Picture of man in a chair
PAPP SMALL & MID-CAP GROWTH FUND, INC.
A No-Load Fund
ANNUAL REPORT
DECEMBER 31, 1998
Managed by:
L. Roy Papp & Associates
6225 North 24th Street
Suite 150
Phoenix, AZ 85016
(602)956-1115 Local
(800)421-4004
E-mail: [email protected]
Web: http://www.roypapp.com
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN PAPP SMALL & MID-CAP
GROWTH FUND, INC. AND RUSSELL 2000 STOCK INDEX
CHART HERE:
AVERAGE ANNUAL TOTAL RETURN
Period from December 15, 1998 until December 31, 1998
Papp Small & Mid-Cap Growth Fund 8.0%
Russell 2000 Stock Index 8.4%
Year Papp Small & Mid-Cap Growth Fund Russell 2000 Stock Index
12/15/98 10,000 10,000
1998 10,800 10,837
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
The investment return and principal value of an investment in the Fund will
fluctuate so that Fund shares, when redeemed may be worth more or less than
their original cost. This Fund's performance is measured against that of the
Russell 2000 Stock Index (an unmanaged, unweighted index that includes stocks
of 2000 small U.S. companies, with dividends reinvested).
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<PAGE>
PAPP SMALL & MID-CAP GROWTH FUND, INC.
Dear Fellow Shareholder:
Welcome to the Papp Small & Mid-Cap Growth Fund. Our shares were available for
only a short time before the end of the year, but we have gotten off to a good
start. Since inception on December 15, 1998 through the end of the year we were
up 8.0%. This compares with the Russell 2000 (an index of small and medium
capitalization companies) which was up 8.4%. The difference is attributable to
brokerage transaction costs associated with our initial purchases of stocks for
the Fund's portfolio. These initial investments were largely funded through
purchases of the Fund's shares by partners and associates of L. Roy Papp &
Associates.
We created this Fund because a number of clients of our firm and shareholders of
our other mutual funds suggested they were interested in owning some smaller
companies, and that a commingled fund comprised of a significant number of
individual companies would diversify the risk of owning a few stocks.
Historically, smaller companies as a group have more price volatility when
compared to large companies.
We also determined that the criteria for the selection of stocks would be the
same as the criteria we have always used. That is, we would purchase good
quality companies that have a successful history, have been able to increase
their earnings year after year on a reasonably consistent basis, have no or
little debt, whose product appears to surpass the competition, and whose
management respects the interest of its stockholders. So long as these factors
remain in place, we will hold these stocks for the long-term. On the other hand,
we determined not to buy new issues with the hope of producing shorter-term
gains, "story" stocks which often contain little substance, "market timing"
stocks whose performance depends on cyclical moves in the economy, and stocks,
such as internet companies, which are currently priced on the basis of sales,
not earnings.
We believe there is a place in the stock portion of many investors' portfolios
for a fund that concentrates on small and medium capitalization companies and
that is the primary reason we started this Fund. However, we intend to stick
with our fundamental investment philosophy and acquire a well-diversified group
of companies whose fundamentals are such that they are real long-term
investments and not a short-term gamble.
Thank you for your vote of confidence.
Warmest regards,
L. Roy Papp, Chairman
February 1, 1999
P.S. Today the per share net asset value of our Fund is $16.87. Since inception,
it is up 12.5% while the Russell 2000 is up 9.6%.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of the
Papp Small & Mid-Cap Growth Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of the Papp
Small & Mid-Cap Growth Fund, Inc. including the schedule of portfolio
investments, as of December 31, 1998, and the related statements of operations,
changes in net assets, and the financial highlights for the period from December
15, 1998 (date of commencement of operations) through December 31, 1998. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Papp Small & Mid-Cap Growth Fund, Inc. as of December 31, 1998, and the results
of its operations, changes in its net assets, and its financial highlights for
the period from December 15, 1998 (date of commencement of operations) through
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 21, 1999.
