KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
APRIL 30, 1998
CONTENTS
PAGE
ACCOUNTANT'S REVIEW 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
(973) 226 4006
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, 1998 and
the related statements of operations, undistributed net income (loss),
statements of 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, 1997 were audited by
us, and we expressed an unqualified opinion on them in our report dated
December 10, 1997, but we have not performed any auditing procedures since
that date.
STUART M. FRIED, CPA
W. Caldwell, New Jersey
June 15, 1998
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
SIX MONTHS YEAR ENDED
ENDED 4/30/98 OCTOBER 31,
(Unaudited) 1997
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,201,261 and $7,293,716) $ 7,209,062 $ 7,340,069
Investment in HSBC NY tax free fund 290,244 226,551
Cash and cash equivalents 6,589 6,230
Interest receivable 153,849 163,314
Prepaid expense 1,779 3,905
Tax refund receivable 23,000 0
----------- -----------
$ 7,684,523 $ 7,740,069
=========== ===========
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 0 $ 81,974
Accrued expenses 5,801 10,636
----------- -----------
5,801 92,610
----------- -----------
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 34,627
Retained earnings 7,566,479 7,564,749
Undistributed net income 69,815 1,730
Unrealized (depreciation) appreciation
of investments 7,801 46,353
----------- -----------
Total Stockholders' Equity
(equivalent to $286.28 per
share at 4/30/98 and 285.12
per share at 10/30/97 7,678,722 7,647,459
----------- -----------
$ 7,684,523 $ 7,740,069
=========== ===========
See accountants' review report and notes to financial statements.
-2-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF OPERATIONS
UNDISTRIBUTED NET INCOME (LOSS)
SIX MONTHS YEAR ENDED
ENDED 4/30/98 OCTOBER 31,
(UNAUDITED) 1997
INVESTMENT INCOME:
INCOME:
Interest income $174,103 $352,080
EXPENSES:
Custodial fees (note 4) 3,197 6,750
Audit fees 1,000 2,500
Legal fees 3,176 16,002
Taxes other than income taxes (22,900) 12,010
Office expense 4,049 6,835
Printing and stationery 742 623
Filing and director's fees 125 850
Insurance 1,978 3,998
--------- ---------
(8,633) 49,568
--------- ---------
INVESTMENT INCOME 182,736 302,512
Net realized gain (loss) from
investment transactions (8,031) (1,053)
--------- ---------
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 174,705 301,459
Less: Federal income taxes 16 229
--------- ---------
NET INVESTMENT INCOME 174,689 301,230
Less: Dividends paid 104,874 299,500
--------- ---------
UNDISTRIBUTED NET INCOME $ 69,815 $ 1,730
========= =========
UNREALIZED APPRECIATION OF INVESTMENTS 7,801 46,353
========= =========
See accountants' review report and notes to fianancial statements.
-3-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS YEAR ENDED
ENDED 4/30/98 OCTOBER 31,
(Unaudited) 1997
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 182,720 $ 302,283
Net realized gain (loss) on investments (8,031) (1,053)
Change in unrealized appreciation (38,552) 26,558
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 136,137 327,788
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME 104,874 299,500
---------- ----------
TOTAL INCREASE (DECREASE) 31,263 28,288
NET ASSETS BEGINNING OF PERIOD 7,647,459 7,619,171
---------- ----------
NET ASSETS END OF PERIOD (including
undistributed net income of $69,815
and $1,730 respectively) $7,678,722 $7,647,459
========== ==========
DIVIDENDS PER SHARE $ 3.91 $ 11.17
========== ==========
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 4/30/98 OCTOBER 31,
(Unaudited) 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $174,689 $301,230
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized (gain) loss from investment
transactions included in net income 8,031 1,053
Changes in assets and liabilities:
(Increase) Decrease in securities
at fair market value 131,007 195,226
(Increase) Decrease in NationsBank tax
exempt fund 0 18,266
(Increase) Decrease in HSBC NY tax free fund (63,693) (226,551)
(Increase) Decrease in interest receivable 9,465 3,726
(Increase) Decrease in prepaid expenses 2,126 (8)
Increase (Decrease) in accrued expenses (4,835) 4,346
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 233,790 297,288
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized
of investments (38,552) 26,555
Realized gain (loss) from investment
transactions (8,031) (1,053)
-------- --------
NET CASH USED BY
INVESTING ACTIVITIES (46,583) 25,502
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (186,848) (319,644)
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 359 3,146
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,230 3,084
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,589 $ 6,230
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ 300 $ 0
See accountants' review report and notes to financial statements.
