<PAGE>
------------------------
MAIRS AND POWER
BALANCED FUND, INC.
------------------------
3RD QUARTER REPORT
September 30, 1998
November 20, 1998
To Our Shareholders:
THIRD QUARTER RESULTS
The third quarter proved to be an extremely difficult quarter for the stock
market in response to growing investor concerns over the outlook for corporate
profits, escalating international economic problems and presidential impeachment
uncertainties. As a result, the Balanced Fund experienced its first negative
return since the fourth quarter of 1994. Based on a September 30, 1998 net asset
value of $45.85 per share, the Fund showed a negative return of -5.9% during the
quarter after adjustment for the reinvestment of cash dividends. By way of
comparison, returns for the major market indices were -10.0% for the Standard &
Poor's 500 Stock Index (S&P 500), -12.0% for the Dow Jones Industrial Average
(DJIA) and +5.0% for the Lehman Bros. Gov't/Corp. Bond Index. For the first nine
months of 1998, the Fund produced a positive return of +2.6% compared to returns
of +6.0% for the S&P 500, +0.4% for the DJIA and +9.3% for the Lehman Bros.
Gov't/Corp. Bond Index. Among other comparable funds, the Fund ranked 118 within
a CDA/Wiesenberger universe of 339 domestic balanced mutual funds during the
first nine months of the year.
Despite dire predictions as to the fall-out effects of Southeast Asian
economic problems, the U. S. economy performed quite well during the third
quarter. Gross Domestic Product rose a solid 3.3% (preliminary basis) in
response to a settlement in the eight-week old General Motors strike and
continuing strength in consumer spending. In this regard, consumer spending held
up remarkably well considering the stock market decline and a deteriorating
level of consumer confidence. As expected, economic performance was adversely
affected by a worsening balance of trade caused by a combination of Southeast
Asian economic weakness and a stronger U. S. dollar. Corporate profits continued
to increase on an operating basis but declined slightly aftertax as a result of
a higher level of non-recurring charge-offs. Interest rates continued to
decline, especially at the longer end of the curve, reflecting diminishing
inflation concerns and increased anxiety over the future direction of the
economy. In this regard, growing questions about future economic growth prompted
the Federal Reserve to reduce the Federal funds rate by 1/4% on three separate
occasions--September 29th, October 15th and November 17th. The second reduction
was also accompanied by a similar drop in the Federal discount rate.
As might be expected in a weak market environment, the best performing sectors
during the quarter included such defensive groups as energy and utilities.
Technology also did well as a result of unusual strength in computers and
software. The weakest areas included financial services (banks and finance),
consumer cyclicals (retailing) and transportation. Individual holdings in the
Fund that performed the best included Firstar (+32.6%) and Amoco (+29.0%), both
because of merger announcements, and National Computer Systems (+22.9%). The
poorest performers included Merrill Lynch (-48.8%), Graco (-33.3%), Community
First Bankshares (-32.2%) and American Express (-31.8%).
FUTURE OUTLOOK
While the economy may be relatively sluggish over the next several quarters in
view of continuing international economic problems in Southeast Asia and Latin
America, a recession is not expected at this time. Consumer spending seems
likely to remain reasonably strong in the face of continuing growth in total
employment. Inflation
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shows no sign of increasing given the downward pressure on most commodity prices
as well as an intensely competitive market place. Corporate earnings should
continue to show at least a modest rate of growth on an operating basis as
productivity gains offset cost increases in most industries.
Although the spectacular market recovery, resulting from recent Federal
Reserve moves to lower interest rates and restore confidence, has pushed
valuation levels back to the historically high levels of last summer, we
continue to be basically positive about market prospects for the coming year
given diminishing prospects for a recession and the likelihood of further
earnings growth. This is especially true for the small and mid-cap sectors of
the market which have significantly lagged the valuation increase that has taken
place for large capitalization issues. However, we hasten to add that market
volatility is also expected to remain high in light of extended valuation levels
and increased investor sensitivity to any changes in the fundamental outlook,
either real or imaginary.
