KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
APRIL 30, 1997
CONTENTS
PAGE
ACCOUNTANTS' REVIEW REPORT 1
STATEMENTS OF ASSETS, LIABILITIES AND
CAPITAL SECURITIES 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CHANGES IN NET ASSETS 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-14
Stuart M. Fried
Certified Public Accountant
11 Twin Brook Road
West Caldwell, N.J. 07006
To the Board of Directors and
Stockholders of Kala Investment Corp.
New York, New York
We have reviewed the accompanying statements of assets, liabilities and
capital securities of Kala Investment Corp. as of April 30, 1997, and the
related statements of operations, changes in net assets and cash flows for
the six months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements
is the representation of the management of Kala Investment Corp.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less
in scope than an audit in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the interim financial statements referred to above in
order for them to be in conformity with generally accepted accounting
principles.
The financial statements for the year ended October 31, 1996 were audited by
us, and we expressed an unqualified opinion on them in our report dated
December 11, 1996, but we have not performed any auditing procedures since
that date.
STUART M. FRIED, CPA
W. Caldwell, New Jersey
June 9, 1997
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
SIX MONTHS YEAR ENDED
ENDED 4/30/97 OCTOBER 31,
(Unaudited) 1996
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,440,580 and $7,416,106) $ 7,416,106 $ 7,535,295
Investment in NationsBank tax
exempt fund 47,159 18,266
Cash and cash equivalents 6,121 3,084
Interest receivable 151,661 167,040
Prepaid expense 1,797 3,897
Organization expense - net of
accumulated amortization 0 0
----------- -----------
$ 7,622,844 $ 7,727,582
=========== ===========
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 0 $ 102,118
Accrued expenses 8,437 6,293
Due to broker 0 0
----------- -----------
8,437 108,411
----------- -----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL SHARES:
CAPITAL SHARES
Class A common 200 shares
authorized and issued -
no par
Class B common 40,000 shares
Authorized, 26,622 -
no par 34,627 4,627
Retained earnings 7,564,749 7,612,435
Undistributed net income 39,504 (47,686)
Unrealized (depreciation) appreciation
of investments (24,473) 19,795
----------- -----------
Total Stockholders' Equity
(equivalent to $283.89 per
share at 4/30/97 and 284.06
per share at 10/30/96 7,614,407 7,619,171
----------- -----------
$ 7,622,844 $ 7,727,582
=========== ===========
See accountants' review report and notes to financial statements.
-2-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF OPERATIONS
SIX MONTHS YEAR ENDED
ENDED 4/30/97 OCTOBER 31,
(Unaudited) 1996
INVESTMENT INCOME:
INCOME:
Interest income $174,749 $369,151
EXPENSES:
Custodial fees (note 4) 3,300 7,598
Audit fees 1,500 3,000
Legal fees 6,370 12,185
Taxes other than income taxes 11,902 12,177
Office expense 2,912 3,606
Printing and stationery 455 737
Filing and director's fees 725 1,065
Insurance 1,984 4,011
Amortization expense 0 1,900
--------- ---------
29,148 46,279
--------- ---------
INVESTMENT INCOME 145,601 322,872
Net realized gain (loss) from
investment transactions (1,053) (50,654)
--------- ---------
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 144,548 272,218
Less: Federal income taxes 170 260
--------- ---------
NET INVESTMENT INCOME 144,378 271,958
Less: Dividends paid 104,874 319,644
--------- ---------
UNDISTRIBUTED NET INCOME $ 39,504 $ (47,686)
========= =========
See accountants' review report and notes to financial statements.
-3-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS YEAR ENDED
ENDED 4/30/97 OCTOBER 31,
(Unaudited) 1996
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 145,431 $ 322,612
Net realized gain (loss) on investments (1,053) (50,654)
Change in unrealized appreciation
(depreciation) (44,268) 28,239
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 100,110 300,197
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME (104,874) (319,644)
---------- ----------
TOTAL INCREASE (DECREASE) (4,764) (19,447)
NET ASSETS BEGINNING OF PERIOD 7,619,171 7,638,618
---------- ----------
NET ASSETS END OF PERIOD (including
undistributed net income of ($39,504) and
($47,686) respectively) $7,614,407 $7,619,171
========== ==========
DIVIDENDS PER SHARE $ 3.91 $ 11.92
========== ==========
See accountants' review report and notes to financial statements.