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PAPP SMALL & MID-CAP GROWTH FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Number Market
Common Stocks of Shares Value
<S> <C> <C>
Financial Services (14.7%)
Federated Investors
(Major U.S. investment management company) 3,800 $ 68,875
T. Rowe Price Associates, Inc.
(Provides investment advisory and administration services
to their family of no-load funds) 2,700 92,475
U.S. Trust Corporation
(Financial services company) 900 68,400
-------------
229,750
-------------
Software (12.7%)
BARRA, Inc. *
(Develops application software for financial services) 2,600 61,425
Fair, Isaac & Co.
(Develops data management systems and software for
financial services) 1,100 50,806
SunGard Data Systems, Inc. *
(Develops, markets and supports application software for
proprietary investment support systems) 2,200 87,313
-------------
199,544
-------------
Industrial Services (12.6%)
Air Express International
(Air freight forwarding) 1,300 28,275
Cambridge Technology Partners, Inc. *
(International professional services business) 3,200 70,800
Expeditors International of Washington, Inc.
(Air freight forwarding) 1,200 50,400
G & K Services, Inc. Class A
(Uniform rental service) 900 47,925
-------------
197,400
-------------
Medical Products (9.2%)
Safeskin Corp. *
(Leading manufacturer of hypoallergenic, disposable
latex examination gloves) 3,000 72,375
Stryker Corp.
(Developer and manufacturer of surgical and medical devices) 1,300 71,581
-------------
143,956
-------------
Specialty Retailing (8.2%)
Dollar General Corporation
(Operates self-service discount stores) 2,800 66,150
Office Depot *
(Office supply retailer and direct marketer of office products) 1,700 62,793
-------------
128,943
-------------
Electrical Equipment (7.9%)
American Power Conversion Corporation *
(Leading producer of uninterruptible power supply products) 1,000 48,438
Baldor Electric Company
(Manufacturer of industrial electric motors) 1,500 30,375
Molex, Inc.
(Supplier of electrical, electronic, and fiber optic interconnection
products and systems) 1,400 44,100
-------------
122,913
-------------
*Non-income producing security.
The accompanying notes are an integral part of this financial statement.
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PAPP SMALL & MID-CAP GROWTH FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
Number Market
Common Stocks (continued) of Shares Value
Health Care Services (6.8%)
Covance, Inc. *
(Leading contract research organization in the
pharmaceutical industry) 2,200 $ 64,075
Techne Corp. *
(Diagnostic kits) 2,000 42,250
-------------
106,325
-------------
Personal Care/Cosmetics (6.6%)
Del Labs, Inc.
(Producer of cosmetics and over the counter pharmaceuticals) 2,300 56,925
Helen of Troy Ltd. *
(Designs, develops, and markets personal care accessories) 3,200 47,000
-------------
103,925
-------------
Broadcasting (5.4%)
Metro Networks, Inc. *
(Provides traffic reporting services, local news and weather video
news to television and radio outlets) 2,000 85,250
-------------
Consumer Services (4.7%)
Steiner Leisure Ltd. *
(Provider of spa services, beauty salons, and health clubs on cruise
ships) 2,300 73,600
-------------
Miscellaneous (7.3%)
Kaydon Corp.
(Designs, manufactures and sells custom-engineered products) 1,400 56,088
Zebra Technologies Corp. *
(Worldwide provider of bar code labeling) 2,000 57,500
-------------
113,588
-------------
Total Common Stocks - 96.1% 1,505,194
Cash and Other Assets, Less Liabilities - 3.9% 61,031
-------------
Net Assets - 100% $ 1,566,225
=============
Net Asset Value Per Share
(Based on 96,681 shares outstanding at December 31, 1998) $ 16.20
=============
*Non-income producing security.
</TABLE>
The accompanying notes are an integral part of this financial statement.
