<PAGE>
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MAIRS AND POWER
INCOME FUND, INC.
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3RD QUARTER REPORT
September 30, 1996
332 Minnesota Street
W-2062 First National Bank Building
St. Paul, Minnesota 55101
612-222-8478
<PAGE>
November 14, 1996
To Our Shareholders:
THIRD QUARTER RESULTS
The Income Fund recorded further gains in the third quarter as the stock
market continued to perform magnificently and the bond market did an about face
from a disappointing first half. Based on a net asset value of $70.75 per share
on September 30, 1996, the Fund produced a total investment return of 3.8%
during the quarter after adjustment for the reinvestment of cash dividends. This
compared with respective returns of 4.6% for the Dow Jones Industrial Average,
3.1% for the Standard & Poor's 500 and 1.8% for the Lehman Bros. Gov't/Corp.
Bond Index. For the first nine months, the Fund broke into "double digits" with
a 10.7% total return as compared to comparable returns of 16.9% for the DJIA,
13.5% for the S&P 500 and a negative 0.2% for the Lehman Bros. Gov't/Corp. Bond
Index. The Fund continued to compare favorably with a CDA/Wiesenberger universe
of 278 balanced mutual funds which had a 7.6% return since the beginning of the
year.
Overall economic growth as measured by Gross Domestic Product slipped to a
more sustainable 2.2% annual rate (preliminary basis) in the third quarter from
an unusually high 4.7% rate reported for the second quarter. The primary cause
for the slowdown was a sharp drop-off in the rate of consumer spending growth
(+0.4%) which more than offset a jump in business spending (+18.9%). Inflation
remained under very good control in the quarter with the Consumer Price Index
advancing at only a 2.6% annual rate which compared with 4.0% and 3.1% rates for
the first and second quarters, respectively. Despite a slowing economy,
corporate profits turned in a remarkably strong performance as indicated by a
recent BUSINESS WEEK survey of 900 companies which showed a year to year gain of
some 13%.
Reflecting the continuing strength in corporate profits, the stock market
increased for the seventh consecutive quarter in the third quarter. The best
performing groups included financials, health care, technology and certain
selected basic industries (chemicals and papers). In line with the slowdown in
consumer spending, the worst performing groups included consumer (cyclicals and
services), transportation, utilities and most industrial groups sensitive to
changes in the overall level of economic activity. Among the individual company
holdings in the Fund, Hershey Foods (+37.0%), IBM (+25.8%), and Norwest (+16.8%)
performed the best while Sturm, Ruger (-16.8%), GTE (-14.0%) and Hormel Foods
(-12.6%) fared the worst.
FUTURE OUTLOOK
Current indications are that the slower rate of economic growth in evidence in
the third quarter will continue in the fourth quarter and on into 1997. While
the rate of business spending may slip from the torrid pace in the third
quarter, consumer spending is expected to pick-up the slack with personal income
growth continuing unabated. If a more normal growth in consumer spending resumes
as we project, recent concerns over unplanned inventory accumulation will prove
to be premature. Considering the outlook for continuing economic growth,
corporate profits should also continue expanding although at a somewhat slower
rate in the 5-10% range as the benefits from past restructuring moves begin to
diminish.
With inflation expected to remain well in check over the near term, prospects
seem to favor continued improvement for the bond market. However, this
improvement will likely take place more at the longer end of the yield curve
unless the Federal Reserve makes a move to stimulate the economy. We do not
think this will happen as long as the economy continues to show some forward
progress and inflation concerns are still around.
Turning to the stock market, we continue to have a positive outlook despite
the strength shown over the past couple of years. While valuation levels have
moved up, they still appear to be well below past extremes when the market sold
above 20 times estimated coming year earnings. Thus, as long as prospects favor
rising corporate earnings and stable to falling interest rates, a constructive
attitude toward the stock market still seems warranted.