-4-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED
ENDED 4/30/97 OCTOBER 31,
(Unaudited) 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $144,378 $271,958
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization 0 1,900
Realized (gain) loss from investment
transactions included in net income 1,053 50,654
Changes in assets and liabilities:
(Increase) Decrease in securities
at fair market value 119,189 61,320
(Increase) Decrease in NationsBank tax
exempt fund (28,893) 44,695
(Increase) Decrease in interest receivable 15,379 19,316
(Increase) Decrease in prepaid expenses 2,100 226
Increase (Decrease) in accrued expenses 2,144 1,975
(Decrease) in due to broker 0 0
NET CASH PROVIDED BY OPERATING ACTIVITIES 255,350 452,044
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized
appreciation of investments (44,268) 28,239
Realized gain (loss) from investment
transactions (1,053) (50,654)
NET CASH USED BY
INVESTING ACTIVITIES (45,321) (22,415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (206,992) (432,250)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,037 (2,621)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 3,084 5,705
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,121 $ 3,084
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 107
See accountants? review report and notes to financial statements.
-5-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Pursuant to the agreement and plan of merger dated October 31, 1991, M-L
Investment Corp., a Delaware corporation, was reincorporated in Maryland as
Kala Investment Corp. Kala Investment Corp. commenced operations as an
investment company investing at least 50% of the value of its total assets,
determined at the close of each quarter of its taxable year, in tax-exempt
state and local obligations, may distribute, as a tax-exempt dividend, to
its shareholders an amount equal to the interest earned on such tax
dividends as tax exempt interest dividends. It is the Company's intention
to invest substantially all of its assets, except such amounts as it may
carry in demand deposits, in such tax-exempt obligations and to distribute
all of its net income, including any net short-term capital gains, to its
shareholders.
On July 26, 1990, the shareholders of the Company approved a change in the
investment objectives of the Company to include investments in U.S.
Government Securities, which would be taxable for federal income tax purposes.
The Company is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end investment company.
The following is a summary of significant accounting policies followed by
the Company in the preparation of its financial statements:
(a) Investments are valued by the Custodian. These values may not
necessarily be bids or actual last sale prices, but are estimates of the
fair value of the investment securities, based upon prevailing interest
rates, applicable bond ratings and other factors influencing the markets in
which the investments are purchased and sold.
(b) It is the policy of the Company to continue to qualify as a regulated
investment company if such qualifications are in the best interests of its
shareholders, by complying with the provisions available under the Internal
Revenue Code, and to make distributions of taxable income sufficient to
relieve it from all, or substantially all, Federal income taxes. Therefore,
unless the Company has capital gains or interest on Treasury Bills, no
federal tax provision is required.
(c) Realized gains and losses on investments are computed on the basis of the
identified cost of the specific securities sold.
(d) Securities transactions are recorded on the date the securities are
purchased or sold (the trade date). Interest income (net of premium or
discount amortization) is recorded as earned.
See accountants' review report.
-6-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
(e) Interest receivable on investment in securities is computed daily.
(f) Amortization Method - The municipal bonds are amortized over the life of
the bonds. As of November 1, 1995 the bonds are amortized to the pre-refunded
date, if earlier. This change in method resulted in a decrease of interest
income of $21,250 for the year ended October 31, 1996.
(g) Unrealized appreciation (depreciation) of investments is stated as the
difference between amortized cost and fair market value at:
APRIL 30, OCTOBER 31,
1997 1996
Unrealized appreciation of bonds totalled $ 24,008 $ (29,670)
Unrealized depreciation of bonds totalled (48,481) 49,465
--------- ---------
Net unrealized depreciation of investments $ (24,473) $ 19,795
--------- ---------
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
Securities purchased by the Company amounted to $1,954,888 (which included
purchases of NationsBank tax exempt fund of $920,369) for the six months
ended April 30, 1997 and $3,298,492, (which included purchases of NationsBank
tax exempt fund of $1,161,601) for the year ended October 31, 1996. Sales of
securities amounted to $1,946,955 (which included sales of Nations Bank tax
exempt fund of $891,477) for the six months ended April 30, 1997 and
$3,265,896 (which included sales of Nations Bank tax exempt fund of
$1,206,296) for the year ended October 31, 1996.
3. DISTRIBUTIONS
The Company distributed income of $104,874 ($3.91 per share) as of April 30,
1997 and $319,644 ($11.92 per share) for the year ended October 31, 1996 in
the form of dividends.
4. CUSTODIAL FEES
Pursuant to an agreement with the custodian (NationsBank of Florida), it will
charge a custodial fee of $6,000 per annum plus transaction and holding
charges of $25 per transaction and $25 per holding per annum.
During the six months ended April 30, 1997, the Company was charged an
aggregate of $3,300 and $7,598 for the year ended October 31, 1996.
See accountants' review report.
-7-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
5. REMUNERATION
The Company's policy is not to pay, and for the periods reported did not pay,
remuneration to either officers or directors.
