<PAGE>
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MAIRS AND POWER
GROWTH FUND, INC.
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2ND QUARTER REPORT
June 30, 1998
August 21, 1998
To Our Shareholders:
On June 30, 1998, the net asset value per share of Mairs and Power Growth Fund
was $92.56, a 7.2% increase from the year-end valuation. This compares with
returns of 17.6% for the Standard and Poor's 500 Stock Index and 14.1% for the
Dow Jones Industrial Average. These two indexes were driven by a relatively
small number of large capitalization stocks that had strong gains during the
period. Mairs and Power Growth Fund holds a blend of large, medium, and small
capitalization stocks. Therefore, we will also use a third bench-mark, which is
the Russell 2000. This is an index of 2,000 medium and small companies which
registered a 4.9% return for the period. We believe that our shareholders are
well served by our exposure to mid-cap and small-cap stocks that historically
experience higher growth rates than that of very large companies. For the ten
year period ending June 30, the Fund registered an average annual return of
20.0%, outpacing the 18.5% return of the Standard and Poor's 500 Stock Index as
well as the 13.6% return of the Russell 2000. According to a WALL STREET JOURNAL
study, the Fund ranked among the twenty-five best performing diversified stock
funds for that ten year period.
FORBES magazine, in the August 24 issue, presented its annual survey of mutual
funds covering 1,200 funds. Each year the survey includes an Honor Roll of
twelve funds as measured by performance, preservation of capital in declining
markets, tax efficiency and continuity of management. For the second year in a
row, Mairs and Power Growth Fund appeared in 1st place on that list. In
addition, FORBES also designated twenty stock funds based on superior
performance coupled with low operating costs. The Fund appeared on that list as
well for the second consecutive year. MONEY magazine devoted much of the June
issue to the Best 100 Mutual Funds and the Fund was included in that group.
The U.S. economy continues to perform remarkably well. Growth moderated in the
second quarter with GDP rising at an annual rate of 1.4%. However, the first
quarter rate of 5.5% was clearly unsustainable. For the first half of the year,
GDP rose at an average rate of 3.5%. Despite this strong growth, inflation
remained well contained with consumer prices rising at a 1.5% rate. While there
is continuing concern about economic developments in Japan and the rest of Asia,
the average effect on the U.S. economy and corporate profits has been relatively
modest. However, the impact on specific companies and industries has been highly
variable. We continue to believe that this country is enjoying a longlasting
period of economic and profit expansion coupled with moderate inflation which is
a very favorable environment for common stocks. The major stock market indexes
have experienced a 10% correction since mid-July. However, the broader market
has suffered a sharper decline. The average stock on the New York stock exchange
has declined almost 30% from its 52-week high. We believe that most stocks are
fairly valued at current levels and believe that stock prices should strengthen
in the months ahead. While growth in corporate earnings has moderated this year
as we anticipated, we still expect earnings to rise a solid 5-6% this year with
similar increases in 1999. We regard this to be the major underpinning for
stronger stock prices. Because the market has provided very high returns during
the past sixteen years, some investors are projecting similar returns in the
future. We note that Mairs and Power Growth Fund has registered an average
annual return of 12.4% since its inception almost 40 years ago. We believe that
the future average rate of return may approximate that benchmark.
George A. Mairs
President
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SCHEDULE OF INVESTMENTS AT JUNE 30, 1998
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<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCKS MARKET VALUE
- --------- ------------------------------------------ -------------
<C> <S> <C>
CHEMICAL 5.2%
530,000 Ecolab, Inc. $ 16,430,000
222,500 H. B. Fuller 12,334,844
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28,764,844
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CONSUMER 10.0%
83,000 Darden Restaurants 1,317,625
247,000 General Mills, Inc. 16,888,625
470,000 Hormel Foods 16,244,375
422,610 Jostens, Inc. 10,089,814
325,800 The Toro Company 11,158,650
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55,699,089
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DRUGS AND HOSPITAL SUPPLIES 9.2%
282,000 Baxter International, Inc. 15,175,125
215,000 Johnson & Johnson 15,856,250
186,000 Pfizer Inc. 20,215,875
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51,247,250
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FINANCIAL 15.5%
520,000 Norwest Corporation 19,435,000
320,000 ReliaStar Financial Corporation 15,360,000
366,000 St. Paul Companies, Inc. 15,394,875
570,000 TCF Financial Corporation 16,815,000
450,000 U.S. Bancorp 19,350,000
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86,354,875
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INFORMATION SERVICES 9.3%
460,000 Deluxe Corp. 16,473,750
875,000 Merrill Corporation 19,304,687
668,400 National Computer Systems Inc. 16,041,600
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51,820,037
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MEDICAL DEVICES 6.8%
386,000 Medtronic, Incorporated 24,607,500
355,000 St. Jude Medical, Inc.* 13,068,437
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37,675,937
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RETAILING 5.7%
368,000 Dayton Hudson Corporation 17,848,000
314,000 SUPERVALU Inc. 13,933,750
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31,781,750
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TECHNOLOGY 15.5%
230,000 Ceridian* 13,512,500
298,050 Emerson Electric Co. 17,994,769
220,000 Honeywell Inc. 18,383,750
987,100 MTS Systems Corporation 15,855,294
193,000 Minnesota Mining & Manufacturing Company 15,862,187
578,500 T S I Inc. 4,700,313
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86,308,813
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TELECOMMUNICATIONS 3.8%
589,000 ADC Telecommunications Inc.* 21,516,906
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OTHER INDUSTRIALS 13.8%
374,000 Bemis Company, Inc. 15,287,250
852,300 BMC Industries, Inc. 7,457,625
150,000 Burlington Northern Santa Fe 14,728,125
211,800 Donaldson Company, Inc. 5,003,775
418,350 Graco Inc. 14,589,956
355,800 Imation Corporation* 5,892,938