-5-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
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.
(e) Interest receivable on investment in securities is computed daily.
See accountants' review report.
-6-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
(f) Unrealized appreciation (depreciation) of investments is stated as the
difference between amortized cost and fair market value at:
APRIL 30, 1998:
Unrealized appreciation of bonds totalled $ 59,807
Unrealized depreciation of bonds totalled (52,006)
---------
Net unrealized depreciation of investments $ 7,801
---------
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
Securities purchased by the Company amounted to $1,780,195 (which included
purchases of HSBC NY tax exempt fund of $851,633) for the six months
ended April 30, 1998) and $3,147,497 (which included purchases of HSBC NY tax
exempt fund of $346,681 and purchases of NationsBank tax exempt fund of
$1,228,946) for the year ended October 31, 1997. Sales of securities
amounted to $1,745,324 (which included sales of HSBC NY tax exempt fund of
$788,793) and $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.
See accountants' review report.
-7-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
3. DISTRIBUTIONS
The Company distributed income of $104,874 ($3.91 per share) as of April 30,
1998 and $299,500 ($11.17 per share) for the year ended October 31, 1997 in
the form of dividends.
4. CUSTODIAL FEES
On August 15, 1998 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 charge is $1,000. Additional charges will include $20 for each
security transaction.
During the six months ended April 30, 1998, the Company was charged an
aggregate of $3,197 and $6,750 for the year ended October 31, 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 $0 for the six
months ended April 30, 1998 and d $600 for the year ended October 31, 1997.
6. CONTINGENCIES
In January 1998 the Securities and Exchange Commission (SEC) conducted a
routine examination of the Company's books and records. This examination
found several possible violations of the Investment Company Act of 1940 (the
Act). Among these were improper payment of the State of Florida Intangilble
Tax and; improper diversification of the Company's investments. The Comapany
agrees with the finding regarding the intangibles tax and refund applications
are pending. The Company believes that the finding regarding diversification
is not correct. The Company contends that the SEC's conclusion in this
matter is in error, in that the base for diversification computations was
incorrectly calculated.
7. CAPITAL PER SHARE AND RELATED INFORMATION
Selected data for a share of capital stock outstanding throughout each year:
See accountants' review report.
-8-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30 1998
SIX MONTHS YEAR ENDED
ENDED 4/30/98 OCTOBER 31,
(Unaudited) 1997
Investment income $ 6.49 $ 13.12
Operating expenses (.32) 1.84
---------- ----------
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 6.81 11.28
FEDERAL INCOME TAX 0 0
---------- ----------
INVESTMENT INCOME - NET 6.81 11.28
Dividends to shareholders 3.91 11.17
---------- ----------
2.90 .11
Realized and unrealized gain
(loss) on investments - net (1.74) .95
---------- ----------
CHANGE IN NET VALUE 1.16 1.06
NET ASSET VALUE:
Beginning of period 285.12 284.06
---------- ----------
End of period $ 286.28 $ 285.12
========== ==========
Ratio of operating expenses
to average net assets .00% .64%
Ratio of investment income
net to average net assets 2.38% 4.60%
Portfolio turnover 22.75% 20.57%
Number of shares outstanding
at end of period 26,822 26,822
Se accountants' review report.
-9-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
8. 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 $165,000 $165,003
Cusip # 017289Q51
Allegheny Cnty Pa Hosp Dev Auth
DTD 2/01/88 6.90% Due 7/01/98
Presbyterian Univ Hosp-Ser-L-MBIA
Book entry only Non Callable
Subj to extraordinary Rdmpt 160,000 160,693 160,766
Cusip # 652474BX6
Austin Tex Util Sys Rev MBIA
DTD 7/15/89 9.25% Due 11/15/01
Unrefunded balance-Comb Pr Lien
Non Callable 235,000 272,856 271,728
Cusip # 652473QW8
Austin Tex Util Sys Rev MBIA
DTD 4/15/86 8.00% Due 11/15/16
Comb Pr Lien 100,000 109,760 110,441
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 275,000 275,643 275,880
Cusip # 088275RS3
Bexar County Texas CTFS Oblig
Go Bond- PRFD
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100 620,000 650,777 661,019
Cusip # 235416KN3
Dallas Texas Wtrwks & Swr Sys Rev
DTD 4/01/95 7.50% Due 4/01/03
RFDG & Impt-Non Callable 250,000 276,178 278,312
Cusip # 235416MC5
Dallas Texas Wtrwks & Swr Sys Rev
DTD 9/01/96 8.00% Due 10/01/01
RFDG & Impt-Callable 4/01/02 @ 101.50 150,000 167,396 167,887
See accountants' review report.
