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MAIRS AND POWER
BALANCED FUND, INC.
--------------------
1ST QUARTER REPORT
March 31, 1998
May 22, 1998
To Our Shareholders:
FIRST QUARTER RESULTS
As has been the case during recent periods, the Balanced Fund continued to
benefit from a surprisingly strong stock market during the first quarter. Based
on a March 31, 1998 net asset value of $98.02 per share, the Fund achieved a
total investment return of 8.3% during the quarter after adjustment for the
reinvestment of cash dividends. This compares to other benchmark returns of
13.9% for the Standard & Poor's 500 Stock Index, 11.7% for the Dow Jones
Industrial Average and 1.5% for the Lehman Bros. Gov't/Corp. Bond Index. Among
its peers, the Fund's investment performance ranked 108 within a
CDA/Wiesenberger universe of 341 comparable domestic balanced funds.
Economic growth accelerated in the first quarter as indicated by an
unexpectedly strong 4.2% (preliminary basis) annualized rate of increase in
Gross Domestic Product. The better than expected showing was triggered by a 5.6%
surge in consumer spending together with a very significant 17.6% rebound in
business spending. In regard to the latter, durable equipment spending improved
at an even greater 28.8% annual rate. Despite strengthening demand, inflation,
as measured by the Consumer Price Index, remained almost non-existent increasing
at only a mere 0.2% annual rate during the quarter. Reflecting receding
inflation concerns, interest rates remained relatively stable, declining only
slightly over the course of the quarter. Finally, corporate profits on an
operating basis continued to grow, albeit at a reduced rate in the area of 5%,
despite the strong dollar and well publicized problems in Southeast Asia.
The stock market continued to respond to an unusually favorable set of
circumstances including a strong economy, low inflation, stable interest rates,
growing corporate profits and plenty of liquidity. As one might expect, the
primary areas of strength in the first quarter were centered around consumer
spending. In this regard, such industries as appliances, autos, cosmetics and
household products, home building and building materials and retailing all did
very well. Other pockets of strength included computer software, pharmaceuticals
and telecommunications. The poorest performing industries included energy,
electric and gas utilities, foods and tobacco. Within the Fund, the best
performing individual issues included Pfizer (+33.7%), National Computer
(+27.7%), American Home Products (+24.7%) and Pentair (+24.5%) while MTS Systems
(-14.7%), Murphy Oil (-7.5%), Schlumberger (-5.9%) and Firstar (-6.9%) fared the
worst.
FUTURE OUTLOOK
All the ingredients that have come together in recent years to move the stock
market to ever higher levels seem likely to remain in place unless the
pessimistic views concerning Southeast Asia turn out to be correct. The domestic
economic outlook continues to be decidedly positive given the recent growth in
employment which in turn influences consumer spending. A relatively high
capacity utilization rate together with the continuing need for productivity
improvement suggests further growth in business spending. Although below the
"double digit" rates of recent years, corporate earnings are nevertheless
expected to show a respectable
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growth in the 5-8% range in 1998. Barring any surprises, the increasingly
competitive nature of the global economy is expected to keep inflation under
control for some time to come. Consequently, interest rates should remain
relatively stable and move within a fairly narrow range over the remainder of
the year.
While the stock market appears rather fully valued at current levels (22x
estimated S & P 500 operating earnings of $51.00), continued earnings growth and
the possibility of some additional increase in valuation levels still leaves
room for reasonable appreciation potential. With investors having few other
attractive investment alternatives, historically high valuation levels seem
likely to persist over the foreseeable future given a shrinking supply of
available equity investments as a result of stock buy-backs and cash mergers
more than offsetting new stock issuance. However, today's lofty valuation levels
also suggests greater volatility because of increased sensitivity to any changes
in the outlook for either earnings or interest rates.
