<PAGE>
------------------------------------------------
MAIRS AND POWER
BALANCED FUND, INC.
-------------------------------------------------
ANNUAL REPORT
December 31, 1998
W-1420 First National Bank Building
332 Minnesota Street
St. Paul, Minnesota 55101
651-222-8478
<PAGE>
TO OUR SHAREHOLDERS February 11, 1999
FOURTH QUARTER RESULTS
With the dire predictions made earlier in the year by many forecasters
failing to materialize, the stock market staged a spectacular recovery in the
final quarter of 1998. As a result, the Balanced Fund had one of its best
quarters ever. Based on a December 31, 1998, net asset value per share of
$50.05, the Fund produced a total investment return of 11.3% during the quarter
after adjustment for the reinvestment of cash dividends and capital gain
distributions. By comparison, the Standard & Poor's 500 Stock Index and Dow
Jones Industrial Average (DJIA) had respective returns of 21.4% and 17.6% while
the Lehman Bros. Gov't/Corp. Bond Index was slightly above breakeven at 0.1%.
The strong stock market rebound reflected an economy that gained momentum
during the quarter instead of losing it and drifting toward a recession, as many
had feared. In fact, real Gross Domestic Product (GDP) increased an incredible
5.6% (preliminary basis) in response to continued strength in consumer spending,
stronger than expected business investment growth and a surprising turnaround in
exports. Based on the GDP deflator, the annual rate of inflation slipped to
0.8%, the lowest rate in 40 years. Longer term interest rates remained
relatively stable during the quarter as the effects of a strengthening economy
offset the impact of a declining rate of inflation. Corporate profits are
estimated to have reversed a third quarter decline with an increase in the area
of 5% with most of the growth coming in service and technology as opposed to the
industrial area of the economy. A major factor responsible for the improvement
in corporate profits was a surprisingly strong 3.7% gain in productivity during
the quarter.
While most groups participated in the fourth quarter market recovery, the
greatest strength was concentrated in a limited number of large capitalization
growth issues mainly in the technology sector (communications equipment,
computers, semiconductors and software). The weakest areas included basic
industries (chemicals and metals), energy and capital goods. The best
performing issues were characterized to a significant degree by strong near-term
earnings momentum and lofty valuation levels. Within the Fund, the best
performing issues included Corning (+52.9%), AMP (+45.6%), IBM (+43.5%) and
Merrill Lynch (+41.5%) while those issues faring worst included Sturm Ruger
(-23.6%), Schlumberger (-8.8%), MTS Systems (-8.5%) and Eastman Kodak (-6.3%).
1
<PAGE>
1998 IN REVIEW
In line with the overall stock market, the Balanced Fund recorded its
fourth consecutive year of "double digit" returns in 1998. Although not as high
as in recent years, the Fund earned a solid full year total investment return of
14.2% after adjustment for the reinvestment of cash dividends and capital gain
distributions. This compared to higher respective returns of 28.7% and 18.1%
for the Standard & Poor's 500 and DJIA and a lesser return of 9.5% for the
Lehman Bros. Gov't/Corp. Bond Index. Relative to other comparable mutual funds,
the Fund ranked 128th within a CDA/Wiesenberger universe of 340 domestic
balanced funds.
The past year marked the seventh straight year of economic growth since the
current expansion began in 1991. Real GDP rose an above average 3.9%
(preliminary basis) matching 1997's rate largely because of continued strength
in consumer spending. This in turn reflected strong employment growth and a
declining savings rate. Inflation remained well contained at 1% on the GDP
deflator and 1.6% for the Consumer Price Index despite strong economic growth
and a low unemployment rate. Corporate operating earnings are estimated to have
increased in the mid "single digits" although special charges may have held net
earnings at the previous year's level. Last year's economic performance was all
the more impressive considering the many problems being faced in other parts of
the world such as Asia/Pacific, Latin America and Russia.
OUTLOOK FOR 1999
The remarkable economic expansion of recent years shows no signs of
faltering as yet. Although the rate of growth is expected to moderate some in
the coming year, real GDP is still expected to achieve an increase near the
historical average of 2.4%. As long as employment continues to grow and
confidence remains high, consumer spending should remain strong over the near
term. Inflation is not expected to become a problem with strong competition
continuing to result from excess production capacity on a worldwide basis in
many areas. Corporate profits are expected to continue growing at a moderate
rate as productivity gains offset higher costs.
