequent calendar years.
Very truly yours,
ROYCE FUND SERVICES, INC.
By: /s/ John D. Diederich
John D. Diederich,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Distribution Fee Waiver - Royce Financial Services Fund (Investment
Class)
Gentlemen:
Reference is made to the Distribution Fee Agreement dated November 1,
1996 (the "Agreement") by and between The Royce Fund (the "Fund"
behalf of Royce Financial Services Fund's (the "Series") Investment Class of
shares (the "Class") and Royce Fund Services, Inc. (the "Distributor").
Notwithstanding the provisions of the Agreement, the Distributor hereby
waives compensation for services provided by it under the Agreement for the
calendar year ending December 31, 1999. This Waiver will also be effective
for the calendar year or years ending after December 31, 1999, unless the
Distributor notifies the Fund in writing at least 10 days prior to the end of
the then current calendar year that this Waiver will cease to be effective
for the next and any and all subsequent calendar years.
Very truly yours,
ROYCE FUND SERVICES, INC.
By: /s/ John D. Diederich
John D. Diederich,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Distribution Fee Waiver - Royce GiftShares Fund (Investment Class)
Gentlemen:
Reference is made to the Distribution Fee Agreement dated as of June 13,
1997 (the "Agreement") by and between The Royce Fund (the "Fund") on behalf
of Royce GiftShares Fund's (the "Series") Investment Class of shares (the
"Class") and Royce Fund Services, Inc. (the "Distributor").
Notwithstanding the provisions of the Agreement, the Distributor hereby
waives compensation for services provided by it under the Agreement for the
calendar year ending December 31, 1999. This Waiver will also be effective
for the calendar year or years ending after December 31, 1999, unless the
Distributor notifies the Fund in writing at least 10 days prior to the end of
the then current calendar year that this Waiver will cease to be effective
for the next and any and all subsequent calendar years.
Very truly yours,
ROYCE FUND SERVICES, INC.
By: /s/ John D. Diederich
John D. Diederich,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
<PAGE>
December 16, 1998
The Royce Fund
1414 Avenue of the Americas
New York, NY 10019
Re: Distribution Fee Waiver - Pennsylvania Mutual Fund (Consultant Class)
Gentlemen:
Reference is made to the Distribution Fee Agreement dated January 2,
1998 (the "Agreement") by and between The Royce Fund (the "Fund") on behalf
of Pennsylvania Mutual Fund's (the "Series") Consultant Class of shares (the
"Class") and Royce Fund Services, Inc. (the "Distributor").
Notwithstanding the provisions of the Agreement, the Distributor hereby
waives compensation for services provided by it under the Agreement for the
calendar year ending December 31, 1999 to the extent necessary so that it
receives a distribution fee of 0.75% of the Classes' average net assets for
such calendar year. This Waiver will also be effective for the calendar year
or years ending after December 31, 1999, unless the Distributor notifies the
Fund in writing at least 10 days prior to the end of the then current
calendar year that this Waiver will cease to be effective for the next and
any and all subsequent calendar years.
Very truly yours,
ROYCE FUND SERVICES, INC.
By: /s/ John D. Diederich
John D. Diederich,
President
ACCEPTED:
THE ROYCE FUND
By: /s/ Charles M. Royce
Charles M. Royce,
President
DEFERRED FEE AGREEMENT
THIS AGREEMENT dated December 31, 1998, by and between The Royce Fund
(the "Trust"), a management investment company organized as a Delaware
business trust, with offices at 1414 Avenue of the Americas, New York, New
York 10019, and ________________ ("Trustee"), currently residing at
__________________________________.
W I T N E S S E T H:
WHEREAS, Trustee currently serves as a trustee or director of the Trust
and receives remuneration ("Trustee's Fees") from the Trust in that capacity;
and
WHEREAS, Trustee desires that an arrangement be established with the
Trust under which Trustee may defer receipt of Trustee's Fees that may
otherwise become payable to Trustee and that relate to services performed
after the date hereof; and
WHEREAS, the Trust is agreeable to such an arrangement.
NOW, THEREFORE, it is agreed as follows:
1. Trustee irrevocably elects to defer receipt, subject to the
provisions of this Agreement, of [all] [$ ] [___%] of Trustee's
Fees which may otherwise become payable to Trustee for the calendar year 1999
and which relate to services to be performed during such year. Such election
shall continue in effect with respect to such Trustee's Fees which may
otherwise become payable to Trustee for any calendar year subsequent to 1999
and which relate to services to be performed during such subsequent year
(which, together with the calendar year 1999, are referred to herein as
"Deferred Years" and individually as a "Deferred Year"), unless prior to
January 1 of a subsequent year, Trustee shall have delivered to the President
or the Secretary of the Trust a written revocation or modification of such
election with respect to all or any portion of such Trustee's Fees which may
otherwise become payable to him for such subsequent year and which relate to
services to be performed during such subsequent year. Trustee's Fees with
respect to which Trustee shall have elected to defer receipt (and shall not
have revoked such election) as provided above are hereinafter referred to as
"Deferred Trustee's Fees".
