UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSRS
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, 2009
Date of reporting period: January 1, 2009-June 30, 2009
Kavilco Incorporated
Semi-Annual Report
June 30, 2009 (unaudited)
ITEM 1. | HIGHLIGHTS FROM AUGUST 2009 NEWSLETTER TO SHAREHOLDERS REGARDING FINANCIAL STATEMENTS. |
Note to SEC: Kavilco Incorporated 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 shareholder meetings announcements, portfolio, and financial issues from Kavilco's newsletter are attached to the N-CSRS. Articles not included in our filing are Direct Deposit, In Memoriam and In Kasaan.
36th Annual Meeting of Shareholders
The 36th Annual Shareholders Meeting is scheduled for Saturday, November 7, 2009 at Cape Fox Lodge in Ketchikan, Alaska.
Registration will be from 11:00 a.m. to noon in the Shaa Hit Room. The meeting will begin at 1:00 p.m. and end at 3:00 p.m. The primary items of business are the approval of the Corporation's independent public accountants and the election of Directors. The Directors whose terms expire this year are John Campbell, Kenneth Gordon and Louis Jones, Sr. Your 2008 Annual Report and Proxy Statement will be mailed in October. We urge you to attend the Annual Meeting if possible. Attendance at our shareholder meetings helps maintain good communications and understanding. Your vote is important! Even if you are unable to attend the Annual Meeting we hope you will vote your proxy as soon as possible.
The Annual Dinner and Auction will be also be held in the Shaa Hit Room at Cape Fox Lodge. Doors will open at 5:30 p.m.
Portfolio
Following is an overview of the economic issues we discussed at the last Board Meeting in July. The Beige Book summary of economic conditions in the 12 Federal Reserve districts begins: "Economic conditions remained weak or deteriorated further during the period from mid-April through May." Loan demand is weak and credit is tightening in all districts. Residential construction has stabilized at very low levels. Commercial real estate weakened in all districts with prices falling everywhere. The unemployment claims have been above 600,00 for an unprecedented 22 weeks. Given the foregoing, we can safely say there is no indication of an economic recovery.
On the housing front, the Mortgage Bankers Association noted that a record 12%, or one in eight homeowners are now behind on their payments or in foreclosure. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. For those who think the end of the recession will be like past recessions, the problems in the housing market should make for serious concern.
The debt and the amounts of money spent after 1971, the last time we had double-digit inflation and prime interest rate peaked at 21.5%, were almost miniscule compared to the amounts being spent today. The monetary response by the Fed and current administration to the recession has been three times more (adjusted to today's dollars) than the U.S. spent to fight World War II. It is 12 times more (relative to the GDP) than the total committed to fight the Great Depression.
Milton Friedman is considered one of the most highly influential economist political commentators and essayists of the century. In his prophetic book Money Mischief: Episodes in Monetary History, written two decades ago, Mr. Friedman showed how, facing massive deficits, the U.S. government would dramatically increase the money supply; why foreign countries would stop buying our debt; how the Fed would start buying our Treasury bills; and why this would cause massive inflation. This is basically what is taking place now.
The bond vigilantes, who demanded higher Treasury bond yields from the late 1970s to the early 1980s because of inflation, vanished earlier in the decade amid the credit mania. But they appear to be returning with a vengeance now that the Congress and the Fed have flooded the world with dollars to beat the recession. The Obama administration's epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two to three years alone.
With the government's borrowing needs soaring, there have been some concerns that foreign interest in holding U.S. debt might falter causing interest rates to rise. So, the bond vigilantes' concern that the only way to pay off this debt is to inflate away its value coupled with a major increase in Treasury bond supply, will ultimately put upward pressure on interest rates on the long end of the yield curve.
In response to the threat of higher interest rates what capital we have will be used to purchase short-term corporate bonds. To offset our money market interest rate of 0.34%, we have been purchasing dividend yielding stocks. The average yield for our stocks and bonds is 7.03% and 5.64%, respectively.
