<PAGE>
-----------------------
MAIRS AND POWER
BALANCED FUND, INC.
-----------------------
2ND QUARTER REPORT
June 30, 1999
To Our Shareholders: August 19, 1999
SECOND QUARTER RESULTS
The Balanced Fund's investment performance improved significantly in the second
quarter of 1999 in response to a relatively strong stock market which more than
offset the adverse effects of continuing weakness in the bond market. Most
importantly, the stock market strength was fairly broad-based with all sectors
(large, midcap and small) participating. Based on a June 30, 1999 net asset
value of $52.78 per share, the Fund produced a total investment return of 6.8%
during the quarter after adjustment for the reinvestment of cash dividends. This
compares to other benchmark returns of 7.0% for the Standard & Poor's 500 Stock
Index, 12.5% for the Dow Jones Industrial Average and a negative 1.1% for the
Lehman Bros. Gov't/Corp. Bond Index. For the first six months, the Fund returned
a slightly lower 6.7% against comparable returns of 12.3% for the Standard &
Poor's 500 Stock Index, 20.4% for the Dow Jones Industrial Average and -2.3% for
the Lehman Bros. Gov't/Corp. Bond Index. Among other similar funds, the Fund
ranked 86th within a CDA/Wiesenberger universe of 364 comparable domestic
balanced funds during the first half.
As expected, U. S. economic growth, as measured by Gross Domestic Product,
slowed to a more manageable 2.3% (preliminary basis) annual rate from the
unsustainably high 4.3% rate in the first quarter. Consumer spending continued
to lead the way as a result of strong employment gains, a low unemployment rate
and a high level of consumer confidence. Although inflation remains very much
under control as indicated by only very modest increases to date in the Consumer
Price Index, recent unit labor cost increases and slowing productivity gains
give some cause for future concern. This has in turn resulted in the Federal
Reserve nudging up interest rates one-quarter percentage point on June 30th with
the likelihood of additional future increases should inflationary pressures
continue to grow. Early indications are that corporate profits increased at an
exceptional 10%+ rate during the second quarter as a result of steady demand
growth and the benefits of cost reduction initiatives.
Reflecting the overall strength in corporate profits, the stock market performed
exceptionally well during the second quarter. Industry groups that performed
best seemed to be those more sensitive to the economy and also those which had
lagged the market during recent periods. Such groups included basic industries
(chemicals, forest products and metals), energy and technology (communication
equipment, computers and electrical equipment). The poorest performing groups
included consumer cyclicals (autos and housing), consumer staples (cosmetics and
household
<PAGE>
products), health care (drugs and hospital supplies) and financials (banks).
Individual stocks doing the best included Honeywell (+52.8%), Deluxe (+33.7%),
Graco (+33.1%) and Ingersoll-Rand (+30.2%) while Pfizer (-20.9%), Delta Air
Lines (-17.1%) and American Home Products (-11.9%) did the worst.
FUTURE OUTLOOK
The outlook for the U. S. economy remains favorable considering the likelihood
of continuing strength in consumer spending fueled by strong employment trends
and higher wages. While growing wage pressures need to be carefully watched, it
continues to be our view that companies will have difficulty passing along cost
increases in the form of higher prices because of an increasingly competitive
global market place. Consequently, the rate of inflation is expected to pick-up
only modestly to around 3% over the coming year even if the economy continues to
grow at an above average rate of 3% or more. If this forecast is correct, the
recent rise in long-term interest rates (up more than 100 basis points since the
beginning of the year) may prove to be an overreaction to the threat of higher
inflation. Another one quarter point tightening by the Federal Reserve also
seems to be already discounted by the market and should not reduce the
possibility of lower long term interest rates in the months to come. Corporate
profits seem likely to continue growing at around a "double digit" rate over the
near term reflecting steady demand growth and continuing productivity gains.
The outlook for the stock market still seems to be basically positive given a
fairly strong outlook for corporate profits and our forecast for stable to
slightly lower long-term interest rates over the near term. However, it is also
important to recognize that the risks of a major market correction have also
increased with the recent rise in interest rates in the face of historically
high valuation levels. Small and mid-cap stocks are expected to continue
performing well against large capitalization issues in light of significant
valuation discounts, and in many cases faster earnings growth, although some of
the valuation disparity has narrowed in recent months.
