N-CSR 1 ncsr.txt SEMI-ANNUAL REPORT TO SHAREHOLDERS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-6027 KAVILCO INCORPORATED (Exact name of registrant as specified in charter) 600 UNIVERSITY STREET, SUITE 3010 SEATTLE, WASHINGTON 98101-1129 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 624-6166 Date of fiscal year end: December 31 Date of reporting period: January 1, 2003 - June 30, 2003 ITEM 1. EXCERPTS FROM NEWSLETTER TO SHAREHOLDERS REGARDING FINANCIAL STATEMENTS Note to the SEC: Kavilco Inc is an Alaska Native Corporation that operates under the Investment Company Act of 1940. The Alaska Native Claims Settlement Act, which is our primary regulating authority, places numerous restrictions on the company's stock. Kavilco's stock can only be transferred by court decree or gifting to a blood relative and cannot be sold or used as collateral. The following discussion has been edited so that only the portfolio and financial issues from Kavilco's newsletter are attached to the N-CSR. Topics that were not addressed in our filing are Notice of Annual Meeting of Shareholders, Direct Deposit, Application for Appropriation, News from Kasaan, and a Memorial for Rosemarie Trambitas. PORTFOLIO A Mid-Year Review There continues to be a powerful tug-of-war between massive policy reflation and the lingering after-effects of the various shocks that have hit the economy during the past three years. The sharp drop in interest rates and tax cuts have been successful in sustaining consumer spending, but have not yet managed to trigger a rebound in business spending. Corporate executives remain extremely cautious, focused more on cost cutting and balance sheet restructuring than on expanding. Since the beginning of the year the Dow Jones Industrials, S&P 500 composite index and the NASDAQ 100 had increases of 7.7%, 11%, and 22%, respectively. Everything looks great about this stock market advance except for one item-VALUES. Every bull market in history has started form a base of stocks at great values. Great values, historically, have been characterized by two phenomena-low price/earnings ratios (P/E) and high dividend yields. The S&P 500 stock index is the best indicator of the overall market sentiment. The average S&P dividend yield over the last 13 bear market lows was 4.7% with a P/E of 11.0. The June 30th dividend yield was 1.7% with a P/E of 31.6. Before the recent stock market bubble, P/E's in the 22 range was indicative of an overvalued stock market. Rallies in a bear market can be violent and spectacular, often better than "the real thing." A few pundits from the value school of investing have made the case that the bear market has not even started. One thing for sure, we have not seen anything even suggesting a bear market bottom. Turning our attention to the portfolio, you will note that Kavilco had a net unrealized gain of $691,784. The gain is courtesy of Fed Chairman Alan Greenspan's statements in May that deflation was a major concern of the Federal Reserve Board. The bond market rallied on these statements only to sober up in mid June when bond investors realized that the fed policy is inflationary. By the end of July, bond investors drove up interest rates, which vaporized Kavilco's unrealized gain. As far as our fallen angels (companies in our portfolio that are under financial stress) are concerned, Qwest Communication has sold their directory business, which has provided much needed cash flow. According to analytical reports, this will buy Qwest more time to get their financial house in order. In September, Ford Motor Company and General Motors will be actively involved in union contract negotiations. Plant closures and pension liabilities are the main issues that must be addressed if these companies are going to survive in the highly competitive automobile market. Selling any of these positions will result in losses that will be offset by selling bonds that have capital gains potential. The problem with this strategy is that we have the perennial re- investment risk. That is, giving up yields in the 7% range only to re-invest at a substantial decrease in yield. Last year, we had bonds that were sold or matured that carried a +7% yield. Currently, interest rates are at a 40-year low with money market funds yielding a whopping .6% and Treasury bonds in the 2-3% range. This translates into lost revenue in the neighborhood of $250,000. To