Annual Report
REAL SILK INVESTMENTS, INCORPORATED
Indianapolis Indiana
Year Ended December 31, 1995
REAL SILK INVESTMENTS, INCORPORATED
____________________
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
Chemical Mellon Shareholder Services, L.L.C.
Pittsburgh, Pennsylvania
Custodian of Securities
NBD Bank, N. A.
Indianapolis, Indiana
Independent Auditors
KPMG Peat Marwick LLP
Indianapolis, Indiana
_____________________
Independent Auditors' Report
The Stockholders and Board of Directors
Real Silk Investments, Incorporated:
We have audited the accompanying statement of assets and liabilities of Real
Silk Investments, Incorporated, including the schedule of investments in
securities, as of December 31, 1995, and the related statement of operations,
the statement of changes in net assets, and the selected per share data and
ratios for the year then ended. These financial statements and per share data
and ratios are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and per
share data and ratios based on our audit. The accompanying statement of
changes in net assets of Real Silk Investments, Incorporated for the year
ended December 31, 1994, and the selected per share data and ratios for each
of the four years in the period then ended, were audited by other auditors
whose report thereon dated January 19, 1995, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and per
share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1995, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data and
ratios referred to above present fairly, in all material respects, the
financial position of Real Silk Investments, Incorporated at December 31,
1995, and the results of its operations, the changes in its net assets, and
the selected per share data and ratios for the year then ended in conformity
with generally accepted accounting principles.
Indianapolis, Indiana
January 19, 1996
REAL SILK INVESTMENTS, INCORPORATED
Statement of Assets and Liabilities
December 31, 1995
Assets
Investments in securities (unaffiliated issuers), at market value:
Money market funds (cost: $527,422) $ 527,422
Common shares (cost: $10,795,206) 85,181,987
U.S. government and agency securities (cost: $8,428,425) 8,797,979
Bonds and notes (cost: $2,060,898) 2,167,133
Total investments in securities (unaffiliated issuers) 96,674,521
Investments in securities (affiliated issuers), at market value:
Common shares (cost: $147,786) (note 4) 10,425,000
Total investments in securities 107,099,521
Cash 10,392
Accrued interest and dividends receivable 391,855
Other assets 9,167
Office furniture and equipment, less accumulated
depreciation of $42,909 44,719
Total assets 107,555,654
Liabilities
Accounts payable and accrued expenses 10,506
Deferred federal income tax payable on net built-in gains (note 1) 12,847,228
Total liabilities 12,857,734
Net Assets
Equivalent to $575.03 per share based on 164,683 shares of
$5.00 par value common stock outstanding (note 2) $ 94,697,920
See accompanying notes to financial statements.
REAL SILK INVESTMENTS, INCORPORATED
Statement of Operations
Year ended December 31, 1995
Investment income:
Dividends, including affiliated issuers of $264,000 (note 4) $ 2,084,504
Interest on securities from unaffiliated issuers 800,949
Total income 2,885,453
Expenses:
Officers' salaries 100,852
Salaries and wages 27,201
Taxes other than federal income tax 47,223
Legal, auditing and other professional services 45,377
Custodian fees 7,151
Directors' fees 10,500
Office expense and supplies 4,707
Insurance 9,226
Rent (note 7) 47,446
Pension (note 5) 5,883
Depreciation 7,598
Dues and subscriptions 9,870
Computer expense 4,006
Equipment lease 15,120
Sundry 15,130
Total expenses 357,290
Net investment income 2,528,163
Net realized gain (loss) on investment securities (unaffiliated issuers):
Proceeds from sales 7,353,668
Cost of securities sold 7,595,455
(241,787)
Capital gain distributions from other investment companies 36,060
(205,727)
Federal income tax (note 1) 3,600
Net realized gain (loss) on investments (note 3) (209,327)
Unrealized appreciation in value of investments:
Beginning of year 73,401,319
End of year 85,139,782
11,738,463
Increase in deferred federal income tax (note 1) 29,740
Net increase in unrealized appreciation, including an
affiliated issuers decrease of $2,025,000 (note 4) 11,708,723
Net realized and unrealized gain (loss) on investments 11,499,396
Net increase (decrease) in net assets resulting from operations $14,027,559
See accompanying notes to financial statements.