William B. Frels
President
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SCHEDULE OF INVESTMENTS AT SEPTEMBER 30, 1998
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FIXED INCOME SECURITIES
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT SECURITY DESCRIPTION COST VALUE
- ---------- ----------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
U.S.TREASURY & FEDERAL AGENCY OBLIGATIONS 24.1%
$ 250,000 U.S. Treasury Bills 5.050% 11/05/98 $ 243,617 $ 248,984
200,000 U.S. Treasury Notes 7.125% 09/30/99 197,172 204,812
250,000 Federal Farm Credit Bank 6.25% 04/29/03 250,000 252,891
260,000 Federal Farm Credit Bank 6.30% 06/09/03 260,000 263,737
250,000 Federal Farm Credit Bank 6.48% 02/09/06 250,000 250,156
250,000 Federal Home Loan Bank 6.25% 10/20/00 250,000 250,234
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 255,703
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 251,562
250,000 Federal Home Loan Bank 6.155% 10/30/02 250,000 251,797
250,000 Federal Home Loan Bank 6.55% 11/12/02 250,000 254,766
250,000 Federal Home Loan Bank 6.515% 12/02/02 250,000 250,625
250,000 Federal Home Loan Bank 6.30% 05/19/03 250,000 254,141
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 254,063
250,000 Federal Home Loan Bank 6.315% 11/25/03 250,000 252,266
250,000 Federal Home Loan Bank 7.012% 07/14/04 250,000 254,141
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,000 259,844
250,000 Federal Home Loan Bank 7.00% 08/15/07 250,000 260,391
250,000 Federal Home Loan Bank 7.075% 07/25/12 250,000 269,531
250,000 Federal Home Loan Bank 7.02% 01/28/13 250,000 251,641
250,000 Federal Home Loan Bank 6.50% 09/18/13 250,000 256,406
250,000 Federal National Mortgage Association 7.23% 05/17/04 250,000 258,047
500,000 Federal National Mortgage Association 6.45% 04/04/05 499,922 511,719
250,000 Federal National Mortgage Association 6.26% 08/03/05 249,687 256,016
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 256,953
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,844 260,078
250,000 Federal National Mortgage Association 7.43% 06/13/07 250,000 260,234
250,000 Federal National Mortgage Association 6.41% 01/16/08 248,516 259,297
250,000 Federal National Mortgage Association 6.52% 03/05/08 250,000 260,000
250,000 Federal National Mortgage Association 6.56% 04/23/08 249,273 261,484
250,000 Federal National Mortgage Association 6.58% 06/16/08 250,000 257,422
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 261,328
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7,944,781 8,150,269
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OTHER NON-CONVERTIBLE BONDS 7.1%
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 263,984
265,000 J.C. Penney & Co. 6.00% 05/01/06 239,613 272,784
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,978 272,031
250,000 General Foods Corporation 7.00% 06/15/11 240,000 267,734
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 271,438
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 272,422
250,000 Allstate Corp. 7.50% 06/15/13 218,938 274,688
250,000 CNA Financial Corp. 6.95% 01/15/18 247,317 250,391
250,000 Lincoln National Corp. 7.00% 03/15/18 249,867 258,203
------------ ------------
2,149,574 2,403,675
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CONVERTIBLE BONDS 1.1%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 125,250
250,000 Noram Energy 6.00% 03/15/12 150,600 238,750
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251,600 364,000
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 1.5%
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 153,000
2,500 J. P. Morgan & Co., Series A., Adj Rate Pf $ 5.00 143,720 231,250
2,000 St. Paul Capital Pf $ 3.00 100,000 123,500
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393,720 507,750
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TOTAL FIXED INCOME SECURITIES 33.8% $10,739,675 $11,425,694
------------ ------------
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</TABLE>
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<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS COST VALUE
- ---------- ----------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
BASIC INDUSTRIES 7.5%
9,000 Bemis Company, Inc. $ 322,058 $ 315,563
5,000 Cooper Industries, Inc. 186,470 203,750
3,000 Delta Air Lines, Inc. 206,976 291,750
5,000 General Signal Corp. 195,449 169,687
18,000 Graco Inc. 147,460 418,500
10,000 Ingersoll-Rand Company 173,547 379,375
10,000 Pentair, Inc. 114,022 322,500
10,000 Weyerhaeuser Company 363,280 421,875
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1,709,262 2,523,000
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CONSUMER 8.5%
7,000 American Greetings Class A 189,500 276,938
6,000 Briggs & Stratton Corporation 98,048 246,750
7,000 Deluxe Corp. 196,774 199,062
2,000 Eastman Kodak Company 53,573 153,750
3,000 General Mills, Inc. 151,030 210,000
6,000 Genuine Parts Company 112,273 180,375
6,000 Hershey Foods Corporation 146,610 410,625
15,000 Hormel (Geo. A.) & Company 354,345 405,938
10,000 Jostens, Inc. 199,575 207,500
10,000 Kimberly Clark 471,200 405,000
12,000 Sturm, Ruger & Co., Inc. 71,460 187,500
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2,044,388 2,883,438
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ENERGY 5.6%
8,000 Amoco Corporation 140,723 431,000
3,000 Burlington Resources Inc. 91,598 112,125
4,000 Exxon Corporation 20,793 282,500
5,000 Mobil Corporation 54,750 379,687
5,000 Murphy Oil Corporation 123,696 193,750
10,000 Schlumberger, Limited 330,590 508,750
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762,150 1,907,812
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FINANCIAL 16.4%
5,000 American Express Company 99,215 388,125
8,000 BankAmerica Corporation 216,194 428,000
20,000 Community First Bankshares, Inc. 232,780 355,000
10,000 Firstar Corp. 163,175 506,250
5,062 Jefferson-Pilot Corp. 60,323 306,251
15,000 Merrill Lynch & Co., Inc. 265,116 707,813
5,000 J. P. Morgan & Co., Inc. 187,765 423,125
40,000 Norwest Corporation 94,825 1,440,000
