KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
OCTOBER 31, 1997
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT 1
STATEMENTS OF ASSETS, LIABILITIES AND
CAPITAL SECURITIES 2
STATEMENTS OF OPERATIONS, UNDISTRIBUTED NET
INCOME (LOSS) 3
STATEMENTS OF CHANGES IN NET ASSETS 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-15
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.
We have audited the accompanying statements of assets, liabilities and
capital securities of Kala Investment Corp. as of October 31, 1997 and 1996,
and the related statements of operations, undistributed net income (loss),
statements of changes in net assets and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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 are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
The investment securities held in custody were confirmed to us by 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 audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kala Investment Corp. as of
October 31, 1997 and 1996, and the results of its operations and the changes in
its operations and the changes in its net assets for the years then ended in
conformity with generally accepted accounting principles.
STUART M. FRIED, CPA
W. Caldwell, New Jersey
December 10, 1997
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
YEAR ENDED OCTOBER 31,
1997 1996
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,293,716 and $7,515,499) $ 7,340,069 $ 7,535,295
Investment in NationsBank tax
exempt fund 18,266
Investment in HSBC NY tax free fund 226,551 0
Cash and cash equivalents 6,230 3,084
Interest receivable 163,314 167,040
Prepaid expense 3,905 3,897
----------- -----------
$ 7,740,069 $ 7,727,582
=========== ===========
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 81,974 $ 102,118
Accrued expenses 10,636 6,293
----------- -----------
92,610 108,411
----------- -----------
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 1,730 (47,686)
Unrealized (depreciation) appreciation
of investments 46,353 19,795
----------- -----------
Total Stockholders' Equity
(equivalent to $285.12 per
share at 10/31/97 and $284.06
per share at 10/30/96 7,647,459 7,619,171
----------- -----------
$ 7,740,069 $ 7,727,582
=========== ===========
The accompanying notes are an integral part of these financial statements.
-2-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF OPERATIONS
UNDISTRIBUTED NET INCOME (LOSS)
YEAR ENDED OCTOBER 31,
1997 1996
INVESTMENT INCOME:
INCOME:
Interest income $352,080 $369,151
-------- --------
EXPENSES:
Custodial fees (note 4) 6,750 7,598
Audit fees 2,500 3,000
Legal fees 16,002 12,185
Taxes other than income taxes 12,010 12,177
Office expense 6,835 3,606
Printing and stationery 623 737
Filing and director's fees 850 1,065
Insurance 3,998 4,011
Amortization expense 0 1,900
--------- ---------
49,568 46,279
--------- ---------
INVESTMENT INCOME 302,512 322,872
Net realized gain (loss) from
investment transactions (1,053) (50,654)
--------- ---------
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 301,459 272,218
Less: Federal income taxes 229 260
--------- ---------
NET INVESTMENT INCOME 301,230 271,958
Less: Dividends paid 299,500 319,644
--------- ---------
UNDISTRIBUTED NET INCOME $ 1,730 $ (47,686)
========= =========
UNREALIZED APPRECIATION OF INVESTMENTS $ 46,353 $ 19,795
========= =========
The accompanying notes are an integral part of these fianancial statements.
-3-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31,
1997 1996
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 302,283 $ 322,612
Net realized gain (loss) on investments (1,053) (50,654)
Change in unrealized appreciation 26,558 28,239
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 327,788 300,197
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME 299,500 (319,644)
---------- ----------
TOTAL INCREASE (DECREASE) 28,288 (19,447)
NET ASSETS BEGINNING OF PERIOD 7,619,171 7,638,618
---------- ----------
NET ASSETS END OF PERIOD (including
undistributed net income of $1,730 and
net loss of $47,686 respectively $7,647,459 $7,619,171
========== ==========
DIVIDENDS PER SHARE $11.17 $ 11.92
========== ==========
The accompanying notes are an integral part of these financial statements.
