<PAGE>
[LINE DRAWING OF L. ROY PAPP]
THE L. ROY PAPP STOCK FUND, INC.
A No-Load Fund
ANNUAL REPORT
DECEMBER 31, 1996
Managed by:
L. Roy Papp & Associates
4400 North 32/nd/ Street
Suite 280
Phoenix, AZ 85018
(602)956-1115 Local
(800)421-4004
<PAGE>
The L. Roy Papp Stock Fund, Inc.
Dear Fellow Shareholder,
Our Fund did well in 1996, being up 21.8% for the year. This followed a good
1995 when we were up 32.9%. Since inception, a little more than seven years
ago, we were up 162.8% at year-end. As of this writing, we are up 7.8% in 1997.
While we believe it will be difficult to match the performance of 1995 and 1996,
we are pleased the year has started well.
I am frequently asked whether the stock market is overpriced. My reply is I do
not think so. The market appears high if your reference point is book value or
many other historical yardsticks. If we were investing in companies requiring
large amounts of capital such as steel, automobiles, chemicals, and utilities, I
would be very worried about their cyclical nature and the possibility of rising
interest rates.
But, we live in a rapidly changing economic society and the rate of change keeps
on accelerating. Companies whose future is linked to technological innovations
like Intel, Microsoft, and Motorola reinvest their earnings primarily in
research and development rather than still more plants and equipment. These
companies reported quarterly earnings well in excess of analysts' expectations
and deserve to sell at a premium to the market as a whole.
Looking at stocks versus U.S. Treasuries, if one purchased a five year U.S.
Treasury today he would pay the equivalent of 16 times earnings while he would
pay about 19 times earnings for the typical stock. After five years, inflation
and taxes would negate practically all of his return on the Treasury while the
rising earnings of a good growth stock would more than justify the initial
differential in the price/earnings ratio. This is borne out by the fact that,
looking at historical results over the last 50 years, the after-inflation return
on stocks has been 3-1/2 to 5 times as large as the return on U.S. Treasuries.
In recent years the media has drawn these facts to the public's attention, and
this has resulted in enormous purchases of common stocks and mutual funds.
Our Fund provides a diversified group of securities for the common stock portion
of an investment portfolio. It holds the securities of very large companies
like General Electric, McDonald's, and Merck, as well as much smaller companies
such as G&K Services, Marshall Industries, and VeriFone. Many of these
companies derive a large percentage of their earnings from overseas activities
where we believe the strong growth of recent years will continue, while others,
like Albertson's and Walgreens, have all of their operations in the United
States. While the Fund provides the industry diversification necessary for a
comprehensive, balanced portfolio of stocks, we remain committed to the purchase
of those companies whose earnings growth over time has substantially exceeded
that of the market as a whole.
Our Fund is designed for those patient, long-term investors who share these
goals.
Best regards,
/s/ L. Roy Papp
L. Roy Papp, Chairman
February 7, 1997
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
The L. Roy Papp Stock Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of The
L. Roy Papp Stock Fund, Inc. (the Fund) as of December 31, 1996 and 1995,
including the schedule of portfolio investments as of December 31, 1996, and
the related statements of operations, and statements of changes in net assets
for the two years then ended, and the financial highlights for the four years
then ended. 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 and financial highlights based on our
audits. The financial highlights of The L. Roy Papp Stock Fund, Inc. for each
of the three years in the three-year period ended December 31, 1992, and the
period from November 29, 1989 (date of commencement of operations) through
December 31, 1989, were audited by other auditors whose report dated January
29, 1993, expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1996, by correspondence
with the custodian. 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
audits provide 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
L. Roy Papp Stock Fund, Inc. as of December 31, 1996 and 1995, and the results
of its operations and changes in its net assets for the two years then ended
and its financial highlights for the four years then ended, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
January 14, 1997.
4
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number Market
Common Stocks of Shares Value
- --------------------------------------------------------------- --------- ----------
<S> <C> <C>
Distributors (13.1%)
Arrow Electronics, Inc.*
(Distributor of electronic components and computer products) 13,700 $ 732,950
Marshall Industries, Inc.*
(Distributor of industrial electronic components) 109,000 3,338,125
Sigma-Aldrich Corp.
