Report for the Six Months Ended June 30, 1996
REAL SILK INVESTMENTS, INCORPORATED
Indianapolis Indiana
____________________
OFFICERS
D. R. Efroymson President and Treasurer
L. M. Efroymson Vice President
M. A. Singer Assistant Vice President
J. D. Hagan Assistant Vice President
L. A. Cox Secretary
D. A. Link Assistant Secretary
DIRECTORS
Daniel R. Efroymson Herbert D. Falender
Loralei M. Efroymson Norman C. Kleifgen, Jr.
Terry W. Bowmaster
Mary Ann Stein
Samuel L. Odle
TRANSFER AGENT AND REGISTRAR CUSTODIAN OF SECURITIES
ChaseMellon Shareholder Services, L.L.C. NBD Bank, N.A.
Pittsburgh, Pennsylvania Indianapolis, Indiana
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
Indianapolis, Indiana
REAL SILK INVESTMENTS, INCORPORATED
Financial Statements
June 30, 1996
Table of Contents
Page
Financial Statements:
Statement of Assets and Liabilities 2
Statement of Operations 3
Statements of Changes in Net Assets 4
Selected Per Share Data for Capital Stock Outstanding Throughout
Each Period and Selected Ratios and Supplemental Data 5
Notes to Financial Statements 6-9
Additional Information:
Schedule of Investments in Securities 10-14
REAL SILK INVESTMENTS, INCORPORATED
Statement of Assets and Liabilities
June 30, 1996
Assets
Investments in securities (unaffiliated issuers), at market value:
Money market funds (cost: $380,314) $380,314
Common shares (cost: $11,166,883) 85,492,602
U.S. government and agency securities (cost: $8,324,959) 8,458,885
Bonds and notes (cost: $3,034,368) 3,095,394
Total investments in securities (unaffiliated issuers)97,427,195
Investments in securities (affiliated issuers), at market value:
Common shares (cost: $147,786) (note 4) 8,550,000
Total investments in securities 105,977,195
Cash 8,616
Accrued interest and dividends receivable 355,398
Other assets 2,542
Office furniture and equipment, less accumulated
depreciation of $45,897 41,451
Total assets 106,385,202
Liabilities
Accounts payable and accrued expenses 2,781
Deferred federal income tax payable on net built-in gains (note 1) 12,863,809
Total liabilities 12,866,590
Net Assets
Equivalent to $567.87 per share based on 164,683 shares of
$5.00 par value common stock outstanding (note 2) $93,518,612
See accompanying notes to financial statements.
This statement was prepared by the Company and was not examined by the
independent auditors.
REAL SILK INVESTMENTS, INCORPORATED
Statement of Operations
Six months ended June 30, 1996
Investment income:
Dividends, including affiliated issuers of $132,000 (note 4) $ 1,047,848
Interest on securities from unaffiliated issuers 408,673
Total income 1,456,521
Expenses:
Officers' salaries 50,752
Salaries and wages 14,338
Taxes other than federal income tax 22,919
Legal, auditing and other professional services 27,746
Custodian fees 3,880
Directors' fees 5,200
Office expense and supplies 2,697
Insurance 4,592
Rent (note 7) 24,255
Pension (note 5) 3,222
Depreciation 4,099
Dues and subscriptions 5,237
Computer expense 3,599
Equipment lease 8,199
Sundry 6,913
Total expenses 187,648
Net investment income 1,268,873
Net realized gain (loss) on investment securities (unaffiliated issuers):
Proceeds from sales 6,598,801
Cost of securities sold 5,970,821
627,980
Federal income tax (note 1) 19,268
Net realized gain (loss) on investments (note 3) 608,712
Unrealized appreciation in value of investments:
Beginning of period (January 1, 1996) 85,139,782
End of period (June 30, 1996) 82,922,885
(2,216,897)
Net(increase) decrease in deferred federal income tax payable (note 1) (16,581)
Net decrease in unrealized appreciation, including an
affiliated issuers decrease of $1,875,000 (note 4) (2,233,478)
Net realized and unrealized gain (loss) on investments (1,624,766)
Net increase (decrease) in net assets resulting from operations $ (355,893)
See accompanying notes to financial statements.
This statement was prepared by the Company and was not examined by the
independent auditors.
