<PAGE>
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MAIRS AND POWER
BALANCED FUND, INC.
-------------------
- --------------------------------------------------------------------------------
1ST QUARTER REPORT
March 31, 1999
To Our Shareholders: May 19, 1999
FIRST QUARTER RESULTS
After showing a strong fourth quarter recovery last year, the Balanced Fund
experienced pretty much a break-even period in the first quarter of 1999.
Investment results were adversely influenced by extremely narrow leadership
in the stock market and lower fixed income returns as a result of rising
interest rates. Based on a March 31, 1999 net asset value of $49.72 per
share, the Fund experienced a very slight negative total investment return
of 0.1% during the quarter after adjustment for the reinvestment of cash
dividends. This compares with other benchmark returns of 5.0% for the
Standard & Poor's 500 Stock Index, 7.0% for the Dow Jones Industrial Average
and -1.2% for the Lehman Bros. Gov't/Corp. Bond Index. Among other
comparable balanced mutual funds, the Fund ranked 240th out of
CDA/Wiesenberger domestic balanced universe of 367 funds.
The U. S. economy turned in a remarkably strong showing in the first quarter
with real Gross Domestic Product rising at a 4.5% annual rate. This
surprising strength continued to be largely a function of consumer spending
which rose at a 6.7% annual rate, the fastest pace in eleven years. Consumer
spending growth, in turn, reflected gains in total employment and a
relatively high level of confidence. Inflation remained under good control
with the implicit deflator rising only 1.4% in spite of above trend economic
growth and a tight labor market. A major factor responsible for this
exceptional price stability has been a high level of productivity which rose
at an impressive 4% annual rate in the quarter. Interest rates moved up
moderately during the quarter in response to economic strength and renewed
expectations of some pick-up in the future rate of inflation. Finally,
preliminary indications are that corporate earnings increased at a high
"single digit" rate after a disappointing second half last year.
Because of increasingly narrow leadership, most major stock market indices
tended to overstate market strength. In this regard, one recent study
suggested that nearly all of the first quarter's S&P 500 return of 5.0% was
contributed by only 21 large capitalization stocks while the remaining 479
canceled each other out. Small and mid-sized capitalization stocks measured
by the Russell 2000 Index were actually down 5.4%. In terms of industry
groups, computer peripherals and software, communications
(cellular/wireless) and oil services had the strongest performance while
home building, certain basic industries (metals and mining) and utilities
were among the weakest performers. Turning to individual holdings in the
Fund, Delta Air Lines (+33.7%), Corning (+33.3%) and Merrill Lynch (+32.6%)
did the best while American Greetings (-38.2%), National Computer Systems
(-33.8%) and MTS Systems (-25.0%) fared the worst.
<PAGE>
FUTURE OUTLOOK
Although the rate of future economic growth is expected to slow some from the
surprisingly robust results of the past two quarters, continuing strong
underlying fundamentals still seem to suggest a rate in the area of 3%. While a
recent up-tick in the rate of inflation (+0.7% for the Consumer Price Index in
April) is a source of some concern, it would be premature to conclude that this
is the beginning of a new longer term trend. Rather, it is our belief that the
April number will prove to be somewhat of an aberration with the full year rate
unlikely to go much beyond a relatively modest rate of 3%. This, of course,
assumes that economic growth will show some slowdown in coming quarters and that
oil costs stabilize near current levels. Continuing progress in the area of
productivity should keep unit labor costs under control and also allow for some
further improvement in corporate profitability. Corporate earnings are projected
to continue increasing at a rate in the 6-8% range over the remainder of the
year.
While the stock market as measured by some major indices appears quite
generously valued, it is important to note that certain indices are being
significantly influenced by a relatively small number of issues which have
extremely high valuations. The broader market, including most small and mid-cap
issues, looks to be far more reasonably valued although still high by historical
standards. When viewing current valuation levels, it is important to consider
such factors as the strength of the U. S. economy, the improving outlook for
corporate earnings, favorable supply/demand fundamentals because of stock
buy-backs and cash mergers, lack of attractive investment alternatives and the
attractiveness of U. S. stocks to foreign investors. Consequently, we believe
the overall outlook for stock prices remains basically positive, however, we
also recognize that the risks of a major correction have also increased with the
recent upward move in interest rates.
