<PAGE>
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MAIRS AND POWER
GROWTH FUND, INC.
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3RD QUARTER REPORT
September 30, 1998
November 11, 1998
To Our Shareholders:
On September 30, 1998, the net asset value per share of Mairs and Power Growth
Fund was $80.39, a decline of 6.9% from the year-end valuation. This compares
with returns of +6% for the Standard & Poor's 500 Stock Index, +0.4% for the Dow
Jones Industrial Average and -16.8% for the Russell 2000. The WALL STREET
JOURNAL, in its quarterly review of Mutual Funds, compiled a list of the 50 best
performing stock funds for the past five and ten year periods. Mairs and Power
Growth Fund was one of the ten diversified stock funds to appear on both lists.
For the past five and ten year periods, the Fund has outperformed all major
stock indexes.
The U.S. economy continued to perform admirably in the third quarter with
G.D.P. rising at an annual rate of 3.3%, up from the second quarter pace of
1.8%. This was well above analysts' estimates and provides further evidence of
sustainable economic growth. The unemployment rate remains low and American
workers have received a boost in real disposable personal income which grew 2.6%
during the past six months. These factors have supported strong consumer
spending, which accounts for roughly two-thirds of G.D.P. Personal consumption
grew at a strong 3.9% rate during the quarter. It appears that the economy has
geared down to a 2.5% growth rate in the fourth quarter due, in part, to slower
exports. However, we share the view held by most economists that a recession is
not in prospect for 1999. The Federal Reserve has lowered interest rates twice
during the past two months and we believe that further rate cuts may lie ahead.
Consumer prices are rising at an annual rate of less than 2% which is a record
low during a period of full employment. Moderately rising wages are being
partially offset by improving worker productivity which has been rising at a 2%
annual rate this year. Economists consider productivity the key to prosperity.
The stock market suffered a sharp correction during August and September,
reflecting investor concern over political instability both here and abroad as
well as further indications of weakness in foreign economies. The sharp decline
in both U.S. and foreign security markets created fears of an impending credit
crisis which prompted the Federal Reserve to take decisive action and lower
interest rates in both September and October. These actions served to restore
confidence in U.S. financial markets and the stock market has recovered much of
its earlier losses. Corporate earnings are in line with lowered expectations but
most companies will report record earnings for 1998 and we believe that this
will be the case in 1999 as well. Large company stocks appear to be at valuation
levels that are consistent with their growth prospects but we believe that the
recent flight to quality on the part of investors has left many mid and small
company stocks clearly undervalued. We also believe that confidence will rise in
the months ahead and substantiate our positive view on the prospects for U.S.
financial markets.
George A. Mairs
President
<PAGE>
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1998
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<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COMMON STOCKS VALUE
- ---------------- ------------------------------------------ -------------
<S> <C> <C>
CHEMICAL 4.8%
540,000 Ecolab, Inc. $ 15,356,250
222,500 H. B. Fuller 8,427,188
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23,783,438
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CONSUMER 9.4%
247,000 General Mills, Inc. 17,290,000
490,000 Hormel foods 13,260,625
442,610 Jostens, Inc. 9,184,157
345,800 The Toro Company 7,153,738
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46,888,520
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DRUGS AND HOSPITAL SUPPLIES 10.5%
282,000 Baxter International, Inc. 16,779,000
215,000 Johnson & Johnson 16,823,750
176,000 Pfizer Inc. 18,645,000
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52,247,750
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FINANCIAL 15.3%
590,000 Norwest Corporation 21,129,375
330,000 ReliaStar Financial Corporation 12,870,000
416,000 St. Paul Companies, Inc. 13,520,000
640,000 TCF Financial Corporation 12,720,000
450,000 US Bancorp 16,003,125
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76,242,500
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INFORMATION SERVICES 9.4%
470,000 Deluxe Corp. 13,365,625
965,000 Merrill Corporation 15,138,437
628,400 National Computer Systems Inc. 18,537,800
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47,041,862
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MEDICAL DEVICES 6.2%
376,000 Medtronic, Incorporated 21,761,000
395,000 St. Jude Medical, Inc. * 9,134,375
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30,895,375
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RETAILING 5.8%
398,000 Dayton Hudson Corporation 14,228,500
628,000 SUPERVALU Inc. 14,640,250
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28,868,750
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TECHNOLOGY 16.7%
230,000 Ceridian * 13,196,250
308,050 Emerson Electric Co. 19,176,113
240,000 Honeywell Inc. 15,375,000
