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MAIRS AND POWER
INCOME FUND, INC.
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1ST QUARTER REPORT
March 31, 1997
332 Minnesota Street
W-2062 First National Bank Building
St. Paul, Minnesota 55101
612-222-8478
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May 23, 1997
To Our Shareholders
FIRST QUARTER RESULTS
The Income Fund continued to perform relatively well during the first quarter
in response to further strength in the stock market. Based on a March 31, 1997
net asset value of $74.82 per share, the Fund produced a total investment return
of 2.3% after adjustment for the reinvestment of cash dividends. Comparable
first quarter investment returns for the Standard & Poor's 500 Stock Index and
Lehman Brothers Gov't/Corp. Bond Index were 2.7% and -0.9%, respectively. The
Fund compared favorably with a CDA/Wiesenberger universe of 326 balanced mutual
funds which evidenced only a composite break-even return during the first
quarter.
The economy exhibited surprising strength during the first quarter with real
Gross Domestic Product expanding at a 5.6% seasonally adjusted annual rate
(preliminary basis). Consumer spending rose a remarkable 6.4% rate while
business spending increased at an even faster rate. However, the strong showing
may have borrowed a bit from the second quarter due to a surge in inventories.
Despite the overall economic strength, inflation remained quite under control
with the Consumer Price Index rising at only a mere 1.8% annual rate during the
period. Interest rates rose slightly during the quarter mainly in response to a
1/4% rise in the Fed Funds rate representing a modest tightening of monetary
policy by the Federal Reserve. Based on a WALL STREET JOURNAL survey of 707
large companies, corporate earnings continued to grow at an above average 18%
annual rate.
Reflecting the continuing strength in corporate profits, the stock market
again reached record highs during the first quarter. The best performing sectors
of the market included consumer cyclicals (retailing), consumer staples (soft
drinks), energy, financial and health care while basic industries, technology
and utilities were among the worst performers. Large company stocks with records
of consistent growth also did better than either cyclicals or small company
stocks. Within the Fund, the best performing issues included Dow Jones (+19.9%),
Delta Air Lines (+18.7%) and Graco (+17.3%) while the poorest performing issues
included Sturm, Ruger (-18.1%), Texas Utilities (-16.0%) and Murphy Oil
(-15.5%).
FUTURE OUTLOOK
While the rate of future economic growth seems likely to slow from the torrid
pace of the first quarter, the outlook still seems to be relatively favorable.
Continuing growth in employment suggests further gains in personal income and
higher consumer spending. Although the level of installment debt is high and
continues to grow, the ability of consumers to service higher debt levels is
also improving. The outlook for inflation remains favorable barring any
surprises in the areas of food and energy. Unit labor costs appear under good
control and intense world competition limits the ability of corporations to
raise prices. However, despite the difficulty in raising prices, corporate
earnings seem likely to continue growing at a near "double digit" rate as a
result of further improvements in productivity.
Although the bond market declined slightly in the first quarter, we remain
optimistic about prospects over the remainder of the year. Assuming some
slowdown in the rate of economic growth and inflation remaining subdued, the
likelihood of any further Federal Reserve action would seem remote.
Consequently, with real interest rates at historically high levels, the odds
have improved that fixed income investments will at least earn their coupons and
provide some opportunity for appreciation, especially in the longer term
maturities.
Turning to the stock market, the outlook remains favorable even though
valuation levels are on the high side historically. Unless interest rates move
up significantly or the outlook for corporate profits deteriorates, a strong
argument can be made to justify valuations remaining near current levels. In
fact, price/earnings ratios have historically ranged at or above current levels
when the inflation rate has been 2 1/2% or less. Based on current estimates of
1997 operating earnings, the price/earnings ratio on the Standard & Poor's 500
Stock Index is now approximately 19 times.
NAME CHANGE
On May 19, 1997, the shareholders approved an amendment to the Articles of
Incorporation allowing the Fund to change its name to the Mairs and Power
Balanced Fund, Inc. The change was made to more accurately reflect the Fund's
investment policies and objectives and also provide a greater opportunity for
the Fund to be compared against other similar funds.