REAL SILK INVESTMENTS, INCORPORATED
Statements of Changes in Net Assets
Six months ended June 30, 1996 and 1995
1996 1995
Net investment income $ 1,268,873 1,231,995
Net realized gain (loss) on investments 608,712 (22,630)
Net increase (decrease) in unrealized appreciation (2,233,478) 4,417,157
Net increase (decrease) in net assets resulting
from operations (355,893) 5,626,522
Distributions to stockholders from:
Net investment income ($5.00 and $5.00 per
share, respectively) (note 1) (823,415) (823,415)
Net realized gain on investments (note 1) - -
Additional paid-in capital (note 1) - -
Increase (decrease) in net assets (1,179,308) 4,803,107
Net assets at beginning of period 94,697,920 83,186,717
Net assets at end of period (including in 1996: undistributed
net investment income of $1,177,796 and undistributed
net realized capital gain of $377,287; including in 1995:
undistributed net investment income of $1,129,112 and
undistributed net realized capital loss of $44,728). $93,518,612 87,989,824
See accompanying notes to financial statements.
This statement was prepared by the Company and was not examined by the
independent auditors.
REAL SILK INVESTMENTS, INCORPORATED
Selected Per Share Data for Capital Stock Outstanding Throughout Each Period and
Selected Ratios and Supplemental Data
Six months
ended
June 30, Year Ended December 31,
1996 1995 1994 1993 1992
Per share data Unaudited
Investment income $ 8.84 17.52 16.23 15.37 15.46
Less: expenses 1.14 2.17 1.92 1.68 1.88
Net investment income 7.70 15.35 14.31 13.69 13.58
Net realized gain (loss) on investments
3.70 (1.27) (.12) (.01) .28
Net increase (decrease) in unrealized
appreciation (13.56) 71.10 (26.29) 59.77 59.71
Net increase (decrease) in net assets
resulting from operations (2.16) 85.18 (12.10) 73.45 73.57
Distributions to stockholders from:
Net investment income (note 1) (5.00) (15.28) (13.92) (13.15) (12.00)
Net realized gains on investments
(note 1) - - - (.28) (1.17)
Additional paid-in capital (note 1) - - - .18 .78
Total increase (decrease) in net asset value
(7.16) 69.90 (26.02) 60.20 61.18
Net assets:
Beginning of period 575.03 505.13 531.15 470.95 409.77
End of period $ 567.87 575.03 505.13 531.15 470.95
Ratios and supplemental data: (for the six
months ended June 30, 1996, the ratios
are annualized to provide comparisons)
Expenses to average net assets .39% .41% .36% .33% .44%
Net investment income to average
net assets 2.65% 2.88% 2.71% 2.72% 3.20%
Portfolio turnover rate 2.71% 2.04% 1.07% 1.28% 4.51%
Average commission rate(1) $ 0.0700
Number of shares outstanding
at the end of the period 164,683 164,683 164,683 164,683 164,683
(1) Computed by dividing the total amount of commissions paid by the total
number of shares purchased or sold during the period for which there was a
commission charged.
See accompanying notes to financial statements.
This statement was prepared by the Company and was not examined by the
independent auditors.
Note 1 - Summary of Significant Accounting Policies
The significant accounting policies of Real Silk Investments,
Incorporated (the Company), which are in conformity with generally accepted
accounting principles for closed-end management investment companies, are
described below.
Investments
Investments in securities traded on national securities exchanges or
the NASDAQ National Market are valued at the last reported sales price.
Other securities traded on the over-the-counter market are valued at the
closing bid prices. Bonds and notes are valued on the basis of quotations
furnished by recognized trade sources. Purchases and sales of securities are
recorded as of the trade dates.
Investment Income
Dividend and interest income are recorded on the accrual basis of
accounting. Cash dividends from securities are recorded as income on the
ex-dividend dates. Dividends for which the recipient has the choice to
receive cash or stock are recognized as investment income in the amount
payable in cash. Other noncash dividends are recognized as investment income at
the fair market value of the property received.
Federal Income Tax
Prior to January 1, 1989, the Company was subject to federal income
tax as a regular ("C") corporation. Beginning January 1, 1989, the Company
qualified and elected to be taxed as a regulated investment company within the
meaning of Section 851 of the Internal Revenue Code and is currently
reporting tax on such basis. As a regulated investment company, the Company
generally does not pay federal income tax at the corporate level on current
earnings which are passed through to its stockholders.
