<PAGE>
-------------------
MAIRS AND POWER
BALANCED FUND, INC.
-------------------
- --------------------------------------------------------------------------------
3rd QUARTER REPORT
September 30, 1999
To Our Shareholders: November 19, 1999
THIRD QUARTER RESULTS
The third quarter proved to be a quite difficult period for the Balanced
Fund in light of a relatively weak stock market and only a very modest
improvement in the bond market. Based on a September 30, 1999 net asset
value of $50.23 per share, the Fund experienced a negative 4.3% total
investment return during the quarter after adjustment for the reinvestment
of cash dividends. Other comparable benchmark comparisons include respective
negative returns of 5.4% and 6.3% for the Dow Jones Industrial Average and
Standard & Poor's 500 Stock Index and a slightly positive 0.5% return for
the Lehman Bros. Gov't/Corp. Bond Index. For the nine month period, the Fund
produced a positive 2.2% return compared to returns of 14.0% for the Dow
Jones Industrial Average and 5.3% for the Standard & Poor's 500 Stock Index
and a negative 1.8% for the Lehman Bros. Gov't/Corp. Bond Index. Compared to
other similar funds, the Fund ranked 105th within a CDA/Wiesenberger
universe of 356 comparable domestic balanced funds during the same period.
The economy continued to perform brilliantly during the third quarter with
real Gross Domestic Product rising 4.8% (preliminary basis) and inflation
remaining well under control. Business spending was particularly strong
during the period with non-residential investment increasing at a 14.9%
annual rate and the rate of inventory accumulation about double the prior
quarter. Although the growth in personal spending showed some slowing, the
rate of growth was still a quite respectable 4.3%. Continuing better than
expected non-inflationary growth is thought to be largely a function of
stronger productivity gains resulting from increased usage of computer
hardware and software during recent years. Although the rate of inflation as
measured by the Consumer Price Index picked up in the third quarter, the
overall 2.6% annual rate and 2.0% core rate (excluding food and energy)
reported for the month of September, 1999 still seems quite reasonable
considering the tight labor market and relatively strong economy.
Indications are that operating corporate profits turned in another strong
performance increasing more than 10% during the period.
Ignoring strong current economic conditions and favorable earnings
comparisons, stock market investors seemed to be focused more on the
possibility of higher interest rates and their resulting impact on the
economy. The Federal Reserve's decision to leave short-term rates unchanged
in October 1999 and subsequent market recovery suggests earlier concerns
were premature. Market leadership was very narrow during the quarter with
only the energy and technology sectors and a couple of specialty industry
groups (gold mining and wireless telecommunications) doing well. Consumer
cyclicals, consumer staples and financials were among the poorest performing
sectors
<PAGE>
reflecting higher interest rates and their expected effect on the economy.
Within the Fund, the best performing individual issues included National
Computer Systems (+13.6%), Graco (+11.7%) and Eastman Kodak (+11.3%) while those
having the poorest showing were Community First Bankshares (-29.3%), American
Home Products (-27.2%), and Genuine Parts (-24.1%).
FUTURE OUTLOOK
The outlook for the economy continues to be favorable even though the rate
of growth seems likely to slow from the torrid pace of the third quarter.
Consumer spending should continue to increase in light of rising personal
income, low unemployment and a relatively high level of confidence. Business
spending seems likely to remain strong with operating rates fairly high and
the ever increasing pressure to improve productivity to remain competitive.
Corporate profits are forecasted to continue increasing at an above trend
rate in the high "single digits" with productivity gains largely offsetting
cost increases. Foreign earnings of U. S. companies should also benefit from
improving economic conditions in Europe and the Far East.
Looking ahead, the one major uncertainty continues to be in the area of
interest rates. Recent action by the Federal Reserve on November 16, 1999 to
increase short-term interest rates by another one quarter of one percent
suggests concern over the continuing strength in the economy and the
resulting effect on the rate of inflation. The approximate doubling of the
price of crude oil since the first of the year also creates additional
inflationary pressure. In this regard, the near 100 basis point increase in
thirty year U. S. Treasury yields since January 1, 1999 seems to pretty well
discount some moderate increase in the future rate of inflation. However, if
investors begin to perceive an inflation rate higher than a 2-3% rate on the
Consumer Price Index in the coming year, longer term interest rates will
most certainly move higher.
Assuming interest rates do remain near current levels in the months to come,
the outlook for the stock market should continue to be relatively positive.