The bond market is forecasted to remain relatively stable over the coming
year with economic growth expected to slow and inflation likely to remain under
control in the 1-2% range. Consequently, fixed income returns are not expected
to differ much from individual bond coupon rates. New supply seems likely to be
confined mainly to the corporate area with budget surpluses expected to continue
reducing government financing requirements.
2
<PAGE>
The stock market is expected to be anything but stable in the year ahead.
Historically high valuation levels, the increasing speed with which information
is disseminated and more of a short-term trading mentality that has developed
for both individual and institutional investors all promise to keep volatility
high or move it even higher over the immediate future. However, we are still
inclined to believe that stock prices can move higher if corporate profits
increase and interest rates remain stable. Ample liquidity in the hands of both
individuals and corporations together with the absence of attractive investment
alternatives are also expected to remain important ingredients for higher prices
in the coming year.
William B. Frels
President
----------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN FUND,
S & P 500 INDEX, AND THE CONSUMER PRICE INDEX
----------------------------------------------------------------
<TABLE>
<CAPTION>
MPB S&P CPI
<S> <C> <C> <C> <C> <C> <C> <C>
1988 10,000.00 10,000.00 10,000.00
1989 11,766.51 11,767.00 17.67% 13,160.00 13.60% 10,480.00 4.80%
1990 11,926.37 11,927.03 1.36% 12,738.88 (3.20%) 11,045.92 5.40%
1991 15,012.92 15,013.75 25.88% 16,624.24 30.50% 11,509.85 4.20%
1992 15,892.45 15,893.55 5.86% 17,904.30 7.70% 11,855.14 3.00%
1993 17,616.83 17,618.00 10.85% 19,712.64 10.10% 12,175.23 2.70%
1994 17,250.37 17,251.55 (2.08%) 19,968.90 1.30% 12,503.96 2.70%
1995 22,432.04 22,433.91 30.04% 27,465.23 37.54% 12,816.56 2.50%
1996 26,454.51 26,456.31 17.93% 33,776.74 22.98% 13,239.51 3.30%
1997 33,867.89 33,869.37 28.02% 45,058.17 33.40% 13,464.58 1.70%
1998 38,663.93 38,665.28 14.16% 57,989.87 28.70% 13,680.01 1.60%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------
1 Year 5 Year 10 Year
- --------------------------------------------------
<S> <C> <C>
14.2% 17.0% 14.5%
- --------------------------------------------------
</TABLE>
PAST INVESTMENT RESULTS SHOULD NOT BE TAKEN AS NECESSARILY REPRESENTATIVE OF
FUTURE PERFORMANCE.
3
<PAGE>
FINANCIAL HIGHLIGHTS
(SELECTED PER SHARE DATA AND RATIOS -- FOR EACH SHARE OF
CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE
Net asset value, beginning of year $45.52 $36.84 $32.70 $26.21 $28.19
Investment operations:
Net investment income 1.29(*) 1.18 1.09 1.01 1.05
Net realized and unrealized
gains (losses) on investment 5.08 9.04 4.69 6.78 (1.63)
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 6.37 10.22 5.78 7.78 (0.58)
Less distributions:
Dividends (from net
investment income) (1.24) (1.19) (1.10) (1.02) (1.03)
Distributions (from capital gains) (0.60) (0.35) (0.54) (0.28) (0.37)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS (1.84) (1.54) (1.64) (1.30) (1.40)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR $50.05 $45.52 $36.84 $32.70 $26.21
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN 14.2% 28.0% 17.9% 30.0% (2.1)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
NET ASSETS, END OF YEAR
(000'S OMITTED) $38,356 $28,790 $20,565 $16,979 $12,973
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to
average net assets 0.91% 0.92% 1.08% 1.12% 1.11%
Ratio of net investment
income to average net
assets 2.69% 2.81% 3.16% 3.47% 3.80%
PORTFOLIO TURNOVER RATE 11.88% 5.32% 8.25% 3.95% 17.28%
</TABLE>