The Tax Reform Act of 1986 gives the United States Treasury
Department the authority, under Section 337(d)(1), to promulgate regulations
to assure that the purposes of certain provisions of that Act (those taxing
appreciated property on the sale or liquidation of a corporation) are not
circumvented by the use of various entities, including regulated investment
companies. In Notice 88-19, Treasury stated its intention to issue
regulations generally making a C corporation taxable on built-in gains at the
time it converts to a regulated investment company, but permitting it to
elect to be subject to rules similar to those applicable to a corporation
which elects to be taxed as an S corporation. Those rules impose tax on the
built-in gains of a C corporation which are recognized during the first ten
years following its election to be an S corporation. If the intended
regulations were adopted as described in Notice 88-19, the appreciation of the
assets of the Company as of January 1, 1989 (the "built-in gains"), would be
taxed to the extent these gains are realized prior to January 1, 1999. To date,
no such regulations have been issued.
Because the authority to promulgate such regulations exists and because the
Treasury Department issued Notice 88-19, the Company has carried a liability
on its books for that potential tax and has deposited with the Internal Revenue
Service amounts representing the potential tax on realized built-in gains.
However, because no regulations have been issued, the Company, while
continuing to make the deposits, is also requesting a refund of the amounts
deposited, commencing with the three most recent tax years, to protect the
Company's right to those deposits should regulations not be issued. The Company
is contemplating making a request for a refund of amounts deposited in all
previous tax years. The Company cannot predict whether or when such regulations
will be issued or the response of the Internal Revenue Service to the Company's
request for a refund.
Also, the Company is a personal holding company as defined in Section
542 of the Internal Revenue Code. As a personal holding company, the Company is
subject to a special surtax on any undistributed personal holding company
income. However, the Company intends to distribute all of its personal holding
company income.
Distributions to Stockholders
The policy of the Company is to distribute all investment company
taxable income and to retain as much tax-exempt income as possible without
incurring tax at the corporate level and without jeopardizing the Company's
regulated investment company status. All or most of its realized capital gains
are retained.
As a regulated investment company, the Company may annually elect to
treat retained capital gains as distributed to its stockholders on the last day
of the year. The Company must pay a tax at the highest corporate rate on the
retained gains deemed distributed. The stockholders include these capital
gains in their individual income tax returns and receive a credit equal to their
share of the tax paid by the Company. The difference between the gains retained
by the Company and the tax paid by the Company on behalf of the stockholders is
added by the stockholders to the basis of their stock.
For the six-month period ended June 30, 1996, the Company realized
capital gains of $627,980 resulting in a net realized capital gain of $608,712
net of a built-in gains tax of $19,268 - (note 3).
For the year ended December 31, 1995, the Company realized capital
gains of $68,319 and capital losses of $274,046 resulting in a net realized
capital loss of $209,327. This net realized capital loss is available for use
until December 31, 2003. This is in addition to net realized capital losses
carried over from prior years. For the year ended December 31, 1994, $19,497 in
net realized capital loss was carried over and is available for use until
December 31, 2002; and for the year ended December 31, 1993, $2,601 was carried
over and is available for use until December 31, 2001.
Note 2 - Net Assets
The Company's net assets at June 30, 1996, were comprised of the
following elements:
Common stock, $5.00 par value; 300,000 shares
authorized, 164,683 shares issued and outstanding $ 19,856,479
Additional paid-in capital 2,047,974
21,904,453
Accumulated undistributed income:
Undistributed net investment income 1,177,796
Undistributed net realized losses (note 1) 377,287
Unrealized gains of $83,283,254 and unrealized losses of
$360,369, less deferred federal income tax of $12,863,809 70,059,076
Net assets at June 30, 1996 $ 93,518,612
Note 3 - Investments
Following is a summary of securities sold during the six months ended
June 30, 1996:
Proceeds from
Sales and Net Gain
Maturities Cost (Loss)
Money market funds $ 5,146,588 5,146,588 -
Common shares 852,213 224,233 627,980
Bonds and notes 600,000 600,000 -
U.S. government and agency securities - - -
Totals $ 6,598,801 5,970,821 627,980
Less provision for federal income tax 19,268
Net realized gain (loss) on investments $ 608,712
The provision for federal income tax is computed at a rate of 35% on
the built-in unrealized gains which existed at January 1, 1989 (the effective
date of the Company's election to be taxed as a regulated investment company-
note 1) and which were realized during the six month period ended June 30, 1996.
Net built-in gains realized during the six months ended June 30, 1996 were
$55,050 for which there was a provision for federal income tax of $19,268. As
discussed in Note 1, it is the Company's intent to request a refund from the IRS
of the built-in gain tax deposit.