William B. Frels
President
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SCHEDULE OF INVESTMENTS AT MARCH 31, 1998
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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 19.8%
$200,000 U.S. Treasury Notes 7.125% 09/30/99 $ 197,172 $ 204,313
250,000 Federal Farm Credit Bank 6.48 02/09/06 250,000 246,250
250,000 Federal Home Loan Bank 6.85% 10/10/00 249,844 250,225
250,000 Federal Home Loan Bank 6.25% 10/20/00 250,000 249,922
250,000 Federal Home Loan Bank 7.025% 05/21/01 250,000 250,391
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 251,719
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 251,719
250,000 Federal Home Loan Bank 6.55% 11/12/02 250,000 251,875
250,000 Federal Home Loan Bank 6.515% 12/02/02 250,000 249,844
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 254,297
250,000 Federal Home Loan Bank 7.20% 09/11/03 250,000 251,484
250,000 Federal Home Loan Bank 7.012% 07/14/04 250,000 252,967
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,000 254,766
250,000 Federal Home Loan Bank 7.00% 08/15/07 250,000 253,437
250,000 Federal Home Loan Bank 7.075% 07/25/12 250,000 255,234
250,000 Federal Home Loan Bank 7.02% 01/28/13 250,000 248,047
250,000 Federal Home Loan Mortgage Corporation 7.30% 07/27/05 250,000 251,250
250,000 Federal National Mortgage Association 7.23% 05/17/04 250,000 255,391
250,000 Federal National Mortgage Association 6.45% 04/04/05 250,000 250,000
250,000 Federal National Mortgage Association 6.67% 02/06/06 249,531 248,594
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 255,391
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,844 257,969
250,000 Federal National Mortgage Association 7.43% 06/13/07 250,000 257,266
250,000 Federal National Mortgage Association 6.41% 01/16/08 248,516 248,125
250,000 Federal National Mortgage Association 6.52% 03/05/08 250,000 248,906
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 254,375
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6,441,657 6,503,757
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OTHER NON-CONVERTIBLE BONDS 7.8%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 248,750
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 257,109
265,000 J. C. Penney & Co. 6.00% 05/01/06 239,613 257,630
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,977 258,984
250,000 General Foods Corporation 7.00% 06/15/11 240,000 248,906
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 252,187
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 277,813
250,000 Allstate Corp. 7.50% 06/15/13 218,938 265,938
250,000 CNA Financial Corp. 6.95% 01/15/18 247,317 244,922
250,000 Lincoln National Corp. 7.00% 03/15/18 249,867 247,656
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2,399,323 2,559,895
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CONVERTIBLE BONDS 1.1%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 120,375
250,000 Noram Energy 6.00% 03/15/12 150,600 236,875
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251,600 357,250
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 2.5%
6,000 Bankers Trust New York Corporation $1.91 144,495 151,875
6,000 Barclays Bank PLC, Series E $2.00 150,000 156,375
5,000 The Bear Stearns Companies, Inc. Pf, Series C $1.90 125,000 125,625
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $5.00 143,720 234,502
2,000 St. Paul Capital Pf $3.00 100,000 153,500
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663,215 821,877
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TOTAL FIXED INCOME SECURITIES 31.2% 9,755,795 10,242,779
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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 7.4%
5,000 Cooper Industries, Inc. $ 186,470 $ 297,188
3,000 Delta Air Lines, Inc. 206,976 354,750
5,000 General Signal Corp. 195,449 233,125
18,000 Graco Inc. 147,460 545,625
7,500 Ingersoll-Rand Company 61,341 359,531
8,000 Pentair, Inc. 51,782 358,000
5,000 Weyerhaeuser Company 135,368 282,500
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984,846 2,430,719
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CONSUMER 7.9%
7,000 American Greetings Class A 189,500 322,000
5,000 Briggs & Stratton Corporation 61,116 229,063
6,000 Deluxe Corp. 164,591 197,625
2,000 Eastman Kodak Company 53,573 129,750
3,000 General Mills, Inc. 151,030 228,000
6,000 Genuine Parts Company 112,273 228,750
6,000 Hershey Foods Corporation 146,610 429,750
10,000 Hormel (Geo. A.) & Company 214,325 388,125
10,000 Jostens. Inc. 199,575 240,000
10,000 Sturm, Ruger & Co., Inc. 42,220 206,250
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1,334,813 2,599,313
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ENERGY 5.2%
4,000 Amoco Corporation 140,723 345,500
4,000 Exxon Corporation 20,793 270,500
5,000 Mobil Corporation 54,750 383,125
5,000 Murphy Oil Corporation 123,696 250,625
6,000 Schlumberger, Limited 105,048 454,500
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445,010 1,704,250
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FINANCIAL 19.8%
5,000 American Express Company 99,215 459,062
7,845 Community First Bankshares, Inc. 125,000 400,095
10,000 Firstar Corp. 163,175 395,000
3,375 Jefferson-Pilot Corp. 60,323 300,164
12,000 Merrill Lynch & Co., Inc. 99,319 996,000
4,000 J.P. Morgan & Co., Inc. 102,082 537,250
8,000 NationsBank Corp. 216,194 583,500
40,000 Norwest Corporation 94,825 1,662,500
12,000 ReliaStar Financial Corp. 110,625 552,750
5,000 U.S. Bancorp 58,358 623,750
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1,129,116 6,510,071
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HEALTH CARE 11.2%
6,000 American Home Products Corporation 182,542 572,250
5,000 Baxter International Inc. 70,751 275,625
8,000 Bristol-Myers Squibb Company 205,563 834,500
20,000 Pfizer Inc. 136,357 1,993,750
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595,213 3,676,125
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</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK COST MARKET VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
TECHNOLOGY 9.8%
5,000 AMP Incorporated $ 133,605 $ 219,063
11,000 Corning Inc. 327,215 486,750