-4-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $301,230 $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 195,226 61,320
(Increase) Decrease in NationsBank tax
exempt fund 18,266 44,695
(Increase) Decrease in HSBC NY tax free fund (226,551) 0
(Increase) Decrease in interest receivable 3,726 19,316
(Increase) Decrease in prepaid expenses (8) 226
Increase (Decrease) in accrued expenses 4,346 1,975
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 297,288 452,044
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized
of investments 26,555 28,239
Realized gain (loss) from investment
transactions (1,053) (50,654)
-------- --------
NET CASH USED BY
INVESTING ACTIVITIES 25,502 (22,415)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (319,644) (432,250)
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,146 (2,621)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 3,084 5,705
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,230 $ 3,084
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ 0 $ 143
======== ========
The accompanying notes are an integral part of these financial statements.
-5-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 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.
-6-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 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 $21,253 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 October 31, 1997:
Unrealized appreciation of bonds totalled $ 82,858
Unrealized depreciation of bonds totalled (36,505)
---------
Net unrealized depreciation of investments $ 46,353
---------
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
Securities purchased by the Company amounted to $3,147,497 (which included
purchases of HSBC NY tax exempt fund of $346,681 and purchases of NationsBank
tax exempt fund $1,228,946) for the year ended October 31, 1997 and
$3,298,492, (which included purchases of HSBC NY tax exempt fund $0 and
purchases of NationsBank tax exempt fund of $1,161,601) for the year ended
October 31, 1996. Sales of securities amounted to $3,047,820 (which
included sales of HSBC NY tax exempt fund of $120,130 and sales of
NationsBank tax exempt fund of $1,247,212) for the year ended October 31,
1997 and $3,265,896 (which included sales of HSBC NY tax exempt fund of $0
and sales of NationsBank tax exempt fund of $1,206,296) for the year ended
October 31, 1996.
-7-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
3. DISTRIBUTIONS
The Company distributed income of $299,500 ($11.17 per share) as of October
31, 1997 and $319,644 ($11.92 per share) for the year ended October 31, 1996 in
the form of dividends.
4. CUSTODIAL FEES
On August 15, 1997, the custodial agreement was transferred to Marine Midland
Bank. Marine Midland Bank (the Custodian) will charge a custodial fee of:
.25% on the first $500,000 face value of bonds per $1,000
.125% on the next $1,000,000 face value of bonds per $1,000
.625% on amounts over $1,500,000 face value of bonds per $1,000
The minimum annual charge is $1,000. Additional charges will include $20 for
each security transaction.
During the year ended October 31, 1997, the Company was charged an
aggregate of $6,750 and $7,598 for the year ended October 31, 1996.
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 and $600 for the
years ended October 31, 1997 and 1996.