William B. Frels
President
<PAGE>
SCHEDULE OF INVESTMENTS MARCH 31, 1999
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<TABLE>
<CAPTION>
FACE MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ---------- ------------------------------------------------------------------------------- ------------
FIXED INCOME SECURITIES
<S> <C> <C> <C> <C>
U.S.TREASURY & FEDERAL AGENCY OBLIGATIONS 21.6%
$ 200,000 U.S. Treasury Notes 7.125% 09/30/99 $202,312
250,000 Federal Farm Credit Bank 6.25% 04/29/03 249,844
260,000 Federal Farm Credit Bank 6.30% 06/09/03 258,944
250,000 Federal Home Loan Bank 6.455% 02/22/02 252,422
250,000 Federal Home Loan Bank 6.155% 10/30/02 250,078
250,000 Federal Home Loan Bank 6.55% 11/12/02 251,875
250,000 Federal Home Loan Bank 6.30% 05/19/03 251,016
250,000 Federal Home Loan Bank 7.42% 07/08/03 251,641
250,000 Federal Home Loan Bank 6.315% 11/25/03 250,156
250,000 Federal Home Loan Bank 7.012% 07/14/04 251,328
250,000 Federal Home Loan Bank 7.00% 07/14/05 254,062
250,000 Federal Home Loan Bank 7.00% 08/15/07 252,891
250,000 Federal Home Loan Bank 7.075% 07/25/12 254,531
250,000 Federal Home Loan Bank 6.50% 09/18/13 244,375
250,000 Federal Home Loan Bank 6.41% 02/11/14 242,500
250,000 Federal Home Loan Mortgage Corporation 6.00% 12/01/05 247,266
250,000 Federal Home Loan Mortgage Corporation 6.41% 01/20/09 246,953
250,000 Federal Home Loan Mortgage Corporation 6.25% 01/21/09 245,547
250,000 Federal Home Loan Mortgage Corporation 6.60% 11/19/13 244,922
250,000 Federal National Mortgage Association 7.23% 05/17/04 253,984
500,000 Federal National Mortgage Association 6.45% 04/04/05 498,281
250,000 Federal National Mortgage Association 6.26% 08/03/05 248,047
250,000 Federal National Mortgage Association 7.50% 02/02/07 253,047
250,000 Federal National Mortgage Association 7.68% 04/24/07 255,312
250,000 Federal National Mortgage Association 7.43% 06/13/07 255,625
250,000 Federal National Mortgage Association 6.41% 01/16/08 248,437
250,000 Federal National Mortgage Association 6.52% 03/05/08 249,141
250,000 Federal National Mortgage Association 6.56% 04/23/08 250,703
250,000 Federal National Mortgage Association 6.58% 06/16/08 248,750
250,000 Federal National Mortgage Association 6.11% 01/15/09 245,391
250,000 Federal National Mortgage Association 6.18% 02/19/09 246,094
250,000 Federal National Mortgage Association 6.49% 03/18/09 249,844
250,000 Federal National Mortgage Association 7.15% 11/03/10 253,281
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8,458,600
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OTHER NON-CONVERTIBLE BONDS 8.5%
300,000 Bankers Trust NY Corp. 7.125% 07/31/02 306,281
250,000 Household Finance Corp. 7.00% 02/15/03 258,750
265,000 J.C. Penney & Co. 6.00% 05/01/06 252,992
250,000 Bankers Trust NY Corp. 6.70% 10/01/07 250,469
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 259,063
250,000 General Foods Corporation 7.00% 06/15/11 253,203
200,000 Ford Motor Company Debentures 9.50% 09/15/11 255,000
250,000 Goldman Sachs & Company 8.00% 03/01/13 272,188
250,000 Allstate Corp. 7.50% 06/15/13 272,891
250,000 CNA Financial Corp. 6.95% 01/15/18 233,984
250,000 Lincoln National Corp. 7.00% 03/15/18 251,484
250,000 Provident Companies 7.00% 07/15/18 250,156
250,000 South Jersey Gas Co. 7.125% 10/22/18 235,859
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3,352,320
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CONVERTIBLE BONDS 1.5%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,625
250,000 Noram Energy 6.00% 03/15/12 238,438
250,000 Oryx Energy 7.50% 05/15/14 247,812
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$ 587,875
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</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 1999
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<TABLE>
<CAPTION>
FACE MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ---------- ------------------------------------------------------------------------------- ------------
FIXED INCOME SECURITIES (CONTINUED)
<S> <C> <C> <C>
NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 1.3%
6,000 Barclays Bank PLC, Series E $ 2.00 $ 159,375
2,500 J.P. Morgan & Co., Series A., Adj Rate Pf $ 5.00 228,750
2,000 St. Paul Capital Pf $ 3.00 115,500
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503,625
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TOTAL FIXED INCOME SECURITIES 32.9% $12,902,420
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</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS
NUMBER OF MARKET
SHARES SECURITY DESCRIPTION VALUE
- ---------- ------------------------------------------------------------------------------- ------------
<S> <C> <C>
BASIC INDUSTRIES 7.3%
10,000 Bemis Company, Inc. $ 310,625
5,000 Cooper Industries, Inc. 213,125
6,000 Delta Air Lines, Inc. 417,000
25,000 Graco Inc. 551,563
10,000 Ingersoll-Rand Company 496,250
10,000 Pentair, Inc. 337,500
10,000 Weyerhaeuser Company 555,000
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2,881,063
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CONSUMER 8.0%
8,000 American Greetings Class A 203,000
6,000 Briggs & Stratton Corporation 295,875
8,000 Deluxe Corp. 233,000
4,000 Eastman Kodak Company 255,500
3,000 General Mills, Inc. 226,687
6,000 Genuine Parts Company 172,875
6,000 Hershey Foods Corporation 336,375
15,000 Hormel (Geo. A.) & Company 534,375
10,000 Jostens, Inc. 212,500
10,000 Kimberly Clark 479,375
20,000 Sturm, Ruger & Co., Inc. 200,000
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3,149,562
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ENERGY 6.2%
5,293 BP Amoco PLC ADR 534,593
8,000 Burlington Resources Inc. 319,500
4,000 Exxon Corporation 282,250
5,000 Mobil Corporation 440,000
6,000 Murphy Oil Corporation 249,000
10,000 Schlumberger, Limited 601,875
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$ 2,427,218
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</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 1999
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<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY DESCRIPTION VALUE
- ---------- ------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
<S> <C> <C>
FINANCIAL 18.2%
5,000 American Express Company $588,750
8,000 BankAmerica Corporation 565,000