300,000 Weyerhaeuser Company 13,856,250
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76,815,919
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TOTAL COMMON STOCKS 94.8% $527,985,420
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OTHER ASSETS IN EXCESS OF LIABILITIES 5.2% 28,834,880
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NET ASSETS 100% $556,820,300
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*Non-income producing
</TABLE>
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STATEMENT OF NET ASSETS AT JUNE 30, 1998
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<TABLE>
<S> <C> <C> <C>
ASSETS
Common stocks as annexed, at market value (cost $376,046,145).................................... $527,985,420
Cash............................................................................................. 29,802,674
Dividends and interest receivable................................................................ 596,620
Receivables for securities sold, not yet delivered............................................... 0
Prepaid expense.................................................................................. 97,905
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$558,482,619
LIABILITIES
Accrued management fee.................................................. $ 274,810
Accrued custodian and transfer agent fee................................ 77,680
Payable for securities purchased, not yet received...................... 1,309,829 1,662,319
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NET ASSETS
Equivalent to $92.56 per share on 6,015,593 shares outstanding................................... $556,820,300
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</TABLE>
STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 1998
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<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1997.................................................................... $412,590,619
Net investment income, per statement below.............................. $ 2,384,184
Net accrued income in price of shares sold and repurchased (Note B)..... 0
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2,384,184
Reversal of Capital Gain Distribution Paid.............................. 3,038
Distribution to Shareholders............................................ (2,095,437) 291,785
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Fund shares issued and repurchased:
Received for 1,627,733 shares issued.................................. 147,877,800
Paid for 372,655 shares repurchased................................... (34,209,832) 113,667,968
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Increase in unrealized net appreciation (depreciation) of investments............................ 29,126,561
Net gain or (loss) realized from sales of securities............................................. 1,143,367
Distribution from net realized gain.............................................................. 0
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NET ASSETS, June 30, 1998........................................................................ $556,820,300
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</TABLE>
STATEMENT OF NET INVESTMENT INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998
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<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends........................................................................................ $ 3,672,035
Interest......................................................................................... 733,705
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4,405,740
EXPENSES
Management fee (Note A)................................................. $ 1,538,413
Fees and expenses of custodian, transfer agent and
dividend disbursing agent (Note A)..................................... 263,764
Legal and auditing fees and expenses.................................... 16,470
Insurance............................................................... 5,878
Other Fees and Expenses................................................. 197,031 2,021,556
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NET INVESTMENT INCOME............................................................................ $ 2,384,184
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</TABLE>
NOTE A: 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.
NOTE B: 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.
SUPPLEMENTARY INFORMATION: 1) Each director of the Fund not affiliated with
Mairs and Power, Inc. received $9,000.00 compensation for meetings attended
during this six 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 six months ended June 30, 1998 aggregated $109,110,225 and $1,155,011
respectively. 4) An annual meeting of shareholders was held on May 18, 1998 for
the purposes of: (a) Election of six directors; (b) to amend the Articles of
Incorporation of the Fund to increase the total number of authorized shares to
25,000,000; and (c) to ratify the selection of Ernst & Young LLP as independent
auditors for the Fund. Of the 5,572,521 shares outstanding on record date of
March 31, 1998, the following votes were cast:
<TABLE>
<CAPTION>
SHARES
PROPOSAL SHARES FOR AGAINST ABSTAINING
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<S> <C> <C> <C>
Elect George A. Mairs, III 2,920,179 20,995 0
Elect William B. Frels 2,919,592 21,582 0
Elect Peter G. Robb 2,918,403 22,772 0
Elect Charlton Dietz 2,907,325 33,849 0
Elect Donald E. Garretson 2,912,915 28,259 0
Elect J. Thomas Simonet 2,920,113 21,061 0
Increase the total number of authorized shares to 25,000,000 2,607,208 200,335 133,631
Ratify Ernst & Young LLP as Independent Auditors 2,841,508 24,561 75,105
</TABLE>
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MAIRS AND POWER
GROWTH FUND, INC.
---------------------------
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
---------------------------------------------------
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
Jun. 30, 1998 6,015,593 556,820,300 92.56 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.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
FUND (PERIODS ENDED JUNE 30, 1998) ARE AS FOLLOWS:
1 YEAR: +16.2% 5 YEARS: +24.3% 10 YEARS: +20.0%
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.
OFFICERS AND DIRECTORS
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<TABLE>
<S> <C> <C> <C>
George A. Mairs, III William B. Frels Peter G. Robb Lisa J. Hartzell
President and Secretary and Vice-President and Treasurer
Director Director Director
Charlton Dietz Donald E. Garretson J. Thomas Simonet
Director Director Director
</TABLE>