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PAPP SMALL & MID-CAP GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities at market value (original
cost $1,399,845 at December 31, 1998) (Note 1) $ 1,505,194
Cash 134,603
Dividends and interest receivable 1,101
Receivable for Fund shares sold 18,000
----------------
Total assets $ 1,658,898
================
LIABILITIES
Payable for securities purchased $ 92,673
================
NET ASSETS
Paid-in capital $ 1,460,455
Accumulated undistributed net realized gain
on sale of investments -
Accumulated undistributed net investment income 421
Net unrealized gain on investments 105,349
----------------
Net assets applicable to Fund shares outstanding $ 1,566,225
================
Fund shares outstanding 96,681
================
Net Asset Value Per Share (net assets/share
outstanding) $ 16.20
================
</TABLE>
The accompanying notes are an integral part of this financial statement.
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<PAGE>
PAPP SMALL & MID-CAP GROWTH FUND, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 15, 1998
(DATE OF COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
INVESTMENT INCOME:
Dividends $ 377
Interest 723
-------------
Total investment income 1,100
EXPENSES:
Management fee (Note 3) 543
Directors' attendance fees 300
-------------
Total expenses 843
-------------
Less fees waived by adviser (Note 3) (164)
-------------
Net expenses 679
-------------
Net investment income 421
-------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS:
Net change in unrealized gain on investments 105,349
-------------
Net increase in net assets resulting from operations $ 105,770
=============
The accompanying notes are an integral part of this financial statement.
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PAPP SMALL & MID-CAP GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM DECEMBER 15, 1998
(DATE OF COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
FROM OPERATIONS:
Net investment income $ 421
Net realized gain on investments sold -
Net change in unrealized gain on investments 105,349
------------------
Increase in net assets resulting from
operations 105,770
------------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -
Net realized gain on investments sold -
------------------
Decrease in net assets resulting from
distributions to shareholders -
------------------
FROM SHAREHOLDER TRANSACTIONS:
Proceeds from sale of shares 1,460,455
Net asset value of shares issued to shareholders
in reinvestment of net investment income and
net realized gain on investments sold -
Payments for redemption of shares -
------------------
Increase in net assets resulting
from shareholder transactions 1,460,455
------------------
Total increase in net assets 1,566,225
Net assets at beginning of the period -
------------------
Net assets at end of period $ 1,566,225
==================
</TABLE>
The accompanying notes are an integral part of this financial statement.
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<PAGE>
PAPP SMALL & MID-CAP GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES:
Papp Small & Mid-Cap Growth Fund, Inc. (the Fund) was incorporated on September
15, 1998 and is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. Operations of the Fund
commenced on December 15, 1998. The Fund invests with the objective of long-term
capital growth in the common stocks of small and mid-capitalization companies.
The investment adviser paid all start up costs, and the Fund will not reimburse
them.
The policies described below are followed by the Fund in the preparation of its
financial statements in conformity with generally accepted accounting
principles.
Investment in Securities
For purposes of computing the net asset value of a share of the Fund, securities
traded on securities exchanges, or in the over-the-counter market in which
transaction prices are reported, are valued at the last sales prices at the time
of valuation or, lacking any reported sales on that day, at the most recent bid
quotations. Other securities traded over-the-counter are valued at the most
recent bid quotations. Securities for which quotations are not available and any
other assets are valued at a fair value as determined in good faith by the Board
of Directors. The price per share for a purchase order or redemption request is
the net asset value next determined after receipt of the order.
The net asset value of a share of the Fund is determined as of the close of
trading on the New York Stock Exchange, currently 4:00 p.m. New York City time,
on any day on which that Exchange is open for trading, by dividing the market
value by the number of shares outstanding, and rounding the result to the
nearest full cent.
Investment transactions are accounted for on the trade date (the date the order
to buy or sell is executed). Dividend income is recorded on the ex-dividend date
and interest is recorded on the accrual basis. Realized gains and losses from
investment transactions and unrealized appreciation or depreciation are
calculated on the identified cost basis.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
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<PAGE>
Federal Income Taxes
The Fund's policy is to comply with the requirements of the Internal Revenue
Code which are applicable to regulated investment companies. The Code requires
that substantially all of the Fund's taxable income, as well as any net realized
gain on sales of investments, is to be distributed to the shareholders. The Fund
has complied with this policy and, accordingly, no provision for federal income
taxes is required.