Independent outside directors were paid an aggregate of $600 for the six
months ended April 30, 1997 and $600 for the year ended October 31, 1996.
6. CAPITAL PER SHARE AND RELATED INFORMATION
Selected data for a share of capital stock outstanding throughout each year:
SIX MONTHS YEAR ENDED
ENDED 4/30/97 OCTOBER 31,
1996
Investment income $ 6.52 $ 13.76
Operating expenses 1.09 1.73
---------- ----------
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 5.43 12.03
FEDERAL INCOME TAX 0 0
---------- ----------
INVESTMENT INCOME - NET 5.43 12.03
Dividends to shareholders 3.91 11.92
---------- ----------
1.52 .11
Realized and unrealized gain
(loss) on investments - net (1.69) (.84)
---------- ----------
CHANGE IN NET VALUE (.17) (.73)
NET ASSET VALUE:
Beginning of period 284.06 284.79
----------- ----------
End of period $ 283.89 $ 284.06
=========== ==========
Ratio of operating expenses
to average net assets .04% .60%
Ratio of investment income
net to average net assets 2.29% 4.81%
Portfolio turnover 13.5% 26.82%
Number of shares outstanding
at end of period 26,822 26,822
See accountants' review report.
-8-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
7. INVESTMENT IN SECURITIES
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 010316BD8
Alabama Mental Health Fin Auth
SPL Tax BDS
DTD 7/01/95 4.750% Due 5/01/98
Non Callable Fixed Rt
Sink 12/01/97 $165,000 $166,089 $166,351
Cusip # 017289Q51
Allegheny Cnty Pa Hosp Dev Auth
Hosp Rev Ref BDS
DTD 2/01/88 6.90% Due 7/01/98
Non Callable Fixed Rt
No Sink Fund Presbyterian Unive 160,000 164,849 165,075
Cusip #07133ABG6
Battery Pk City Auth NY Rev
Jr Rev Ref BDS
DTD 11/15/93 4.50% Due 11/01/98
Non Callable Fixed Rt
No Sink Fund 275,000 276,919 275,883
Cusip #088275RS3
Bexar County Texas CTFS Oblig
Go Bond- PRFD
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100 620,000 658,393 656,958
Cusip # 235416KN3
Dallas Texas Wtrwks & Swr Sys
Ref & Impt Rev
DTD 4/01/95 7.50% Due 4/01/03 150,000 170,933 169,932
Cusip # 235416MC5
Dallas Texas Wtrwks & Swr Sys
Ref # Impt Rev
DTD 9/01/96 8.00% Due 10/01/01 250,000 283,838 281,080
See accountants' review report.
-9-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #254760E64
District of Columbia
Ser D Go BDS O.I.D.
DTD 6/01/93 4.60% Due 12/01/97
Non Callable Fixed Rt No Sink Fund 250,000 250,164 250,120
Cusip #341148JD7
Florida St Jacksonville
Prerefunded 1/01/98 at 102
DTD 1/01/85 9.20% Due 1/01/2010 75,000 87,171 79,069
Cusip # 36119AF2
Garland Texas GO Bond
DTD 3/15/97 7.125% Due 2/15/03 205,000 228,740 226,586
Cusip # 396482BY6
Greenville SC Hosp Rev FGIC
Call 5/01/98 @ 102, 5/1/00 @ 100
DTD 3/01/88 7.80% Due 5/01/2015 250,000 269,206 264,177
Cusip #45200KSU3
Illinois Health Facs Auth
Rev
DTD 1/01/90 9.50% Due 11/15/19 495,000 600,891 579,541
Cusip #4693638R9
Jacksonville Fla Elec Auth Rev
Elec Auth Rev Ref BDS
DTD 10/01/95 6.250% Due 10/01/98
Non Callable Fixed Rate
Sink 8/01/96 St. John's Riv Pwr P 250,000 258,124 257,255
Cusip #516823AJ0
Laredo Texas
Go Bond- Ser A
DTD 11/01/94 8.625% Due 8/15/03 295,000 351,052 350,997
Cusip #546591HP6
Louisville-Jefferson KY Swr DS
Swr Rev BDS (JR Lien)
DTD 6/01/71 6.250% Due 6/01/97
Escrowed to Maturity Fixed Rt
No Sink Fund 100,000 100,134 100,212
See accountants' review report.
