<PAGE>
------------------------
MAIRS AND POWER
BALANCED FUND, INC.
------------------------
2ND QUARTER REPORT
June 30, 1998
August 24, 1998
To Our Shareholders:
SECOND QUARTER RESULTS
In response to an increasingly difficult equity investment environment, the
Balanced Fund produced only a slight gain for the second quarter. Based on a
June 30, 1998 net asset value of $49.06 per share (adjusted for a 2-for-1 stock
split on June 22, 1998), the Fund achieved a total investment return of 0.7%
during the quarter after adjustment for the reinvestment of cash dividends.
Other comparable index returns for the same period were 3.3% for the Standard &
Poor's 500 Stock Index, 2.1% for the Dow Jones Industrial Average and 2.6% for
the Lehman Bros. Gov't/Corp. Bond Index. For the first half, the Fund had a
return of 9.0% as compared to 17.6% for the Standard & Poor's 500, 14.1% for the
Dow Jones Industrial Average and 4.2% for the Lehman Bros. Gov't/Corp. Bond
Index. Among other comparable funds, the Fund ranked 118 within a
CDA/Wiesenberger universe of 346 domestic balanced funds during the first half
of the year.
The economy weakened considerably during the second quarter in response to a
number of factors including the General Motors strike, a sharply lower rate of
inventory accumulation and a deteriorating balance of trade attributable to the
strong dollar and Southeast Asian economic crisis. Real Gross Domestic Product
increased at a relatively modest 1.4% (preliminary basis) annual rate with
consumer spending again leading the way with an impressive 5.8% annual rate of
growth. Business spending also continued to be reasonably strong with producers'
durable equipment growing at an exceptional 17.8% annual rate. Inflation
remained quite subdued with the Consumer Price Index advancing at only a 2%
annual rate during the quarter. Interest rates declined slightly at the long end
and the yield curve continued to flatten. In line with the overall economy,
corporate operating earnings growth slipped to around 2% based on a BUSINESS
WEEK survey of some 900 companies. However, indications are that larger Standard
& Poor's 500 companies did a bit better showing a gain in the area of 6% on an
operating basis.
Turning to the stock market, large capitalization stocks continued to dominate
the market in the second quarter as they have for the past year. In this regard,
the top decile of the Standard & Poor's 500 Index (ranked by market
capitalization) accounted for nearly all of the performance during the quarter.
Furthermore, on an equal weighted basis, the S&P 500 Index would have been
actually down for the quarter. Among industry groups, consumer cyclicals,
staples and services did the best, as one would expect given the continuing
strength in consumer spending while basic industries, energy, transportation and
utilities fared the worst. Within the Fund, the best performing individual
issues included American Express (+23.9%), Graco (+15.0%), Eastman Kodak
(+12.6%) and Merrill Lynch (+11.1%) while those that had the poorest showing
included General Signal (-22.8%), AMP (-21.5%), Corning (-21.5%) and Sturm,
Ruger (-18.8%).
FUTURE OUTLOOK
With the overall economy likely to show continuing growth, albeit at a reduced
rate, over the remainder of the year and into 1999, accompanied by only a modest
level of inflation, we remain positive on the outlook for both stock and bond
markets. The recent stock market correction, approximating 10% since the end of
the quarter, seems to have gone a long way toward discounting the uncertainties
related to continuing Southeast Asian economic problems together with newer
problems involving a weakened Presidency and acts of terrorism. While market
valuation levels still remain on the high side historically, there appears to be
ample justification for the
<PAGE>
current condition. Support for higher valuations comes from interest rates that
have trended downward during recent periods along a moderating rate of inflation
and corporate earnings growth that seems likely to continue although at a
reduced rate in the mid "single digits". Other factors lending support for
continuing higher than normal valuation levels include the strong dollar which
encourages foreign investment in our markets and an ever shrinking supply of
equity investment resulting from corporate repurchase programs and acquisitions
made for cash. Finally, greater volatility also seems likely to remain in place
given a heightened level of sensitivity to any changes in the outlook for either
earnings or interest rates.