William B. Frels
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SCHEDULE OF INVESTMENTS AT MARCH 31, 1997
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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 16.9%
$200,000 U.S. Treasury Notes 7.125% 09/30/99 $ 197,172 $ 202,688
250,000 Federal Home Loan Bank 6.01% 12/04/98 250,000 248,203
250,000 Federal Home Loan Bank 6.85% 10/10/00 249,844 249,062
250,000 Federal Home Loan Bank 7.025% 05/21/01 250,000 249,453
250,000 Federal Home Loan Bank 7.48% 06/28/01 250,000 251,094
250,000 Federal Home Loan Bank 6.455% 02/22/02 250,000 244,610
250,000 Federal Home Loan Bank 6.885% 07/29/02 250,000 247,031
250,000 Federal Home Loan Bank 7.42% 07/08/03 250,000 249,922
250,000 Federal Home Loan Bank 7.20% 09/11/03 250,000 247,031
250,000 Federal Home Loan Mortgage Corporation 7.00% 03/24/03 250,000 246,250
250,000 Federal Home Loan Mortgage Corporation 7.30% 07/27/05 250,000 242,735
250,000 Federal Home Loan Mortgage Corporation 7.00% 03/13/06 250,000 241,562
250,000 Federal National Mortgage Association 6.67% 02/06/06 249,531 239,531
250,000 Federal National Mortgage Association 7.50% 02/02/07 250,000 246,750
250,000 Federal National Mortgage Association 7.15% 11/03/10 246,750 238,516
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3,693,297 3,644,438
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OTHER NON-CONVERTIBLE BONDS 8.9%
250,000 Dupont (E.I.) de Nemours & Company 6.00% 12/01/01 249,750 240,625
250,000 Household Finance Corp. 7.00% 02/15/03 250,000 246,328
265,000 J. C. Penney & Co. 6.00% 05/01/06 239,613 239,328
250,000 Merrill Lynch and Co., Inc. 7.00% 04/27/08 247,977 240,703
250,000 General Foods Corporation 7.00% 06/15/11 240,000 230,703
200,000 Ford Motor Company Debentures 9.50% 09/15/11 199,836 231,438
250,000 Goldman Sachs & Company 8.00% 03/01/13 256,025 251,953
250,000 Allstate Corp. 7.50% 06/15/13 218,938 245,235
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1,902,139 1,926,313
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CONVERTIBLE BONDS 2.2%
150,000 Cray Research, Inc. 6.125% 02/01/11 101,000 112,688
250,000 Noram Energy 6.00% 03/15/12 150,600 206,250
150,000 Ashland Oil 6.75% 07/01/14 144,000 153,000
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395,600 471,938
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NON-CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK 5.1%
6,000 Bankers Trust New York Corporation $ 1.91 144,495 153,750
6,000 Barclays Bank PLC, Series E $ 2.00 150,000 150,000
5,000 The Bear Stearns Companies, Inc. Pf,
Series C $ 1.90 125,000 127,500
5,000 Community First Bankshares, Inc. $ 1.75 125,000 243,750
2,500 J. P. Morgan & Co., Series A, Adj Rate Pf $ 5.00 143,720 192,500
4,000 Provident Life & Accident Insurance Co. Pf $ 2.025 100,000 103,500
2,000 St. Paul Capital Pf $ 3.00 100,000 119,000
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888,215 1,090,000
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TOTAL FIXED INCOME SECURITIES 33.1% $ 6,879,251 $ 7,132,689
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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 9.1%
9,991 Cooper Industries, Inc. $ 372,604 $ 433,360
3,802 Delta Air Lines, Inc. 262,307 319,843
5,000 General Signal Corp. 195,449 195,625
12,000 Graco Inc. 147,460 345,000
5,000 Ingersoll-Rand Company 61,341 218,125
8,000 Pentair, Inc. 51,782 231,000
5,000 Weyerhaeuser Company 135,368 223,125
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1,226,311 1,966,078
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CONSUMER 10.5%
7,000 American Greetings Class A 189,500 223,563
5,000 Briggs & Stratton Corporation 61,116 224,375
6,000 Deluxe Corp. 164,591 193,500
5,000 Dow Jones & Company, Inc. 171,125 203,125
2,000 Eastman Kodak Company 53,573 152,000
3,000 General Mills, Inc. 151,031 186,375
4,000 Genuine Parts Company 112,273 186,500
6,000 Hershey Foods Corporation 146,610 300,000
8,000 Hormel (Geo. A.) & Company 166,210 205,000
10,000 Jostens. Inc. 199,575 226,250
10,000 Sturm, Ruger & Co., Inc. 42,220 158,750
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1,457,824 2,259,438
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ENERGY 6.7%
4,000 Amoco Corporation 140,723 346,500
2,000 Exxon Corporation 20,793 215,500
2,500 Mobil Corporation 54,750 326,563
5,000 Murphy Oil Corporation 123,696 235,000
3,000 Schlumberger, Limited 105,048 321,750
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445,010 1,445,313
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FINANCIAL 17.7%
5,000 American Express Company 99,215 299,375
5,000 First Bank System, Inc. 58,358 365,000
10,000 Firstar Corp. 163,175 275,000
3,375 Jefferson-Pilot Corp. 60,323 183,516
6,000 Merrill Lynch & Co., Inc. 99,319 515,250
4,000 J.P. Morgan & Co., Inc. 102,082 393,000
9,001 NationsBank Corp. 243,245 499,555
20,000 Norwest Corporation 94,825 925,000
6,000 ReliaStar Financial Corp. 110,625 354,750
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1,031,167 3,810,446
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HEALTH CARE 9.0%
1,000 Allegiance Corp. 5,773 22,125
6,000 American Home Products Corporation 182,542 360,000
5,000 Baxter International Inc. 70,751 215,625
8,000 Bristol-Myers Squibb Company 205,563 472,000
1,500 Covance, Inc. 20,505 24,187
10,000 Pfizer Inc. 136,357 841,250
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621,491 1,935,187
