<PAGE>
--------------------
MAIRS AND POWER
BALANCED FUND, INC.
--------------------
3RD QUARTER REPORT
September 30, 1997
November 14, 1997
To Our Shareholders:
THIRD QUARTER RESULTS
The Balanced Fund turned in another relatively strong performance during the
third quarter in response to continuing above average stock market returns and a
much improved showing in the bond market. Based on a net asset value of $89.05
on September 30, 1997, the Fund produced a total investment return of 6.4% for
the quarter after adjustment for the reinvestment of cash dividends. This
compared to returns of 4.0% for the Dow Jones Industrial Average, 7.5% for the
Standard & Poor's 500 and 3.5% for the Lehman Bros. Gov't/Corp. Bond Index. For
the first nine months, the Fund achieved an exceptional 23.3% return as compared
to returns of 24.9% for the DJIA, 29.6% for the S&P 500 and 6.3% for the Lehman
Bros. Gov't/ Corp. Bond Index. In line with recent experience, the Fund compared
quite favorably with a CDA/ Wiesenberger universe of 314 domestic balanced
mutual funds which experienced an average return of 17.5% since the beginning of
the year. Within the universe, the Fund was the 11th best performing fund during
the same period.
The economy continued to show surprising strength in the third quarter with a
3.5% annualized gain (preliminary basis) in Gross Domestic Product. This rate of
improvement is really remarkable considering the fact that the current expansion
is well into its seventh year. The strong showing resulted primarily from an
unexpected 5.7% spurt in consumer spending together with a continuing above
average 18.7% rate of growth in business spending. Government spending was up at
only a 1% rate while the rate of inventory accumulation slowed and net exports
were a greater drag reflecting a deteriorating trade balance. Inflation remained
well contained with the Consumer Price Index increasing at only a 2.2% annual
rate and the GDP deflator at an even lower 1.4%. This represents the best
inflation performance in over thirty years. In line with the overall economy,
corporate profits at the larger publicly held companies are estimated to have
grown at approximately 13% on an operating basis during the period.
Turning to the stock market, the unexpected strength in the economy,
especially in the area of consumer spending, seemed to lead investors back to
some of the more cyclically sensitive consumer related industries including
autos, home building, and retailing. Stable to declining interest rates also
resulted in generally above average performance for the financials such as banks
and life insurance. Other industries that did well included computers,
semiconductors and oil service. Sectors of the market that performed less well
included basic industries, consumer staples, health care and utilities. Among
the individual common stock holdings in the Fund, Schlumberger (+34.7%),
National Computer (+32.9%) and AMP (+28.3%) performed the best while Eastman
Kodak (-15.4%), Corning (-15.1%) and Honeywell (-11.4%) fared the worst.
FUTURE OUTLOOK
Although somewhat below recent experience, indications are that the economy
will continue growing in the 2-3% range over the remainder of 1997 and on into
1998. Consumer spending should remain strong considering recent increases in
employment and a jobless rate that has fallen to a 24 year low. Although more
difficult to predict, business spending is expected to show further growth given
the continuing high capacity utilization rate in the face of a steadily
expanding economy. Government spending should also continue to grow albeit at a
relatively modest rate by historical standards. The major area of uncertainty
exists with foreign trade where further weakness seems likely in light of the
strong dollar and a deteriorating economic situation in the Far East. In any
event, corporate profits are expected to show further growth in 1998 in response
to a relatively strong domestic economy together with the likelihood of
continuing gains in profitability.
While the outlook for interest rates is basically positive, the potential for
any meaningful decline from current levels is thought to be limited considering
our optimistic view of the economy. Consequently, returns on longer term
maturities seem unlikely to be much above their coupon rates barring a change in
the economic outlook or unforeseen international developments.
<PAGE>
The outlook for the stock market also remains favorable given a forecast for
continued growth in corporate profits and flat to modestly declining interest
rates. However, higher than average volatility is also expected with valuation
levels that are near the high end of their historical range and a recent
tendency toward increased sensitivity to any change in market fundamentals no
matter how slight.