2. During any Deferred Year, the Trust shall credit the amount of
Deferred Trustee's Fees to a book reserve account (the "Deferred Fee
Account") based on the rate(s) of such Trustee's Fees in effect from time to
time during such year.
3 The "Underlying Securities" for the Deferred Fee Account shall be
Investment Class shares of up to any three (3) series of [the Trust] [The
Royce Fund, a Delaware business trust,] as the Trustee may from time to time
designate in writing as the Underlying Securities.
4. The value of the Deferred Fee Account as of any date shall be equal
to the value such account would have had as of such date if the amounts
credited thereto had been invested and reinvested in the Underlying
Securities from and after the date such Underlying Securities
<PAGE>
were designated. In addition, the Deferred Fee Account shall be credited or
debited, as the case may be, with all gains, losses, interest, dividends and
earnings that would have been realized had the Deferred Fee Account been
invested in such Underlying Securities from and after the date such
Underlying Securities were designated.
5. The Trust's obligation to make payments of the Deferred Fee Account
shall be a general obligation of the Trust, and such payments shall be made
from the Trust's general assets and property. Trustee's relationship to the
Trust under this Agreement shall be only that of a general unsecured
creditor, and neither this Agreement nor any action taken pursuant hereto
shall create or be construed to create a trust or fiduciary relationship of
any kind between the Trust and Trustee, Trustee's designated beneficiary or
any other person, or a security interest of any kind in any property of the
Trust in favor of Trustee or any other person. The Trust shall not be
required to purchase, hold or dispose of any investments pursuant to this
Agreement; provided, however, that if in order to cover its obligations
hereunder the Trust elects to purchase any investments (including, without
limitation, investments in the Underlying Securities), the same shall
continue for all purposes to be a part of the general assets and property of
the Trust, subject to the claims of its general creditors, and no person
other than the Trust shall by virtue of the provisions of this Agreement have
any interest in such assets other than an interest as a general creditor.
The Trust shall provide an annual statement to Trustee showing such
information as is appropriate, including the aggregate amount in the Deferred
Fee Account, as of a reasonably current date, which amount may increase or
decrease from time to time as a result of gains, losses, interest, dividends
and earnings, in accordance with Paragraph 4 above.
6. Trustee hereby elects to have payments made, upon termination of
Trustee's service as a trustee, out of Trustee's Deferred Fee Account
/ / in a lump sum;
/ / in _____ annual installments (not to exceed 10); or
/ / in _____ quarterly installments (not to exceed 40).
Otherwise, payment shall be made to Trustee in such number of annual
installments as shall be determined by the Trust in its sole discretion. The
Trust may consult with Trustee prior to such determination. Each annual
installment payment shall be made as of January 31, beginning with the
January 31st following the termination of Trustee's service as a trustee or
director. Until complete payment of amounts credited to the Deferred Fee
Account, the unpaid balance shall be credited or debited, as the case may be,
with all gains, losses, interest, dividends and earnings in accordance with
Paragraph 4 above. The Trust in its sole discretion reserves the right to
accelerate payment of amounts in Trustee's Deferred Fee Account at any time
after termination of Trustee's service as a trustee or director.
Notwithstanding the foregoing, in the event of the liquidation, dissolution
or winding up of the Trust or the distribution of all or substantially all of
the Trust's assets and property relating to one or more series of its shares,
if any, to shareholders of such series (for this purpose a sale, conveyance
or transfer of the Trust's assets to a trust, partnership, association or
other entity in exchange for cash, shares or other securities with the
<PAGE>
transfer being made subject to, or with the assumption by the transferee of,
the liabilities of the Trust shall not be deemed a termination of the Trust
or such a distribution), all unpaid amounts in the Deferred Fee Account as to
such series as of the effective date thereof shall be paid in a lump sum on
such effective date.
7. Payment of amounts credited to the Deferred Fee Account shall be
made in the form of a check. Such payments shall be made to Trustee, except
that:
(a) In the event that Trustee shall be determined by a court of
competent jurisdiction to be incapable of managing Trustee's financial
affairs, and if the Trust has actual notice of such determination, payment
shall be made to Trustee's personal representative(s); and
(b) In the event of Trustee's death, payment shall be made to the
last beneficiary designated by Trustee for purposes of receiving such payment
in such event in a written notice delivered to the President or the Secretary
of the Trust; provided that if such beneficiary has not survived Trustee,
payment shall instead be made to Trustee's estate. (Trustee hereby
designates _____________________ as the initial beneficiary for purposes of
receiving such payment in such event.)