Kavilco Incorporated
(An Investment Company)
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
For six months ended June 30, 2009 (unaudited)
ASSETS | |||||
Investments in securities, at market value (identified cost $32,692,381) | $ | 33,486,834 | |||
Real estate at fair value (identified cost $1,054,089) | 3,588,815 | ||||
Cash and cash equivalents | 978,253 | ||||
Interest receivable | 564,462 | ||||
Premises and equipment, net | 5,785 | ||||
Prepaid expenses and other assets | 25,902 | ||||
Total assets | 38,650,051 | ||||
LIABILITIES | |||||
Accounts payable and accrued expenses | 21,671 | ||||
Dividends payable | 97,446 | ||||
Total liabilities | 119,117 | ||||
NET ASSETS | $ | 38,530,934 | |||
Net assets consist of: | |||||
Unrealized appreciation on | |||||
Investments | $ | 2,551,008 | |||
Real estate | 2,534,726 | ||||
Contributed capital | 33,445,200 | ||||
Net assets | $ | 38,530,934 | |||
Net asset value per share of Class A and Class B common stock ($38,530,934 divided by 12,000 shares outstanding) | $ | 3,211 | |||
See accompanying notes (unaudited). |
Kavilco Incorporated
(An Investment Company)
Financial Statements
SCHEDULE OF INVESTMENTS
For six months ended June 30, 2009 (unaudited)
Principal amount/shares | Fair Value | ||||||
INVESTMENTS IN SECURITIES - 86.9% | |||||||
U.S. Corporate Obligations - 85.5 % | |||||||
Chemical Industry - 4.1% | |||||||
E.I. Du Pont de Nemour, 5.250%, due December 15, 2016 | 1,519,000 | $ | 1,581,208 | ||||
Communications - 15.3% | |||||||
Deutsche Telecom Int. Fin., 8.500%, due June 15, 2010 | 450,000 | 473,249 | |||||
Verizon NE Inc., 6.500%, due September 15, 2011 | 1,000,000 | 1,064,419 | |||||
Comcast Corp., 10.625%, due July 15, 2012 | 1,338,000 | 1,565,460 | |||||
AT&T, 5.100%, due September 15, 2014 | 1,250,000 | 1,298,485 | |||||
CBS Corporation, 4.625%, due May 15, 2018 | 2,000,000 | 1,486,344 | |||||
Total Communications | 5,887,957 | ||||||
Consumer, Cyclical - 11.7% | |||||||
Wal-Mart Stores, 6.875%, due August 10, 2009 | 1,000,000 | 1,006,098 | |||||
Dayton Hudson, 8.600%, due January 15, 2012 | 100,000 | 112,341 | |||||
Home Depot Inc., 5.250%, due December 16, 2013 | 1,000,000 | 1,027,448 | |||||
Safeway Inc., 5.625%, due August 15, 2014 | 1,229,000 | 1,289,335 | |||||
Target Corp., 5.875%, due July 15, 2016 | 1,000,000 | 1,082,590 | |||||
Total Consumer, Cyclical | 4,517,812 | ||||||
Consumer, Non-cyclical - 9.0% | |||||||
Clorox Company, 6.125%, due February 1, 2011 | 1,000,000 | 1,042,795 | |||||
Yum! Brands Inc., 8.875%, due April 15, 2011 | 1,000,000 | 1,091,588 | |||||
Coca Cola Enterprises, 8.500%, due February 1, 2012 | 700,000 | 798,720 | |||||
McDonald's Corp., 5.300%, due March 15, 2017 | 500,000 | 524,568 | |||||
Total Consumer, Non-cyclical | 3,457,671 | ||||||
Energy - 11.3% | |||||||
Smith International Inc., 6.750%, due February 15, 2011 | 500,000 | 514,704 | |||||
Plains All American Pipeline, 6.125%, due January 15, 2017 | 1,345,000 | 1,296,904 | |||||
XTO Energy Inc., 6.250%, due August 1, 2017 | 1,000,000 | 1,052,289 | |||||
Transocean Sedco Forex Inc., 7.375%, due April 15, 2018 | 1,350,000 | 1,492,738 | |||||
Total Energy | 4,356,635 | ||||||