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
June 30, 1996
The aggregate cost of securities acquired during the six months ended
June 30, 1996, was as follows:
Money market funds $ 4,999,481
Common shares 595,910
U.S. government and agency securities 498,555
Bonds and notes 974,345
Total purchase of securities $ 7,068,291
Note 4 - Investment in Affiliated Issuer
The Company is an affiliated company, as defined in Section 2(a)(2)
and 2(a)(3) of the Investment Company Act of 1940, with respect to its
investment in Arnold Industries, Inc. The Company and affiliated persons owned
more than five percent of the voting common stock of Arnold Industries, Inc., at
June 30, 1996.
Note 5 - Retirement Plan
The Company sponsors a money purchase pension plan for all employees of
the Company who have met certain service requirements. Annually, the Company
must contribute to the Plan an amount equal to five percent of each
participant's compensation. Pension expense for the six months ended June 30,
1996 was $3,222.
Note 6 - Line of Credit
The Company has an unsecured line of credit for short-term bank
borrowings of up to $5 million, with interest computed at the bank's prime rate.
The line of credit expires on July 1, 1997. At June 30, 1996, the entire line
of credit was unused.
Note 7 - Rent Commitment
In March 1993, the Company entered into a five-year operating lease for
office space. At June 30, 1996, the future minimum rental payments required by
the lease are as follows:
Required
Payable In Rent Payments
1996 $ 24,435
1997 50,335
1998 12,676
Total $ 87,446
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1996
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals
Portfolio
Money Market Funds (unaffiliated issuers):
Money Market Funds $ 380,314 .36%
Fidelity Cash Reserves Fund 204,317 $ 204,317
Woodward Money Market Fund 175,997 175,997
Total Money Market Funds $ 380,314 $ 380,314 .36%
Common Shares (unaffiliated issuers):
Automotive 1,416,000 1.34%
MascoTech, Inc. 96,000 1,416,000
Banking 3,635,808 3.43%
First Chicago NBD Corporation
formerly NBD Bancorp, Inc.) 92,928 3,635,808
Building Materials 200,288 .19%
Ply-Gem Industries, Inc. 14,700 200,288
Chemicals 267,500 .25%
Sigma-Aldrich Corporation 5,000 267,500
Diversified 1,885,541 1.78%
Hanson PLC 29,075 412,487
TRW, Inc. 16,000 1,438,000
U.S. Industries, Inc. 1,453 35,054
Diversified Manufacturing 2,009,000 1.89%
Manitowoc Co., Inc. 56,000 2,009,000
Electronics 1,841,377 1.74%
Marshall Industries, Inc. 36,000 1,057,500
Vishay Intertechnology, Inc. 33,180 783,877
Energy and Utilities 3,770,608 3.56%
Atlantic Richfield Co., Inc. 16,000 1,892,000
Kerr-McGee Corporation 18,000 1,095,750
Northwest Natural Gas, Inc. 15,600 546,000
Occidental Petroleum Corp. 9,570 236,858
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1996
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Entertainment 5,652,000 5.33%
Time Warner, Inc. 144,000 5,652,000
Environmental Services 889,750 .84%
Browning-Ferris
Industries, Inc. 16,000 464,000
WMX Technologies, Inc. 13,000 425,750
Food Producers 453,750 .43%
ConAgra, Inc. 10,000 453,750
Food/Restaurants 4,821,143 4.55%
Consolidated Products, Inc. 33,645 555,143
Kroger Company, Inc. 108,000 4,266,000
Furniture 1,102,500 1.04%
Miller (Herman), Inc. 36,000 1,102,500
Information Services 550,000 .52%
Dun & Bradstreet, Inc. 8,800 550,000
Insurance 14,315,105 13.51%
American Financial Group, Inc. 33,902 1,021,298
Chubb Corporation 54,000 2,693,250
Hartford Steam Boiler Inspection &
Insurance Co., Inc. 186,000 9,137,250
Ohio Casualty Corp. 16,000 556,000
ReliaStar Financial Corp. 21,039 907,307
Machine Tools 864,000 .81%
Cincinnati Milacron, Inc. 36,000 864,000
