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MAIRS AND POWER
INCOME FUND, INC.
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1ST QUARTER REPORT
March 31, 1996
332 Minnesota Street
W-2062 First National Bank Building
St. Paul, Minnesota 55101
612-222-8478
<PAGE>
May 23, 1996
To Our Shareholders:
FIRST QUARTER RESULTS
The strong stock market gains of last year carried over into the first quarter
of 1996 and helped the Income Fund realize another relatively strong performance
despite a weaker bond market. Based on a net asset value of $67.74 per share on
March 31, 1996, the Fund earned a total investment return of 4.4% for the
quarter after adjustment for the reinvestment of cash dividends. This compared
with respective returns of 5.4% and 9.8% for the Standard and Poor's 500 and Dow
Jones Industrial Average and -2.3% for the Lehman Brothers Gov't/Corp. Bond
Index. The Fund's performance compared favorably with a 2.5% average return for
a CDA/Wiesenberger universe of 272 balanced funds.
The major event of the first quarter was a reversal in the bond market late in
the period when it became evident that the Federal Reserve would not pursue a
further easing of interest rates due to an unexpected pick-up in economic
activity. A higher rate of job creation together with a lower rate of
unemployment provided the impetus for a much needed rebound in consumer spending
after a weak Christmas season. Higher energy and food (especially grain) prices
added further support for the view that inflation would be higher in the months
ahead. However, unit labor costs, the major component of inflation, have yet to
show much evidence of moving up in any meaningful way.
As one might expect, the prospect of an improved economic outlook resulted in
a much better stock market performance for such cyclically sensitive sectors as
basic industries (chemicals, metals and mining), capital goods (agricultural
equipment) and consumer cyclicals (retailing). Other industries more sensitive
to interest rates such as utilities, home building and certain defensive
industries (food, tobacco and health care) performed relatively poorly.
Individual common stock holdings within the Fund that did the best included
Sturm, Ruger (+40.6%), IBM (+21.8%) and First Bank System (+20.2%) while US West
(-9.1%), Dun & Bradstreet (-6.4%) and Graco (-4.1%) did the worst.
FUTURE OUTLOOK
The economic outlook appears favorable over the remainder of the year although
the rate of growth seems likely to slow somewhat from the surprisingly strong
2.8% gain in real Gross Domestic Product reported for the first quarter. The
pace of consumer spending should moderate from the first quarter spurt given the
historically high level of installment debt outstanding. Notwithstanding the
fact that 1996 is an election year, government spending is also expected to
remain sluggish in light of the continuing attention being paid to the Federal
deficit. Business spending for plant and equipment is forecasted to remain
reasonably strong in view of a relatively high capacity utilization rate. The
outlook for export demand also continues bright due to the highly competitive
cost structure brought about by massive restructuring moves made by U.S.
manufacturers in recent years. Finally, corporate profits on an operating basis
give every indication of further growth although the rate seems likely to be
below the "double digit" levels of the past few years.
Reflecting a near perfect environment of steadily rising corporate profits and
low inflation, the stock market performed brilliantly last year and so far
during 1996. Aside from the possibility of a normal 5-10% correction which we
have yet to see since the beginning of the current move, there seems to be no
compelling reason why further progress cannot be expected in the months ahead.
Price/earnings ratio valuation levels remain comfortably below past peaks and
very much in line with other periods of low inflation (16-17x during years
having an inflation rate of 3 1/2% or less).
If inflation continues to be held in check as we project, interest rates
should show some decline over the near term as concerns over recent food and
energy price increases abate. Moreover, Federal Reserve policy seems likely to
remain accommodative even in the face of a faster rate of economic growth given
the fact that 1996 is a Presidential election year. Consequently, we look for
bonds to at least earn their coupons and more likely show some modest price
appreciation between now and the end of the year.
