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MAIRS AND POWER
INCOME FUND, INC.
------------------
2ND QUARTER REPORT
June 30, 1996
332 Minnesota Street
W-2062 First National Bank Building
St. Paul, Minnesota 55101
612-222-8478
<PAGE>
August 21, 1996
To Our Shareholders:
SECOND QUARTER RESULTS
The Income Fund continued to build upon its first quarter gain in the second
quarter with the help of another strong showing by the stock market. Based on a
net asset value of $68.71 per share on June 30, 1996, the Fund achieved a 2.2%
total investment return for the quarter after adjustment for the reinvestment of
cash dividends. This compared to respective returns of 1.8% and 4.4% for the Dow
Jones Industrial Average and Standard & Poor's 500 and 0.5% for the Lehman Bros.
Gov't/Corp. Bond Index. For the first half, the Fund produced a 6.6% total
investment return compared to respective returns of 11.7% and 10.0% for the Dow
Jones Industrial Average and the Standard & Poor's 500 and -1.9% for the Lehman
Bros.Gov't/Corp. Bond Index. The Fund's first half performance compared
favorably with a 4.9% average return for a CDA/ Wiesenberger universe of 272
balanced mutual funds.
The U.S. economy performed quite well during the second quarter showing a
substantial pick-up over the first quarter. Real Gross Domestic Product rose
4.2% on a preliminary basis due in large part to continued strength in consumer
spending, an acceleration in government spending and some inventory rebuilding.
Inflation remained well in check rising at only a 2.1% annual rate despite a
continued tightening in the job market. Corporate profits are thought to have
shown an overall gain in the area of 10% with the vast majority of companies
meeting or exceeding expectations. After moving up significantly in the first
quarter and half way through the second quarter, interest rates finally showed
some signs of leveling off by the end of the quarter.
Although showing a relatively strong overall gain in the second quarter, the
stock market's performance varied considerably between industry sectors. The
best gains showed up in consumer staples, capital goods and technology while the
worst performers were in basic industries, conglomerates, consumer services and
financial services. Among individual companies held in the Fund, Sturm, Ruger
(+20.8%), Pentair (+18.8%) and Deluxe (+13.1%) did the best while IBM (-11.0%),
American Express (-9.6%) and Weyerhaeuser (-7.9%) did the worst.
FUTURE OUTLOOK
With no storm clouds on the horizon, the outlook for the economy continues to
be reasonably bright. Although below the unexpectedly strong second quarter,
real Gross Domestic Product is still expected to grow at a quite respectable
2-3% rate during the second half of 1996. Consumer spending should continue to
move ahead reflecting steady employment gains even though installment debt
remains high by historical standards. Further growth in business spending seems
likely given the continuing high rate of capacity utilization. While unlikely to
show the strength of past election years, government spending should
nevertheless experience additional growth despite increased efforts of
restraint. Export demand is expected to continue to improve although some of the
competitive benefits of cost containment have been eroded by the recent strength
of the U.S. Dollar. Corporate profit growth also seems likely to continue
although the rate is expected to moderate from the "double digit" levels
reported by many companies in the second quarter.
Considering the second half slowdown being projected for the economy,
inflation is not expected to advance much from recent levels anytime soon. If
this forecast is correct, the Federal Reserve seems unlikely to take any action
to increase interest rates over the near term especially in light of the
upcoming Presidential election in November. Consequently, the bond market should
perform better in the months to come with prices at least holding their own and
more likely showing some modest appreciation.
While current stock market valuation levels are certainly not cheap neither do
they seem unduly expensive when compared to other comparable periods of low
inflation (16-17x during years having an inflation rate of 3 1/2% or less).
Thus, with the Standard & Poor's 500 priced only slightly higher than other
comparable past periods at some 17-18x estimated 1996 reported earnings of
$37.50, we believe further market progress can be achieved as earnings gains
continue in the future. Moreover, the recent market correction (10% on the S&P
500 and 20% on the NASDAQ based on interday lows ) goes a long way toward
setting the stage for new highs later in the year.