(Develops, manufactures, and distributes specialty chemicals) 19,500 1,217,531
W.W. Grainger
(Distributor and manufacturer of electric equipment) 21,200 1,701,300
----------
6,989,906
----------
Computers and Software (12.1%)
Hewlett-Packard Company
(Manufacturer of printers, computers and medical
electronic equipment) 24,000 1,206,000
Intel Corporation
(Manufacturer of microprocessors, microcontrollers,
and memory chips) 20,000 2,618,750
Microsoft Corporation*
(Personal computer software) 32,000 2,644,000
----------
6,468,750
----------
Consumer Services (10.9%)
G&K Services Class A
(Uniform rental service) 59,000 2,227,250
Service Corporation International
(Funeral service; cemetery owner/operator) 127,000 3,556,000
----------
5,783,250
----------
Financial Services (10.6%)
Northern Trust Corporation
(Bank specializing in trust services) 36,000 1,305,000
State Street Boston Corporation
(Provider of securities custodial services) 54,600 3,521,700
T. Rowe Price Associates, Inc.
(Provides investment advisory and administrative
services to their family of no-load mutual funds) 19,000 826,500
----------
5,653,200
----------
Ethical Drugs (8.7%)
American Home Products Corporation
(Ethical and proprietary drugs) 15,000 879,375
Merck & Company
(Ethical drugs and specialty chemicals) 47,500 3,764,375
----------
4,643,750
----------
Industrial Services (7.9%)
Interpublic Group of Companies, Inc.
(Worldwide advertising agencies) 60,000 2,850,000
Manpower, Inc.
(Provider of nongovernment employment services) 42,000 1,365,000
----------
4,215,000
----------
</TABLE>
*Non-income producing security.
The accompanying notes are an integral part of this financial statement.
5
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number Market
Common Stocks (continued) of Shares Value
- ----------------------------------------------------------------------- --------- ------------
<S> <C> <C>
Retail Stores ( 6.5%)
Albertson's Inc.
(Regional retail grocery chain) 51,800 $ 1,845,375
Walgreen Company
(Retail drug store chain) 40,000 1,600,000
-----------
3,445,375
-----------
Electrical Equipment ( 6.1%)
General Electric Co.
(Diversified industrial company) 15,600 1,542,450
Emerson Electric Company
(Manufacturer of electrical and electronic products and systems) 17,500 1,693,125
-----------
3,235,575
-----------
Telecommunications ( 5.3%)
Motorola, Inc.
(Manufacturer of electronic equipment) 46,000 2,823,250
-----------
Consumer Products ( 4.9%)
Clorox Company
(Manufacturer of bleach and other consumer products) 14,600 1,465,475
Procter & Gamble Company
(Household, personal care, and food products) 10,700 1,150,250
-----------
2,615,725
-----------
Restaurants ( 3.3%)
McDonald's Corporation
(Fast food restaurants and franchising) 39,000 1,764,750
-----------
Miscellaneous ( 9.1%)
Intermagnetics General*
(Manufacturer of superconductive magnetic systems
and environmentally acceptable refrigerant) 22,950 275,400
Mattel, Inc.
(Toy manufacturer) 83,750 2,324,063
Millipore Corporation
(Leading supplier of purification products) 25,700 1,063,337
VeriFone, Inc.*
(Supplier of transaction automation systems) 39,000 1,150,500
-----------
4,813,300
-----------
Total Common Stocks - 98.5% 52,451,831
Cash and Other Assets, Less Liabilities - 1.5% 825,256
-----------
Net Assets - 100% $53,277,087
===========
Net Asset Value Per Share
(Based on 2,346,779 shares outstanding at December 31, 1996) $22.70
===========
</TABLE>
*Non-income producing security.
The accompanying notes are an integral part of this financial statement.
