Report for the Six Months Ended June 30, 1997
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
Registrar & Transfer Company NBD Bank, N.A.
Cranford, New Jersey Indianapolis, Indiana
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Indianapolis, Indiana
REAL SILK INVESTMENTS, INCORPORATED
Financial Statements
June 30, 1997
Table of Contents
Page
Financial Statements:
Statement of Assets and Liabilities 2
Statement of Operations 3
Statements of Changes in Net Assets 4
Supplementary Information Financial Highlights 5
Notes to Financial Statements 6-10
Additional Information:
Schedule of Investments in Securities 11-15
REAL SILK INVESTMENTS, INCORPORATED
Statement of Assets and Liabilities
June 30, 1997
Assets
Investments in securities (unaffiliated issuers), at market
value:
Money market funds (cost: $1,191,293) $1,191,293
Common shares (cost: $11,699,315) 107,932,327
U.S. government and agency securities (cost: $6,321,062) 6,446,152
Bonds and notes (cost: $3,648,924) 3,681,633
Total investments in securities (unaffiliated issuers) 119,251,405
Investments in securities (affiliated issuers), at market value:
Common shares (cost: $147,786) (note 4) 10,200,000
Total investments in securities 129,451,405
Cash 9,901
Accrued interest and dividends receivable 324,496
Other assets 25,679
Office furniture and equipment, less accumulated
depreciation of $54,925 37,734
Total assets 129,849,215
Liabilities
Accounts payable and accrued expenses 21,244
Deferred federal income tax payable on net built-in gains (note 1) 13,004,767
Total liabilities 13,026,011
Net Assets
Equivalent to $709.38 per share based on 164,683 shares of
$5.00 par value common stock outstanding (note 2) $116,823,204
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, 1997
Investment income:
Dividends, including affiliated issuers of $132,000(note 4) $1,088,200
Interest on securities from unaffiliated issuers 370,197
Total income 1,458,397
Expenses:
Officers' salaries 51,722
Salaries and wages 22,384
Taxes other than federal income tax 23,462
Legal, auditing and other professional services 29,232
Custodian fees 5,409
Directors' fees 5,200
Office expense and supplies 3,327
Insurance 5,706
Rent (note 7) 25,883
Pension (note 5) 3,456
Depreciation 4,397
Dues and subscriptions 9,674
Computer expense 3,374
Equipment lease 11,970
Sundry 6,734
Total expenses 211,930
Net investment income 1,246,467
Net realized gain (loss) on investment securities (unaffiliated issuers):
Proceeds from sales 5,720,812
Cost of securities sold 5,723,202
(2,390)
Federal income (tax) benefit (note 1) 19,267
Net realized gain (loss) on investment securities(note 3) 16,877
Unrealized appreciation in value of investments:
Beginning of period (January 1, 1997) 91,378,918
End of period (June 30, 1997) 106,443,025
15,064,107
Increase in deferred federal income tax payable (note 1) (28,176)
Net increase in unrealized appreciation, including an
affiliated issuers increase of $675,000 (note 4) 15,035,931
Net realized and unrealized gain (loss) on investments 15,052,808
Net increase (decrease) in net assets resulting from operations $ 16,299,275
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, 1997 and 1996
1997 1996
Net investment income $ 1,246,467 1,268,873
Net realized gain (loss) on investments 16,877 608,712
Net increase (decrease) in unrealized appreciation 15,035,931 (2,233,478)
Net increase (decrease) in net assets resulting
from operations 16,299,275 (355,893)
Federal income tax paid on realized gain on behalf of - -
stockholders, charged to operations (note 1)
Cash distributions to stockholders from net investment
income ($5.00 and $5.00 per share, respectively)
(note 1) (823,415) (823,415)
Deemed distributions to stockholders from net realized
gain on investments (note 1) - -
Additional paid-in capital (note 1) - -
Increase (decrease) in net assets 15,475,860 (1,179,308)
Net assets at beginning of period 101,347,344 94,697,920
Net assets at end of period (including undistributed
net investment income of $1,209,514 and $1,177,796,
respectively, and undistributed net realized capital
gain (loss) of $16,877 and $377,287, respectively) $116,823,204 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
Supplementary Information
Financial Highlights
Six months
ended Year Ended December 31,
June 30,
1997 1996 1995 1994 1993
Per share data Unaudited
Investment income $ 8.86 17.85 17.52 16.23 15.37
Less: expenses 1.29 2.29 2.17 1.92 1.68
Net investment income 7.57 15.56 15.35 14.31 13.69
Net realized gain (loss) on investments .10 2.95 (1.27) (.12) (.01)
Net increase (decrease) in unrealized
appreciation 91.30 37.10 71.10 (26.29) 59.77
Net increase (decrease) in net assets
resulting from operations 98.97 55.61 85.18 (12.10) 73.45
Federal income tax paid on realized gain
on behalf of stockholders, charged to
operations (note 1) - .87 - - -
Cash distributions to stockholders from net
investment income (note 1) (5.00) (15.23) (15.28) (13.92)(13.15)