make up for this deficit, we have employed a strategy where we actively trade the 10-year Treasury bond. We have had some success with this strategy, however, it is too early to tell if we can make up the deficit in earnings. Possible Reduction In Fall Dividend Last year three unique financial events occurred that played a major role in your dividend. First, due to a computer glitch, interest income was overstated by $103,000. This was discovered after the November dividend payment. The Second event was a rent-for-land swap deal with Rayonier Timber. Rayonier owed us $120,000 for back rent on our log storage site. In lieu of payment we obtained property and a mining claim that was contiguous to our property. The last issue is a major decline in interest rates which has severely crimped our interest earnings. So the combined effect of these issues is in the neighbor- hood of $370,000. We have employed a strategy that is designed to try and off- set interest income issues. However, there is no way we can make up for the lost rental income. There are four months left until dividend payments and we are trying diligently to make up some of the short fall in earnings. KAVILCO INCORPORATED
STATEMENT OF ASSETS FOR THE SIX MONTHS AND LIABILITIES ENDED JUNE 30, 2003(UNAUDITED) ASSETS Securities, at value - Identified cost of $26,623,492 $29,799,210 Real Estate at fair value 3,588,815 Cash 7,006,256 Interest receivable 527,724 Prepaid expenses and other assets 29,778 Premises and equipment (Net of depreciation) 7,333 ----------- Total Assets 40,959,116 ----------- LIABILITIES Accounts payable and accrued expenses 139 ----------- Total Liabilities 139 ----------- NET ASSETS(12,000 shares outstanding) $40,958,977 =========== Net asset value per outstanding share ($40,958,977 divided by 12,000 shares outstanding) $3,413.25 ===========
See accompanying notes to the Financial Statement KAVILCO INCORPORATED
SCHEDULE OF INVESTMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) PRINCIPAL AMOUNT/SHARES VALUE -------------------------------------------------------------------- INVESTMENTS IN SECURITIES - 72.8% OF NET ASSETS U.S. Government Securities - 18.7% U.S. Treasury Notes, 7.25% due August 15, 2004 5,000,000 $ 5,346,090 Federal National Mortgage Association, 6.210% due November 7, 2007 1,000,000 1,154,376 Federal National Mortgage Association, 6.150% due December 10, 2007 1,000,000 1,154,056 ----------- Total U.S. Government Securities (cost $6,871,504) 7,654,522 ----------- CORPORATE OBLIGATIONS - 53.8% Auto and truck - 4.5% Ford Motor Company, 6.625% due February 15, 2028 1,000,000 851,442 General Motors Corp., 7.70% due April 15, 2016 1,000,000 1,026,001 Banking - 5.5% Chase Manhattan Corp., 6.50% due January 15, 2009 2,000,000 1,113,003 Chemical Bank Corp., 7.875% due July 15, 2006 1,000,000 1,152,059 Beverage (soft drink) - 2.2% Coca-Cola Enterprises, 8.50% due February 1, 2012 700,000 911,344 Diversified financial services - 3% General Electric Capital Corp., 8.50% due July 24, 2008 1,000,000 1,240,963 Electric Utility - 5.6% Nisource Financial Corp., 7.50% due November 15, 2003 1,000,000 1,020,000 Northern State Power, 6.50% due March 1, 2028 1,000,000 1,073,470 Patomac Electric Power, 6.5% due March 15, 2008 190,000 251,141 Entertainment - 0.7% Walt Disney Co., 5.80% due October 27, 2008 290,000 314,218 Finance - auto loans - 2.1% General Motors Acceptance Corp., 6.625% due October 15, 2005 827,000 877,642 Financial Services - 2.5% Marsh & McLennan Co. Inc., 6.625% due June 15, 2004 1,000,000 1,050,202 Food Processing - 6.0% Heinz Corp., 6.00% due March 15, 2008 229,000 260,225 Hershey Foods Corp., 6.95% due August 15, 2012 1,000,000 1,196,376 Unilever Cap Corp., 6.75% due August 1, 2003 1,000,000 1,018,020 Petroleum (integrated) - 2.5% Texaco Capital Inc., 5.70% due December 1, 2008 975,000 1,058,352 Retail Store - 3.2% Dayton Hudson, 8.60% due January 15, 2012 100,000 131,954 Wal-Mart Stores, 6.875% due August 10, 2009 1,000,000 1,198,710
KAVILCO INCORPORATED