(*) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
4
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments as annexed, at market value (cost $13,145,059) $29,396,953
U.S. Governments (cost $7,701,163) 7,811,769
Cash 926,205
Dividends and interest receivable 240,576
Receivables for securities sold, not yet delivered 0
Prepaid expense 0
------------
Total assets 38,375,503
LIABILITIES
Accrued management fee 19,168
Accrued custodian and transfer agent fee 726
Payable for securities purchased, not yet received 0
------------
Total liabilities 19,894
NET ASSETS
Equivalent to $50.05 per share on 766,420 shares outstanding $38,355,609
------------
------------
NET ASSETS CONSIST OF:
Capital stock $ 76,642
Additional paid-in capital 21,903,802
Accumulated undistributed net investment income 14,369
Accumulated overdistributed net realized gain (loss)
on investment transactions (1,704)
Net unrealized appreciation (depreciation) of investments 16,362,500
------------
TOTAL NET ASSETS $38,355,609
------------
------------
CAPITAL STOCK (par value $.10 a share)
Shares authorized 10,000,000
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
FIXED INCOME SECURITIES
<TABLE>
<CAPTION>
MARKET
FACE VALUE
AMOUNT SECURITY DESCRIPTION COST (NOTE 2a.)
- ---------- -------------------------------------------------------------------- ------------ ------------
U.S.TREASURY & FEDERAL AGENCY OBLIGATIONS 20.4%
<S> <C> <C> <C> <C> <C>
$ 200,000 U.S. Treasury Notes 7.125% 09/30/99 $ 197,172 $ 203,562
250,000 Federal Farm Credit Bank 6.25% 04/29/03 250,000 251,719
260,000 Federal Farm Credit Bank 6.30% 06/09/03 260,000 260,081
250,000 Federal Farm Credit Bank 6.48% 02/09/06 250,000 248,828
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 253,672
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 250,313
250,000 Federal Home Loan Bank 6.155% 10/30/02 250,000 250,547
250,000 Federal Home Loan Bank 6.55% 11/12/02 250,000 252,891
250,000 Federal Home Loan Bank 6.30% 05/19/03 250,000 251,953
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 252,969
250,000 Federal Home Loan Bank 6.315% 11/25/03 250,000 250,703
250,000 Federal Home Loan Bank 7.012% 07/14/04 250,000 252,422
250,000 Federal Home Loan Bank 7.00% 07/14/05 250,000 256,328
250,000 Federal Home Loan Bank 7.00% 08/15/07 250,000 255,859
250,000 Federal Home Loan Bank 7.075% 07/25/12 250,000 259,922
250,000 Federal Home Loan Bank 7.02% 01/28/13 250,000 250,078
250,000 Federal Home Loan Bank 6.50% 09/18/13 250,000 248,828
250,000 Federal Home Loan Mortgage Corporation 6.00% 12/01/05 250,000 249,531
250,000 Federal Home Loan Mortgage Corporation 6.60% 11/19/13 250,000 248,359
250,000 Federal National Mortgage Association 7.23% 05/17/04 250,000 255,703
500,000 Federal National Mortgage Association 6.45% 04/04/05 499,922 506,875
250,000 Federal National Mortgage Association 6.26% 08/03/05 249,687 252,969
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 254,609
250,000 Federal National Mortgage Association 7.68% 04/24/07 249,844 257,266
250,000 Federal National Mortgage Association 7.43% 06/13/07 250,000 257,578
250,000 Federal National Mortgage Association 6.41% 01/16/08 248,516 254,688
250,000 Federal National Mortgage Association 6.52% 03/05/08 250,000 255,391
250,000 Federal National Mortgage Association 6.56% 04/23/08 249,272 256,250
250,000 Federal National Mortgage Association 6.58% 06/16/08 250,000 253,437
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 258,438
------------ ------------
7,701,163 7,811,769
------------ ------------
</TABLE>
6
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
FIXED INCOME SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
AMOUNT SECURITY DESCRIPTION COST (NOTE 2a.)