(2) DIVIDENDS AND DISTRIBUTIONS:
Dividends and capital gain distributions are reinvested in additional shares of
the Fund unless the shareholder has requested in writing to be paid by check.
Dividends and distributions payable to its shareholders are recorded by the Fund
on the ex-dividend date. There were no dividends or distributions for the period
ended December 31, 1998.
(3) TRANSACTIONS WITH AFFILIATES:
The Fund has an investment advisory and management services agreement with L.
Roy Papp & Associates (Manager). The Manager receives from the Fund, as
compensation for its services, a fee accrued daily and payable monthly at an
annual rate of 1% of the Fund's net assets. The Manager will reimburse the Fund
to the extent the Fund's regular operating expenses during any of its fiscal
years exceed 1.25% of its average daily net asset value in such year. A
management fee expense reimbursement of $164 was required in 1998.
The Fund's independent directors receive $100 for each meeting of the Board of
Directors attended on behalf of the Fund. Certain officers and/or directors of
the Fund are also partners of the Manager and shareholders in the Fund. The Fund
made no payments to its officers or directors, except to independent directors
as stated above.
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<PAGE>
(4) PURCHASES AND SALES OF SECURITIES:
For the period from December 15, 1998 (date of commencement of operations) to
December 31, 1998, investment transactions excluding short-term investments were
as follows:
Purchases at cost $ 1,399,845
Sales -
(5) CAPITAL SHARE TRANSACTIONS:
At December 31, 1998, there were 25,000,000 shares of $.01 par value capital
stock authorized. Transactions in capital shares of the Fund were as follows:
Proceeds Shares
------------- ------------
Period ended December 31, 1998
Shares issued $ 1,460,455 96,681
Dividends and distributions reinvested - -
Shares redeemed - -
------------- ------------
Net increase $ 1,460,455 96,681
============= =============
(6) UNREALIZED APPRECIATION:
Unrealized appreciation of portfolio securities for both financial statement
and federal income tax purposes is as follows:
December 31,
1998
Market value $ 1,505,194
Original cost (1,399,845)
---------------
Net unrealized appreciation $ 105,349
==============
As of December 31, 1998, gross unrealized gains on investments in which market
value exceeded cost totaled $125,365 and gross unrealized losses on investments
in which cost exceeded market value totaled $20,016.
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<PAGE>
(7) SELECTED FINANCIAL HIGHLIGHTS:
The following selected per share data has been calculated using revenues and
expenses for the periods indicated, divided by the weighted average number of
shares outstanding during the periods. The ratios are calculated using the
revenues and expenses for the period, divided by the weighted average of the
daily net assets of the Fund.
Period Ended December 31,
1998
---------------
Net asset value, beginning
of period (A) $ 15.00
Income from investment
operations:
Net investment income -
Net realized and unrealized
gain (loss) on investments 1.20
--------------
Total from investment
operations 1.20
Less Distributions:
Dividend from investment
income -
Distribution of net realized
gain -
-------------
Total Distributions -
Net asset value, end of period $ 16.20
=============
Total return 8.00%
=============
Ratios/Supplemental Data:
Net assets, end of period $1,566,225
Expenses to average
net assets (B) 1.25%*
Net investment income to
average net assets (C) 1.01%*
Portfolio turnover rate 0.00%
Average commission per share $ 0.031
* Annualized
(A) From the date of commencement of operations (December 15, 1998).
(B) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have
been 1.56%, for the period ended December 31, 1998.
(C) Computed giving effect to investment adviser's expense limitation
undertaking.
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<PAGE>
FACTS ABOUT THE FUND
Investment Objective - The Fund, which commenced operations on December 15,
1998, is designed for those long-term investors who wish to invest a portion of
their common stock assets in stocks of small and mid-capitalization companies.
The Fund purchases the shares of companies that, over time, have shown the
ability to substantially increase their earnings.