William B. Frels
President
<PAGE>
SCHEDULE OF INVESTMENTS AT JUNE 30, 1998
- --------------------------------------------------------------------------------
FIXED INCOME SECURITIES
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT SECURITY DESCRIPTION COST VALUE
- ----------------------------------------------------------------------------- ----------- -----------
<C> <S> <C> <C> <C> <C>
U.S. TREASURY & FEDERAL AGENCY OBLIGATIONS 23.3%
$250,000 U.S. Treasury Bill 5.050% 11/05/98 $ 243,617 $ 245,547
200,000 U.S. Treasury Notes 7.125% 09/30/99 197,172 203,750
250,000 Federal Farm Credit Bank 6.25% 04/29/03 250,000 250,292
260,000 Federal Farm Credit Bank 6.30% 06/09/03 260,000 260,996
250,000 Federal Farm Credit Bank 6.48% 02/09/06 250,000 247,298
250,000 Federal Home Loan Bank 6.25% 10/20/00 250,000 250,000
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 252,891
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 251,719
250,000 Federal Home Loan Bank 6.155% 10/30/02 250,000 249,062
250,000 Federal Home Loan Bank 6.55% 11/12/02 250,000 251,953
250,000 Federal Home Loan Bank 6.515% 12/02/02 250,000 250,000
250,000 Federal Home Loan Bank 6.30% 05/19/03 250,000 250,313
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 253,359
250,000 Federal Home Loan Bank 7.20% 09/11/03 250,000 250,703
250,000 Federal Home Loan Bank 6.315% 11/25/03 250,000 249,219
250,000 Federal Home Loan Bank 7.012% 07/14/04 250,000 253,203
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,000 256,562
250,000 Federal Home Loan Bank 7.00% 08/15/07 250,000 255,781
250,000 Federal Home Loan Bank 7.075% 07/25/12 250,000 258,828
250,000 Federal Home Loan Bank 7.02% 01/28/13 250,000 250,469
250,000 Federal Home Loan Mortgage Corporation 7.30% 07/27/05 250,000 250,312
250,000 Federal National Mortgage Association 7.23% 05/17/04 250,000 255,195
500,000 Federal National Mortgage Association 6.45% 04/04/05 499,922 501,855
250,000 Federal National Mortgage Association 6.67% 02/06/06 249,531 250,113
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 254,800
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,844 257,372
250,000 Federal National Mortgage Association 7.43% 06/13/07 250,000 257,238
250,000 Federal National Mortgage Association 6.41% 01/16/08 248,516 250,815
250,000 Federal National Mortgage Association 6.52% 03/05/08 250,000 251,562
250,000 Federal National Mortgage Association 6.56% 04/23/08 249,273 252,450
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 255,753
----------- -----------
7,944,625 8,029,410
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OTHER NON-CONVERTIBLE BONDS 7.6%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 250,635
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 256,848
265,000 J. C. Penney & Co. 6.00% 05/01/06 239,613 259,901
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,977 264,530
250,000 General Foods Corporation 7.00% 06/15/11 240,000 251,610
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 254,244
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 285,572
250,000 Allstate Corp. 7.50% 06/15/13 218,938 275,250
250,000 CNA Financial Corp. 6.95% 01/15/18 247,317 253,218
250,000 Lincoln National Corp. 7.00% 03/15/18 249,867 259,660
----------- -----------
2,399,323 2,611,468
----------- -----------
CONVERTIBLE BONDS 1.0%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 122,250
250,000 Noram Energy 6.00% 03/15/12 150,600 237,500
----------- -----------
251,600 359,750
----------- -----------
NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 1.9%
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 157,125
5,000 The Bear Stearns Companies, Inc. Pf, Series C $ 1.90 125,000 125,000
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 242,500
2,000 St. Paul Capital Pf $ 3.00 100,000 144,000
----------- -----------
518,720 668,625
----------- -----------
TOTAL FIXED INCOME SECURITIES 33.8% 11,114,268 11,669,253
----------- -----------
----------- -----------
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK COST MARKET VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
BASIC INDUSTRIES 7.6%
5,000 Cooper Industries, Inc. $ 186,470 $ 274,688
3,000 Delta Air Lines, Inc. 206,976 387,750
5,000 General Signal Corp. 195,449 180,000
18,000 Graco Inc. 147,460 627,750
10,000 Ingersoll-Rand Company 173,547 440,625
8,000 Pentair, Inc. 51,782 340,000
8,000 Weyerhaeuser Company 273,478 369,500
------------ ------------
1,235,162 2,620,313
------------ ------------
CONSUMER 8.5%
7,000 American Greetings Class A 189,500 356,562
5,000 Briggs & Stratton Corporation 61,116 187,188
7,000 Deluxe Corp. 196,774 250,250
2,000 Eastman Kodak Company 53,573 146,125
3,000 General Mills, Inc. 151,030 204,750
6,000 Genuine Parts Company 112,273 207,375
6,000 Hershey Foods Corporation 146,610 414,000
10,000 Hormel (Geo. A.) & Company 214,325 345,625
10,000 Jostens. Inc. 199,575 238,750
9,000 Kimberly Clark 427,642 412,875
10,000 Sturm, Ruger & Co., Inc. 42,220 167,500
------------ ------------
1,794,638 2,931,000
------------ ------------
ENERGY 4.8%
8,000 Amoco Corporation 140,723 334,000
4,000 Exxon Corporation 20,793 285,500
5,000 Mobil Corporation 54,750 383,125
5,000 Murphy Oil Corporation 123,696 253,437
6,000 Schlumberger, Limited 105,048 409,875