Deemed distributions to stockholders from net
realized gains on investments (note 1) - (2.49) - - (.28)
Additional paid-in capital (note 1) - 1.62 - - .18
Increase (decrease) in net assets 93.97 40.38 69.90 (26.02) 60.20
Net asset value per share:
Beginning of period 615.41 575.03 505.13 531.15 470.95
End of period $ 709.38 615.41 575.03 505.13 531.15
Market value per share, end of period $ 491.50 450.00 420.00 375.00 335.00
Ratios/Supplemental Data: (for the six months
ended June 30, 1997, the ratios are
annualized to provide comparisons)
Expenses to average net assets .40% 39% .41% .36% .33%
Net investment income to average
net assets 2.34% 2.67% 2.88% 2.71% 2.72%
Portfolio turnover rate 3.73% 3.35% 2.04% 1.07% 1.28%
Average commission rate(1) $ 0.0700 0.0700
Total investment return 20.76% 10.89% 16.31% 16.33% 12.47%
Net assets
at the end
of year $116,823,204 101,347,344 94,697,920 83,186,717 87,471,939
(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.
REAL SILK INVESTMENTS, INCORPORATED
Notes to Financial Statements
June 30, 1997
Note 1 - Summary of Significant Accounting Policies
Real Silk Investments, Incorporated (the Company) is registered under the
Investment Company Act of 1940 (as amended) as a closed-end diversified
management investment company. The Company, which primarily invests in
common stock, has no external managers and pays no management fees. The
significant accounting policies of 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 thever-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. The cost bases of
investments for federal income tax purposes are the same as the book
values.
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.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease
in net assets from operations during the period. Actual results could
differ from those estimates.
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 recorded a
deferred tax liability in its financial statements for the potential tax.
If the deferred tax liability did not exist, which will at least occur
as of January 1, 1999, the net asset value of the Company would be
increased by the amount of the deferred tax liability, which amounts to
approximately $78.97 per share at June 30, 1997.
As built-in gains have been realized, the Company 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 refunds of the amounts deposited to protect the Company's
right to those deposits should regulations not be issued.
The Company has received a refund, or a notice of refund, from the
Internal Revenue Service for the amounts deposited representing the
potential tax on realized built-in gains for the tax years ending
December 31, 1992 and 1996. However, the Company cannot predict the
response of the Internal Revenue Service to the Company's request for
refunds for the amounts deposited in other years or whether or when such
regulations will be issued.
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.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes. The character of distributions
made during the year from net investment income or net realized gains,
if any, may differ from the ultimate characterization for federal income
tax purposes.
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 stockholder to
the basis of their stock.
For the six-month period ended June 30, 1997, the Company realized
long-term capital gains of $9,132, realized long-term capital losses of
$11,522 and received a notice of refund of the 1996 built-in gains tax
deposit of $19,267.
Note 2 - Net Assets
The Company's net assets at June 30, 1997, were comprised of the following
elements:
Common stock ($5.00 par value) and additional paid-in
capital; 300,000 shares authorized, 164,683 shares
issued and outstanding $ 22,158,555
Accumulated undistributed income:
Undistributed net investment income 1,209,514
Undistributed net realized capital gain (loss) (note1) 16,877
Unrealized gains of $106,627,274 and unrealized losses of
$184,249, less deferred federal income tax of $13,004,767 93,438,258
Net assets at June 30, 1997 $116,823,204
Note 3 - Investments
Following is a summary of securities sold during the six months ended June
30, 1997:
Proceeds from
Sales and Net Gain
Maturities Cost (Loss)
Money market funds $3,180,648 3,180,648 -
Common shares 234,164 242,554 (8,390)
U.S. government securities 2,000,000 2,000,000 -
Bonds and notes 306,000 300,000 6,000
Totals $5,720,812 5,723,202 (2,390)
Federal income tax:
Refund of 1996 built-in gains deposit 19,267
Net realized capital gain (loss) $ 16,877
The 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, 1997. There were no net built-in gains realized during
the six months ended June 30, 1997. As discussed in Note 1, the Company
requests a refund from the IRS of built-in gain tax deposits made. In
July, 1997, the Company received from the Internal Revenue Service a
notice of refund of taxes paid in 1996 of $19,267. This refund is
recorded as a receivable to the Company as of June 30, 1997.