The Trust may deduct from the payment of amounts in the Deferred Fee
Account any amounts required for purposes of withholding for Federal, state
and/or local income and employment tax or any similar tax or levy.
8. Amounts in the Deferred Fee Account shall not in any way be subject
to the debts or other obligations of Trustee and may not be voluntarily sold,
transferred, pledged or assigned by him, except as provided in Paragraph 7(b)
above.
9. This Agreement shall not be construed to confer any right on the
part of Trustee to be or remain a trustee or director of the Trust or to
receive any, or any particular rate of, Trustee's Fees.
10. Interpretations of, and determinations related to, this Agreement
made by the Trust, including any determinations of the amounts in the
Deferred Fee Account, shall be made by the Board of Trustees or Directors of
the Trust (excluding trustees or directors who are personally interested in
such interpretations and/or determinations) and, if made in good faith, shall
be conclusive and binding upon all parties; and the Trust shall not incur any
liability to Trustee for any such interpretation or determination so made or
for any other action taken by it in connection with this Agreement in good
faith.
11. This Agreement contains the entire understanding and agreement
between the parties with respect to the subject matter hereof, and may not be
amended, modified or supplemented in any respect except by subsequent written
agreement approved by the Board of Trustees or Directors of the Trust
(excluding trustees or directors who are personally interested therein) and
entered into by both parties.
<PAGE>
12. This Agreement shall be binding upon, and shall inure to the
benefit of, the Trust and its successors and assigns and Trustee and
Trustee's heirs, executors, administrators and personal representatives.
13. This Agreement is being entered into in, and shall be construed in
accordance with the internal laws of, the State of New York, without regard
to conflicts of law provisions thereof.
14. Notice is hereby given that this Agreement is executed on behalf of
the Trust by an officer of the Trust as an officer and not individually, and
that the obligations of or arising out of this Agreement are not binding upon
any of the Trustees, officers, shareholders, employees or agents of the Trust
individually but are binding only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the Trust has caused this Agreement to be executed
on its behalf by its duly authorized officer and Trustee has executed this
Agreement, on the date first written above.
THE ROYCE FUND
By: ________________________________
Name:
Title:
____________________________________
Trustee
<PAGE>
DEFERRED FEE AGREEMENT
Election Form
1. Election to Defer
I hereby elect to defer $_________ or _________% of Trustee's Fees
for services rendered after _______, 199_.
2. Underlying Securities
I hereby elect the following series of The Royce Fund (not to exceed
three (3)) to serve as my Underlying Securities under the Deferred Fee
Agreement and allocate the respective percentages of Deferred Trustee's
Fees to each such series, as follows:
Percent of Deferred
Name of Series Trustee's Fee Allocated
______________ _______________________
3. Payment Selection
I hereby elect to receive the amounts credited to my Deferred Fee
Account, upon termination of my service as a Trustee, as follows:
/ / in a lump sum;
/ / in annual installments (not to exceed 10); or
/ / in quarterly installments (not to exceed 40).
<PAGE>
4. Beneficiary Designation
I hereby designate the following as my initial beneficiary for purposes
of receiving deferred fee payments in the event of my death:
Name:
Address:
Social Security Number:
5. Acknowledgment
I understand that the above election shall take effect with respect to
Trustee's Fees earned after December 31, 1998. I acknowledge that the
election to defer may be revoked or modified with respect to Trustee's
Fees to be earned on or after the following January 1 so long as I
deliver a written revocation or modification to the President or the
Secretary of the Trust prior to such January 1.
Executed this ____ day of________,1998. By:________________________________
AMENDMENT NO. 1
TO THE TRANSFER AGENCY
AND SERVICE AGREEMENT
This Amendment is made as of this 18th day of November,
1998 to the Transfer Agency and Service Agreement between The
Royce Fund (the Fund") and State Street Bank and Trust
Company ( the "Bank") dated as of December 31, 1985 (the
"Agreement").
WHEREAS, the Fund intends to establish a new series to be
named Royce Select Fund ("Select Fund") whose transfer agency
and service fees pursuant to the Agreement are intended by
the Fund and Royce & Associates, Inc., Select Fund's
investment adviser (the "Investment Adviser") to be paid by
the Investment Adviser;
WHEREAS, the Fund, the Investment Adviser, and the Bank
desire to amend the Agreement to include provisions for the
Investment Adviser to be solely responsible for the payment
of Select Fund's transfer agency and service fees pursuant to
the Agreement;
WHEREAS, the Fund, the Investment Adviser, and the Bank
desire that the Fund solely be responsible for the payment of
the transfer agency and service fees pursuant to the
Agreement for all other series on Schedule A of the
Agreement, as may be amended from time to time, unless
indicated otherwise by amendment to the Agreement;
WHEREAS, Article 10 of the Agreement states that the
Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a
resolution of the Trustees of the Fund;
NOW, THEREFORE, the parties agree as follows:
1. Pursuant to Article 8 of the Agreement entitled Additional
Funds, the Fund and the Bank hereby agree to add Select
Fund as a Series for which the Bank shall render
transfer agency services under the terms of the Agreement
as amended.