------------ ------------
445,010 1,665,937
------------ ------------
FINANCIAL 19.4%
5,000 American Express Company 99,215 568,750
20,000 Community First Bankshares, Inc. 232,780 523,750
10,000 Firstar Corp. 163,175 381,875
5,062 Jefferson-Pilot Corp. 60,323 293,280
12,000 Merrill Lynch & Co., Inc. 99,319 1,107,000
4,000 J.P. Morgan & Co., Inc. 102,082 468,250
8,000 NationsBank Corp. 216,194 613,500
40,000 Norwest Corporation 94,825 1,500,000
12,000 ReliaStar Financial Corp. 110,625 576,000
15,000 U.S. Bancorp 58,358 645,000
------------ ------------
1,236,896 6,677,405
------------ ------------
HEALTH CARE 10.9%
12,000 American Home Products Corporation 182,542 621,000
5,000 Baxter International Inc. 70,751 269,062
8,000 Bristol-Myers Squibb Company 205,563 919,500
18,000 Pfizer Inc. 129,344 1,956,375
------------ ------------
588,200 3,765,937
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK COST MARKET VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
TECHNOLOGY 9.5%
10,000 AMP Incorporated $ 321,892 $ 343,750
12,000 Corning Inc. 366,773 417,000
6,000 Emerson Electric Co. 128,697 362,250
5,000 Honeywell Inc. 90,716 417,813
4,000 International Business Machines
Corporation 96,740 459,250
25,000 MTS Systems Corporation 154,000 401,562
5,000 Minnesota Mining & Manufacturing Company 247,240 410,938
20,000 National Computer Systems, Inc. 121,380 480,000
------------ ------------
1,527,438 3,292,563
------------ ------------
UTILITIES 2.4%
5,000 American Water Works Company, Inc. 130,600 155,000
7,000 GTE Corporation 96,007 389,375
6,000 U S West Inc. 142,035 280,875
------------ ------------
368,642 825,250
------------ ------------
TOTAL COMMON STOCK 63.1% 7,195,986 21,778,405
------------ ------------
OTHER ASSETS IN EXCESS OF LIABILITIES 3.1% 1,080,414
------------
NET ASSETS 100% $ 18,310,254 $ 34,528,072
------------ ------------
------------ ------------
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS AT JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $10,365,630)......................................... $ 25,418,248
U.S. Governments (cost $7,944,624)................................................................. 8,029,410
Cash............................................................................................... 910,895
Dividends and interest receivable.................................................................. 223,387
Receivables for securities sold, not yet delivered................................................. 0
Prepaid expense.................................................................................... 8,888
------------
$ 34,590,828
LIABILITIES
Accrued management fee..................................................... $ 17,255
Accrued custodian and transfer agent fee................................... 693
Payable for securities purchased, not yet received......................... 44,808 62,756
------------ ------------
NET ASSETS
Equivalent to $49.06 per share on 703,860 shares outstanding....................................... $ 34,528,072
------------
------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1997...................................................................... $ 28,789,592
Net investment income, per statement below................................. $ 427,817
Net accrued income in price of shares sold and repurchased (Note B)........ 0
------------
427,817
Distribution to shareholders............................................... (374,204) 53,613
------------
Fund shares issued and repurchased:
Received for 399,245 shares issued....................................... 4,422,339
Paid for 11,656 shares repurchased....................................... (969,895) 3,452,444
------------
Increase in unrealized net appreciation (depreciation) of investments.............................. 1,931,630
Net gain or (loss) realized from sales of securities............................................... 300,793
Distribution from net realized gain................................................................ 0
------------
NET ASSETS, June 30, 1998.......................................................................... $ 34,528,072
------------
------------
</TABLE>
STATEMENT OF NET INVESTMENT INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends.......................................................................................... $ 220,573
Interest........................................................................................... 350,543
------------
$ 571,117
EXPENSES
Management fee (Note A).................................................... $ 97,649
Fees and expenses of custodian, transfer agent and dividend disbursing
agent (Note A)............................................................ 15,142
Legal and auditing fees and expenses....................................... 11,887
Insurance.................................................................. 1,030
Other Fees and Expenses.................................................... 17,592 143,300
------------ ------------
NET INVESTMENT INCOME.............................................................................. $ 427,817
------------
------------
</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.