The Investment Adviser - The Fund's assets are managed by L. Roy Papp &
Associates, the largest investment counseling firm in Arizona, with over $1.3
billion in total assets managed for individuals, trusts, corporations, and
charitable and educational institutions. Founded in 1978, the firm is solely in
the investment management business. The firm is an independent general
partnership. Of its ten general partners, seven hold the Chartered Financial
Analyst (CFA) designation.
Experienced Management - The securities portfolio of the Fund is managed by
L. Roy Papp and Rosellen C. Papp. Mr. Papp, the founder of L. Roy
Papp & Associates, has over 44 years experience in the field of investment
management. Prior to founding L. Roy Papp & Associates, he was a senior partner
of a large investment counseling firm in Chicago, Illinois and the United States
Director and Ambassador to the Asian Development Bank, Manila, Philippines. He
received his M.B.A. degree from the Wharton School, University of Pennsylvania
and his A.B. degree from Brown University.
Rosellen C. Papp, the director of research at L. Roy Papp & Associates, has over
21 years experience in security and financial analysis. She holds a Master of
Management degree in finance from the Kellogg Graduate School of Management,
Northwestern University and a B.B.A. degree from the University of Michigan. She
is a Chartered Financial Analyst and member of the International Society of
Financial Analysts.
"Pure" No-Load - The Fund is a "pure" no-load fund in that there are no
"loading" charges or sales commissions paid in connection with the purchase of
its shares. In addition, there are no deferred sales loads, no redemption fees,
and no 12b-1 fees. The Fund's investment adviser receives an annual management
fee of 1% which is based on the Fund's average daily net asset value. Other
expenses such as auditing charges, legal fees, and custodial expenses are
limited to 1/4% of the Fund's average daily net asset value; therefore, the
Fund's annual expenses may not exceed 1 1/4%.
Suitability - The Fund is suitable only for long-term investors seeking capital
appreciation over time. Included are individuals of most ages, institutional
accounts such as pension and profit sharing plans, retirement accounts such as
IRA's, educational accounts for young children, and many personal trusts. The
Fund is not suitable for those with high current income needs, aggressive
investors who desire maximum short-term results and are willing to assume the
attendant risks, and those with relatively short time horizons who may require
their capital in the near-term.
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<PAGE>
PAPP SMALL & MID-CAP GROWTH FUND, INC.
Directors
James K. Ballinger Harry A. Papp
Amy S. Clague L. Roy Papp
Robert L. Mueller Rosellen C. Papp
Carolyn P. O'Malley Bruce C. Williams
Officers
Chairman - L. Roy Papp President - Harry A. Papp
Vice Presidents
Victoria S. Cavallero Julie A. Hein
George D. Clark, Jr. Robert L. Mueller
Jeffrey N. Edwards Rosellen C. Papp
Robert L. Hawley Bruce C. Williams
Secretary - Robert L. Mueller
Treasurer - Rosellen C. Papp
Assistant Treasurer - Julie A. Hein
Investment Adviser
L. Roy Papp & Associates
6225 North 24th Street, Suite 150
Phoenix, Arizona 85016
Telephone: (602) 956-1115
E-mail: [email protected]
Web: http://www.roypapp.com
Custodian
Founders Bank of Arizona
7335 E. Doubletree Ranch Road
Scottsdale, Arizona 85258
Shareholder Services and Transfer Agent
L. Roy Papp & Associates
6225 North 24th Street, Suite 150
Phoenix, Arizona 85016
Telephone: (602) 956-1115
(800) 421-4004
Independent Public Accountants
Arthur Andersen LLP
501 North 44th Street, Suite 300
Phoenix, Arizona 85008
Legal Counsel
Bell, Boyd & Lloyd
70 West Madison Street
Chicago, Illinois 60602
This report is submitted for the general information of the shareholders of the
Fund. The report is not authorized for distribution to prospective investors in
the Fund unless it is accompanied or preceded by a currently effective
prospectus of the Fund. No sales charge to the shareholder or to the new
investor is made in offering the shares of the Fund.
15