REAL SILK INVESTMENTS, INCORPORATED
Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
1995 1994
Net investment income $ 2,528,163 2,356,909
Net realized gain (loss) on investments (209,327) (19,497)
Net increase (decrease) in unrealized appreciation 11,708,723 (4,330,247)
Net increase (decrease) in net assets resulting
from operations 14,027,559 (1,992,835)
Distributions to stockholders from:
Net investment income ($15.28 and $13.92 per
share, respectively) (note 1) (2,516,356) (2,292,387)
Net realized gain on investments (note 1) - -
Additional paid-in capital (note 1) - -
Increase (decrease) in net assets 11,511,203 (4,285,222)
Net assets at beginning of year 83,186,717 87,471,939
Net assets at end of year (including in 1995: undistributed
net investment income of $732,338 and undistributed
capital loss carryover of $231,425; including in 1994:
undistributed net investment income of $720,532 and
undistributed capital loss carryover of $22,098). $ 94,697,920 83,186,717
See accompanying notes to financial statements.
REAL SILK INVESTMENTS, INCORPORATED
Supplementary Information
Selected Per Share Data for Capital Stock Outstanding Throughout Each Year
and Selected Ratios
Year Ended December 31,
1995 1994 1993 1992 1991
Per share data
Investment income $ 17.52 16.23 15.37 15.46 15.82
Less: expenses 2.17 1.92 1.68 1.88 1.73
Net investment income 15.35 14.31 13.69 13.58 14.09
Net realized gain (loss) on
investments (1.27) (.12) (.01) .28 1.63
Net increase (decrease) in unrealized
appreciation 71.10 (26.29) 59.77 59.71 90.68
Net increase (decrease) in net assets
resulting from operations 85.18 (12.10) 73.45 73.57 106.40
Distributions to stockholders from:
Net investment income
(note 1) (15.28) (13.92) (13.15) (12.00) (12.65)
Net realized gains on investments
(note 1) - - (.28) (1.17) -
Additional paid-in capital
(note 1) - - .18 .78 -
Total increase (decrease) 69.90 (26.02) 60.20 61.18 93.75
Net assets:
Beginning of year 505.13 531.15 470.95 409.77 316.02
End of year $ 575.03 505.13 531.15 470.95 409.77
Ratios
Expenses to average net assets .41% .36% .33% .44% .46%
Net investment income to average
net assets 2.88% 2.71% 2.72% 3.20% 3.77%
Portfolio turnover rate 2.04% 1.07% 1.28% 4.51% 3.96%
Number of shares outstanding
at the end of the year 164,683 164,683 164,683 164,683 164,683
See accompanying notes to financial statements.
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
December 31, 1995
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. However,
any net built-in gain on its assets (that is, appreciation in the value of
its assets) as of the date of qualification (January 1, 1989) is subject to
tax at the corporate level to the extent realized within ten years of the
date of qualification.
The deferred federal income tax on built-in gains at December 31, 1995,
will only be payable if and to the extent any built-in gains are realized
before January 1, 1999. If realized gains before January 1, 1999 are less
than the built-in gains, a tax benefit will be realized because the tax
paid will be less than the amount recorded as deferred federal income tax
payable.
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
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 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, including a built-in gains tax of $3,600 - (note 3).
This net realized capital loss is available for use until December 31,
2003.
For the year ended December 31, 1994, the Company realized capital gains of
$23,662 and capital losses of $43,907 resulting in a net realized capital
loss of $20,780, including a built-in gains tax of $535. This net realized
capital loss is available for use until December 31, 2002.
During 1994, the Company was notified of a federal income tax credit of
$1,283 pertaining to realized built-in losses for the year ended December
31, 1993. This amount reduced the capital loss carryforward from 1993 from
$2,601 to $1,318. This net realized capital loss is available for use
until December 31, 2001.
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
Note 2 - Net Assets
The Company's net assets at December 31, 1995, 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 732,338
Undistributed net realized losses (note 1) (231,425)
Unrealized gains of $85,528,256 and unrealized losses of
$388,474, less deferred federal income tax of$12,847,228 72,292,554
Net assets at December 31, 1995 $ 94,697,920
Note 3 - Investments
Following is a summary of securities sold during the year ended December
31, 1995:
Proceeds from
Sales and Net Gain
Maturities Cost (Loss)
Money market funds $ 5,330,005 5,330,005 -
Common shares 943,987 1,185,774 (241,787)
Bonds and notes 91,300 91,300 -
U.S. government securities 988,376 988,376 -
Totals $ 7,353,668 7,595,455 (241,787)
Capital gain distributions from
other investment companies 36,060
Provision for federal income tax 3,600
Net realized gain (loss) on investments $ (209,327)
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
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 year ended December 31,
1995. Net built-in gains realized during the year ended December 31, 1995
were $10,170 for which there was a provision for federal income tax of
$3,600.