RECENT EVENTS
On October 27, 1997, the DJIA plunged a record 554.26 points or 7.2% along
with similar weakness in most other major world markets in response to a
currency crisis in Hong Kong and certain other Southeast Asian countries. The
following day witnessed a record recovery of 337.17 points or 4.7% as the
previous day's fears were calmed and bargain hunting buying developed. The
market break in Hong Kong as well as in a number of other Asian markets would
seem to be an inevitable occurrence following a period of unsustainable growth
fueled by excess liquidity. Whether these events will eventually lead to
worldwide deflationary trends and lower profits for U. S. companies is all but
impossible to predict at this juncture.
NEW DIRECTOR
Mr. Charlton Dietz, retired Senior Vice President and General Counsel,
Minnesota Mining and Manufacturing Company, was appointed a Director of the Fund
at the last meeting of the Board of Directors on September 12, 1997.
William B. Frels
332 Minnesota Street
W-2062 First National Bank Building
St. Paul, Minnesota 55101
612-222-8478
<PAGE>
SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1997
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FIXED INCOME SECURITIES
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT SECURITY DESCRIPTION COST VALUE
- ----------------------------------------------------------------------------- ----------- -----------
<C> <S> <C> <C> <C> <C>
U.S. TREASURY & FEDERAL AGENCY BONDS 20.1%
$200,000 U.S. Treasury Notes 7.125% 09/30/99 $ 197,172 $ 204,875
250,000 Federal Home Loan Bank 6.01% 12/04/98 250,000 250,000
250,000 Federal Home Loan Bank 6.85% 10/10/00 249,844 251,650
250,000 Federal Home Loan Bank 6.25% 10/20/00 250,000 250,000
250,000 Federal Home Loan Bank 7.025% 05/21/01 250,000 252,187
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 251,172
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 252,422
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 255,156
250,000 Federal Home Loan Bank 7.20% 09/11/03 250,000 251,953
250,000 Federal Home Loan Bank 7.01% 07/14/04 250,000 251,562
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,000 252,813
250,000 Federal Home Loan Bank 7.00% 08/15/07 250,000 250,937
250,000 Federal Home Loan Bank 7.08% 07/25/12 250,000 250,313
250,000 Federal Home Loan Mortgage Corporation 7.00% 03/24/03 250,000 250,859
250,000 Federal Home Loan Mortgage Corporation 7.30% 07/27/05 250,000 249,688
250,000 Federal Home Loan Mortgage Corporation 7.00% 03/13/06 250,000 249,922
250,000 Federal National Mortgage Association 7.23% 05/17/04 250,000 254,609
250,000 Federal National Mortgage Association 6.67% 02/06/06 249,531 246,875
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 256,797
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,844 259,688
250,000 Federal National Mortgage Association 7.43% 06/13/07 250,000 256,016
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 252,109
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5,443,141 5,501,603
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OTHER NON-CONVERTIBLE BONDS 7.5%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 246,875
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 255,234
265,000 J. C. Penney & Co. 6.00% 05/01/06 239,613 254,152
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,977 255,234
250,000 General Foods Corporation 7.00% 06/15/11 240,000 246,406
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 247,250
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 268,906
250,000 Allstate Corp. 7.50% 06/15/13 218,938 262,969
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1,902,139 2,037,026
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CONVERTIBLE BONDS 1.3%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 123,188
250,000 Noram Energy 6.00% 03/15/12 150,600 226,250
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251,600 349,438
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 3.3%
6,000 Bankers Trust New York Corporation $ 1.91 144,495 154,125
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 157,125
5,000 The Bear Stearns Companies, Inc. Pf, Series C $ 1.90 125,000 127,500
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 218,125
4,000 Provident Life & Accident Insurance Co. Pf $2.025 100,000 103,000
2,000 St. Paul Capital Pf $ 3.00 100,000 143,500
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763,215 903,375
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TOTAL FIXED INCOME SECURITIES 32.2% 8,360,095 8,791,442
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK COST MARKET VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