William B. Frels
<PAGE>
SCHEDULE OF INVESTMENTS AT SEPTEMBER 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 12.4%
$200,000 U.S. Treasury Notes 7.125% 9/30/99 $ 197,172 $ 204,563
250,000 Federal Home Loan Bank 7.03% 5/21/01 250,000 250,600
250,000 Federal Home Loan Bank 7.48% 6/28/01 250,000 251,623
250,000 Federal Home Loan Bank 7.42% 7/08/03 250,000 251,705
250,000 Federal Home Loan Bank 7.20% 9/11/03 250,000 248,303
250,000 Federal Home Loan Mortgage Corporation 7.00% 3/24/03 250,000 248,200
250,000 Federal Home Loan Mortgage Corporation 7.30% 7/27/05 250,000 245,988
250,000 Federal Home Loan Mortgage Corporation 7.00% 3/13/06 250,000 240,815
250,000 Federal National Mortgage Association 6.67% 2/06/06 249,531 239,844
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 238,280
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2,443,453 2,419,921
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OTHER NON-CONVERTIBLE BONDS 9.9%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 241,563
250,000 Household Finance Corp. 7.00% 2/15/03 250,000 248,078
265,000 J. C. Penney & Co. 6.00% 5/01/06 239,613 239,841
250,000 Merrill Lynch and Co., Inc. 7.00% 4/27/08 247,978 241,875
250,000 General Foods Corporation 7.00% 6/15/11 240,000 234,718
250,000 Ford Motor Company Debentures 9.50% 9/15/11 199,836 234,184
250,000 Goldman Sachs & Company 8.00% 3/01/13 256,025 250,650
250,000 Allstate Corp. 7.50% 6/15/13 218,937 243,700
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1,902,139 1,934,609
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CONVERTIBLE BONDS 4.7%
150,000 General Signal Corporation 5.75% 6/01/02 147,375 165,000
150,000 Cray Research, Inc. 6.125% 2/01/11 101,000 115,312
250,000 Noram Energy 6.00% 3/15/12 150,600 206,875
150,000 Ashland, Inc. 6.75% 7/01/14 144,000 153,000
250,000 Cooper Industries, Inc. 7.05% 1/01/15 240,892 273,125
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783,867 913,312
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 7.1%
6,000 Bankers Trust New York Corporation $ 1.91 144,495 148,500
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 150,000
8,000 Boatman's Bancshares Pfd $ 1.75 243,245 382,000
5,000 The Bear Stearns Companies, Inc. Pf,
Series C $ 1.90 125,000 120,625
5,000 Community First Bankshares, Inc. $ 1.75 125,000 183,750
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 185,000
4,000 Provident Life & Accident Insurance Co. Pf $ 2.025 100,000 101,125
2,000 St. Paul Capital Pf $ 3.00 100,000 107,500
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1,131,460 1,378,500
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TOTAL FIXED INCOME SECURITIES 34.1% $ 6,260,919 $ 6,646,342
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COMMON STOCK COST VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
BASIC INDUSTRIES 7.2%
5,000 Cooper Industries, Inc. $ 171,431 $ 216,250
3,802 Delta Air Lines, Inc. 262,308 273,744
12,000 Graco Inc. 147,460 225,000
5,000 Ingersoll-Rand Company 61,341 237,500
8,000 Pentair, Inc. 51,782 212,000
5,000 Weyerhaeuser Company 135,368 230,625
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829,690 1,395,119
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CONSUMER 12.1%
7,000 American Greetings Class A 189,500 200,375
5,000 Briggs & Stratton Corporation 61,116 221,875
3,000 ConAgra, Inc. 94,063 147,750
5,000 Deluxe Corp. 132,596 188,750
3,000 The Dun & Bradstreet Corporation 146,260 178,875
2,000 Eastman Kodak Company 53,573 157,000
3,000 General Mills, Inc. 151,030 181,125
4,000 Genuine Parts Company 112,272 175,000
6,000 Hershey Foods Corporation 146,610 301,500
8,000 Hormel (Geo. A.) & Company 166,210 187,000
10,000 Jostens, Inc. 199,575 208,750
10,000 Sturm, Ruger & Co., Inc. 42,220 196,250
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1,495,025 2,344,250
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ENERGY 6.3%
4,000 Amoco Corporation 140,723 282,000
2,000 Exxon Corporation 20,793 166,500
2,500 Mobil Corporation 54,750 289,375
5,000 Murphy Oil Corporation 139,408 241,250
3,000 Schlumberger, Limited 105,048 253,500
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460,722 1,232,625
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FINANCIAL 14.6%
5,000 American Express Company 99,215 231,250
5,000 First Bank System, Inc. 58,358 334,375
5,000 Firstar Corp. 163,175 241,250
3,375 Jefferson-Pilot Corp. 60,323 174,656
6,000 Merrill Lynch & Co., Inc. 99,319 395,250
4,000 J.P. Morgan & Co., Inc. 102,082 355,500
20,000 Norwest Corporation 94,825 815,000
6,000 ReliaStar Financial Corporation 110,625 285,000
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787,922 2,832,281
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HEALTH CARE 9.2%
6,000 American Home Products Corporation 182,542 382,500
5,000 Baxter International Inc. 76,524 232,500
4,000 Bristol-Myers Squibb Company 205,562 385,500
10,000 Pfizer Inc. 136,357 791,250
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600,985 1,791,750
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<PAGE>
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COMMON STOCK COST VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
TECHNOLOGY 9.8%
5,000 AMP Incorporated $ 133,605 $ 193,750
7,000 Corning Inc. 188,965 273,000
3,000 Emerson Electric Co. 128,697 270,375