2.1 For Select Fund only, any reduction in fees made by the
Bank if the cumulative net effect of "As-of" share
transactions as described in Article 1.02(c) is
negative shall be made to fees charged to the
Investment Adviser. The Investment Adviser shall be
responsible for reimbursing the Fund for the negative
cumulative net effect if such fee reduction is made. At
the Bank's option, the Bank may make a cash payment,
which will be paid directly to the Fund, to reduce
the negative cumulative net effect.
2.2 For Select Fund only, any positive cumulative net effect
upon Select Fund shall be paid by the Fund to the
Investment Adviser, who shall reimburse the Bank in
the same way as the Fund would reimburse the Bank for
all other Series pursuant to Article 1.02(c).
<PAGE>
3. For Select Fund only, the Investment Adviser, and not the
Fund, shall be responsible for payment of all fees and expenses
enumerated in Article 2 of the Agreement entitled Fees
and Expenses. For all other Series of the Fund, such
series shall be responsible for payment of such fees and
expenses.
4.1 Article 4 of the Agreement entitled Representations and
Warranties of the Fund, Section 4.01 is hereby
deleted and replaced with the following:
4.01 It is a business trust duly organized and existing
and in good standing under the laws of Delaware.
4.2 The following is added to Article 4 of the Agreement, and
the name of the Article is changed to "Representations and
Warranties of the Fund and the Investment Adviser":
The Investment Adviser represents and warrants to the
Transfer Agent and the Fund that:
4.06 It is a corporation duly organized and existing and
in good standing under the laws of the State of New
York.
4.07 It is empowered under applicable laws and by its
Charter and ByLaws to enter into and perform this
Agreement.
4.08 All requisite corporate proceedings have been taken
to authorize it to enter into and perform this
Agreement.
5. For the Portfolio only, the Investment Adviser, and not
the Fund, shall bear all expenses for the termination of this
Agreement as enumerated in Article 7 of the Agreement
entitled Termination of Agreement. For all other Series
of the Fund, the Fund shall bear such expenses.
6. Except as provided in Section 9.03 of the Agreement,
neither this Amendment nor any rights or obligations hereunder
may be assigned by any party without the written consent of the
other parties.
7. In all other respects, the Agreement is confirmed.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their
behalf by and through their duly authorized officers, as of
the day and year first above written.
THE ROYCE FUND
BY: /s/ Dan O'Byrne
Vice President
ATTEST:
/s/ John E. Denneen
Secretary
ROYCE & ASSOCIATES, INC.
BY: /s/ Dan O'Byrne
Vice President
ATTEST:
/s/ W. Whitney George
Vice President
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Ronald E. Louge
Executive Vice President
ATTEST:
/s/ David M. Elwood
Vice President
Consent of Independent Accountants
We consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of Post-
Effective Amendment No. 49 to the Registration Statement of The
Royce Fund (consisting of Royce Premier Fund, Royce Micro Cap Fund,
Pennsylvania Mutual Fund, Royce Select Fund, Royce GiftShares Fund
, Royce Total Return Fund, Royce Low-Priced Stock Fund and PMF II)
on Form N-1A (File No. 2-80348) of our report dated February 10,
1999, on our audits of the financial statements and financial
highlights of the Fund, which report is included in the Annual
Report for The Royce Fund for the year ended December 31, 1998,
which is incorporated by reference in the Registration Statement.
We also consent to the references to our firm under the caption
"Independent Accountants and Financial Statements" in the Statement
of Additional Information and under the heading "Financial
Highlights information" in such Prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 1999
THE ROYCE FUND
1414 Avenue of the Americas
New York, New York 10019
November 17, 1998
Mr. Charles M. Royce
1414 Avenue of the Americas
New York, New York 10019
Dear Mr. Royce:
The Royce Fund (the "Trust") hereby accepts your offer to purchase 10
shares of beneficial interest of Royce Select Fund, a series of the Trust,
at $100.00 per share, for an aggregate purchase price of $1,000.00, subject
to the understanding that you have no present intention of redeeming or
selling the shares so acquired.
Sincerely,
THE ROYCE FUND
/s/ Charles M. Royce
By: __________________________
Charles M. Royce
President
Agreed:
I, Charles M. Royce, hereby agree to purchase the shares of beneficial
interest covered under the above letter agreement. I acknowledge that I have
no present intention of redeeming or selling any of the 10 shares of the
Royce Select Fund covered by such letter agreement.
/s/ Charles M. Royce
__________________________
Charles M. Royce