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</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COMMON STOCKS COST VALUE
- --------- ---------------------------------------------- ------------ ------------
<C> <S> <C> <C>
TECHNOLOGY 9.5%
5,000 AMP Incorporated $ 133,605 $ 171,875
6,000 Corning Inc. 134,678 266,250
6,000 Emerson Electric Co. 128,697 270,000
5,000 Honeywell Inc. 90,716 339,375
2,000 International Business Machines Corporation 96,740 274,500
10,000 MTS Systems Corporation 81,500 220,000
3,000 Minnesota Mining & Manufacturing Company 75,000 253,875
10,000 National Computer Systems, Inc. 121,380 252,500
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862,316 2,048,375
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UTILITIES 3.2%
7,000 GTE Corporation 96,007 326,375
5,000 Texas Utilities Company 183,482 171,250
6,000 U S West Communications 142,035 203,250
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421,524 700,875
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TOTAL COMMON STOCK 65.7% $ 6,065,643 $ 14,165,712
Other Assets in Excess of Liabilities 1.2% 251,646
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NET ASSETS 100% $ 12,944,894 $ 21,550,047
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</TABLE>
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STATEMENT OF NET ASSETS AT MARCH 31, 1997
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<TABLE>
<S> <C> <C> <C>
ASSETS
Investments as annexed, at market value (cost $9,251,597)............................ $ 17,653,962
U.S. Governments (cost $3,693,297)................................................... 3,644,439
Cash................................................................................. 402,370
Dividends and interest receivable.................................................... 108,134
Receivables for securities sold, not yet delivered................................... 0
Prepaid expense...................................................................... 2,459
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$ 21,811,364
LIABILITIES
Accrued management fee......................................... $ 10,771
Accrued custodian and transfer agent fee....................... 702
Payable for securities purchased, not yet received............. 249,844 261,317
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NET ASSETS
Equivalent to $74.82 per share on 288,027 shares outstanding......................... $ 21,550,047
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</TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<S> <C> <C> <C>
NET ASSETS, December 31, 1996........................................................ $ 20,565,014
Net investment income, per statement below..................... $ 149,834
Net accrued income in price of shares sold and repurchased..... 2,405
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152,239
Distribution to shareholders................................... 157,587 (5,348)
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Fund shares issued and repurchased:
Received for 33,101 shares issued............................ 1,168,877
Paid for 17,875 shares repurchased........................... 502,451 666,426
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Increase in unrealized net appreciation (depreciation) of investments................ 293,226
Net gain or (loss) realized from sales of securities................................. 30,729
Distribution from net realized gain.................................................. 0
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NET ASSETS, March 31, 1997........................................................... $ 21,550,047
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</TABLE>
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STATEMENT OF NET INVESTMENT INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................................................ $ 99,654
Interest............................................................................. 103,042
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$ 202,696
EXPENSES
Management fee (Note A)........................................ $ 32,835
Fees and expenses of custodian, transfer agent and dividend
disbursing agent (Note A)..................................... 3,862
Legal and auditing fees and expenses........................... 5,284
Insurance...................................................... 743
Other Fees and Expenses........................................ 10,138 52,862
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NET INVESTMENT INCOME................................................................ $ 149,834
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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 $-0-. 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 three months ended March 31, 1997 aggregated
$1,047,918 and $92,945 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, 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
Dec. 31, 1996 279,117 20,565,014 73.68 1.08 2.20
Mar. 31, 1997 288,027 21,550,047 74.82 0.55
</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 MARCH 31, 1997) ARE AS FOLLOWS:
1 YEAR: +15.6% 5 YEARS: +12.7% 10 YEARS: +10.9%
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>
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MAIRS AND POWER
INCOME FUND, INC.