- ---------- ---------------------------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OTHER NON-CONVERTIBLE BONDS 9.0%
$ 300,000 Bankers Trust NY Corp. 7.125% 07/31/02 $ 301,185 $ 311,156
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 261,562
265,000 J.C. Penney & Co. 6.00% 05/01/06 239,613 264,503
250,000 Bankers Trust NY Corp. 6.70% 10/01/07 234,023 258,047
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,978 266,406
250,000 General Foods Corporation 7.00% 06/15/11 240,000 263,438
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 266,000
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 269,375
250,000 Allstate Corp. 7.50% 06/15/13 218,938 284,922
250,000 CNA Financial Corp. 6.95% 01/15/18 247,317 244,141
250,000 Lincoln National Corp. 7.00% 03/15/18 249,867 258,437
250,000 Provident Companies 7.00% 07/15/18 247,332 255,234
250,000 South Jersey Gas Co. 7.125% 10/22/18 250,000 248,516
----------- -----------
3,182,114 3,451,737
----------- -----------
CONVERTIBLE BONDS 0.9%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 108,750
250,000 Noram Energy 6.00% 03/15/12 150,600 239,375
----------- -----------
251,600 348,125
----------- -----------
NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 1.3%
6,000 Barclays Bank PLC, Series E $2.00 150,000 159,750
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $5.00 143,720 225,000
2,000 St. Paul Capital Pf $3.00 100,000 129,000
----------- -----------
393,720 513,750
----------- -----------
TOTAL FIXED INCOME SECURITIES 31.6% 11,528,597 12,125,381
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
MARKET
NUMBER OF VALUE
SHARES SECURITY DESCRIPTION COST (NOTE 2a.)
- --------- ------------------------------------- ----------- ------------
<S> <C> <C> <C>
BASIC INDUSTRIES 7.6%
10,000 Bemis Company, Inc. $ 355,803 $ 379,375
5,000 Cooper Industries, Inc. 186,470 238,438
6,000 Delta Air Lines, Inc. 206,976 312,000
20,000 Graco Inc. 191,200 590,000
10,000 Ingersoll-Rand Company 173,547 472,500
10,000 Pentair, Inc. 114,022 398,125
10,000 Weyerhaeuser Company 363,280 508,125
----------- -----------
1,591,298 2,898,563
CONSUMER 9.0%
7,000 American Greetings Class A 189,500 287,437
6,000 Briggs & Stratton Corporation 98,048 299,250
8,000 Deluxe Corp. 225,206 292,500
3,000 Eastman Kodak Company 126,006 216,000
3,000 General Mills, Inc. 151,030 233,250
6,000 Genuine Parts Company 112,273 200,625
6,000 Hershey Foods Corporation 146,610 373,125
15,000 Hormel (Geo. A.) & Company 354,345 491,250
10,000 Jostens, Inc. 199,575 261,875
10,000 Kimberly Clark 471,200 545,000
20,000 Sturm, Ruger & Co., Inc. 173,385 238,750
----------- -----------
2,247,178 3,439,062
ENERGY 5.7%
8,000 Amoco Corporation 140,723 479,000
8,000 Burlington Resources Inc. 268,322 286,500
4,000 Exxon Corporation 20,793 292,500
5,000 Mobil Corporation 54,750 435,625
6,000 Murphy Oil Corporation 162,066 247,500
10,000 Schlumberger, Limited 330,590 463,750
----------- -----------
977,244 2,204,875
FINANCIAL 17.9%
5,000 American Express Company 99,215 512,500
8,000 BankAmerica Corporation 216,194 481,000
25,000 Community First Bankshares, Inc. 314,155 526,563
7,600 Firstar Corporation 163,175 706,800
5,062 Jefferson-Pilot Corp. 60,323 379,650
16,000 Merrill Lynch & Co., Inc. 302,986 1,068,000
5,000 J. P. Morgan & Co., Inc. 187,765 525,312
12,000 ReliaStar Financial Corp. 110,625 553,500
15,000 U.S. Bancorp 58,358 532,500
40,000 Wells Fargo & Company 94,825 1,597,500
----------- -----------
1,607,621 6,883,325
</TABLE>
8
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
MARKET
NUMBER OF VALUE
SHARES SECURITY DESCRIPTION COST (NOTE 2a.)