6
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
Investment in securities at market value (original
cost $29,944,927 and $29,651,819 at December 31, 1996 and 1995) (Note 1) $52,451,831 $44,219,525
Cash 774,220 411,707
Dividends and interest receivable 68,899 63,889
----------- -----------
Total assets $53,294,950 $44,695,121
=========== ===========
LIABILITIES
Redemptions payable $ 17,863 $ 186,578
=========== ===========
NET ASSETS
Paid-in capital applicable to 2,346,779 outstanding
shares at December 31, 1996 and 2,307,757 outstanding
shares at December 31, 1995 $30,770,183 $29,940,837
Net unrealized gain on investments 22,506,904 14,567,706
----------- -----------
Net assets $53,277,087 $44,508,543
=========== ===========
Net Asset Value Per Share (net assets/shares
outstanding) $ 22.70 $ 19.29
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
7
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 551,760 $ 622,720
Interest 26,886 23,975
---------- -----------
Total investment income 578,646 646,695
---------- -----------
EXPENSES:
Management fee (Note 3) 486,360 404,846
Filing fees 24,097 21,032
Accounting 13,850 12,700
Transfer agent fees 7,658 7,907
Custodial 6,956 8,281
Directors' attendance fees 6,300 5,250
Legal 6,129 1,049
Printing and postage 5,830 5,858
Other fees 3,758 5,393
---------- -----------
Total expenses 560,938 472,316
---------- -----------
Net investment income 17,708 174,379
---------- -----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Proceeds from sales of securities 8,351,349 12,294,010
Cost of securities sold 6,627,620 12,115,564
---------- -----------
Net realized gain on investments sold 1,723,729 178,446
Net change in unrealized gain on investments 7,939,198 11,093,392
---------- -----------
Net realized and unrealized gain on investments 9,662,927 11,271,838
---------- -----------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $9,680,635 $11,446,217
========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
8
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 17,708 $ 174,379
Net realized gain on investments sold 1,723,729 178,446
Net change in unrealized gain on investments 7,939,198 11,093,392
----------- -----------
Increase in net assets resulting
from operations 9,680,635 11,446,217
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (17,708) (174,379)
Net realized gain on investments sold (1,723,729) (177,387)
----------- -----------
Decrease in net assets resulting from
distributions to shareholders (1,741,437) (351,766)
----------- -----------
FROM SHAREHOLDER TRANSACTIONS:
Proceeds from sale of shares 4,733,700 2,657,765
Net asset value of shares issued to shareholders
in reinvestment of net investment income and
net realized gain on investments sold 1,527,688 310,260
Payments for redemption of shares (5,432,042) (6,131,692)
----------- -----------
Increase <decrease> in net assets resulting
from shareholder transactions 829,346 (3,163,667)
----------- -----------
Total increase in net assets 8,768,544 7,930,784
Net assets at beginning of the period 44,508,543 36,577,759
----------- -----------
Net assets at end of period $53,277,087 $44,508,543
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
9
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SIGNIFICANT ACCOUNTING POLICIES:
The L. Roy Papp Stock Fund, Inc. (the Fund) was incorporated on September 15,
1989, and is registered under the Investment Company Act of 1940 as an open-end
diversified management investment company. Operations of the Fund commenced on
November 29, 1989. The Fund invests for the long-term in good quality common
stocks. For the most part, the companies in which the Fund invests occupy a
dominant position in their industry and are purchased at prices which, in the
opinion of the Fund's management, do not reflect their superior long-term growth
of earnings and dividends.
The policies described below are followed by the Fund in the preparation of its
financial statements in conformity with generally accepted accounting
principles.
(a) 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.
10
<PAGE>
(b) 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.
On December 18, 1996, a dividend of approximately $.0067 a share, aggregating
$17,708, was declared from net investment income earned during 1996. A
distribution was also declared from net realized long-term capital gains of
approximately $.4014 a share, aggregating $925,933. The dividend and
distribution were paid on December 31, 1996, to shareholders of record on
December 17, 1996.
On June 19, 1996, a distribution of approximately $.35 a share, aggregating
$797,796, was declared from net realized long-term capital gains earned during
1996. The distribution was paid on June 28, 1996, to shareholders of record on
June 19, 1996.
On December 21, 1995, a dividend of approximately $.029793 a share, aggregating
$68,704, was declared from net investment income earned during 1995. A
distribution was also declared from net realized long-term capital gains of
approximately $.076922 a share, aggregating $177,387. The dividend and
distribution were paid on December 29, 1995, to shareholders of record on
December 20, 1995.
On June 21, 1995, a dividend of approximately $.044 a share, aggregating
$105,675, was declared from net investment income earned during 1995. The
dividend was paid on June 30, 1995, to shareholders of record on June 20, 1995.
Dividends and distributions payable to its shareholders are recorded by the Fund
on the ex-dividend date.
(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. The Fund
incurred fees of $7,658 and $7,907 in 1996 and 1995, respectively, from the
Manager for its services as shareholder services and transfer agent.
11
<PAGE>
The Fund's independent directors receive $800 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.