William B. Frels
President
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS JUNE 30, 1999
- -------------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ------------- ---------------------------------------------------------------- ------------
FIXED INCOME SECURITIES
U.S.TREASURY & FEDERAL AGENCY OBLIGATIONS 20.5%
<S> <C> <C> <C> <C>
$ 200,000 U.S. Treasury Notes 7.125% 09/30/99 $201,125
260,000 Federal Farm Credit Bank 6.30% 06/09/03 256,023
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,661
250,000 Federal Home Loan Bank 6.55% 11/12/02 250,098
250,000 Federal Home Loan Bank 6.30% 05/19/03 248,647
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,088
250,000 Federal Home Loan Bank 7.012% 07/14/04 250,034
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,527
250,000 Federal Home Loan Bank 7.00% 08/15/07 248,423
250,000 Federal Home Loan Bank 7.075% 07/25/12 246,803
250,000 Federal Home Loan Bank 6.50% 09/18/13 236,534
250,000 Federal Home Loan Bank 6.41% 02/11/14 234,656
250,000 Federal Home Loan Mortgage Corporation 6.00% 12/01/05 242,784
250,000 Federal Home Loan Mortgage Corporation 6.33% 04/24/06 245,010
250,000 Federal Home Loan Mortgage Corporation 6.41% 01/20/09 241,040
250,000 Federal Home Loan Mortgage Corporation 6.25% 01/21/09 239,316
250,000 Federal Home Loan Mortgage Corporation 6.45% 04/29/09 242,083
250,000 Federal Home Loan Mortgage Corporation 6.60% 11/19/13 237,735
250,000 Federal National Mortgage Association 7.23% 05/17/04 249,927
500,000 Federal National Mortgage Association 6.45% 04/04/05 488,611
250,000 Federal National Mortgage Association 6.26% 08/03/05 242,066
250,000 Federal National Mortgage Association 7.50% 02/02/07 248,006
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,977
250,000 Federal National Mortgage Association 7.43% 06/13/07 248,426
250,000 Federal National Mortgage Association 6.41% 01/16/08 240,390
250,000 Federal National Mortgage Association 6.52% 03/05/08 241,070
250,000 Federal National Mortgage Association 6.56% 04/23/08 241,797
250,000 Federal National Mortgage Association 6.58% 06/16/08 240,496
250,000 Federal National Mortgage Association 6.11% 01/15/09 236,091
250,000 Federal National Mortgage Association 6.18% 02/19/09 236,839
250,000 Federal National Mortgage Association 6.49% 03/18/09 240,653
250,000 Federal National Mortgage Association 7.15% 06/11/09 246,994
250,000 Federal National Mortgage Association 7.15% 11/03/10 244,044
250,000 Federal National Mortgage Association 6.37% 02/25/14 234,049
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8,501,023
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OTHER NON-CONVERTIBLE BONDS 7.7%
300,000 Bankers Trust NY Corp. 7.125% 07/31/02 301,419
250,000 Household Finance Corp. 7.00% 02/15/03 252,634
265,000 J.C. Penney & Co. 6.00% 05/01/06 245,765
250,000 Bankers Trust NY Corp. 6.70% 10/01/07 238,875
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 248,326
250,000 General Foods Corporation 7.00% 06/15/11 239,433
200,000 Ford Motor Company Debentures 9.50% 09/15/11 239,342
250,000 Goldman Sachs & Company 8.00% 03/01/13 260,877
250,000 Allstate Corp. 7.50% 06/15/13 257,879
250,000 CNA Financial Corp. 6.95% 01/15/18 229,717
250,000 Lincoln National Corp. 7.00% 03/15/18 239,188
250,000 Provident Companies 7.00% 07/15/18 239,545
250,000 South Jersey Gas Co. 7.125% 10/22/18 224,594
----------
3,217,594
----------
CONVERTIBLE BONDS 1.4%
150,000 Cray Research, Inc. 6.125% 02/01/11 108,750
238,000 Kerr McGee Corp. 7.50% 05/15/14 238,000
250,000 Noram Energy 6.00% 03/15/12 231,250
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$ 578,000
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</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (CONTINUED) JUNE 30, 1999
- -------------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ------------- ---------------------------------------------------------------- ------------
FIXED INCOME SECURITIES (CONTINUED)
NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 1.2%
<S> <C> <C> <C>
6,000 Barclays Bank PLC, Series E $ 2.00 $ 151,125
2,500 J. P. Morgan & Co., Series A., Adj Rate Pf $ 5.00 217,500
2,000 St. Paul Capital Pf $ 3.00 117,500
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486,125
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TOTAL FIXED INCOME SECURITIES 30.8% $12,782,742
-----------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS
NUMBER OF MARKET
SHARES SECURITY DESCRIPTION VALUE
- ------------- ---------------------------------------------------------------- ------------
<S> <C> <C>
BASIC INDUSTRIES 8.6%
11,000 Bemis Company, Inc. $ 437,250
5,000 Cooper Industries, Inc. 260,000
6,000 Delta Air Lines, Inc. 345,750
25,000 Graco Inc. 734,375
10,000 Ingersoll-Rand Company 646,250
10,000 Pentair, Inc. 457,500
10,000 Weyerhaeuser Company 687,500
-----------
3,568,625
-----------
CONSUMER 8.6%
9,000 American Greetings Class A 271,125
6,000 Briggs & Stratton Corporation 346,500
8,000 Deluxe Corp. 311,500
4,000 Eastman Kodak Company 271,000
3,000 General Mills, Inc. 241,125
5,000 Genuine Parts Company 175,000
6,000 Hershey Foods Corporation 356,250
15,000 Hormel (Geo. A.) & Company 603,750
10,000 Jostens, Inc. 210,625
10,000 Kimberly Clark 570,000
20,000 Sturm, Ruger & Co., Inc. 213,750
-----------
3,570,625
-----------
ENERGY 6.4%
5,293 BP Amoco PLC ADR 574,291
8,000 Burlington Resources Inc. 346,000
4,000 Exxon Corporation 308,500
5,000 Mobil Corporation 495,000
6,000 Murphy Oil Corporation 292,875
10,000 Schlumberger, Limited 636,875
-----------
$ 2,653,541
-----------
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED) JUNE 30, 1999
- -------------------------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES SECURITY DESCRIPTION VALUE
- ------------- ---------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