William B. Frels
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SCHEDULE OF INVESTMENTS AT MARCH 31, 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 11.2%
$300,000 U.S. Treasury Notes 7.00% 9/30/96 $ 300,000 $ 302,531
200,000 U.S. Treasury Notes 7.125% 9/30/99 197,172 207,063
250,000 Federal Home Loan Bank 7.48% 6/28/01 250,000 253,035
250,000 Federal Home Loan Mortgage Corporation 7.00% 3/24/03 250,000 249,063
250,000 Federal Home Loan Mortgage Corporation 7.30% 7/27/05 250,000 249,625
250,000 Federal Home Loan Mortgage Corporation 7.00% 3/13/06 250,000 246,125
250,000 Federal National Mortgage Association 6.67% 2/6/06 249,531 243,672
250,000 Federal National Mortgage Association 7.15% 11/3/10 246,750 246,205
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1,993,453 1,997,319
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OTHER NON-CONVERTIBLE BONDS 11.0%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/1/01 249,750 244,375
250,000 Household Finance Corp. 7.00% 2/15/03 250,000 250,372
265,000 J.C. Penney & Co. 6.00% 5/01/06 239,613 245,687
250,000 Merrill Lynch and Co., Inc. 7.00% 4/27/08 247,977 248,975
250,000 General Foods Corporation 7.00% 6/15/11 240,000 242,698
200,000 Ford Motor Company Debentures 9.50% 9/15/11 199,836 238,892
250,000 Goldman Sachs & Company 8.00% 3/01/13 256,025 255,807
250,000 Allstate Corp. 7.50% 6/15/13 218,937 248,765
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1,902,138 1,975,571
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CONVERTIBLE BONDS 4.8%
150,000 General Signal Corporation 5.75% 6/01/02 147,375 155,250
177,000 Pogo Producing Co. 8.00% 12/31/05 135,221 182,310
150,000 Cray Research, Inc. 6.125% 2/01/11 101,000 118,125
150,000 Ashland, Inc. 6.75% 7/01/14 144,000 153,000
250,000 Cooper Industries, Inc. 7.05% 1/01/15 240,892 258,750
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768,488 867,435
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 9.7%
6,000 Bankers Trust New York Corporation $ 1.91 144,495 150,750
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 151,500
7,000 Boatman's Bankshares Pfd $ 1.75 209,125 238,000
5,000 The Bear Stearns Companies, Inc. Pf,
Series C $ 1.90 125,000 123,125
5,000 Community First Bankshares, Inc. $ 1.75 125,000 167,500
5,000 Delta Air Lines, Inc. Pf, Series C $ 3.50 262,308 305,625
2,500 J.P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 185,625
5,000 Noram Energy Pf $ 3.00 150,600 202,500
4,000 Provident Life & Accident Insurance Co. Pf $ 2.025 100,000 103,500
2,000 St. Paul Capital Pf $ 3.00 100,000 113,000
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1,510,248 1,741,125
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TOTAL FIXED INCOME SECURITIES 36.7% $ 6,174,327 $ 6,581,450
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</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COMMON STOCKS COST VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
BASIC INDUSTRIES 5.9%
5,000 Cooper Industries, Inc. $ 171,431 $ 195,000
12,000 Graco Inc. 147,460 234,000
5,000 Ingersoll-Rand Company 61,341 203,750
8,000 Pentair, Inc. 51,782 202,000
5,000 Weyerhaeuser Company 135,368 230,625
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567,382 1,065,375
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CONSUMER 11.8%
7,000 American Greetings Class A 189,500 193,375
5,000 Briggs & Stratton Corporation 61,116 215,625
5,088 ConAgra, Inc. 159,531 206,700
6,000 Deluxe Corp. 159,116 188,250
3,000 The Dun & Bradstreet Corporation 146,260 181,875
2,000 Eastman Kodak Company 53,573 142,000
3,000 General Mills, Inc. 151,030 175,125
4,000 Genuine Parts Company 112,272 180,000
3,000 Hershey Foods Corporation 146,610 223,500
7,000 Hormel (Geo. A.) & Company 141,965 183,750
6,000 Sturm, Ruger & Co., Inc. 50,664 231,000
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1,371,637 2,121,200
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ENERGY 6.7%
4,000 Amoco Corporation 140,723 289,000
2,000 Exxon Corporation 20,793 163,000
2,500 Mobil Corporation 54,750 289,688
5,000 Murphy Oil Corporation 139,408 214,375
3,000 Schlumberger, Limited 105,048 237,375
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460,722 1,193,438
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FINANCIAL 14.8%
5,000 American Express Company 99,215 246,875
5,000 First Bank System, Inc. 58,358 298,125
5,000 Firstar Corp. 163,175 223,750
3,375 Jefferson-Pilot Corp. 60,323 181,828
6,000 Merrill Lynch & Co., Inc. 99,319 364,500
4,000 J.P. Morgan & Co., Inc. 102,082 332,000
20,000 Norwest Corporation 94,825 735,000
6,000 ReliaStar 110,625 271,500
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787,922 2,653,578
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HEALTH CARE 8.7%
3,000 American Home Products Corporation 182,542 325,125
5,000 Baxter International Inc. 76,524 226,250
4,000 Bristol-Myers Squibb Company 205,562 342,375
10,000 Pfizer Inc. 136,357 672,500
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600,985 1,566,250
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</TABLE>
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COMMON STOCKS COST VALUE
- --------- ------------------------------------------ ------------ ------------
<C> <S> <C> <C>
TECHNOLOGY 9.9%
5,000 AMP Incorporated $ 133,605 $ 206,875
7,000 Corning Inc. 188,965 245,000
3,000 Emerson Electric Co. 128,697 242,250
5,000 Honeywell Inc. 90,716 276,250