Financial - 5.4% | |||||||
Bear Stearns, 7.625%, due December 7, 2009 | 1,000,000 | 1,025,326 | |||||
John Deere Capital Corp., 3.500%, due October 15, 2010 | 500,000 | 500,141 | |||||
Boeing Capital Corp., 6.500%, due February 15, 2012 | 500,000 | 548,649 | |||||
Total Financial | 2,074,116 | ||||||
Industrial - 9.6% | |||||||
CSX Corp., 6.750%, due March 15, 2011 | 450,000 | 472,391 | |||||
CSX Corp., 5.500%, due August 1, 2013 | 964,000 | 981,157 | |||||
TYCO Intl Group, 6.000%, due November 15, 2013 | 1,245,000 | 1,265,938 | |||||
Union Pacific Corp., 4.875%, due January 15, 2015 | 1,000,000 | 1,005,494 | |||||
Total Industrial | 3,724,980 | ||||||
Technology - 7.8% | |||||||
Xerox Corporation, 5.500%, due May 15, 2012 | 2,000,000 | 1,994,526 | |||||
Cisco Systems Inc., 5.500%, due February 22, 2016 | 960,000 | 1,017,015 | |||||
Total Technology | 3,011,541 | ||||||
Utilities - 11.3% | |||||||
American Electric Power, 5.375%, due March 15, 2010 | 1,475,000 | 1,508,763 | |||||
Dominion Resources Inc., 5.000%, due March 15, 2013 | 1,000,000 | 1,023,324 | |||||
Potomac Electric Power, 4.650%, due April 15, 2014 | 600,000 | 607,442 | |||||
Southern Power Company, 4.875%, due July 15, 2015 | 1,250,000 | 1,209,066 | |||||
Total Utilities | 4,348,595 | ||||||
Total U.S. Corporate Obligations (cost $32,221,454) | 32,960,515 | ||||||
Common Stock - 1.4% | |||||||
Chemicals-Specialty - less than 1% | |||||||
Terra Nitrogen Company LP | 100 | 10,078 | |||||
Computer Software & Services - 0.2% | |||||||
Microsoft Corp. | 3,640 | 86,523 | |||||
Drug Industry - less than 1% | |||||||
Sanofi-Aventis-ADR | 600 | 17,694 | |||||
Electric Utility - 0.3% | |||||||
Consolidated Edison Inc. | 600 | 22,452 | |||||
Duke Energy Corp. | 700 | 10,213 | |||||
NSTAR | 600 | 19,266 | |||||
Progress Energy Inc. | 600 | 22,698 | |||||
Scana Corp. | 700 | 22,729 | |||||
Southern Company | 600 | 18,696 | |||||
Total Electric Utility | 116,054 | ||||||
Exchange Traded Funds - 0.1% | |||||||
iShares Investment Grade Corp. Bonds | 200 | 20,056 | |||||
SPDR Gold Trust | 250 | 22,795 | |||||
Total Exchange Traded Funds | 42,851 | ||||||
Food Processing - less than 1% | |||||||
Unilever PLC | 800 | 18,800 | |||||
Natural Gas (Diversified) - less than 1% | |||||||
ONEOK Inc. | 600 | 17,694 | |||||
Oil/Gas Distribution - 0.3% | |||||||
Buckeye Partners LP | 500 | 21,415 | |||||
Energy Transfer Partners LP | 600 | 24,294 | |||||
Kinder Morgan Energy Partners | 500 | 25,560 | |||||
Plains All American Pipeline | 400 | 17,020 | |||||
Suburban Propane Partners LP | 400 | 16,868 | |||||
Total Oil/Gas Distribution | 105,157 | ||||||
Petroleum Industry - less than 1% | |||||||
Royal Dutch Shell PLC | 930 | 20,076 | |||||
Real Estate Investment Trust - 0.1% | |||||||
AvalonBay Communities, Inc. | 400 | 22,376 | |||||
Telecommunication Services - 0.2% | |||||||
AT&T | 800 | 19,872 | |||||
CenturyTel Inc. | 800 | 24,560 | |||||
Verizon Communications | 800 | 24,584 | |||||
Total Telecommunication Services | 69,016 | ||||||
Total Common Stock (cost $467,392) | 526,319 | ||||||
Total Investments in Securities (identified cost $32,692,381) | $ | 33,486,834 | |||||
See accompanying notes (unaudited).