(4) PURCHASES AND SALES OF SECURITIES:
For the years ended December 31, investment transactions excluding short-term
investments were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Purchases at cost $6,954,851 $ 8,953,222
Sales 8,351,349 12,294,010
</TABLE>
(5) CAPITAL SHARE TRANSACTIONS:
At December 31, 1996, there were 5,000,000 shares of $.01 par value capital
stock authorized. Transactions in capital shares of the Fund were as follows:
<TABLE>
<CAPTION>
Proceeds Shares
----------- --------
<S> <C> <C>
Year ended December 31, 1996
Shares issued $ 4,733,700 223,665
Dividends and distributions reinvested 1,527,688 70,029
Shares redeemed (5,432,042) (254,673)
----------- --------
Net increase $ 829,346 39,022
=========== ========
Year ended December 31, 1995
Shares issued $ 2,657,765 155,585
Dividends and distributions reinvested 310,260 16,810
Shares redeemed (6,131,692) (364,966)
----------- --------
Net decrease $(3,163,667) (192,571)
=========== ========
</TABLE>
(6) UNREALIZED APPRECIATION:
Unrealized appreciation of portfolio securities for both financial statement and
federal income tax purposes is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Market value $52,451,831 $44,219,525
Original cost 29,944,927 29,651,819
----------- -----------
Net unrealized appreciation $22,506,904 $14,567,706
=========== ===========
</TABLE>
As of December 31, 1996, gross unrealized gains on investments in which market
value exceeded cost totaled $22,672,122 and gross unrealized losses on
investments in which cost exceeded market value totaled $165,218.
As of December 31, 1995, gross unrealized gains on investments in which market
value exceeded cost totaled $14,619,841 and gross unrealized losses on
investments in which cost exceeded market value totaled $52,135.
12
<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 periods, divided by the weighted average of the
daily net assets of the Fund.
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
------------------------------------------------------------------------------------ December 31,
1996 1995 1994 1993 1992 1991 1990 1989 (A)
------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $19.29 $14.63 $14.98 $14.96 $13.45 $10.42 $10.38 $10.00
Income from operations:
Net investment income .01 .07 .13 .13 .13 .15 .16 .02
Net realized and
unrealized gain (loss)
on investments 4.16 4.73 (.35) .11 1.68 3.46 .09 .38
------ ------ ------ ------ ------ ------ ------ ------
Total from operations 4.17 4.80 (.22) .24 1.81 3.61 .25 .40
Less distributions:
Dividend from net
investment income (.01) (.07) (.13) (.13) (.13) (.15) (.16) (.02)
Distribution of net
realized gain (.75) (.07) - (.09) (.17) (.43) (.05) -
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (.76) (.14) (.13) (.22) (.30) (.58) (.21) (.02)
Net asset value,
end of period $22.70 $19.29 $14.63 $14.98 $14.96 $13.45 $10.42 $10.38
====== ====== ====== ====== ====== ====== ====== ======
Total return 21.77% 32.93% (1.46)% 1.65% 13.54% 33.79% 2.60% 3.99%
====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period $53,277,087 $44,508,543 $36,577,759 $39,522,420 $22,874,733 $13,367,176 $6,104,345 $1,322,532
Expenses to average
net assets (B) 1.16% 1.17% 1.19% 1.25% 1.25% 1.25% 1.25% 1.25%*
Net investment income
to average net assets
(C) 1.19% 1.60% 2.08% 2.22% 2.28% 2.46% 2.82% 2.23%*
Portfolio turnover rate 14.47% 22.39% 20.00% 15.00% 11.00% 4.00% 28.00% 0.00%
Average commission per
share $0.0442
</TABLE>
* Annualized
(A) From the date of commencement of operations (November 29, 1989).
(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 1.25%, 1.26%, 1.35%,
1.92% and 1.80% for the years ended December 31, 1993, 1992, 1991, 1990 and
the period ended December 31, 1989, respectively.
(C) Computed giving effect to investment adviser's expense limitation
undertaking.
13
<PAGE>
THE L. ROY PAPP STOCK FUND, INC.
Directors
James K. Ballinger L. Roy Papp
Amy S. Clague Rosellen C. Papp
Robert L. Mueller Bruce C. Williams
Harry A. Papp
Officers
Chairman - L. Roy Papp President - Harry A. Papp
Vice Presidents
Victoria S. Cavallero Robert L. Mueller
George D. Clark, Jr. Rosellen C. Papp
Jeffrey N. Edwards Bruce C. Williams
Robert L. Hawley
Secretary - Robert L. Mueller
Assistant Secretary - Barbara D. Perleberg
Treasurer - Rosellen C. Papp
Assistant Treasurer - Julie A. Hein
Investment Adviser
L. Roy Papp & Associates
4400 North 32nd Street, Suite 280
Phoenix, Arizona 85018
Telephone: (602) 956-1115
Custodian
Founders Bank of Arizona
7335 E. Doubletree Ranch Road
Scottsdale, Arizona 85258
Shareholder Services and Transfer Agent
L. Roy Papp & Associates
4400 North 32nd Street, Suite 280
Phoenix, Arizona 85018
Telephone: (602) 956-1115, (800) 421-4004
Independent Public Accountants
Arthur Andersen LLP
2 North Central Avenue, Suite 1000
Phoenix, Arizona 85004
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.