International Business Machines
2,000 Corporation 96,740 222,500
5,000 MTS Systems Corporation 81,500 187,500
3,000 Minnesota Mining & Manufacturing Company 78,077 193,875
10,000 National Computer Systems, Inc. 121,380 202,500
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919,680 1,776,750
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UTILITIES 3.8%
7,000 GTE Corporation 96,007 306,250
5,000 Texas Utilities Company 183,482 206,875
5,000 U S West Communications 111,040 161,875
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390,529 675,000
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TOTAL COMMON STOCK 61.7% $ 5,098,857 $ 11,051,591
Other Assets in Excess of Liabilities 1.6% 295,058
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NET ASSETS 100.0% $ 11,273,184 $ 17,928,099
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</TABLE>
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STATEMENT OF NET ASSETS AT MARCH 31, 1996
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $9,279,731).............................. $ 15,635,722
U.S. Governments (cost $1,993,453)..................................................... 1,997,319
Cash................................................................................... 183,518
Dividends and interest receivable...................................................... 115,068
Receivables for securities sold, not yet delivered..................................... 0
Prepaid expense........................................................................ 8,267
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$ 17,939,894
LIABILITIES
Accrued management fee........................................... $ 8,960
Accrued custodian and transfer agent fee......................... 2,835
Payable for securities purchased, not yet received............... 0 11,795
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NET ASSETS
Equivalent to $67.74 per share on 264,654 shares outstanding........................... $ 17,928,099
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</TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1995.......................................................... $ 16,978,753
Net investment income, per statement below....................... $ 141,485
Net accrued income in price of shares sold and repurchased....... 515
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142,000
Distribution to shareholders..................................... 132,007 9,993
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Fund shares issued and repurchased:
Received for 14,051 shares issued.............................. 926,152
Paid for 9,034 shares repurchased.............................. 599,957 326,195
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Increase in unrealized net appreciation (depreciation) of investments.................. 537,038
Net gain or (loss) realized from sales of securities................................... 76,120
Distribution from net realized gain.................................................... 0
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NET ASSETS, March 31, 1996............................................................. $ 17,928,099
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</TABLE>
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STATEMENT OF NET INVESTMENT INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends.............................................................................. $ 103,567
Interest............................................................................... 83,623
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$ 187,190
EXPENSES
Management fee (Note B).......................................... $ 26,731
Fees and expenses of custodian, transfer agent and dividend
disbursing agent (Note B)....................................... 7,837
Legal and auditing fees and expenses............................. 3,756
Insurance........................................................ 809
Other Fees and Expenses.......................................... 6,572 45,705
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NET INVESTMENT INCOME.................................................................. $ 141,485
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</TABLE>
NOTE A: No provision has been made for Federal income taxes as it is the
intention of the Fund to comply with the provision 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.
NOTE B: 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 no
compensation for meetings attended during this period. No compensation was paid
to any other officer or director of the Fund.
SUPPLEMENTARY INFORMATION: Purchases and sales of investment securities during
the three months ended March 31, 1996 aggregated $1,124,521 and $476,883
respectively.
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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
Mar. 31, 1996 264,654 17,928,099 67.74 0.00 0.50
</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 MARCH 31, 1996) ARE AS FOLLOWS:
1 YEAR: +24.3% 5 YEARS: +12.3% 10 YEARS: +10.9%
PAST INVESTMENT RESULTS SHOULD NOT BE TAKEN AS NECESSARILY REPRESENTATIVE
OF FURTURE 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 Kathleen M. Kellerman
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>
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MAIRS AND POWER
INCOME FUND, INC.