- --------- ------------------------------------------- ------------ ------------
<S> <C> <C> <C>
HEALTH CARE 11.1%
13,000 American Home Products Corporation $ 227,143 $ 732,875
5,000 Baxter International Inc. 70,751 321,563
8,000 Bristol-Myers Squibb Company 205,563 1,070,500
17,000 Pfizer Inc. 125,837 2,125,000
------------ ------------
629,294 4,249,938
TECHNOLOGY 11.5%
8,723 AMP Incorporated 287,583 454,141
15,000 Corning Inc. 442,571 675,000
6,000 Emerson Electric Co. 128,697 363,000
7,000 Honeywell Inc. 218,831 527,187
4,000 International Business Machines Corporation 96,740 737,500
35,000 MTS Systems Corporation 274,375 472,500
6,000 Minnesota Mining & Manufacturing Company 326,172 426,750
20,000 National Computer Systems, Inc. 121,380 740,000
------------ ------------
1,896,349 4,396,078
UTILITIES 2.6%
5,000 American Water Works Company, Inc. 130,600 168,750
7,000 GTE Corporation 96,007 455,000
6,000 U S West Inc. 142,034 387,750
------------ ------------
368,641 1,011,500
------------ ------------
TOTAL COMMON STOCK 65.4% 9,317,625 25,083,341
TOTAL INVESTMENTS 97.0% $20,846,222 37,208,722
------------ ------------
------------
OTHER ASSETS IN EXCESS OF LIABILITIES 3.0% 1,146,887
------------
NET ASSETS 100% $38,355,609
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends $ 451,512
Interest 756,837
-----------
TOTAL INCOME $ 1,208,349
Expenses:
Investment advisory fees (NOTE 5) 203,541
Administrative fees 47,508
Transfer agent fees (NOTE 5) 22,911
Legal and audit fees 20,929
Custodian fees 8,284
Other fees and expenses 1,487
-----------
TOTAL EXPENSES 304,660
-----------
NET INVESTMENT INCOME 903,689
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 4)
Net realized gains on investments sold 452,769
Unrealized appreciation of investments 3,156,726
-----------
NET GAIN ON INVESTMENTS 3,609,495
-----------
INCREASE IN NET ASSETS FROM OPERATIONS $ 4,513,184
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended December 31
1998 1997
---------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 903,689 $ 694,882
Net realized gains on investments sold 452,769 222,772
Unrealized appreciation of investments 3,156,726 5,145,492
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS 4,513,184 6,063,146
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (889,320) (707,676)
Short-term gain distributed as ordinary income - (4,819)
From net realized gains (454,472) (219,253)
----------- -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,343,792) (931,748)
CAPITAL STOCK TRANSACTIONS
Proceeds from shares sold 8,482,738 3,869,174
Reinvestment of distributions from net
investment income and net realized gains 1,089,262 735,269
Cost of shares redeemed (3,175,376) (1,511,262)
INCREASE IN NET ASSETS FROM
CAPITAL STOCK TRANSACTIONS 6,396,624 3,093,181
----------- -----------
TOTAL INCREASE IN NET ASSETS 9,566,016 8,224,579
NET ASSETS
Beginning of year 28,789,593 20,565,014
----------- -----------
End of year (including undistributed
investment income of $14,369 and
$73,712, respectively) $38,355,609 $28,789,593
----------- -----------
----------- -----------
CHANGES IN CAPITAL STOCK
Shares sold 178,359 93,778
Shares issued for reinvested distributions 22,241 17,070
Shares redeemed (66,720) (36,542)
----------- -----------
NET INCREASE IN SHARES 133,880 74,306
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
Note 1 -- The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, no-load, open-end management investment
company. The investment objective of the Fund is to provide regular
current income, the potential for capital appreciation, and a
moderate level of volatility by investing in a diversified list of
securities, including bonds, preferred stocks, common stocks and
other securities convertible into common stock.