The aggregate cost of securities acquired during the six months ended June
30, 1997, was as follows:
Money market funds $ 3,820,611
Common shares 150,938
U.S. government securities -
Bonds and notes 2,051,040
Total purchase of securities $ 6,022,589
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, 1997.
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 for the six months ended June 30, 1997
and 1996 was $3,208 and $3,222, respectively.
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, 1998. At June 30, 1997, 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, 1997, the future minimum rental payments
required by the lease are as follows:
Required
Payable In Rent Payments
1997 $ 26,252
1998 13,126
Total $ 39,378
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1997
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
MONEY MARKET FUNDS (unaffiliated issuers):
Fidelity Cash Reserves Fund 214,934 $ 214,934
Pegasus Money Market Fund 976,359 976,359
Total Money Market Funds $1,191,293 $1,191,293 .92%
COMMON SHARES (unaffiliated issuers):
Sector: Business Services
Industry: Information Services 3,179,400 2.46%
Cognizant Corporation 8,800 356,400
Dun & Bradstreet, Inc. 8,800 231,000
Industry: Office Furniture
Miller (Herman), Inc. 72,000 2,592,000
Sector: Consumer Goods 13,407,148 10.36%
Industry: Apparel/Textiles
Guilford Mills, Inc. 19,687 409,726
Russell Corporation 179,200 5,308,800
Industry: Food/Restaurants
ConAgra, Inc. 10,000 641,870
*Consolidated Products, Inc. 37,009 689,293
*Kroger Company, Inc. 216,000 6,264,000
Industry: Tobacco
*Imperial Tobacco Group PLC (ADR) 7,268 93,459
Sector: Diversified
Industry: Conglomerate 1,960,597 1.51%
Hanson, PLC (ADS) 3,634 90,850
TRW, Inc. 32,000 1,817,984
*U.S. Industries, Inc. 1,453 51,763
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1997
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Sector: Energy/Natural Resources 12,219,293 9.44%
Industry: Metals/Mining
Newmont Mining Corporation 54,916 2,141,724
Penn Virginia Corporation 40,000 1,960,000
Reynolds Metals Co., Inc. 8,344 594,510
*The Energy Group PLC (ADS) 3,634 153,990
Industry: Oil & Gas
Atlantic Richfield Co., Inc. 32,000 2,256,000
Kerr-McGee Corporation 18,000 1,140,750
Northwest Natural Gas, Inc. 23,400 612,776
Occidental Petroleum Corporation 9,570 239,843
Union Pacific Resources Group Inc. 29,118 724,310
Industry: Paper
Boise Cascade Corporation 6,666 235,390
Temple-Inland, Inc. 40,000 2,160,000
Sector: Financial 24,492,308 18.92%
Industry: Bank/Thrift
First Chicago NBD Corporation 92,928 5,622,144
*Ocwen Financial Corporation 13,500 440,438
Industry: Insurance
American Financial Group, Inc. 33,902 1,445,072
Chubb Corporation 54,000 3,611,250
CMAC Investment Corporation 8,000 382,000
HSB Group, Inc. (Formerly: Hartford Steam
Boiler Inspection & Insurance Co.)186,000 9,927,750
Ohio Casualty Corporation 16,000 704,000
ReliaStar Financial Corporation 21,039 1,538,476
Industry: Mortgage
*First Alliance Corporation 11,500 336,375
Industry: Mutual Funds
Japan Fund, Inc. 17,651 169,803
Scudder Large Company Value Fund 12,000 315,000
(Formerly: Scudder Capital Growth Fund, Inc.)