Despite historically high valuation levels, the broader market should be
able to continue working its way higher as long as corporate profits
continue to increase. However, an increasing level of speculative activity
in certain areas of high technology (internet, software, wireless
communications, etc.), where valuations have risen to unjustifiably high
levels, represents an area of considerable concern. Any collapse of this
bubble of enthusiasm could have a detrimental effect on overall market
psychology even though many sectors of the market remain reasonably valued
in relation to their longer term growth prospects.
William B. Frels
President
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1999
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FACE MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ------------ --------------------------------------------------------------- -------- -----------
<S> <C> <C> <C> <C>
FIXED INCOME SECURITIES
U.S.TREASURY & FEDERAL AGENCY OBLIGATIONS 21.3%
$ 260,000 Federal Farm Credit Bank 6.30% 06/09/03 $255,766
250,000 Federal Farm Credit Bank 7.00% 07/19/06 247,651
250,000 Federal Home Loan Bank 6.455% 02/22/02 249,858
250,000 Federal Home Loan Bank 6.30% 05/19/03 247,573
250,000 Federal Home Loan Bank 7.025% 02/17/05 249,444
250,000 Federal Home Loan Bank 7.00% 07/14/05 248,746
250,000 Federal Home Loan Bank 7.00% 08/15/07 246,416
250,000 Federal Home Loan Bank 7.075% 07/25/12 242,299
250,000 Federal Home Loan Bank 6.50% 09/18/13 232,007
250,000 Federal Home Loan Bank 6.41% 02/11/14 230,087
250,000 Federal Home Loan Mortgage Corporation 6.00% 12/01/05 240,547
250,000 Federal Home Loan Mortgage Corporation 6.33% 04/24/06 242,666
250,000 Federal Home Loan Mortgage Corporation 7.01% 07/13/06 248,696
250,000 Federal Home Loan Mortgage Corporation 6.41% 01/20/09 238,442
250,000 Federal Home Loan Mortgage Corporation 6.25% 01/21/09 236,522
250,000 Federal Home Loan Mortgage Corporation 6.45% 04/29/09 238,497
250,000 Federal Home Loan Mortgage Corporation 7.33% 07/13/09 247,886
250,000 Federal Home Loan Mortgage Corporation 6.60% 11/19/13 233,231
250,000 Federal National Mortgage Association 7.23% 05/17/04 249,423
500,000 Federal National Mortgage Association 6.45% 04/04/05 486,807
250,000 Federal National Mortgage Association 6.26% 08/03/05 240,713
250,000 Federal National Mortgage Association 7.50% 02/02/07 246,063
250,000 Federal National Mortgage Association 7.68% 04/24/07 248,818
250,000 Federal National Mortgage Association 7.43% 06/13/07 247,255
250,000 Federal National Mortgage Association 6.41% 01/16/08 239,013
250,000 Federal National Mortgage Association 6.52% 03/05/08 239,661
250,000 Federal National Mortgage Association 6.56% 04/23/08 240,803
250,000 Federal National Mortgage Association 6.58% 06/16/08 239,557
250,000 Federal National Mortgage Association 6.11% 01/15/09 234,551
250,000 Federal National Mortgage Association 6.18% 02/19/09 235,302
500,000 Federal National Mortgage Association 6.49% 03/18/09 478,119
250,000 Federal National Mortgage Association 7.15% 06/11/09 245,853
250,000 Federal National Mortgage Association 7.15% 11/03/10 242,609
250,000 Federal National Mortgage Association 6.37% 02/25/14 231,633
-----------
8,722,514
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OTHER NON-CONVERTIBLE BONDS 11.3%
300,000 Bankers Trust NY Corp. 7.125% 07/31/02 301,354
250,000 Household Finance Corp. 7.00% 02/15/03 250,239
250,000 Ford Motor Credit Company 6.70% 07/16/04 248,689
265,000 J.C. Penney & Co. 6.00% 05/01/06 241,400
250,000 Bankers Trust NY Corp. 6.70% 10/01/07 238,887
500,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 489,927
250,000 General Foods Corporation 7.00% 06/15/11 237,644
200,000 Ford Motor Company Debentures 9.50% 09/15/11 238,377
250,000 Goldman Sachs & Company 8.00% 03/01/13 259,505
250,000 Allstate Corp. 7.50% 06/15/13 251,510
500,000 General Motors Acceptance Corporation 7.30% 07/15/14 501,731
250,000 CNA Financial Corp. 6.95% 01/15/18 223,983
500,000 Lincoln National Corp. 7.00% 03/15/18 476,589
500,000 Provident Companies 7.00% 07/15/18 451,354
250,000 South Jersey Gas Co. 7.125% 10/22/18 220,910
-----------
4,632,099
-----------
CONVERTIBLE BONDS 1.6%
150,000 Cray Research, Inc. 6.125% 02/01/11 100,500
350,000 Kerr McGee Corp. 7.50% 05/15/14 339,938
250,000 Noram Energy 6.00% 03/15/12 231,250
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$ 671,688
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</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1999
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FACE MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ------------ --------------------------------------------------------------------------- -----------