Metals/Mining 19,126,408 18.05%
Newmont Mining Corp. 54,916 2,711,477
Nucor Corporation 288,000 14,580,000
Penn Virginia Corp. 40,000 1,400,000
Reynolds Metals Co., Inc. 8,344 434,931
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1996
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Mortgage Insurance 228,500 .21%
CMAC Investment Corp. 4,000 228,500
Mutual Funds 436,330 .41%
Japan Fund, Inc. 17,651 172,450
Scudder Capital Growth Fund, In 12,000 263,880
Paper/Lumber Products 2,114,142 1.99%
Boise Cascade Corp. 6,666 244,142
Temple-Inland, Inc. 40,000 1,870,000
Pharmaceutical 6,630,625 6.26%
Bristol-Myers Squibb Co., Inc. 4,000 360,000
Johnson & Johnson, Inc. 96,000 4,752,000
Lilly (Eli) & Co., Inc. 8,000 520,000
Merck & Co., Inc. 9,000 581,625
Mylan Laboratories, Inc. 24,000 417,000
Railroads 3,927,802 3.71%
Norfolk Southern Corporation 18,000 1,525,500
Union Pacific Corporation 34,380 2,402,302
Technology 1,596,625 1.51%
Hewlett-Packard Corp. 8,000 797,000
Microsoft Corp. 3,000 360,375
Motorola Inc. 7,000 439,250
Telecommunications 2,301,775 2.17%
Ameritech Corp. 8,000 475,000
Bell Atlantic Corp. 4,000 255,000
Bell South Corp. 12,000 504,000
GTE Corp. 7,900 353,525
MCI Communications Corp. 14,800 379,250
Telefonos de Mexico S.A. ADR
Series L 10,000 335,000
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1996
Principal % of
Amount Total
or Number Industr Investment
Description of Shares Value Totals Portfolio
Textiles/Apparel 5,278,525 4.98%
Guilford Mills, Inc. 13,125 328,125
Russell Corporation 179,200 4,950,400
Truck Trailer Manufacturing 177,500 .17%
Wabash National Corporation 10,000 177,500
Total common shares
(unaffiliated issuers) $ 85,492,602 $85,492,602 80.67%
U.S. Government and Agency Securities
(unaffiliated issuers):
U.S. Treasury Notes 8.500%, 4/15/97 2,000,000 2,042,180
U.S. Treasury Notes 8.500%, 7/15/97 500,000 513,045
U.S. Treasury Notes 7.875%, 1/15/98 1,000,000 1,026,870
U.S. Treasury Notes 8.250%, 7/15/98 500,000 519,765
Federal Home Loan Mtg. Corp. REMIC,
5.75%, 2006 1,000,000 970,310
Federal National Mtg. Assn REMIC,
6%, 2015 1,000,000 975,310
Federal National Mtg. Assn Guaranteed
REMIC, 6.75%, 2018 1,000,000 976,560
Federal Home Loan Bank Note, 7.305%,
1996 500,000 468,595
Federal Home Loan Mortgage Corp.,
6.55%, 2003 1,000,000 966,250
Total U.S. Government and Agency
Securities (unaffiliated issuers) $ 8,458,885 $ 8,458,885 7.98%
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1996
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Bonds and Notes (unaffiliated issuers):
Farmington, NM Power Rev., 13/14%,
1996 150,000 150,138
Kentucky State Turnpike Auth. Res.,
13.125%, 1997 125,000 136,446
Miami Cty, Ohio Econ. Dev (Winters
National Bank), 10.75%, 2006, put option
1996 300,000 318,720
New Mexico Fin., Auth Single Fam,
11.40%, 1996 5,000 5,000
Ford Motor Credit Company Note,
8.875%, 1996 500,000 501,050
General Motors Acceptance Corp. Note,
7.125%, 2003 500,000 499,760
General Motors Acceptance Corp. Note,
8.625%, 1996 500,000 500,415
Household Finance Corp. Note, 7.625%,
1999 500,000 511,355
Pacific Gas and Electric Corp. Note,
6.25%, 2004 500,000 472,510
Total Bonds and Notes
(unaffiliated issuers) $ 3,095,394 $ 3,095,394 2.92%
Total investments in securities
(unaffiliated issuers) $97,427,195 $97,427,195 91.93%
Common shares (affiliated issuers):
Trucking
Arnold Industries, Inc. 600,000 8,550,000 8,550,000 8.07%
Total investments in securities
(affiliated issuers) $ 8,550,000 $ 8,550,000 8.07%
Total investments in securities $105,977,195 $105,977,195 100.00%
See accompanying notes to financial statements.
This statement was prepared by the Company and was not examined by the
independent auditors.