MANAGEMENT CHANGES
Lisa J. Hartzell was elected Treasurer of the Fund at the May 20, 1996,
meeting of the Board of Directors replacing Kathleen M. Kellerman who retired
from Mairs and Power, Inc. on June 30, 1996. Kathy made many valuable
contributions to the management of the Fund during her many years of service and
she will be greatly missed.
William B. Frels
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SCHEDULE OF INVESTMENTS AT JUNE 30, 1996
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<TABLE>
<CAPTION>
FACE MARKET
AMOUNT FIXED INCOME SECURITIES COST VALUE
- --------- ------------------------------------------------------------------- ------------ ------------
<C> <S> <C> <C> <C> <C>
U.S. TREASURY & FEDERAL AGENCY OBLIGATIONS 13.1%
$300,000 U.S. Treasury Notes 7.00% 9/30/96 $ 300,000 $ 301,313
200,000 U.S. Treasury Notes 7.125% 9/30/99 197,172 204,375
250,000 Federal Home Loan Bank 7.03% 5/21/01 250,000 250,563
250,000 Federal Home Loan Bank 7.48% 6/28/01 250,000 251,320
250,000 Federal Home Loan Bank 7.42% 7/08/03 250,000 249,375
250,000 Federal Home Loan Mortgage Corporation 7.00% 3/24/03 250,000 244,250
250,000 Federal Home Loan Mortgage Corporation 7.30% 7/27/05 250,000 245,767
250,000 Federal Home Loan Mortgage Corporation 7.00% 3/13/06 250,000 240,460
250,000 Federal National Mortgage Association 6.67% 2/06/06 249,531 238,125
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 237,942
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2,493,453 2,463,490
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OTHER NON-CONVERTIBLE BONDS 10.3%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 240,938
250,000 Household Finance Corp. 7.00% 2/15/03 250,000 247,762
265,000 J. C. Penney & Co. 6.00% 5/01/06 239,613 239,208
250,000 Merrill Lynch and Co., Inc. 7.00% 4/27/08 247,977 241,075
250,000 General Foods Corporation 7.00% 6/15/11 240,000 234,392
200,000 Ford Motor Company Debentures 9.50% 9/15/11 199,836 234,266
250,000 Goldman Sachs & Company 8.00% 3/01/13 256,025 251,330
250,000 Allstate Corp. 7.50% 6/15/13 218,937 244,370
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1,902,138 1,933,341
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CONVERTIBLE BONDS 5.7%
150,000 General Signal Corporation 5.75% 6/01/02 147,375 159,750
177,000 Pogo Producing Co. 8.00% 12/31/05 135,221 180,540
150,000 Cray Research, Inc. 6.125% 2/01/11 101,000 120,000
250,000 Noram Energy 6.00% 3/15/12 150,600 200,625
150,000 Ashland, Inc. 6.75% 7/01/14 144,000 150,000
250,000 Cooper Industries, Inc. 7.05% 1/01/15 240,892 266,250
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919,088 1,077,165
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 8.2%
6,000 Bankers Trust New York Corporation $ 1.91 144,495 147,750
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 148,500
7,000 Boatman's Bancshares Pfd $ 1.75 209,125 241,500
5,000 The Bear Stearns Companies, Inc. Pf,
Series C $ 1.90 125,000 119,375
5,000 Community First Bankshares, Inc. $ 1.75 125,000 185,000
5,000 Delta Air Lines, Inc. Pf, Series C $ 3.50 262,308 315,000
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 180,117
4,000 Provident Life & Accident Insurance Co. Pf $ 2.025 100,000 102,000
2,000 St. Paul Capital Pf $ 3.00 100,000 105,000
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1,359,648 1,544,242
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TOTAL FIXED INCOME SECURITIES 37.3% $ 6,674,327 $ 7,018,238
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</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COMMON STOCKS COST VALUE
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<C> <S> <C> <C>
BASIC INDUSTRIES 6.0%
5,000 Cooper Industries, Inc. $ 171,431 $ 207,500
12,000 Graco Inc. 147,460 243,000
5,000 Ingersoll-Rand Company 61,341 218,750
8,000 Pentair, Inc. 51,782 240,000
5,000 Weyerhaeuser Company 135,368 212,500
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567,382 1,121,750
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CONSUMER 12.1%
7,000 American Greetings Class A 189,500 191,625
5,000 Briggs & Stratton Corporation 61,116 205,625
5,088 ConAgra, Inc. 159,531 230,868