<S> <C> <C>
FIXED INCOME SECURITIES (CONTINUED)
NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 1.1%
6,000 Barclays Bank PLC, Series E $ 2.00 $ 149,625
2,500 J. P. Morgan & Co., Series A., Adj Rate Pf $ 5.00 198,750
2,000 St. Paul Capital Pf $ 3.00 109,375
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457,750
-----------
TOTAL FIXED INCOME SECURITIES 35.3% $14,484,051
-----------
COMMON STOCKS
NUMBER OF MARKET
SHARES SECURITY DESCRIPTION VALUE
- ------------ --------------------------------------------------------------------------- -----------
BASIC INDUSTRIES 7.6%
12,000 Bemis Company, Inc. $ 406,500
2,000 Cooper Industries, Inc. 93,500
6,000 Delta Air Lines, Inc. 291,000
25,000 Graco Inc. 820,312
10,000 Ingersoll-Rand Company 549,375
10,000 Pentair, Inc. 401,250
10,000 Weyerhaeuser Company 576,250
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3,138,187
-----------
CONSUMER 7.8%
9,000 American Greetings Class A 231,750
6,000 Briggs & Stratton Corporation 350,250
8,000 Deluxe Corp. 272,000
4,000 Eastman Kodak Company 301,750
3,000 General Mills, Inc. 243,375
5,000 Genuine Parts Company 132,813
6,000 Hershey Foods Corporation 292,125
15,000 Hormel (Geo. A.) & Company 619,687
3,000 Jostens, Inc. 57,375
10,000 Kimberly Clark 525,000
20,000 Sturm, Ruger & Co., Inc. 180,000
-----------
3,206,125
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ENERGY 6.4%
5,293 BP Amoco PLC ADR 586,531
8,000 Burlington Resources Inc. 294,000
4,000 Exxon Corporation 303,750
5,000 Mobil Corporation 503,750
6,000 Murphy Oil Corporation 324,375
10,000 Schlumberger, Limited 623,125
-----------
$ 2,635,531
-----------
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES SECURITY DESCRIPTION VALUE
- ------------ --------------------------------------------------------------------------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 16.9%
5,000 American Express Company $673,125
8,000 BankAmerica Corporation 445,500
25,000 Community First Bankshares, Inc. 421,875
22,800 Firstar Corp. 584,250
5,062 Jefferson-Pilot Corp. 319,855
15,000 Merrill Lynch & Co., Inc. 1,007,812
5,000 J. P. Morgan & Co., Inc. 571,250
16,000 ReliaStar Financial Corp. 532,000
12,000 St. Paul Companies 330,000
15,000 U.S. Bancorp 452,813
40,000 Wells Fargo & Company 1,585,000
-----------
6,923,480
-----------
HEALTH CARE 8.5%
13,000 American Home Products Corporation 539,500
5,000 Baxter International Inc. 301,250
15,000 Bristol-Myers Squibb Company 1,012,500
45,000 Pfizer Inc. 1,617,188
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3,470,438
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TECHNOLOGY 12.9%
15,000 Corning Inc. 1,028,437
9,000 Emerson Electric Co. 568,688
8,000 Honeywell Inc. 890,500
8,000 International Business Machines Corporation 971,000
40,000 MTS Systems Corporation 415,000
7,000 Minnesota Mining & Manufacturing Company 672,437
20,000 National Computer Systems, Inc. 766,875
-----------
5,312,937
UTILITIES 2.6%
6,000 American Water Works Company, Inc. 173,625
7,000 GTE Corporation 538,125
6,000 U S West Inc. 342,375
-----------
1,054,125
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TOTAL COMMON STOCK 62.7% 25,740,823
TOTAL INVESTMENTS 98.0% 40,224,874
-----------
OTHER ASSETS IN EXCESS OF LIABILITIES 2.0% 846,225
NET ASSETS 100% $41,071,099
-----------
-----------
</TABLE>
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<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS AT SEPTEMBER 30, 1999
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<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $15,577,464)....................................... $ 31,502,360
US Governments (cost $8,983,225)................................................................. 8,722,514
Cash............................................................................................. 591,945
Dividends and interest receivable................................................................ 273,222
Receivables for securities sold, not yet delivered............................................... 0
Prepaid expense.................................................................................. 5,044
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41,095,085
LIABILITIES
Accrued management fee................................................. $ 20,465
Accrued custodian and transfer agent fee............................... 3,521
Payable for securities purchased, not yet received..................... 0 23,986
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NET ASSETS
Equivalent to $50.23 per share on 817,616 shares outstanding..................................... $ 41,071,099