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #57585OXD9
Massachusetts St. Health & Edl
Rev Ser B Prfd 7/1/99 @102
DTD 1/01/89 8.15% Due 7/01/14 195,000 208,945 213,022
Cusip #639557EY9
Nebo Utah School Dist
Go BDS
DTD 6/15/94 9.75% Due 6/15/01 210,000 241,533 247,878
Cusip #649665NC6
New York New York
Ser A-1 Go Bond
DTD 8/14/95 5.50% due 8/01/01 15,000 15,232 15,427
Cusip #649665NF9
New York New York
Go Bond Ser A-1
DTD 8/14/95 5.50% Due 8/01/01 85,000 86,319 86,148
Cusip #649650Z92
New York, New York
Ser B Go Bond
DTD 8/14/95 5.3% Due 8/15/00 50,000 50,149 50,524
Cusip #626190UJ9
New York NY Muni Assit Corp
Rev BDS
DTD 0/01/88 6.75% Due 7/01/98
Non Callable Fixed Rt
No Sink Fund 100,000 102,829 103,057
Cusip #626190WR9
New York NY Muni Assit Corp
Serries 67 BDS
DTD 9/01/88 7.10% Due 7/01/98
Non callable No Sink Fund 150,000 154,656 155,155
Cusip #649664HM4
New York N Y
Ser G Go BD
DTD 1/09/96 5.10% Due 2/01/00 200,000 200,521 200,844
See accountants' review report.
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #649649ZP8
New York N Y
Go BDS-OID
DTD 2/01/90 7.70% Due 8/01/97
Non Callable Fixed Rt
No Sink Fund 225,000 226,748 227,011
Cusip #649706JB5
New York N Y City Mun Wtr Fin
Auth Rev Prfd 6/15/98 @ 101.50
DTD 3/28/89 7.625% Due 6/15/17 230,000 236,389 242,556
Cusip #649810JL3
New York St CTFS Partn
COPS-OID
DTD 2/01/92 6.90% Due 3/1/98
Non Callable Fixed Rt
No Sink Fund 200,000 203,750 204,108
Cusip #6497852Y7
New York State
Go Bond
DTD 7/15/92 7.50% Due 11/15/01 50,000 55,833 55,299
Cusip #649830E69
New York State Dorm Auth Revs
St Univ Edl Facs Rev BDS-OID
DTD 6/01/89 6.75% Due 5/15/97
Non Callable Fixed Rt
No Sink Fund - St. Univ of NY 100,000 100,099 100,111
Cusip #649833KS8
New York St Dorm Auth Revs
Ref BDS-OID
DTD 3/01/93 4.10% Due 7/1/98
Non Callable Fixed Rt
No Sink Fund - Upstate Cmty-Coll 100,000 99,882 99,800
See accountants' review report.
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #650017BM7
New York State Twy Auth
Loc Hwy & Brdg Contract BDS-OID
DTD 9/15/93 4.60% Due 4/01/99
Non Callable Fixed Rt
Sink 8/15/11 150,000 150,910 149,746
Cusip #745144JV8
Puerto Rico Commonwlth
Pub Impt Ref BDS
DTD 7/01/93 4.30% Due 7/1/97
Non-Callable Fixed Rt
No Sink Fund 200,000 200,033 200,122
Cusip # 745269BW9
Puerto Rico Hsg Bk & Fin Agy
Subsidy Prepayment Ref BDS-OID
DTD 9/01/93 4.375% Due 12/01/97
Non-Callable Fixed Rt
Sink 7/01/98 320,000 319,041 320,662
Cusip #745144JY2
Puerto Rico Commonwealth
Go BDS-O.I.D. Ref
DTD 7/01/93 4.90% Due 7/1/00 200,000 200,261 200,342
Cusip # 745269BY5
Puerto Rico Hsg Bk & Fin Agy
Subsidy Prepayment Ref BDS-OID
DTD 9/01/93 4.50% Due 12/01/98
Non-Callable Fixed Rt
Sink 7/01/98 135,000 135,048 134,914
See accountants' review report.
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 796236AN7
San Antonio Texas
Ref Go Bond
DTD 8/01/93 8.00% Due 8/01/02 300,000 345,294 342,730
Cusip #8375592Q5
South Dakota St Hlth & Edl Fac
Rev-Prfd 11/01/98 @ 102
DTD 1/15/89 7.625% Due 11/01/13 130,000 137,504 138,863
Cusip #896029MF9
Triborough Brdg & Tunl Auth
NY Rev-Ser L Prfd 1/01/98 @ 102
DTD 12/01/87 7.80% Due 1/01/03 100,000 103,101 104,551
------- ------- -------
Total Investment - 97.4% $6,985,000 $7,440,580 7,416,106
========== ==========
Other Assets Less Liabilities - 2.6% 198,301
----------
Net Assets - 100% $7,614,407
==========
Net Asset Value Per Share $ 283.89
==========
Outstanding shares at April 30, 1997 26,822
==========
See accountants' review report.
-14-