Note 2 -- Significant accounting polices of the Fund are as follows:
(a) Market value of investments is based on the last reported
sale price on December 31 for listed securities or the mean
of the bid and asked price for other securities. Security
transactions are recorded on the trade date, the date on
which securities are purchased or sold. Dividend income is
recognized on the ex-dividend date and interest income is
recorded on the accrual basis. Realized gains and losses
are reported on an identified cost basis.
(b) The Fund is a "regulated investment company" as defined in
Subtitle A, Chapter 1, Subchapter M of the Internal Revenue
Code, as amended. 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 applicable to investment
companies and to make distributions of income and security gains
sufficient to relieve it from all or substantially all income
taxes.
(c) Effective January 1, 1998, the Fund discontinued the
accounting practice of equalization, which it had used
since its inception. Equalization is a practice whereby a
portion of the proceeds from sales and costs of redemptions
of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is
charged or credited to undistributed net investment income.
The balance of equalization included in undistributed net
investment income at the date of change, which was $15,984,
was reclassified to additional paid-in capital. Such
reclassification had no effect on net assets, results of
operations, or net asset value per share of the Fund.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
(d) Income distributions and capital gain distributions are
determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
Accordingly, cumulative permanent book and tax basis
differences relating to shareholder distributions have been
reclassified between accumulated undistributed net
investment income, accumulated overdistributed net realized
gain on investment transactions and additional paid-in
capital. Net investment income, net realized gains on
investments sold, and net assets were not affected by this
reclassification.
Note 3 -- Purchases and sales of investment securities, excluding government
and short-term securities, during the year ended December 31, 1998
aggregated $9,507,196 and $3,842,825, respectively.
Note 4 -- Net unrealized appreciation on investments for Federal income tax
purposes aggregated $16,362,500, of which $16,371,614 related to
appreciated investment securities and $9,114 related to depreciated
investment securities. Aggregate cost of investments for federal
income tax purposes was $20,846,222.
Note 5 -- The investment advisory fees were 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 were 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
fees were also paid to Mairs and Power, Inc. who serves as transfer
agent. Directors of the Fund not affiliated with Mairs and Power,
Inc. received compensation for meetings attended totaling $6,000 in
1998. No compensation was paid to any other director or officer of
the Fund.
Note 6 -- The Board of Directors authorized a two-for-one split of the Fund's
common stock announced on June 19, 1998. The stock split was in the
form of a 100% stock dividend payable June 22, 1998 to shareholders
of record on June 19, 1998. The impact of the stock split has been
reflected in the financial statements and all share and per share
data included herein.
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Mairs and Power Balanced Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Mairs
and Power Balanced Fund, Inc. (the Fund), including the schedule of
investments, as of December 31, 1998, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Mairs and Power Balanced Fund, Inc. at December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
January 22, 1999
14
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