5,000 Honeywell Inc. 90,716 315,625
2,000 International Business Machines
Corporation 96,740 249,000
10,000 MTS Systems Corporation 81,500 197,500
3,000 Minnesota Mining & Manufacturing Company 75,000 209,250
10,000 National Computer Systems, Inc. 121,380 205,000
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916,603 1,913,500
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UTILITIES 3.2%
7,000 GTE Corporation 96,007 269,500
5,000 Texas Utilities Company 183,482 198,750
5,000 U S West Communications 111,040 149,375
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390,529 617,625
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TOTAL COMMON STOCK 62.4% $ 5,481,476 $ 12,127,150
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Other Assets in Excess of Liabilities 3.5% 672,114
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NET ASSETS 100% $ 11,742,395 $ 19,445,606
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</TABLE>
<PAGE>
STATEMENT OF NET ASSETS AT SEPTEMBER 30, 1996
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $9,298,942)..................................... $ 16,353,568
U.S. Governments (cost $2,443,453)............................................................ 2,419,921
Cash.......................................................................................... 568,837
Dividends and interest receivable............................................................. 101,528
Receivables for securities sold, not yet delivered............................................ 0
Prepaid expense............................................................................... 12,921
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$ 19,456,775
LIABILITIES
Accrued management fee.................................................... $ 9,720
Accrued custodian and transfer agent fee.................................. 1,449
Payable for securities purchased, not yet received........................ 0 11,169
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NET ASSETS
Equivalent to $70.75 per share on 274,862 shares outstanding.................................. $ 19,445,606
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</TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1995................................................................. $ 16,978,753
Net investment income, per statement below................................ $ 451,215
Net accrued income in price of shares sold and repurchased................ 3,255
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454,470
Distribution to shareholders.............................................. 416,345 38,125
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Fund shares issued and repurchased:
Received for 33,101 shares issued....................................... 2,226,606
Paid for 17,875 shares repurchased...................................... 1,197,194 1,029,412
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Increase in unrealized net appreciation (depreciation) of investments......................... 1,208,275
Net gain or (loss) realized from sales of securities.......................................... 191,041
Distribution from net realized gain........................................................... 0
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NET ASSETS, September 30, 1996................................................................ $ 19,445,606
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</TABLE>
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STATEMENT OF NET INVESTMENT INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends..................................................................................... $ 309,965
Interest...................................................................................... 276,599
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586,564
EXPENSES
Management fee (Note A)................................................... $ 82,701
Fees and expenses of custodian, transfer agent and dividend disbursing
agent (Note A)........................................................... 19,516
Legal and auditing fees and expenses...................................... 11,269
Insurance................................................................. 2,146
Other Fees and Expenses................................................... 19,717 135,349
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NET INVESTMENT INCOME......................................................................... $ 451,215
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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 $3,712. 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) Purchases and sales of
investment securities during the nine months ended September 30, 1996 aggregated
$2,132,461 and $1,130,533 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
Sept. 30, 1996 274,862 19,445,606 70.75 1.55
</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 SEPTEMBER 30, 1996) ARE AS FOLLOWS:
1 YEAR: +16.1% 5 YEARS: +12.2% 10 YEARS: +11.6%
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 Secretary and Vice-President and Treasurer
Director Director Director
Litton E.S. Field Donald E. Garretson J. Thomas Simonet
Director Director Director
</TABLE>
<PAGE>
MAIRS AND POWER
INCOME FUND, INC.