1,052,100 MTS Systems Corporation 15,518,475
213,000 Minnesota Mining & Manufacturing Company 15,695,437
578,500 TSI Inc. 4,266,438
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83,227,713
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TELECOMMUNICATIONS 2.6%
629,000 ADC Telecommunications Inc. * 13,287,625
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OTHER INDUSTRIALS 14.7%
374,000 Bemis Company, Inc. 13,113,375
862,300 BMC Industries, Inc. 5,173,800
450,000 Burlington Northern Santa Fe 14,400,000
494,800 Donaldson Company, Inc. 7,916,800
549,850 Graco Inc. 12,784,012
355,800 Imation Corporation * 6,582,300
320,000 Weyerhaeuser Company 13,500,000
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73,470,287
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TOTAL COMMON STOCKS 95.4% $475,953,820
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OTHER ASSETS IN EXCESS OF LIABILITIES 4.6% 22,721,600
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NET ASSETS 100% $498,675,420
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</TABLE>
*Non-income producing
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS AT SEPTEMBER 30, 1998
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<S> <C> <C>
ASSETS
Common stocks as annexed, at market value (cost $402,259,904). . . . . . . . . . . . . . . . . . . . . . . . . $ 475,953,820
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,560,336
Dividends and interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,233
Receivables for securities sold, not yet delivered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,178
Prepaid expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,298
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$ 499,390,865
LIABILITIES
Accrued management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 238,934
Accrued custodian and transfer agent fee . . . . . . . . . . . . . . . . . . 80,623
Payable for securities purchased, not yet received . . . . . . . . . . . . . 395,888 715,445
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NET ASSETS
Equivalent to $80.39 per share on 6,203,431 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . $ 498,675,420
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STATEMENT OF CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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NET ASSETS, December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 412,590,619
Net investment income, per statement below . . . . . . . . . . . . . . . . . $ 3,678,332
Net accrued income in price of shares sold and repurchased (Note A). . . . . 0
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3,678,332
Reversal of Capital Gain Distribution Paid . . . . . . . . . . . . . . . . . 3,038
Distribution to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . (2,095,337) 1,586,033
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Fund shares issued and repurchased:
Received for 2,129,456 shares issued. . . . . . . . . . . . . . . . . . 190,448,855
Paid for 686,540 shares repurchased . . . . . . . . . . . . . . . . . . (61,335,055) 129,113,800
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Increase in unrealized net appreciation (depreciation) of investments. . . . . . . . . . . . . . . . . . . . . (49,118,798)
Net gain or (loss) realized from sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,503,766
Distribution from net realized gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
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NET ASSETS, September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 498,675,420
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STATEMENT OF NET INVESTMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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INVESTMENT INCOME
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,644,057
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,086,795
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6,730,852
EXPENSES
Management fee (Note B). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,282,301
Fees and expenses of custodian, transfer agent and
dividend disbursing agent (Note B) . . . . . . . . . . . . . . . . . . . 401,671
Legal and auditing fees and expenses . . . . . . . . . . . . . . . . . . . . 26,070
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,817
Other Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 333,661 3,052,520
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NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,678,332
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</TABLE>
NOTE A: As of January 1, 1998, the Fund has retroactively elected to
discontinue the use of the equalization method of accounting. The now
current method being applied is more consistent with industry standard. The
change has no impact on the net asset value per share.
NOTE B: The investment advisory fee was paid to Mairs and Power, Inc., which
is owned by individuals who are directors and officers of the Fund, for its
services as investment adviser. Investment advisory fees are paid to the
adviser pursuant to an advisory agreement approved by the Directors of the
Fund. The advisor fee is computed each month and is 1/20th of one percent of
the net asset value of the Fund on the last valuation day of the month. The
transfer agent fee was paid to Firstar Trust Company which serves as transfer
agent.