This table covers a period of generally rising common stock prices. The results
shown should not be considered as a representation of the dividend income or
capital gain or loss which may be realized from an investment made in the Fund
today.
<TABLE>
<CAPTION>
PER SHARE
---------------------------------------------------
DISTRIBU- PERFORMANCE
TIONS OF DIVIDENDS OF AN
SHARES REALIZED FROM NET ASSUMED
OUT- TOTAL NET NET ASSETS SECURITIES INVESTMENT INVESTMENT OF
DATES STANDING ASSETS VALUE GAINS INCOME $10,000*
- ------------- --------- ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1974 39,930 $ 436,518 $ 10.93 $ 0.33 $ 0.80 $ 7,952
Dec. 31, 1975 53,298 $ 695,686 $ 13.06 $ 0.52 $ 0.70 $ 10,556
Dec. 31, 1976 60,638 $ 973,550 $ 16.06 $ 0.43 $ 0.80 $ 14,058
Dec. 31, 1977 94,234 $ 1,439,735 $ 15.28 $ 0.39 $ 0.88 $ 14,500
Dec. 31, 1978 100,458 $ 1,439,598 $ 14.33 $ 0.35 $ 1.00 $ 14,862
Dec. 31, 1979 113,790 $ 1,644,853 $ 14.46 $ 0.30 $ 1.10 $ 16,446
Dec. 31, 1980 129,196 $ 1,969,896 $ 15.25 $ 0.21 $ 1.25 $ 19,132
Dec. 31, 1981 132,236 $ 1,928,460 $ 14.59 - $ 1.21 $ 19,823
Dec. 31, 1982 135,050 $ 2,274,421 $ 16.84 $ 0.33 $ 1.25 $ 25,480
Dec. 31, 1983 155,828 $ 2,907,432 $ 18.66 - $ 1.28 $ 30,244
Dec. 31, 1984 155,810 $ 2,729,570 $ 17.52 $ 0.45 $ 1.28 $ 31,334
Dec. 31, 1985 183,348 $ 3,837,245 $ 20.93 $ 0.35 $ 1.13 $ 40,447
Dec. 31, 1986 253,724 $ 5,395,111 $ 21.27 $ 1.87 $ 0.98 $ 46,655
Dec. 31, 1987 295,434 $ 5,772,298 $ 19.54 $ 1.09 $ 1.06 $ 47,457
Dec. 31, 1988 317,426 $ 6,569,555 $ 20.70 $ 0.42 $ 1.12 $ 54,053
Dec. 31, 1989 344,486 $ 7,886,058 $ 22.89 $ 0.33 $ 1.08 $ 63,602
Dec. 31, 1990 366,158 $ 8,075,488 $ 22.06 $ 0.07 $ 1.07 $ 64,466
Dec. 31, 1991 400,276 $ 10,676,264 $ 26.67 - $ 1.00 $ 81,149
Dec. 31, 1992 428,672 $ 11,535,822 $ 26.91 $ 0.30 $ 1.00 $ 85,904
Dec. 31, 1993 476,860 $ 13,441,576 $ 28.19 $ 0.63 $ 0.99 $ 95,225
Dec. 31, 1994 494,968 $ 12,972,976 $ 26.21 $ 0.37 $ 1.03 $ 93,244
Dec. 31, 1995 519,272 $ 16,978,753 $ 32.70 $ 0.28 $ 1.02 $121,253
Dec. 31, 1996 558,234 $ 20,565,014 $ 36.84 $ 0.54 $ 1.10 $142,996
Dec. 31, 1997 632,540 $ 28,789,593 $ 45.52 $ 0.35 $ 1.19 $183,068
Dec. 31, 1998 766,420 $ 38,355,609 $ 50.05 $ 0.60 $ 1.24 $208,992
</TABLE>
*Assumes the reinvestment of all income dividends and capital gain distributions
for a $10,000 investment made at the beginning of 1974.
- --------------------------------------------------------------------------------
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 DECEMBER 31, 1998) ARE AS FOLLOWS:
1 YEAR: + 14.2% 5 Years: + 17.0% 10 Years: + 14.5%
THE TOTAL RETURN DATA REPRESENTS PAST PERFORMANCE, AND 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.
- --------------------------------------------------------------------------------
15
<PAGE>
OFFICERS AND DIRECTORS
----------------------
William B. Frels . . . . . . . . . . . . . . . .President and Director
George A. Mairs, III . . . . . . . . . . . . . .Secretary and Director
Peter G. Robb. . . . . . . . . . . . . . . Vice-President and Director
Lisa J. Hartzell . . . . . . . . . . . . . . . . . . . . . . Treasurer
Charlton Dietz . . . . . . . . . . . . . . . . . . . . . . . .Director
Donald E. Garretson. . . . . . . . . . . . . . . . . . . . . .Director
J. Thomas Simonet. . . . . . . . . . . . . . . . . . . . . . .Director
INVESTMENT ADVISER
Mairs and Power, Inc.
W-1420 First National Bank Building
332 Minnesota Street
Saint Paul, Minnesota 55101-1363
INDEPENDENT AUDITORS
Ernst & Young, LLP
1400 Pillsbury Center
200 South Sixth Street
Minneapolis, Minnesota 55402
TRANSFER AGENT
Mairs and Power, Inc.
W-1420 First National Bank Building
332 Minnesota Street
Saint Paul, Minnesota 55101-1363
CUSTODIAN
Firstar Bank Milwaukee
615 East Michigan Street
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
SHAREHOLDER ACCOUNT INFORMATION AND INQUIRIES
651-222-8478
16
<PAGE>
MAIRS AND POWER
BALANCED FUND, INC.
