<PAGE>
--------------------
MAIRS AND POWER
BALANCED FUND, INC.
--------------------
2ND QUARTER REPORT
June 30, 1997
August 15, 1997
To Our Shareholders:
SECOND QUARTER RESULTS
Reflecting the strong overall stock market performance in recent months, the
Balanced Fund turned in one of its best performances ever in the second quarter.
Based on a June 30, 1997 net asset value of $84.22 per share, the Fund earned a
total investment return of 13.3% after adjustment for the reinvestment of cash
dividends for the period. This compared to investment returns of 17.4% for the
Standard & Poor's 500 Stock Index and 3.6% for the Lehman Bros. Gov't/Corp. Bond
Index. For the first half, the Balanced Fund produced an investment return of
15.9% compared to returns of 20.6% for the S&P 500 and 2.7% for the Lehman Bros.
Gov't/Corp. Bond Index. The Fund compared very favorably with other balanced
funds ranking second out of a CDA/Wiesenberger universe of 309 domestic balanced
funds during the first half of 1997.
The strength in the stock market is thought to have been the result of a
number of factors creating a near perfect environment for financial assets. The
economy as measured by Gross Domestic Product continued to grow in the second
quarter albeit at a reduced 2.2% rate (preliminary basis) as compared to a
faster 4.9% rate (revised) in the first quarter. The inflation rate improved
further to only a modest 1.4% annual rate, the lowest quarterly rate since the
second quarter of 1964. Corporate profits continued to show unexpected strength
with a 7% gain based on BUSINESS WEEKS' "Corporate Scoreboard" representing some
900 companies. More importantly, a survey by I/B/E/S International indicated 62%
of reporting companies came in with earnings above what had been estimated by
Wall Street analysts. Responding to the improved outlook for inflation, interest
rates declined slightly along the entire length of the yield curve except for
only the very shortest maturities.
All major stock market groups enjoyed a pretty good performance during the
quarter with the exception of electric utilities. However, earnings
predictability seemed to take on more importance with both large and small
capitalization growth stocks generally doing better than average. As a result,
stocks in the consumer staple (cosmetics and household products), financial
(insurance), health care (drugs) and technology (computer software and
telecommunications) sectors generally outperformed while those in basic
industries (metals and mining), consumer cyclical (footwear and textiles),
consumer service (restaurants), energy and utility sectors under performed.
Among individual holdings in the Fund, Pfizer (+42.1%), Ingersoll Rand (+41.5%),
Merrill Lynch (+38.9%) and MTS Systems (+38.6%) did the best while GTE (-5.9%),
Delta Air Lines (-1.8%) and Dow Jones (-1.1%) fared the worst.
FUTURE OUTLOOK
Fundamentally, the outlook for the U.S. economy still appears sound with
further growth in the area of 2% anticipated over the remainder of this year and
into 1998. Consumer spending seems likely to show continued growth considering
recent employment trends and expansion in personal disposable income. The same
seems to be true for the always volatile area of business spending given a
relatively high capacity utilization rate. While the recent increase in
inventory levels is somewhat troublesome, levels are still considered to be
manageable if spending holds up. Even though the rate of growth in government
spending may continue to slow, continued expansion still seems all but certain.
Assuming overall economic growth remains moderate, the rate of inflation is not
expected to increase much from current levels in view of the strong dollar and
very competitive market place. Finally, corporate earnings are projected to
continue growing although the rate of growth may moderate a bit from the "double
digit" levels of recent periods.
Prospects for the bond market continue to be positive if our forecast for
inflation proves to be correct. On the other hand, returns on longer term
maturities seem unlikely to be much above their coupon rates with most of the
favorable inflation outlook thought to be already discounted by the market.
Considering the outlook for continuing earnings growth, low inflation and
ample liquidity, the background for the stock market remains decidedly positive.
Consequently, stock prices are expected to continue
<PAGE>
working their way higher in the months to come despite historically high
valuation levels. However, higher market levels are also expected to be
accompanied by increasing volatility due to a greater sensitivity to any
perceived changes in the fundamentals be they either real or imaginary.
RECENT EVENT
It is with deep regret that we must inform you of the recent passing of our
long time Director, Litton E. S. Field, on July 14, 1997. Over the twenty five
year period of his service, Mr. Field provided insightful leadership and was a
strong supporter of the Fund. Mr. Field's presence will be greatly missed by his
many friends and associates.