SUPPLEMENTARY INFORMATION: 1) Each director of the Fund not affiliated with
Mairs and Power, Inc. received $13,500.00 compensation for meetings attended
during this nine month period. No compensation was paid to any other
director or officer of the Fund. 2) No provision has been made for federal
income taxes as it is the intention of the Fund to comply with the provisions
of the Internal Revenue Code available to investment companies and to make
distributions of income and security profits which will be sufficient to
relieve it from all or substantially all income taxes. 3) Purchases and
sales of investment securities during the nine months ended September 30,
1998 aggregated $136,628,642 and $5,816,526 respectively.
<PAGE>
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MAIRS AND POWER
GROWTH FUND, INC.
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A NO-LOAD FUND
W-1420 First National Bank Building, 332 Minnesota Street,
St. Paul, Minnesota 55101-1363
651-222-8478
Shareholder Information: 800-304-7404
SUMMARY OF FINANCIAL INFORMATION
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This table covers a period of generally rising common stock prices. The results
shown should not be considered as a representation of the dividend income or
capital gain or loss which may result from an investment made in the Fund today.
<TABLE>
<CAPTION>
PER SHARE
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DISTRIBUTIONS DIVIDENDS
OF REALIZED FROM NET
SHARES TOTAL NET NET ASSET SECURITIES INVESTMENT
DATES OUTSTANDING ASSETS VALUE GAINS INCOME
------------- ----------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Dec. 31, 1978 998,265 $ 13,282,487 $ 13.31 $ 0.35
Dec. 31, 1979 914,635 14,104,765 15.42 0.45
Dec. 31, 1980 840,882 14,540,014 17.29 0.55
Dec. 31, 1981 861,678 13,148,158 15.26 $ 0.74 0.60
Dec. 31, 1982 850,942 16,784,217 19.72 0.58 0.50
Dec. 31, 1983 881,592 18,972,177 21.52 0.70 0.48
Dec. 31, 1984 872,069 17,304,204 19.84 0.76 0.46
Dec. 31, 1985 856,738 21,553,457 25.16 0.86 0.46
Dec. 31, 1986 893,850 22,235,453 24.88 2.74 0.40
Dec. 31, 1987 914,139 19,816,097 21.68 2.29 0.48
Dec. 31, 1988 929,039 20,630,251 22.21 1.21 0.41
Dec. 31, 1989 866,584 22,630,081 26.11 1.83 0.43
Dec. 31, 1990 867,432 22,501,587 25.94 0.70 0.42
Dec. 31, 1991 904,023 31,440,529 34.78 1.58 0.39
Dec. 31, 1992 956,814 34,363,306 35.91 1.16 0.40
Dec. 31, 1993 1,006,285 39,081,010 38.84 1.22 0.43
Dec. 31, 1994 1,064,019 41,889,850 39.37 0.98 0.65
Dec. 31, 1995 1,245,325 70,536,880 56.64 1.51 0.56
Dec. 31, 1996 2,161,246 150,161,759 69.48 1.39 0.71
Dec. 31, 1997 4,760,515 412,590,619 86.67 1.69 1.00
Sep. 30, 1998 6,203,431 498,675,420 80.39 0.35
</TABLE>
No adjustment has been made for any income tax payable by shareholders on
capital gain distributions accepted in shares.
This report is not to be used in connection with the offering of shares of
the Fund unless accompanied or preceded by an effective Prospectus. Please
call or write if you desire further information.
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AVERAGE ANNUAL TOTAL RETURNS -- THE AVERAGE ANNUAL TOTAL RETURNS FOR
THE FUND (PERIODS ENDED SEPTEMBER 30, 1998) ARE AS FOLLOWS:
1 YEAR: -4.7% 5 YEARS: +20.0% 10 YEARS: +18.6%
PAST INVESTMENT RESULTS SHOULD NOT BE TAKEN AS NECESSARILY
REPRESENTATIVE OF FUTURE PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
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OFFICERS AND DIRECTORS
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George A. Mairs, III William B. Frels Peter G. Robb Lisa J. Hartzell
President and Secretary and Vice-President Treasurer
Director Director and Director
Charlton Dietz Donald E. Garretson J. Thomas Simonet
Director Director Director