5,000 Deluxe Corp. 132,596 177,500
3,000 The Dun & Bradstreet Corporation 146,260 187,500
2,000 Eastman Kodak Company 53,573 155,500
3,000 General Mills, Inc. 151,030 163,875
4,000 Genuine Parts Company 112,272 183,000
3,000 Hershey Foods Corporation 146,610 220,125
8,000 Hormel (Geo. A.) & Company 166,210 214,000
6,000 Jostens, Inc. 124,845 118,500
5,000 Sturm, Ruger & Co., Inc. 42,220 232,500
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1,485,763 2,280,618
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ENERGY 6.5%
4,000 Amoco Corporation 140,723 288,500
2,000 Exxon Corporation 20,793 173,750
2,500 Mobil Corporation 54,750 280,938
5,000 Murphy Oil Corporation 139,408 226,875
3,000 Schlumberger, Limited 105,048 252,750
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460,722 1,222,813
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FINANCIAL 13.8%
5,000 American Express Company 99,215 223,125
5,000 First Bank System, Inc. 58,358 290,000
5,000 Firstar Corp. 163,175 230,625
3,375 Jefferson-Pilot Corp. 60,323 174,234
6,000 Merrill Lynch & Co., Inc. 99,319 390,750
4,000 J.P. Morgan & Co., Inc. 102,082 338,500
20,000 Norwest Corporation 94,825 697,500
6,000 ReliaStar 110,625 258,750
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787,922 2,603,484
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HEALTH CARE 8.9%
6,000 American Home Products Corporation 182,542 360,750
5,000 Baxter International Inc. 76,524 236,250
4,000 Bristol-Myers Squibb Company 205,562 360,000
10,000 Pfizer Inc. 136,357 713,750
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600,985 1,670,750
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</TABLE>
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COMMON STOCKS COST VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
TECHNOLOGY 9.8%
5,000 AMP Incorporated $ 133,605 $ 200,625
7,000 Corning Inc. 188,965 268,625
3,000 Emerson Electric Co. 128,697 271,125
5,000 Honeywell Inc. 90,716 272,500
International Business Machines
2,000 Corporation 96,740 198,000
10,000 MTS Systems Corporation 81,500 210,000
3,000 Minnesota Mining & Manufacturing Company 78,077 207,000
10,000 National Computer Systems, Inc. 121,380 213,750
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919,680 1,841,625
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UTILITIES 3.6%
7,000 GTE Corporation 96,007 313,250
5,000 Texas Utilities Company 183,482 213,750
5,000 U S West Communications 111,040 160,000
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390,529 687,000
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TOTAL COMMON STOCK 60.7% $ 5,212,983 $ 11,428,040
Other Assets in Excess of Liabilities 2.0% 387,031
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NET ASSETS 100.0% $ 11,887,310 $ 18,833,309
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</TABLE>
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STATEMENT OF NET ASSETS AT JUNE 30, 1996
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $9,393,857)............................ $ 15,982,788
U.S. Governments (cost $2,493,453)................................................... 2,463,490
Cash................................................................................. 518,255
Dividends and interest receivable.................................................... 124,210
Receivables for securities sold, not yet delivered................................... 0
Prepaid expense...................................................................... 4,559
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$ 19,093,302
LIABILITIES
Accrued management fee......................................... $ 8,283
Accrued custodian and transfer agent fee....................... 1,710
Payable for securities purchased, not yet received............. 250,000 259,993
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NET ASSETS
Equivalent to $68.71 per share on 274,093 shares outstanding......................... $ 18,833,309
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</TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1995........................................................ $ 16,978,753