6,000 Emerson Electric Co. 128,697 391,125
5,000 Honeywell Inc. 90,716 413,437
4,000 International Business Machines
Corporation 96,740 415,500
25,000 MTS Systems Corporation 154,000 400,000
5,000 Minnesota Mining & Manufacturing Company 247,240 455,000
20,000 National Computer Systems, Inc. 121,380 450,000
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1,299,593 3,230,875
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UTILITIES 2.8%
5,000 American Water Works Company, Inc. 130,600 157,812
7,000 GTE Corporation 96,007 419,125
6,000 U S West Communications 142,035 327,750
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368,642 904,687
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TOTAL COMMON STOCK 64.1% 6,157,233 21,056,040
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OTHER ASSETS IN EXCESS OF LIABILITIES 4.7% 1,536,678
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NET ASSETS 100% $ 15,913,028 $ 32,835,497
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</TABLE>
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STATEMENT OF NET ASSETS AT MARCH 31, 1998
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $9,471,371)........................................ $ 24,795,063
U.S. Governments (cost $6,441,657)............................................................... 6,503,756
Cash............................................................................................. 1,880,713
Dividends and interest receivable................................................................ 167,650
Receivables for securities sold, not yet delivered............................................... 0
Prepaid expense.................................................................................. 5,787
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$ 33,352,969
LIABILITIES
Accrued management fee................................................... $ 16,410
Accrued custodian and transfer agent fee................................. 1,195
Payable for securities purchased, not yet received....................... 499,867 517,472
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NET ASSETS
Equivalent to $98.02 per share on 334,984 shares outstanding..................................... $ 32,835,497
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</TABLE>
STATEMENT OF CHANGES IN NET ASSETS FOR THE THREE MONTHS ENDED MARCH 31, 1998
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<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1997.................................................................... $ 28,789,592
Net investment income, per statement below............................... $ 196,912
Net accrued income in price of shares sold and repurchased............... 8,391
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205,303
Distribution to shareholders............................................. 181,215 24,088
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Fund shares issued and repurchased:
Received for 22,476 shares issued...................................... 2,114,712
Paid for 3,762 shares repurchased...................................... 349,777 1,764,935
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Increase in unrealized net appreciation (depreciation) of investments............................ 2,180,018
Net gain or (loss) realized from sales of securities............................................. 76,864
Distribution from net realized gain.............................................................. 0
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NET ASSETS, March 31, 1998....................................................................... $ 32,835,497
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</TABLE>
STATEMENT OF NET INVESTMENT INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998
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<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends........................................................................................ $ 106,283
Interest......................................................................................... 159,693
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$ 265,976
EXPENSES
Management fee (Note A).................................................. $ 46,310
Fees and expenses of custodian, transfer agent and dividend disbursing
agent (Note A).......................................................... 7,499
Legal and auditing fees and expenses..................................... 5,944
Insurance................................................................ 515
Other Fees and Expenses.................................................. 8,796 69,064
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NET INVESTMENT INCOME............................................................................ $ 196,912
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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 $-0- compensation for meetings attended during
this three month period. 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 three months ended March 31, 1998 aggregated $2,065,103 and $963,022
respectively.
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MAIRS AND POWER
BALANCED FUND, INC.
---------------------------
A NO-LOAD FUND
W-1420 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, 1977 47,117 1,439,735 30.56 0.77 1.76
Dec. 31, 1978 50,229 1,439,598 28.66 0.70 2.00
Dec. 31, 1979 56,895 1,644,853 28.91 0.60 2.20
Dec. 31, 1980 64,598 1,969,896 30.49 0.81 2.10
Dec. 31, 1981 66,118 1,928,460 29.17 2.41
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 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
Dec. 31, 1997 316,270 28,789,593 91.03 0.70 2.37
Mar. 31, 1998 334,984 32,835,497 98.02 0.55
</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 MARCH 31, 1998) ARE AS FOLLOWS:
1 YEAR: +35.6% 5 YEARS: +16.9% 10 YEARS: +14.5%
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
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<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>
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MAIRS AND POWER
BALANCED FUND, INC.