6. CAPITAL PER SHARE AND RELATED INFORMATION
Selected data for a share of capital stock outstanding throughout each year:
-8-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
YEAR ENDED OCTOBER 31,
1997 1996
Investment income $ 13.12 $ 13.76
Operating expenses 1.84 1.73
---------- ----------
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 11.28 12.03
FEDERAL INCOME TAX 0 0
---------- ----------
INVESTMENT INCOME - NET 11.28 12.03
Dividends to shareholders 11.17 11.92
---------- ----------
.11 .11
Realized and unrealized gain
(loss) on investments - net .95 (.84)
---------- ----------
CHANGE IN NET VALUE 1.06 (.73)
NET ASSET VALUE:
Beginning of period 284.06 284.79
---------- ----------
End of period $ 285.12 $ 284.06
========== ==========
Ratio of operating expenses
to average net assets .64% .60%
Ratio of investment income
net to average net assets 4.60% 4.81%
Portfolio turnover 20.57% 26.82%
Number of shares outstanding
at end of period 26,822 26,822
-9-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
7. INVESTMENT IN SECURITIES
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 010316BD8
Alabama Mental Health Fin Auth
DTD 7/01/95 4.750% Due 5/01/98
SPL Tax RFDG MBJA Non callable $165,000 $165,544 $165,810
Cusip # 017289Q51
Allegheny Cnty Pa Hosp Dev Auth
DTD 2/01/88 6.90% Due 7/01/98
Presbyterian Univ Hosp-Ser-L-MB1A
Book entry only-Non Callable
Subj to extraordinary Rdmpt 160,000 162,771 163,266
Cusip # 652474BX6
Austin Tex Util Sys Rev MB1A
DTD 7/15/89 9.25% Due 11/15/01
Unrefunded balance-Comb Pr Lien
Non Callable 235,000 278,200 277,911
Cusip # 652473QW8
Austin Tex Util Sys Rev Sera
DTD 4/15/86 8.00% Due 11/15/16
Comb Pr Lien 100,000 111,364 112,443
Cusip #07133ABG6
Battery Pk City Auth NY Rev-RFDG
Ser B-Book Entry Only
DTD 11/15/93 4.50% Due 11/01/98
Non Callable 275,000 276,281 276,521
Cusip #088275RS3
Bexar County Texas CTFS Oblig
GO Bond- PRFD
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100 620,000 654,585 668,602
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 235416KN3
Dallas Texas Wtrwks & Swr Sys
DTD 9/01/96 8.0% Due 10/01/01
RFD6 & Impt-Non Callable 250,000 280,008 283,485
Cusip # 235416MC5
Dallas Texas Wtrwks & Swr Sys
DTD 4/01/95 7.5% Due 4/01/03
RFDG & Impt-Callable 4/01/02 @ 101.50 150,000 169,165 170,265
Cusip #254760E64
District of Columbia RFDG Ser D
DTD 6/01/93 4.60% Due 12/01/97
Book Entry Only-Non Callable OID 250,000 250,022 250,077
Cusip #341148JD7
Florida St Jacksonville TranN Auth
DTD 1/01/85 9.20% Due 1/01/10
Pre-refunded 1/1/98 @ 102.00 75,000 86,691 77,152
Cusip # 36119AF2
Garland Texas MB1A
DTD 3/15/97 7.125% Due 2/15/03
Book Entry Only-Non Callable 205,000 226,690 231,332
Cusip # 396482BY6
Greenville SC Hosp Sys Hosp Fac Rev
DTD 3/01/88 7.80% Due 5/01/15
Ser A FG1C Book Entry Only-OID
Pre-refunded 5/1/98 @ 102.00 250,000 266,004 259,830
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #45200KSU3
Illinois Health Facs Auth Rev
DTD 1/01/90 9.50% Due 11/15/19
Hinsdale Hosp C-Book Entry Only
Pre-refunded 11/15/00 @ 102.00 495,000 596,543 578,373
Cusip #4693638R9
Jacksonville Fla Elec Auth Rev RFDG
DTD 10/01/95 6.250% Due 10/01/98
St. John's Riv-ISS 2 Ser 6-C
OID Book Entry Only-Non Callable 250,000 255,256 255,582
Cusip #516823AJ0
Laredo Texas Ser A MBIA
DTD 11/01/94 8.625% Due 8/15/03
Book Entry Only-Non Callable 295,000 346,598 357,516