Kavilco Incorporated
(An Investment Company)
Financial Statements
STATEMENT OF OPERATIONS
For six months ended June 30, 2009 (unaudited)
INVESTMENT INCOME | |||||||
Interest | $ | 900,588 | |||||
Dividends | 18,264 | ||||||
Total investment income | 918,852 | ||||||
EXPENSES | |||||||
Salaries and benefits | 144,026 | ||||||
Directors' compensation and expenses | 133,237 | ||||||
Legal and accounting | 35,714 | ||||||
Custodian | 8,783 | ||||||
Insurance expense | 35,171 | ||||||
Office and equipment leases | 33,256 | ||||||
General and administrative | 54,508 | ||||||
Total expenses | 444,695 | ||||||
| |||||||
Net investment income | 474,157 | ||||||
REALIZED AND UNREALIZED GAIN ON INVESTMENTS | |||||||
Net increase in unrealized appreciation on investments (Note 4) | 2,551,008 | ||||||
Total realized and unrealized gain on investments | 2,551,008 | ||||||
NET OPERATING INCOME | 3,025,165 | ||||||
OTHER INCOME | 118,299 | ||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 3,143,464 | |||||
| |||||||
See accompanying notes (unaudited). |
Kavilco Incorporated
(An Investment Company)
Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
For six months ended June 30, 2009 (unaudited)
INCREASE IN NET ASSETS FROM OPERATIONS | |||||||
Net investment income | $ | 474,157 | |||||
Net increase in unrealized appreciation on investments | 2,551,008 | ||||||
Other income | 118,299 | ||||||
Net increase in net assets resulting from operations | 3,143,464 | ||||||
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS | (300,000) | ||||||
Total increase in net assets | 2,843,464 | ||||||
NET ASSETS | |||||||
Beginning of year | 35,687,470 | ||||||
Six months ended | $ | 38,530,934 | |||||
| |||||||
See accompanying notes (unaudited). |
Kavilco Incorporated
(An Investment Company)
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
Forthe six months ended June 30, 2009 (unaudited)
Note 1. SEC Compliance
The following information discussed in Notes 1 and 3 are required to be conveyed to shareholders pursuant to Section 30 of the Investment Act of 1940.
Board fees: $28,600
Officers' compensation: $110,691
Note 2. Financial Accounting Standards No.157
The Company adopted the provisions of the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”), effective January 1, 2008. In accordance with FAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data from sources independent of the Company. Unobservab le inputs reflect the Company’s own assumption about the assumptions that market participants would use in pricing the asset or liability developed on the best information available in the circumstance. The three-tier hierarchy of inputs is summarized below.
Level 1 - quoted prices in active markets for identical investments
Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Company's own assumptions in determining fair value of investments
The following table summarizes the valuation of the Company’s investments by the above fair value hierarchy levels as of June 30, 2009.
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of June 30, 2009 | |||||||||
ASSETS | ||||||||||||
Common Stock | $ | 506,243 | $ | - | $ | - | $ | 506,243 | ||||
U.S. Corporate Obligations | - | 32,960,515 | - | 32,960,515 | ||||||||
Real Estate | - | - | 3,588,815 | 3,588,815 | ||||||||
| $ | 506,243 | $ | 32,960,515 | $ | 3,588,815 | $ | 37,055,573 | ||||
Note 3. Purchases and Sales of Securities
Purchases and sales of securities for the six months ended June 30, 2009 totaled $23,880,025 and $0 respectively.
Note 4. Unrealized Gain on Investments
Unrealized gain/loss is an accounting adjustment and does not enter into the calculation of dividend payments. The $2,551,008 unrealized gain is directly related to a drop in corporate bond interest rates over the past six months ended June 30, 2009.
ITEM 2. | CODE OF ETHICS. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 6. | SCHEDULE OF INVESTMENTS. |
Please see Schedule of Investments contained in the Report to Shareholders filed under Item 1 of this Form N-CSRS.
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable when filing a semi-annual report to shareholders.
ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
The Alaska Native Claims Settlement Act (ANCSA), which is our primary regulating authority, places numerous restrictions on the Company's stock. Kavilco's stock was given to its shareholders. It can only be transferred by court decree or gifting to a blood relative and cannot be sold or used as collateral. There is no provision in the ANCSA regulations for repurchase of shares.
ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
No matters were voted on by shareholders during the period covered by this report.
ITEM 11. | CONTROLS AND PROCEDURES. |
(a) The registrant’s President/Chief Executive Officer and Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective at the reasonable assurance level based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.
(b) There were no changes in the registrant’s internal controls over financial reporting that occurred during the second fiscal quarter of the period that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
ITEM 12. | EXHIBITS. |
The following exhibits are attached to this Form N-CSRS:
EXHIBIT NO. | DESCRIPTION OF EXHIBIT | |
12 (a) (1) | Certification of President/Chief Executive Officer | |
12 (a) (2) | Certification of Chief Financial Officer |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant): Kavilco Incorporated | ||
By: | /s/ Louis A. Thompson | |
Louis A. Thompson | ||
President/Chief Executive Officer |
Date: August 21, 2009
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 the registrant and in the capacities and on the dates indicated.
By: | /s/ Scott Burns | |
Scott Burns | ||
Chief Financial Officer | ||
Date: August 21, 2009 |