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1997
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Sector: Industrial 22,480,206 17.37%
Industry: Capital Goods
Cincinnati Milacron, Inc. 36,000 933,732
Manitowoc Co., Inc. 84,000 3,927,000
Industry: Chemicals
Sigma-Aldrich Corporation 10,000 350,620
Millenium Chemicals Inc. 2,076 47,229
Industry: Environmental Services
Browning-Ferris Industries, Inc. 16,000 532,000
Waste Management, Inc. (Formerly:
WMX Technologies, Inc.) 13,000 417,625
Industry: Steel
Nucor Corporation 288,000 16,272,000
Sector: Medical 8,977,309 6.93%
Industry: Pharmaceutical
Bristol-Myers Squibb Co., Inc. 8,000 648,000
Johnson & Johnson, Inc. 96,000 6,180,000
Lilly (Eli) & Co., Inc. 8,000 874,496
Merck & Co., Inc. 9,000 920,813
Mylan Laboratories, Inc. 24,000 354,000
Sector: Technology 4,976,261 3.84%
Industry: Computer Hardware/Software
Hewlett-Packard Corporation 16,000 896,000
*Microsoft Corporation 6,000 758,250
Industry: Electronics
*DII Group, Inc. 10,000 440,000
*Marshall Industries, Inc. 36,000 1,341,000
Motorola Inc. 7,000 532,875
*Vishay Intertechnology, Inc. 34,839 1,008,136
Sector: Communications 9,743,418 7.53%
Industry: Entertainment
Time Warner, Inc. 144,000 6,948,000
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1997
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
Industry: Telecommunication
Ameritech Corporation 8,000 543,496
Bell Atlantic Corporation 4,000 303,500
Bell South Corporation 12,000 556,500
GTE Corporation 7,900 346,613
MCI Communications Corporation 14,800 566,559
Telefonos de Mexico S.A.
(ADR Series L) 10,000 478,750
Sector: Transportation (see also
affiliated issuers) 6,496,387 5.02%
Industry: Automotive
MascoTech, Inc. 96,000 2,004,000
Industry: Railroads
Norfolk Southern Corporation 18,000 1,813,500
Union Pacific Corporation 34,380 2,400,137
Industry: Trucking
Wabash National Corporation 10,000 278,750
Total common shares
(unaffiliated issuers) $107,932,327 $107,932,327 83.38%
U.S. GOVERNMENT AND AGENCY
SECURITIES (unaffiliated issuers):
U.S. Treasury Notes 8.500%, 7/15/97 500,000 500,625
U.S. Treasury Notes 7.875%, 1/15/98 1,000,000 1,011,870
U.S. Treasury Notes 8.250%, 7/15/98 500,000 512,187
Federal Home Loan Mtg. Corp. REMIC,
5.75%, 2006 1,000,000 982,180
Federal National Mtg. Assn. Guaranteed
REMIC, 6.75%, 2018 1,000,000 995,620
Federal National Mtg. Assn. REMIC,
6.00%, 2015 1,000,000 987,180
Federal Home Loan Mtg. Corp.,
6.55%, 2003 1,000,000 980,160
Federal Home Loan Mtg. Corp.,
6.25%, 2006 500,000 476,330
Total U.S. Government and Agency
Securities (unaffiliated issuers) $6,446,152 $6,446,152 4.98%
REAL SILK INVESTMENTS, INCORPORATED
Schedule of Investments in Securities
June 30, 1997
Principal % of
Amount Total
or Number Industry Investment
Description of Shares Value Totals Portfolio
OTHER BONDS AND NOTES (unaffiliated
issuers):
Kentucky State Turnpike Auth. Res.,
13.125%, 2009 125,000 125,031
BankAmerica Corp., 7.875%, 2002 1,000,000 1,045,310
Household Finance Corp. Note, 7.25%,
2003 1,000,000 1,011,940
General Motors Acceptance Corp. Note,
7.125%, 2003 500,000 504,762
Household Finance Corp. Note, 7.625%,
1999 500,000 510,800
Pacific Gas and Electric Co., 6.25%,
2004 500,000 483,790
Total Other Bonds and Notes
(unaffiliated issuers) $ 3,681,633 $ 3,681,633 2.84%
Total investments in securities
(unaffiliated issuers) $119,251,405 $119,251,405 92.12%
COMMON SHARES (affiliated issuers):
Sector: Transportation (see also
unaffiliated issuers)
Industry: Trucking
Arnold Industries, Inc. 600,000 10,200,000 7.88%
Total investments in securities
(affiliated issuers) $ 10,200,000 $ 10,200,000 7.88%
Total investments in securities $129,451,405 $129,451,405 100.00%
See accompanying notes to financial statements.
This statement was prepared by the Company and was not examined by the
independent auditors.