The aggregate cost of securities acquired during the year ended December
31, 1995, was as follows:
Money market funds $ 4,938,831
Common shares 896,385
U.S. government securities 1,542,844
Bonds and notes -
Total purchase of securities $ 7,378,060
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 December 31, 1995.
Note 5 - Retirement Plan
Effective January 1, 1992, the Company began sponsoring a money purchase
pension plan which covers 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 was $5,883 in 1995 and $4,302 in 1994.
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, 1996. At December 31, 1995, the entire
line of credit was unused.
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
Note 7 - Rent Commitment
In March 1993, the Company entered into a five-year operating lease for
office space. At December 31, 1995, the future minimum rental payments
required by the lease are as follows:
1996 $ 48,869
1997 50,335
1998 12,676
Total $ 111,880
Note 8 - Subsequent Event
On January 8, 1996, the Company tendered 27,600 shares of Magma Copper
Company Class B common held in the Company's investment portfolio at
December 31, 1995. The $28.00 cash per share received in the tender offer
approximated market value as of December 31, 1995. Proceeds of $772,800
will result in a realized capital gain of $620,700. This capital gain
includes a realized built-in gain of $55,050 which is taxable at the
highest corporate tax rate.
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
December 31, 1995
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Money Market Funds (unaffiliated issuers):
Money Market Funds $ 527,422 .49%
Fidelity Cash Reserves Fund 270,711 $ 270,711
Woodward Money Market Fund 256,711 256,711
Total Money Market Funds $ 527,422 $ 527,422 .49%
Common Shares (unaffiliated issuers):
Automotive 1,044,000 .98%
MascoTech, Inc. 96,000 1,044,000
Banking 3,670,656 3.43%
First Chicago NBD Corporation
(formerly NBD Bancorp, Inc.) 92,928 3,670,656
Building Materials 325,000 .30%
Ply-Gem Industries, Inc. 20,000 325,000
Chemicals 247,500 .23%
Sigma-Aldrich Corporation 5,000 247,500
Diversified 1,710,093 1.60%
Hanson PLC 29,075 443,394
TRW, Inc. 16,000 1,240,000
U.S. Industries, Inc. 1,453 26,699
Diversified Manufacturing 1,715,000 1.60%
Manitowoc Co., Inc. 56,000 1,715,000
Electronics 2,151,900 2.01%
Marshall Industries, Inc. 36,000 1,156,500
Vishay Intertechnology, Inc. 31,600 995,400
Energy and Utilities 3,634,359 3.39%
Atlantic Richfield Co., Inc. 16,000 1,772,000
Kerr-McGee Corporation 18,000 1,143,000
Northwest Natural Gas, Inc. 15,600 514,800
Occidental Petroleum Corp. 9,570 204,559
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
December 31, 1995
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Entertainment 5,454,000 5.09%
Time Warner, Inc. 144,000 5,454,000
Environmental Services 856,750 .80%
Browning-Ferris Industries, Inc. 16,000 470,000
WMX Technologies, Inc. 13,000 386,750
Food/Restaurants 4,532,764 4.23%
Consolidated Products, Inc. 33,645 496,264
Kroger Company, Inc. 108,000 4,036,500
Furniture 1,080,000 1.01%
Miller (Herman), Inc. 36,000 1,080,000
Information Services 569,800 .53%
Dun & Bradstreet, Inc. 8,800 569,800
Insurance 14,504,104 13.54%
American Financial Group, Inc. 33,902 1,038,249
(formerly American Premier Group and
American Premier Underwriters, Inc.)