William B. Frels
332 Minnesota Street
W-2062 First National Bank Building
St. Paul, Minnesota 55101
612-222-8478
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SCHEDULE OF INVESTMENTS AT JUNE 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 OBLIGATIONS 18.7%
$200,000 U.S. Treasury Notes 7.125% 09/30/99 $ 197,172 $ 204,125
250,000 Federal Home Loan Bank 6.01% 12/04/98 250,000 249,766
250,000 Federal Home Loan Bank 6.85% 10/10/00 249,844 251,400
250,000 Federal Home Loan Bank 7.025% 05/21/01 250,000 251,641
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 248,516
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 250,859
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 254,141
250,000 Federal Home Loan Bank 7.20% 09/11/03 250,000 251,094
250,000 Federal Home Loan Bank 7.01% 07/14/04 250,000 250,000
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,000 250,000
250,000 Federal Home Loan Mortgage Corporation 7.00% 03/24/03 250,000 250,000
250,000 Federal Home Loan Mortgage Corporation 7.30% 07/27/05 250,000 247,578
250,000 Federal Home Loan Mortgage Corporation 7.00% 03/13/06 250,000 246,719
250,000 Federal National Mortgage Association 7.23% 05/17/04 250,000 250,078
250,000 Federal National Mortgage Association 6.67% 02/06/06 249,531 242,578
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 251,162
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,844 254,453
250,000 Federal National Mortgage Association 7.43% 06/13/07 250,000 250,625
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 245,078
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4,693,141 4,699,813
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OTHER NON-CONVERTIBLE BONDS 7.9%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 243,437
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 250,625
265,000 J. C. Penney & Co. 6.00% 05/01/06 239,613 247,527
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,977 247,734
250,000 General Foods Corporation 7.00% 06/15/11 240,000 238,516
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 239,688
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 259,687
250,000 Allstate Corp. 7.50% 06/15/13 218,938 253,437
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1,902,139 1,980,651
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CONVERTIBLE BONDS 1.9%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 115,875
250,000 Noram Energy 6.00% 03/15/12 150,600 220,000
150,000 Ashland Oil 6.75% 07/01/14 144,000 151,500
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395,600 487,375
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 3.6%
6,000 Bankers Trust New York Corporation $ 1.91 144,495 154,500
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 152,250
5,000 The Bear Stearns Companies, Inc. Pf, Series C $ 1.90 125,000 127,813
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 203,750
4,000 Provident Life & Accident Insurance Co. Pf $2.025 100,000 103,250
2,000 St. Paul Capital Pf $ 3.00 100,000 138,500
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763,215 880,063
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TOTAL FIXED INCOME SECURITIES 32.1% 7,754,095 8,047,902
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</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK COST MARKET VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
BASIC INDUSTRIES 7.9%
5,000 Cooper Industries, Inc. $ 186,470 $ 248,750
3,802 Delta Air Lines, Inc. 262,307 314,140
5,000 General Signal Corp. 195,449 218,125
12,000 Graco Inc. 147,460 361,500
5,000 Ingersoll-Rand Company 61,341 308,750
8,000 Pentair, Inc. 51,782 263,000
5,000 Weyerhaeuser Company 135,368 260,000
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1,040,177 1,974,265
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CONSUMER 10.1%
7,000 American Greetings Class A 189,500 259,875
5,000 Briggs & Stratton Corporation 61,116 250,000
6,000 Deluxe Corp. 164,591 204,750
5,000 Dow Jones & Company, Inc. 171,125 200,938
2,000 Eastman Kodak Company 53,573 153,500
3,000 General Mills, Inc. 151,031 195,375
6,000 Genuine Parts Company 112,272 203,250
6,000 Hershey Foods Corporation 146,610 331,875
10,000 Hormel (Geo. A.) & Company 214,325 268,750
10,000 Jostens. Inc. 199,575 267,500
10,000 Sturm, Ruger & Co., Inc. 42,220 196,250
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1,505,938 2,532,063
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ENERGY 6.2%
4,000 Amoco Corporation 140,723 347,750
4,000 Exxon Corporation 20,793 245,000
5,000 Mobil Corporation 54,750 349,375
5,000 Murphy Oil Corporation 123,696 243,750
3,000 Schlumberger, Limited 105,048 375,000
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445,010 1,560,875
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FINANCIAL 19.4%
5,000 American Express Company 99,215 372,500
7,845 Community First Bankshares, Inc. 125,000 301,052
5,000 First Bank System, Inc. 58,358 426,875
10,000 Firstar Corp. 163,175 305,000
3,375 Jefferson-Pilot Corp. 60,323 235,828
12,000 Merrill Lynch & Co., Inc. 99,319 715,500
4,000 J.P. Morgan & Co., Inc. 102,082 417,500
8,000 NationsBank Corp. 216,194 516,500
20,000 Norwest Corporation 94,825 1,125,000
6,000 ReliaStar Financial Corp. 110,625 438,750
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1,129,116 4,854,505
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HEALTH CARE 10.2%
6,000 American Home Products Corporation 182,542 459,000
5,000 Baxter International Inc. 70,751 261,563
8,000 Bristol-Myers Squibb Company 205,563 648,000
10,000 Pfizer Inc. 136,357 1,195,000
------------ ------------
595,213 2,563,563
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK COST MARKET VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
</TABLE>
<TABLE>
<C> <S> <C> <C>
TECHNOLOGY 9.9%
5,000 AMP Incorporated $ 133,605 $ 208,750
6,000 Corning Inc. 134,678 333,750
6,000 Emerson Electric Co. 128,697 330,375
5,000 Honeywell Inc. 90,716 379,375
International Business Machines
4,000 Corporation 96,740 361,000
10,000 MTS Systems Corporation 81,500 305,000
3,000 Minnesota Mining & Manufacturing Company 75,000 306,750
10,000 National Computer Systems, Inc. 121,380 266,250
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862,316 2,491,250