BASIC INDUSTRIES 7.7%
5,000 Cooper Industries, Inc. $ 186,470 $ 270,313
3,000 Delta Air Lines, Inc. 206,976 282,562
5,000 General Signal Corp. 195,449 216,250
12,000 Graco Inc. 147,460 429,000
7,500 Ingersoll-Rand Company 61,341 322,969
8,000 Pentair, Inc. 51,782 295,000
5,000 Weyerhaeuser Company 135,368 297,500
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984,846 2,113,594
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CONSUMER 9.5%
7,000 American Greetings Class A 189,500 258,125
5,000 Briggs & Stratton Corporation 61,116 247,188
6,000 Deluxe Corp. 164,591 201,375
5,000 Dow Jones & Company, Inc. 171,125 233,750
2,000 Eastman Kodak Company 53,573 129,875
3,000 General Mills, Inc. 151,030 206,812
6,000 Genuine Parts Company 112,273 184,875
6,000 Hershey Foods Corporation 146,610 339,000
10,000 Hormel (Geo. A.) & Company 214,325 320,625
10,000 Jostens, Inc. 199,575 271,250
10,000 Sturm, Ruger & Co., Inc. 42,220 189,375
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1,505,938 2,582,250
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ENERGY 6.6%
4,000 Amoco Corporation 140,723 385,500
4,000 Exxon Corporation 20,793 256,250
5,000 Mobil Corporation 54,750 370,000
5,000 Murphy Oil Corporation 123,696 285,625
6,000 Schlumberger, Limited 105,048 505,125
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445,010 1,802,500
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FINANCIAL 20.0%
5,000 American Express Company 99,215 409,375
7,845 Community First Bankshares, Inc. 125,000 380,483
5,000 U.S. Bancorp 58,358 482,500
10,000 Firstar Corp. 163,175 362,500
3,375 Jefferson-Pilot Corp. 60,323 266,625
12,000 Merrill Lynch & Co., Inc. 99,319 890,250
4,000 J. P. Morgan & Co., Inc. 102,082 454,500
8,000 NationsBank Corp. 216,194 495,000
20,000 Norwest Corporation 94,825 1,225,000
12,000 ReliaStar Financial Corp. 110,625 477,750
------------ ------------
1,129,116 5,443,983
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HEALTH CARE 9.4%
6,000 American Home Products Corporation 182,542 438,000
5,000 Baxter International Inc. 70,751 261,250
8,000 Bristol-Myers Squibb Company 205,562 662,000
20,000 Pfizer Inc. 136,357 1,202,500
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595,212 2,563,750
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TECHNOLOGY 10.0%
5,000 AMP Incorporated 133,605 267,813
6,000 Corning Inc. 134,678 283,500
6,000 Emerson Electric Co. 128,697 345,750
5,000 Honeywell Inc. 90,716 335,937
International Business Machines
4,000 Corporation 96,740 424,000
10,000 MTS Systems Corporation 81,500 365,000
4,000 Minnesota Mining & Manufacturing Company 163,370 369,750
10,000 National Computer Systems, Inc. 121,380 353,750
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950,686 2,745,500
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UTILITIES 2.7%
7,000 GTE Corporation 96,007 317,625
5,000 Texas Utilities Company (Holding Company) 183,482 180,000
6,000 U S West Communications 142,035 231,000
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421,524 728,625
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TOTAL COMMON STOCK 65.9% 6,032,332 17,980,202
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OTHER ASSETS IN EXCESS OF LIABILITIES 1.9% 509,679
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NET ASSETS 100% $ 14,392,427 $ 27,281,323
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</TABLE>
<PAGE>
STATEMENT OF NET ASSETS AT SEPTEMBER 30, 1997
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $8,949,286).......................................... $ 21,270,040
U.S. Governments (cost $5,443,141)................................................................. 5,501,603
Cash............................................................................................... 629,934
Dividends receivable............................................................................... 22,398
Interest receivable................................................................................ 120,250
Receivables for securities sold, not yet delivered................................................. 0
Prepaid expense.................................................................................... 2,090
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$ 27,546,315
LIABILITIES
Accrued management fee..................................................... $ 13,635
Accrued custodian and transfer agent fee................................... 1,357
Payable for securities purchased, not yet received......................... 250,000 264,992
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NET ASSETS