Chubb Corporation 27,000 2,612,250
Hartford Steam Boiler Inspection &
Insurance Co., Inc. 186,000 9,300,000
Ohio Casualty Corp. 16,000 620,000
ReliaStar Financial Corp. 21,039 933,605
(formerly The NWNL Companies and
USLICO Corporation)
Machine Tools 945,000 .88%
Cincinnati Milacron, Inc. 36,000 945,000
Metals/Mining 21,477,729 20.06%
Magma Copper Company, Inc. -
Class B 27,600 769,350
Newmont Mining Corp. 54,916 2,491,814
Nucor Corporation 288,000 16,452,000
Penn Virginia Corp. 40,000 1,290,000
Reynolds Metals Co., Inc. 8,344 474,565
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
December 31, 1995
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Mortgage Insurance 176,000 .17%
CMAC Investment Corp. 4,000 176,000
Mutual Funds 414,665 .39%
Japan Fund, Inc. 17,651 166,625
Scudder Capital Growth Fund, Inc. 12,000 248,040
Paper/Lumber Products 1,984,977 1.85%
Boise Cascade Corp. 6,666 229,977
Temple-Inland, Inc. 40,000 1,755,000
Pharmaceutical 6,052,125 5.65%
Bristol-Myers Squibb Co., Inc. 4,000 343,500
Johnson & Johnson, Inc. 48,000 4,104,000
Lilly (Eli) & Co., Inc. 8,000 450,000
Merck & Co., Inc. 9,000 590,625
Mylan Laboratories, Inc. 24,000 564,000
Railroads 3,697,830 3.45%
Norfolk Southern Corporation 18,000 1,428,750
Union Pacific Corporation 34,380 2,269,080
Technology 1,161,250 1.09%
Hewlett-Packard Corp. 8,000 670,000
Microsoft Corp. 3,000 263,250
Motorola Inc. 4,000 228,000
Telecommunications 2,312,513 2.16%
Ameritech Corp. 8,000 471,000
Bell Atlantic Corp. 4,000 267,500
Bell South Corp. 12,000 522,000
GTE Corp. 7,900 346,613
MCI Communications Corp. 14,800 386,650
Telefonos de Mexico S.A. ADR
Series L 10,000 318,750
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
December 31, 1995
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Textiles/Apparel 5,240,222 4.89%
Guilford Mills, Inc. 13,125 267,422
Russell Corporation 179,200 4,972,800
Truck Trailer Manufacturing 223,750 .21%
Wabash National Corporation 10,000 223,750
Total common shares
(unaffiliated issuers) $ 85,181,987 $ 85,181,987 79.54%
U.S. Government and Agency Securities
(unaffiliated issuers):
U.S. Treasury Notes 8.500%, 4/15/97 2,000,000 2,080,320
U.S. Treasury Notes 8.500%, 7/15/97 500,000 524,140
U.S. Treasury Notes 7.875%, 1/15/98 1,000,000 1,050,780
U.S. Treasury Notes 8.250%, 7/15/98 500,000 535,155
Federal Home Loan Mtg. Corp. REMIC,
5.75%, 2006 1,000,000 993,120
Federal National Mtg. Assn REMIC,
6%, 2015 1,000,000 993,120
Federal National Mtg. Assn Guaranteed
REMIC, 6.75%, 2018 1,000,000 1,012,500
Federal Home Loan Bank Note, 7.305%,
1996 600,000 600,564
Federal Home Loan Mortgage Corp.,
6.55%, 2003 1,000,000 1,008,280
Total U.S. Government and Agency
Securities (unaffiliated issuers) $ 8,797,979 $ 8,797,979 8.22%
(Continued)
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
December 31, 1995
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 150,000 157,404
Kentucky State Turnpike Auth. Res.,
13.125%, 1997 125,000 141,415
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 5,009
Ford Motor Credit Company Note,
8.875%, 1996 500,000 508,845
General Motors Acceptance Corp. Note,
8.625%, 1996 500,000 507,055
Household Finance Corp. Note, 7.625%,
1999 500,000 528,685
Total Bonds and Notes
(unaffiliated issuers) $ 2,167,133 $ 2,167,133 2.02%
Total investments in securities
(unaffiliated issuers) $ 96,674,521 $ 96,674,521 90.27%
Common shares (affiliated issuers):
Trucking
Arnold Industries, Inc. 600,000 10,425,000 10,425,000 9.73%
Total investments in securities
(affiliated issuers) $ 10,425,000 $ 10,425,000 9.73%
Total investments in securities $107,099,521 $107,099,521 100.00%
See accompanying notes to financial statements.