25,000 Community First Bankshares, Inc. 500,000
7,600 Firstar Corp. 680,200
5,062 Jefferson-Pilot Corp. 342,951
15,000 Merrill Lynch & Co., Inc. 1,327,500
5,000 J.P. Morgan & Co., Inc. 616,875
14,000 ReliaStar Financial Corp. 596,750
15,000 U.S. Bancorp 510,937
40,000 Wells Fargo & Company 1,402,500
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7,131,463
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HEALTH CARE 10.9%
13,000 American Home Products Corporation 848,250
5,000 Baxter International Inc. 330,000
16,000 Bristol-Myers Squibb Company 1,026,000
15,000 Pfizer Inc. 2,081,250
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4,285,500
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TECHNOLOGY 11.3%
8,723 AMP Incorporated 466,681
15,000 Corning Inc. 900,000
8,000 Emerson Electric Co. 423,500
8,000 Honeywell Inc. 606,500
4,000 International Business Machines Corporation 709,000
35,000 MTS Systems Corporation 354,375
7,000 Minnesota Mining & Manufacturing Company 495,250
20,000 National Computer Systems, Inc. 490,000
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4,445,306
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UTILITIES 2.3%
5,000 American Water Works Company, Inc. 145,625
7,000 GTE Corporation 423,500
6,000 U S West Inc. 330,375
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899,500
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TOTAL COMMON STOCK 64.2% 25,219,612
TOTAL INVESTMENTS 97.1% 38,122,032
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OTHER ASSETS IN EXCESS OF LIABILITIES 2.9% 1,153,281
NET ASSETS 100% $39,275,313
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</TABLE>
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<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS AT MARCH 31, 1999
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<S> <C> <C>
ASSETS
Investments as annexed, at market value (cost $13,912,387)................................... $29,663,432
US Governments (cost $8,450,413)............................................................. 8,458,600
Cash......................................................................................... 881,650
Dividends and interest receivable............................................................ 252,386
Receivables for securities sold, not yet delivered........................................... 91,189
Prepaid expense.............................................................................. 2,545
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39,349,802
LIABILITIES
Accrued management fee.................................................. $19,081
Accrued custodian and transfer agent fee................................ 725
Payable for securities purchased, not yet received...................... 54,683 74,489
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NET ASSETS
Equivalent to $49.72 per share on 789,969 shares outstanding................................. $39,275,313
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</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS FOR THE THREE MONTHS ENDED MARCH 31, 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, December 31, 1998................................................................ $38,355,609
Net investment income, per statement below.............................. $258,892
Distribution to Shareholders............................................ (235,302) 23,590
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Fund shares issued and repurchased:
Received for 42,709 shares issued..................................... 2,116,894
Paid for 19,160 shares repurchased.................................... (952,847) 1,164,047
Increase in unrealized net appreciation (depreciation) of investments........................ (603,268)
Net gain (or loss) realized from sales of securities......................................... 335,335
Distribution from net realized gain.......................................................... 0
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NET ASSETS, March 31, 1999................................................................... $39,275,313
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----------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF NET INVESTMENT INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999
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<S> <C>
INVESTMENT INCOME
Dividends.................................................................................... $132,867
Interest..................................................................................... 209,609
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342,476
</TABLE>
<TABLE>
<CAPTION>
EXPENSES
<S> <C> <C>
Management fee (Note A)................................................. $57,435
Fees and expenses of custodian, transfer agent and
dividend disbursing agent (Note A).................................... 8,668
Legal and auditing fees and expenses.................................... 5,232
Insurance............................................................... 372
Other Fees and Expenses................................................. 11,877 83,584
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NET INVESTMENT INCOME........................................................................ $258,892
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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 $-0- compensation for meetings attended during
this three 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 three months ended March 31, 1999 aggregated $2,281,963 and
$1,100,721 respectively.
<PAGE>
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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, 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
Mar. 31, 1999 789,969 39,275,213 49.72 - 0.30
</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>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1999) ARE AS FOLLOWS:
1 YEAR: +5.4% 5 YEARS: +17.9% 10 YEARS: +14.0%
<S><C>
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
- -------------------------------------------------------------------------------------------------------------------------
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.