12,000 ReliaStar Financial Corp. 110,625 468,000
15,000 U.S. Bancorp 58,358 534,375
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1,488,376 5,556,939
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HEALTH CARE 10.8%
12,000 American Home Products Corporation 182,542 631,500
5,000 Baxter International Inc. 70,751 298,438
8,000 Bristol-Myers Squibb Company 205,563 831,000
18,000 Pfizer Inc. 129,344 1,903,500
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588,200 3,664,438
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<PAGE>
<CAPTION>
NUMBER MARKET
OF SHARES COMMON STOCKS COST VALUE
- ---------- ----------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
TECHNOLOGY 10.3%
10,000 AMP Incorporated $ 321,892 $ 357,500
15,000 Corning Inc. 442,571 441,562
6,000 Emerson Electric Co. 128,697 373,500
6,000 Honeywell Inc. 157,148 384,375
4,000 International Business Machines Corporation 96,740 514,000
25,000 MTS Systems Corporation 154,000 368,750
6,000 Minnesota Mining & Manufacturing Company 326,172 442,125
20,000 National Computer Systems, Inc. 121,380 590,000
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1,748,600 3,471,812
UTILITIES 2.5%
5,000 American Water Works Company, Inc. 130,600 156,875
7,000 GTE Corporation 96,007 385,000
6,000 U S West Inc. 142,035 315,000
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368,642 856,875
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TOTAL COMMON STOCK 61.6% 8,709,618 20,864,314
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OTHER ASSETS IN EXCESS OF LIABILITIES 4.6% 1,562,994
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NET ASSETS 100% $19,449,293 $33,853,002
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</TABLE>
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<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS AT SEPTEMBER 30, 1998
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<S> <C> <C>
ASSETS
Investments as annexed, at market value (cost $11,504,512)....... $24,139,739
US Governments (cost $7,944,781)................................. 8,150,269
Cash............................................................. 1,386,625
Dividends and interest receivable................................ 214,923
Receivables for securities sold, not yet delivered............... 0
Prepaid expense.................................................. 14,784
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$33,906,340
LIABILITIES
Accrued management fee............................ $ 16,918
Accrued custodian and transfer agent fee.......... 613
Payable for securities purchased, not yet......... 35,807 53,338
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NET ASSETS
Equivalent to $45.85 per share on 738,300 shares outstanding..... $33,853,002
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</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, December 31, 1997...................................... $ 28,789,592
Net investment income, per statement below..... $ 663,276
Net accrued income in price of shares sold and
repurchased (Note A)........................... 0
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663,276
Distribution to Shareholders................... (595,694) 67,582
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Fund shares issued and repurchased:
Received for 450,790 shares issued.......... 6,831,037
Paid for 28,760 shares repurchased.......... (1,771,662) 5,059,375
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Increase in unrealized net appreciation
(depreciation) of investments...................................... (365,059)
Net gain (or loss) realized from sales of
securities......................................................... 301,512
Distribution from net realized gain................................ 0
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NET ASSETS, September 30, 1998..................................... $ 33,853,002
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</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF NET INVESTMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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<S> <C> <C>
INVESTMENT INCOME
Dividends.......................................................... $ 329,538
Interest........................................................... 550,502
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880,040
EXPENSES
Management fee (Note B)........................ $ 147,511
Fees and expenses of custodian, transfer agent
and dividend disbursing agent (Note B)........ 22,834
Legal and auditing fees and expenses........... 18,487
Insurance...................................... 1,545
Other Fees and Expenses........................ 26,387 216,764
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NET INVESTMENT INCOME.............................................. $ 663,276
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</TABLE>
NOTE A: 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.
NOTE B: 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 $1,500.00 compensation for meetings attended
during this nine 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 nine months ended September 30, 1998
aggregated $7,377,001 and $2,963,302 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 55101-1363
651-222-8478
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, 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
Sep. 30, 1998 738,300 33,853,002 45.850 0.850
</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 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 SEPTEMBER 30, 1998) ARE AS FOLLOWS:
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<S> <C> <C>
1 Year: +6.5% 5 Years: +14.2% 10 Years: +13.3%
</TABLE>
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.
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OFFICERS AND DIRECTORS
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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
<PAGE>
Mairs and Power
Balanced Fund, Inc.