Cusip #57585OXD9
Massachusetts St. Health & EDL FALS Auth Rev
Salem Hosp Ser B-Book Entry Only
Pre-refunded 7/1/99 @102.00
DTD 1/01/89 8.15% Due 7/01/14 195,000 205,727 211,540
Cusip # 57585GH39
Massachusetts St. Health & EDL FALS Auth Rev
DTD 5/01/90 7.5%-Book Entry Only
Only Subj to Spec Redmpt DTD 5/01/90 7.5%
Due 7/01/10 Pre-refunded 7/01/00
@ 102.00 130,000 143,644 143,311
Cusip #639557EY9
Nebo Utah School Dist FGIC
DTD 6/15/94 9.75% Due 6/15/01
Book Entry Only-Non Callable 210,000 237,711 248,356
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #649665NC6
New York New York Ser A-1
DTD 8/14/95 5.50% due 8/01/01
Book Entry Only-Escrowed to Maty-OID 15,000 15,204 15,680
Cusip #649665NF9
New York New York Ser A-1
DTD 8/14/95 5.50% Due 8/01/01
Book Entry Only-Non Callable-OID 85,000 86,163 88,134
Cusip #649650Z92
New York, New York Ser B
DTD 8/14/95 5.3% Due 8/15/00
Book Entry Only-Non Callable 50,000 50,127 51,310
Cusip #626190UJ9
Muni Assit Corp for City New York NY
Ser 64
DTD 0/01/88 6.75% Due 7/01/98 100,000 101,615 101,979
Cusip #626190WR9
Muni Assit Corp for City New York NY
Ser 67
DTD 9/01/88 7.10% Due 7/01/98 150,000 152,658 153,292
Cusip #649664HM4
New York NY Ser G
DTD 1/09/96 5.10% Due 2/01/00
Book Entry Only-Non Callable-OID 200,000 200,427 203,426
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip #649706JB5
New York N Y City Mun Wtr Fin Auth
Wtr & Swr Sys Rev Ser B FGIC
DTD 3/28/89 7.625% Due 6/15/17
Pre-refunded 6/15/98 @ 101.50
Book Entry Only-OID 230,000 233,551 238,834
Cusip #649810JL3
New York St CTFS Partn
COPS-OID
DTD 2/01/92 6.90% Due 3/1/98
Book Entry Only
Subj to Spec Rdmpt 200,000 201,500 201,990
Cusip #6497852Y7
New York St. Crossover RFDG
DTD 7/15/92 7.50% Due 11/15/01
Book Entry Only-Non Callable 50,000 55,191 55,981
Cusip #649833KS8
New York St Dorm Auth Revs RFDG
DTD 3/01/93 4.10% Due 7/1/98
Upstate Cmty Colleges A-OID 100,000 99,932 100,181
Cusip # 650017BM7
New York State Twy Auth Svc Contract
Rev Loc Hwy & Brdg
DTD 9/15/93 4.60% Due 4/01/99
Book Entry Only-Non Callable 150,000 150,672 151,120
Cusip # 745269BW9
Puerto Rico Hsg Bk & Fin Agy RFDG
DTD 9/01/93 4.375% Due 12/01/97
Cmwlth Apr-Subsidy Prepy-Singl Fam
Book Entry Only-OID-Non Callable 320,000 319,861 320,182
Cusip # 745144JY2
Puerto Rico Comwlth RFDG Impt
DTD 7/01/93 4.90% Due 7/1/00
Book Entry Only-Non Callable-OID 200,000 200,219 203,790
-14-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 745269BY5
Puerto Rico Hsg Bk & Fin Agy RFDG
DTD 9/01/93 4.50% Due 12/01/98
Cmwlth Appr Subsidy Prepay - Singl Fam
Book Entry Only-Non Callable-OID 135,000 135,032 135,435
Cusip # 796236AN7
San Antonio Tex RFDG & Gen Impt
DTD 8/01/93 8.00% Due 8/01/02
Book Entry Only-Non Callable 300,000 340,983 347,483
Cusip # 8375592Q5
South Dakota St Hlth & Edl Fac Auth Rev
Sioux Vy Hosp MBIA
DTD 1/15/89 7.625% Due 11/01/13
Pre-refunded 11/01/98 @ 102.00 130,000 135,002 137,227
Cusip # 896029MF9
Triborough Brdg & Tunl Auth
NY Rev-Ser L
DTD 12/01/87 7.80% Due 1/01/03
Prfd 1/01/98 @ 102.00 100,000 100,775 102,653
------- -------
Total Investment - 96.0% $6,825,000 $7,293,716 7,340,069
========== ==========
Other Assets Less Liabilities - 4.0% 307,390
----------
Net Assets - 100% $7,647,459
==========
Net Asset Value Per Share $ 285.12
==========
Outstanding shares at October 31, 1997 26,822
==========
-15-