Equivalent to $89.05 per share on 306,373 shares outstanding....................................... $ 27,281,323
------------
------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1996...................................................................... $ 20,565,014
Net investment income, per statement below................................. $ 496,734
Net accrued income in price of shares sold and repurchased................. 10,851
------------
507,585
Distribution to shareholders............................................... 488,105 19,480
------------
Fund shares issued and repurchased:
Received for 40,086 shares issued........................................ 3,199,742
Paid for 12,829 shares repurchased....................................... 1,013,279 2,186,463
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Increase in unrealized net appreciation (depreciation) of investments.............................. 4,318,935
Net gain or (loss) realized from sales of securities............................................... 191,431
Distribution from net realized gain................................................................ 0
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NET ASSETS, September 30, 1997..................................................................... $ 27,281,323
------------
------------
</TABLE>
STATEMENT OF NET INVESTMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends.......................................................................................... $ 308,619
Interest........................................................................................... 357,797
------------
$ 666,416
EXPENSES
Management fee (Note A).................................................... $ 108,498
Fees and expenses of custodian, transfer agent and dividend disbursing
agent (Note A)............................................................ 12,234
Legal and auditing fees and expenses....................................... 16,681
Insurance.................................................................. 1,856
Other Fees and Expenses.................................................... 30,413 169,682
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NET INVESTMENT INCOME.............................................................................. $ 496,734
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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
advisory 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 also paid to Mairs and Power, Inc. which serves as transfer agent.
SUPPLEMENTARY INFORMATION: 1) Each director of the Fund not affiliated with
Mairs and Power Inc. received compensation for meetings attended during this
nine month period in the amount of $900. No compensation was paid to any other
officer or director 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, 1997 aggregated
$3,184,246 and $942,442 respectively.
<PAGE>
---------------------------
MAIRS AND POWER
BALANCED FUND, INC.
---------------------------
A NO-LOAD FUND
W-2062 FIRST NATIONAL BANK BUILDING, 332 MINNESOTA STREET, ST. PAUL, MINNESOTA
55101
612-222-8478
SUMMARY OF FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
This table covers a period of generally rising bond and common stock prices. The
results shown should not be considered as a representation of the dividend
income and 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, 1982 67,525 2,274,421 33.68 0.66 2.50
Dec. 31, 1983 77,914 2,907,432 37.32 0.21 2.34
Dec. 31, 1984 77,905 2,729,570 35.04 1.10 2.34
Dec. 31, 1985 91,674 3,837,245 41.86 0.69 2.19
Dec. 31, 1986 126,862 5,395,111 42.53 3.74 1.95
Dec. 31, 1987 147,717 5,772,298 39.08 2.18 2.11
Dec. 31, 1988 158,713 6,569,555 41.39 0.84 2.23
Dec. 31, 1989 172,243 7,886,058 45.78 0.66 2.15
Dec. 31, 1990 183,079 8,075,488 44.11 0.13 2.13
Dec. 31, 1991 200,138 10,676,264 53.34 0.00 1.99
Dec. 31, 1992 214,336 11,535,822 53.82 0.60 1.99
Dec. 31, 1993 238,430 13,441,576 56.38 1.25 1.98
Dec. 31, 1994 247,484 12,972,976 52.42 0.74 2.06
Dec. 31, 1995 259,636 16,978,753 65.39 0.55 2.04
Dec. 31, 1996 279,117 20,565,014 73.68 1.08 2.20
Sept. 30, 1997 306,373 27,281,323 89.05 1.65
</TABLE>
No adjustment has been made for any income tax payable by stockholders on
capital gains 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 SEPTEMBER 30, 1997) ARE AS FOLLOWS:
1 YEAR: +31.4% 5 YEARS: +16.0% 10 YEARS: +12.5%
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
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
William B. Frels George A. Mairs, III 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>