---------------
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STATEMENT OF CHANGES IN NET ASSETS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
NET ASSETS, December 31, 1998.................................................................... $ 38,355,609
Net investment income, per statement below............................. $ 816,145
Distribution to Shareholders........................................... (715,635) 100,510
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Fund shares issued and repurchased:
Received for 122,633 shares issued.................................. 6,306,226
Paid for 71,437 shares repurchased.................................. (3,685,101) 2,621,125
--------------
Increase in unrealized net appreciation (depreciation) of investments............................ (698,315)
Net gain (or loss) realized from sales of securities............................................. 692,170
Distribution from net realized gain.............................................................. 0
---------------
NET ASSETS, September 30, 1999................................................................... $ 41,071,099
---------------
---------------
STATEMENT OF NET INVESTMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
INVESTMENT INCOME
Dividends........................................................................................ $ 394,512
Interest......................................................................................... 685,310
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1,079,822
EXPENSES
Management fee (Note A)................................................ $ 182,977
Fees and expenses of custodian, transfer agent and
dividend disbursing agent (Note A)................................. 23,565
Legal and auditing fees and expenses................................... 14,965
Insurance.............................................................. 1,110
Other Fees and Expenses................................................ 41,060 263,677
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NET INVESTMENT INCOME............................................................................ $ 816,145
---------------
---------------
</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. Transfer agent
fees were paid to Mairs and Power, Inc. which served as transfer agent for the
period 1-1-99 through 5-31-99. Transfer agent fees were also paid to Firstar
Mutual Fund Services, LLC for the period 6-1-99 through 9-30-99, which now
serves as transfer agent.
SUPPLEMENTARY INFORMATION: 1) Each director of the Fund not affiliated with
Mairs and Power, Inc. received $1,800 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, 1999 aggregated $6,753,284 and
$3,730,987 respectively.
<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
Shareholder Information: 800-304-7404
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> <C>
Dec. 31, 1979 113,790 $1,644,853 $14.46 $0.30 $1.10
Dec. 31, 1980 129,196 1,969,896 15.25 0.21 1.25
Dec. 31, 1981 132,236 1,928,460 14.59 - 1.21
Dec. 31, 1982 135,050 2,274,421 16.84 0.33 1.25
Dec. 31, 1983 155,828 2,907,432 18.66 - 1.28
Dec. 31, 1984 155,810 2,729,570 17.52 0.45 1.28
Dec. 31, 1985 183,348 3,837,245 20.93 0.35 1.13
Dec. 31, 1986 253,724 5,395,111 21.27 1.87 0.98
Dec. 31, 1987 295,434 5,772,298 19.54 1.09 1.06
Dec. 31, 1988 317,426 6,569,555 20.70 0.42 1.12
Dec. 31, 1989 344,486 7,886,058 22.89 0.33 1.08
Dec. 31, 1990 366,158 8,075,488 22.06 0.07 1.07
Dec. 31, 1991 400,276 10,676,264 26.67 - 1.00
Dec. 31, 1992 428,672 11,535,822 26.91 0.30 1.00
Dec. 31, 1993 476,860 13,441,576 28.19 0.63 0.99
Dec. 31, 1994 494,968 12,972,976 26.21 0.37 1.03
Dec. 31, 1995 519,272 16,978,753 32.70 0.28 1.02
Dec. 31, 1996 558,234 20,565,014 36.84 0.54 1.10
Dec. 31, 1997 632,540 28,789,593 45.52 0.35 1.19
Dec. 31, 1998 766,420 38,355,609 50.05 0.60 1.24
Sep. 30, 1999 817,616 41,071,099 50.23 - 0.90
</TABLE>
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.
<TABLE>
<S><C>
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AVERAGE ANNUAL TOTAL RETURNS
----------------------------
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIOD ENDED SEPTEMBER 30, 1999) ARE AS FOLLOWS:
1 YEAR + 13.7% 5 YEARS + 17.7% 10 YEARS 13.1%
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.
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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 Director Secretary and Director Vice-President and Director Treasurer
Charlton Dietz Donald E. Garretson J. Thomas Simonet
Director Director Director
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