FINANCIAL 19.1%
5,000 American Express Company $650,625
8,000 BankAmerica Corporation 586,500
25,000 Community First Bankshares, Inc. 596,875
22,800 Firstar Corp. 638,400
5,062 Jefferson-Pilot Corp. 335,041
15,000 Merrill Lynch & Co., Inc. 1,199,062
5,000 J. P. Morgan & Co., Inc. 702,500
16,000 ReliaStar Financial Corp. 700,000
10,000 St. Paul Companies 318,125
15,000 U.S. Bancorp 510,000
40,000 Wells Fargo & Company 1,710,000
-----------
7,947,128
-----------
HEALTH CARE 9.2%
13,000 American Home Products Corporation 747,500
5,000 Baxter International Inc. 303,125
16,000 Bristol-Myers Squibb Company 1,127,000
15,000 Pfizer Inc. 1,646,250
-----------
3,823,875
-----------
TECHNOLOGY 12.7%
15,000 Corning Inc. 1,051,875
9,000 Emerson Electric Co. 565,875
8,000 Honeywell Inc. 927,000
8,000 International Business Machines Corporation 1,034,000
35,000 MTS Systems Corporation 426,562
7,000 Minnesota Mining & Manufacturing Company 608,563
20,000 National Computer Systems, Inc. 675,000
-----------
5,288,875
-----------
UTILITIES 2.6%
6,000 American Water Works Company, Inc. 184,500
7,000 GTE Corporation 530,250
6,000 U S West Inc. 352,500
-----------
1,067,250
-----------
TOTAL COMMON STOCK 67.2% 27,919,919
TOTAL INVESTMENTS 98.0% 40,702,661
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OTHER ASSETS IN EXCESS OF LIABILITIES 2.0% 855,087
NET ASSETS 100% $41,557,748
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-----------
</TABLE>
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<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS AT JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments as annexed, at market value (cost $14,099,327)....................................... $ 32,201,640
US Governments (cost $8,692,924)................................................................. 8,501,021
Cash............................................................................................. 610,919
Dividends and interest receivable................................................................ 265,231
Receivables for securities sold, not yet delivered............................................... 0
Prepaid expense.................................................................................. 2,344
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41,581,155
LIABILITIES
Accrued management fee................................................. $ 20,503
Accrued custodian and transfer agent fee............................... 2,904
Payable for securities purchased, not yet received..................... 0 23,407
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NET ASSETS
Equivalent to $52.78 per share on 787,389 shares outstanding..................................... $ 41,557,748
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STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS, December 31, 1998.................................................................... $ 38,355,609
Net investment income, per statement below............................. $ 523,353
Distribution to Shareholders........................................... (471,519) 51,834
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Fund shares issued and repurchased:
Received for 60,095 shares issued................................... 3,019,245
Paid for 39,126 shares repurchased.................................. (1,990,622) 1,028,623
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Increase in unrealized net appreciation (depreciation) of investments............................ 1,547,909
Net gain (or loss) realized from sales of securities............................................. 573,773
Distribution from net realized gain.............................................................. 0
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NET ASSETS, June 30, 1999........................................................................ $ 41,557,748
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--------------
STATEMENT OF NET INVESTMENT INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends........................................................................................ $ 262,536
Interest......................................................................................... 432,916
--------------
695,452
EXPENSES
Management fee (Note A)................................................ $ 119,612
Fees and expenses of custodian, transfer agent and
dividend disbursing agent (Note A)................................. 17,525
Legal and auditing fees and expenses................................... 10,464
Insurance.............................................................. 744
Other Fees and Expenses................................................ 23,754 172,099
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NET INVESTMENT INCOME............................................................................ $ 523,353
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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 $1,200 compensation for meetings attended during
this six 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 six months ended June 30, 1999 aggregated $3,778,669 and $2,406,413
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
- --------------------------------------------------------------------------------
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, 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
Jun. 30, 1999 787,389 41,557,748 52.78 - 0.60
</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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED JUNE 30, 1999) ARE
AS FOLLOWS:
1 YEAR: +11.7% 5 YEARS: +19.2% 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>
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
</TABLE>
<PAGE>
MAIRS AND POWER
BALANCED FUND, INC.