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UTILITIES 2.8%
7,000 GTE Corporation 96,007 307,125
5,000 Texas Utilities Company 183,482 172,187
6,000 U S West Communications 142,035 226,125
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421,524 705,437
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TOTAL COMMON STOCK 66.5% 5,999,294 16,681,958
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OTHER ASSETS IN EXCESS OF LIABILITIES 1.4% 356,320
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NET ASSETS 100% $ 13,753,389 $ 25,086,180
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</TABLE>
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STATEMENT OF NET ASSETS AT JUNE 30, 1997
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $9,060,248).......................................... $ 20,030,046
U.S. Governments (cost $4,693,141)................................................................. 4,699,813
Cash............................................................................................... 725,665
Dividends receivable............................................................................... 20,997
Interest receivable................................................................................ 127,632
Receivables for securities sold, not yet delivered................................................. 0
Prepaid expense.................................................................................... (4,718)
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$ 25,599,435
LIABILITIES
Accrued management fee..................................................... $ 12,537
Accrued custodian and transfer agent fee................................... 718
Payable for securities purchased, not yet received......................... 500,000 513,255
------------ ------------
NET ASSETS
Equivalent to $84.22 per share on 297,871 shares outstanding....................................... $ 25,086,180
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</TABLE>
STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1996...................................................................... $ 20,565,014
Net investment income, per statement below................................. $ 317,194
Net accrued income in price of shares sold and repurchased................. 6,679
------------
323,873
Distribution to shareholders............................................... 320,592 3,281
------------
Fund shares issued and repurchased:
Received for 28,632 shares issued........................................ 2,206,931
Paid for 9,877 shares repurchased........................................ 757,255 1,449,676
------------
Increase in unrealized net appreciation (depreciation) of investments.............................. 2,916,189
Net gain or (loss) realized from sales of securities............................................... 152,020
Distribution from net realized gain................................................................ 0
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NET ASSETS, June 30, 1997.......................................................................... $ 25,086,180
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------------
</TABLE>
STATEMENT OF NET INVESTMENT INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends.......................................................................................... $ 203,822
Interest........................................................................................... 222,284
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$ 426,106
EXPENSES
Management fee (Note A).................................................... $ 68,659
Fees and expenses of custodian, transfer agent and dividend disbursing
agent (Note A)............................................................ 7,924
Legal and auditing fees and expenses....................................... 10,567
Insurance.................................................................. 1,486
Other Fees and Expenses.................................................... 20,276 108,912
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NET INVESTMENT INCOME.............................................................................. $ 317,194
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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) The three directors of the Fund not affiliated
with Mairs and Power Inc. received compensation for meetings attended during
this period totaling $600 each. No compensation was paid to any 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 six months ended June 30, 1997 aggregated $2,345,876 and $703,700
respectively. 4) An annual meeting of shareholders was held on May 19, 1997 for
the purposes of: (a) Election of six directors; (b) to change the name of the
Fund to Mairs and Power Balanced Fund, Inc.; and (c) to ratify the selection of
Ernst & Young LLP as independent auditors for the Fund. Of the 290,225 shares
outstanding on record date of April 11, 1997, the following votes were cast:
<TABLE>
<CAPTION>
PROPOSAL SHARES FOR SHARES AGAINST ABSTAINING
- -------------------------------------------------------- ---------- --------------- -------------
<S> <C> <C> <C>
Elect George A. Mairs, III 186,584.302 0.000 0.000
Elect William B. Frels 186,584.302 0.000 0.000
Elect Peter G. Robb 186,584.302 0.000 0.000
Elect Litton E. S. Field 186,584.302 0.000 0.000
Elect Donald E. Garretson 186,584.302 0.000 0.000
Elect J. Thomas Simonet 186,584.302 0.000 0.000
Change name of Fund to Mairs and Power Balanced Fund,
Inc. 186,344.440 239.862 0.000
Ratify Ernst & Young LLP as Independent Auditors 185,803.002 781.300 0.000
</TABLE>
<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
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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, 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
Jun. 30, 1997 297,871 25,086,180 84.22 1.10
</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 JUNE 30, 1997) ARE AS FOLLOWS:
1 YEAR: +28.1% 5 YEARS: +15.2% 10 YEARS: +12.1%
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
Litton E.S. Field Donald E. Garretson J. Thomas Simonet
Director Director Director
</TABLE>