Net investment income, per statement below..................... $ 292,558
Net accrued income in price of shares sold and repurchased..... 3,899
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296,457
Distribution to shareholders................................... 265,950 30,507
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Fund shares issued and repurchased:
Received for 26,023 shares issued............................ 1,741,463
Paid for 11,566 shares repurchased........................... 770,801 970,662
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Increase in unrealized net appreciation (depreciation) of investments................ 736,149
Net gain or (loss) realized from sales of securities................................. 117,238
Distribution from net realized gain.................................................. 0
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NET ASSETS, June 30, 1996............................................................ $ 18,833,309
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</TABLE>
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STATEMENT OF NET INVESTMENT INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................................................ $ 210,159
Interest............................................................................. 173,278
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$ 383,437
EXPENSES
Management fee (Note A)........................................ $ 53,274
Fees and expenses of custodian, transfer agent and dividend
disbursing agent (Note A)..................................... 15,471
Legal and auditing fees and expenses........................... 7,513
Insurance...................................................... 1,477
Other Fees and Expenses........................................ 13,144 90,879
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NET INVESTMENT INCOME................................................................ $ 292,558
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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.
Directors of the Fund not affiliated with Mairs and Power, Inc. received
compensation for meetings attended during this period totaling $2,700. No
compensation was paid to any other officer or director of the Fund.
SUPPLEMENTARY INFORMATION: 1) 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. 2) The annual meeting of
stockholders of Mairs and Power Income Fund, Inc. was held on Monday, May 20,
1996, at 11:00 A.M. Proxies representing 224,983 shares were received, which
represented 85% of the total outstanding shares. 3) Purchases and sales of
investment securities during the six months ended June 30, 1996 aggregated
$1,773,611 and $552,965 respectively.
<PAGE>
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MAIRS AND POWER
INCOME FUND, INC.
---------------------------
A NO-LOAD FUND
W-2062 FIRST NATIONAL BANK BUILDING,
332 MINNESOTA STREET, ST. PAUL, MINNESOTA 55101
612-222-8478
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, 1986 126,862 5,395,111 42.53 3.74 1.95
Dec. 31, 1987 147,717 5,772,298 39.08 2.18 2.11
Dec. 31, 1988 158,713 6,569,555 41.39 0.84 2.23
Dec. 31, 1989 172,243 7,886,058 45.78 0.66 2.15
Dec. 31, 1990 183,079 8,075,488 44.11 0.13 2.13
Dec. 31, 1991 200,138 10,676,264 53.34 0.00 1.99
Dec. 31, 1992 214,336 11,535,822 53.82 0.60 1.99
Dec. 31, 1993 238,430 13,441,576 56.38 1.25 1.98
Dec. 31, 1994 247,484 12,972,976 52.42 0.74 2.06
Dec. 31, 1995 259,636 16,978,753 65.39 0.55 2.04
June 30, 1996 274,093 18,833,309 68.71 1.00
</TABLE>
No adjustment has been made for any income tax payable by stockholders on
capital gains 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, 1996) ARE AS FOLLOWS:
1 YEAR: +17.9% 5 YEARS: +12.4% 10 YEARS: +10.8%
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
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<TABLE>
<S> <C> <C> <C>
William B. Frels George A. Mairs, III Peter G. Robb Lisa J. Hartzell
President and Director Secretary and Vice-President and Treasurer
Director Director
Litton E. S. Field Donald E. Garretson J. Thomas Simonet
Director Director Director
</TABLE>