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 366119AF2
Garland Tex MBIA
DTD 3/15/97 7.125% Due 2/15/03
Book Entry Only-Non Callable 205,000 224,640 227,878
Cusip # 396482BY6
Greenville SC Hosp Fac Rev
DTD 3/01/88 7.80% 5/01/2015
Ser A FG1C Book Entry Only-OID
Pre-refunded 5/1/98 @ 102.00 250,000 262,802 255,025
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 @ 102.00 495,000 596,195 566,161
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 250,000 252,388 252,520
Cusip # 516823AJ0
Laredo Texas Ser A MBIA
DTD 11/01/94 8.625% Due 8/15/03
Book Entry Only-Non Callable 295,000 342,144 351,153
See accountants' review report.
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 57585OXD9
Massachusetts St. Health & EDL FALS
Auth Rev
Salem Hosp Ser B-Book Entry Only
Pre-refunded 7/1/99 @102
DTD 1/01/89 8.15% Due 7/01/14 195,000 202,509 208,073
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 @ 102.00 130,000 143,105 141,257
Cusip # 639557EY9
Nebo Utah School Dist FGIC
DTD 6/15/94 9.75% Due 6/15/01
Book Entry Only-Non Callable 210,000 233,889 242,483
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 15,176 15,522
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 86,007 87,539
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 50,105 51,066
Cusip # 626190UJ9
Muni Assit Corp for City New York NY
Ser 64
DTD 0/01/88 6.75% Due 7/01/98 100,000 100,402 100,454
Cusip # 626190WR9
New York NY Muni Assit Corp
Ser 67
DTD 9/01/88 7.10% Due 7/01/98 150,000 150,660 150,772
Cusip # 649664HM4
New York NY Ser G
DTD 1/09/96 5.10% Due 2/01/00
Book Entry Only-Non Callable-OID 200,000 200,332 202,830
See accountants' review report.
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 649667FS6
New York City 6.0 Sr '93
DTD 10/29/92 7.00% Due 10/1/14
Callable 10/1/02 245,000 277,255 272,567
Cusip # 649785ZZ4
New York St. 6.0 Rfdg BDS
DTD 7/15/92 7% Due 11/15/02 175,000 196,143 192,733
Cusip # 649876EE5
New York St. Loc Gov't assist
DTD 12/1/91 7.00% Due 4/1/18
Callable 4/1/02 110,000 123,559 122,296
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 # 649876BB4
New York St Local Gov't Assist
DTD 2/01/91 7.00% Due 4/1/16
Callable 4/01/01 100,000 109,948 109,240
Cusip # 6497852Y7
New York State Crossover RFDG
DTD 7/15/92 7.50% Due 11/15/01
Book Entry Only-Non Callable 50,000 54,549 55,001
Cusip #649833KS8
New York St Dorm Auth RFDG
DTD 3/01/93 4.10% Due 7/1/98
Upstate Cmty Colleges A-OID 100,000 99,982 100,000
See accountants' review report.
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
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 150,000 150,434 150,880
Cusip # 649785247
New York St 6.0 Rfdg
DTD 7/15/92 7.5% Due 11/15/01 195,000 215,657 214,507
Cusip #745144JY2
Puerto Rico Commonwealth RFDG Impt
DTD 7/01/93 4.90% Due 7/1/00
Book Entry Only-Non Callable-OID 200,000 200,177 202,656
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 135,000 135,018 135,274
See accountants' review report.
-14-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Cusip # 796236AN7
San Antonio Tex RFDG & Gen Impt
DTD 8/01/93 8.00% Due 8/01/02
Book Entry Only- Non Callable 300,000 336,663 340,671
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 @ 102.00 130,000 132,506 135,006
---------- ---------- ---------
Total Investment - 93.88% $6,705,000 $7,201,261 7,209,062
========== ==========
Other Assets Less Liabilities - 6.2% 469,660
----------
Net Assets - 100% $7,678,722
==========
Net Asset Value Per Share $ 286.28
==========
Outstanding shares at April 30, 1998 26,822
==========
See accountants' review report.
-15-