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 $1,000.00 compensation for meetings attended
during this six 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 six months ended June 30, 1998 aggregated $5,113,681 and $1,838,302
respectively. 4) An annual meeting of shareholders was held on May 18, 1998 for
the purposes of: (a) Election of six directors; (b) to ratify the selection of
Ernst & Young LLP as independent auditors for the Fund. Of the 334,984 shares
outstanding on record date of March 31, 1998, the following votes were cast:
<TABLE>
<CAPTION>
SHARES
PROPOSAL SHARES FOR AGAINST ABSTAINING
- ------------------------------------------------------------------------------ ----------- --------- -----------
<S> <C> <C> <C>
Elect George A. Mairs, III 241,469.386 0.000 0.000
Elect William B. Frels 241,469.386 0.000 0.000
Elect Peter G. Robb 241,469.386 0.000 0.000
Elect Charlton Dietz 241,469.386 0.000 0.000
Elect Donald E. Garretson 241,469.386 0.000 0.000
Elect J. Thomas Simonet 241,469.386 0.000 0.000
Ratify Ernst & Young LLP as Independent Auditors 239,130.697 1,152.396 1,186.293
</TABLE>
<PAGE>
---------------------------
MAIRS AND POWER
BALANCED FUND, INC.
---------------------------
A NO-LOAD FUND
W-1420 FIRST NATIONAL BANK BUILDING, 332 MINNESOTA STREET, ST. PAUL, MINNESOTA
55101-1363
651-222-8478
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, 1977 94,234 1,439,735 15.280 0.385 0.880
Dec. 31, 1978 100,458 1,439,598 14.330 0.350 1.000
Dec. 31, 1979 113,790 1,644,853 14.455 0.300 1.100
Dec. 31, 1980 129,196 1,969,896 15.245 0.405 1.050
Dec. 31, 1981 132,236 1,928,460 14.585 1.205
Dec. 31, 1982 135,050 2,274,421 16.840 0.330 1.250
Dec. 31, 1983 155,828 2,907,432 18.660 0.105 1.170
Dec. 31, 1984 155,810 2,729,570 17.520 0.550 1.170
Dec. 31, 1985 183,348 3,837,245 20.930 0.345 1.095
Dec. 31, 1986 253,724 5,395,111 21.265 1.870 0.975
Dec. 31, 1987 295,434 5,772,298 19.540 1.090 1.055
Dec. 31, 1988 317,426 6,569,555 20.695 0.420 1.115
Dec. 31, 1989 344,486 7,886,058 22.890 0.330 1.075
Dec. 31, 1990 366,158 8,075,488 22.055 0.065 1.065
Dec. 31, 1991 400,276 10,676,264 26.670 0.995
Dec. 31, 1992 428,672 11,535,822 26.910 0.300 0.995
Dec. 31, 1993 476,860 13,441,576 28.190 0.625 0.990
Dec. 31, 1994 494,968 12,972,976 26.210 0.370 1.030
Dec. 31, 1995 519,272 16,978,753 32.695 0.275 1.020
Dec. 31, 1996 558,234 20,565,014 36.840 0.540 1.100
Dec. 31, 1997 632,540 28,789,593 45.515 0.350 1.185
Jun. 30, 1998 703,860 34,528,072 49.060 0.550
</TABLE>
Above data has been adjusted to reflect the 2-for-1 stock split paid to
shareholders on June 22, 1998.
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, 1998) ARE AS FOLLOWS:
1 YEAR: +20.5% 5 YEARS: +16.6% 10 YEARS: +14.1%
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
Charlton Dietz Donald E. Garretson J. Thomas Simonet
Director Director Director
</TABLE>
<PAGE>
MAIRS AND POWER
BALANCED FUND, INC.