SCHEDULE OF INVESTMENTS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) PRINCIPAL AMOUNT/SHARES VALUE -------------------------------------------------------------------- Securities Brokerage - 8.9% Bear Stearns Co. Inc., 6.150% due March 2, 2004 172,000 177,576 Bear Stearns Co. Inc., 7.625% due December 7, 2009 1,000,000 1,222,837 Merrill Lynch & Co., 6.375% due October 15, 2008 1,000,000 1,155,024 Paine Webber Group, Inc., 8.875% due March 15, 2005 1,000,000 1,111,324 Telecommunication Services - 6.4% GTE Corp., 6.460% due April 15, 2008 500,000 572,298 Pacific Bell, 6.125% due February 15, 2008 1,000,000 1,127,025 U.S. West Communications, Inc., 7.5% due June 15, 2023 1,000,000 930,000 ---------- Total Corporate Obligations (cost $19,701,710) 22,005,206 ---------- COMMON STOCK - 0.3% OF NET ASSETS Technology - 0.3% Microsoft Corp. 2,720 139,482 --------- Total common stock (cost $50,277) 139,482 --------- Total investments in securities (identified cost $26,623,491) TOTAL PORTFOLIO $29,799,210 ===========
See accompanying notes to the Financial Statement KAVILCO INCORPORATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) ----------------------------------------------------------------------- INVESTMENT INCOME Income Interest and Dividend $1,011,215 Net amortization of premiums 5,009 ---------- Total income 1,016,224 Expenses Salaries and benefits 130,352 Legal and accounting services 14,913 Director's compensation and expenses 115,755 Insurance expense 30,226 General and administrative 78,137 ---------- Total expenses 369,383 ---------- Investment income, net 646,841 ---------- REALIZED AND UNREALIZED NET GAIN ON INVESTMENTS Net realized gain on securities 189,837 Increase (decrease) in net unrealized gain on investments (Note #1) 691,784 ---------- Net gain on investments 881,621 ---------- OPERATING INCOME 1,528,462 Other income 19,245 Net increase (decrease) in net assets resulting from operations $1,547,707 ===========
See accompanying notes to the Financial Statement KAVILCO INCORPORATED
STATEMENT OF CHANGES FOR THE SIX MONTHS IN NET ASSETS ENDED JUNE 30, 2003 (UNAUDITED) ----------------------------------------------------------------------- INCREASE IN NET ASSETS Operations Net investment income $ 646,841 Net other income 19,245 Realized gain on securities 189,837 Net increase (decrease) in unrealized appreciation on investments (Note #1) 691,784 Net increase in net assets from operations 1,547,707 Dividends to shareholders (312,000) ----------- Total increase in net assets 1,235,707 NET ASSETS Beginning of period 39,723,270 ----------- Six months ended June 30, 2003 $40,958,977 ===========
See accompanying notes to Financial Statements NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) NOTE 1. SEC COMPLIANCE The following information dicussed in Notes 1 and 2 are required to be conveyed to shareholders pursuant to Section 30 of the Investment Company Act of 1940. Board fees $31,900 Officer's Compensation $100,490 NOTE 2. PURCHASES AND SALES OF SECURITIES Purchases and sales of Treasury Bonds for the 6 months ended June 30, 2003 totaled $6,914,375 and $9,094,375 respectively. NOTE 3. UNREALIZED GAIN ON INVESTMENTS Unrealized gain/loss is an accounting adjustment and does not enter into the calculation of dividend payments. The $691,621 unrealized gain is directly associated with statements made by Alan Greenspan, Chairman of the Federal Reserve Board. In early May, the Fed said it was concerned about deflation. His statement resulted in a major bond market rally which increased our portfolio value. In mid-June the bond market reversed course and the entire gain disappeared by mid-July. ITEM 2. CODE OF ETHICS Not Applicable (disclosure required in Annual Report on N-CSR only). ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT Not Applicable (disclosure required in Annual Report on N-CSR only). ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not Applicable (disclosure required in Annual Report on N-CSR only). ITEM 5-6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES (a) The registrant's President and Chief Financial Officer have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-2 under the Investment Company Act of 1940) are effective in design and operation and are sufficient to form the basis of the certifications required, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report. (b) There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 10. - EXHIBITS (a) Not Applicable (b)(1) Filed as Exhibit (b)(2) Filed as Exhibit SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of Kavilco Incorporated and in the capacities and on the dates indicated. By /s/Louis A. Thompson Louis A. Thompson Chief Executive Officer August 21, 2003 By /s/Scott Burns Scott Burns Chief Financial Officer August 21, 2003