KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 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 6-14
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.
We have audited the accompanying statements of assets, liabilities and
capital securities of Kala Investment Corp. as of October 31, 1998 and 1997,
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, 1998 and 1997, and the results of 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 8, 1998
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
YEAR ENDED OCTOBER 31,
1998 1997
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,181,921 and $7,293,716) $ 7,291,343 $ 7,340,069
Investment in HSBC NY tax free fund 344,367 226,551
Cash and cash equivalents 39,072 6,230
Interest receivable 144,518 163,314
Prepaid expense 3,878 3,905
----------- -----------
$ 7,823,178 $ 7,740,069
=========== ===========
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 113,725 $ 81,974
Accrued expenses 10,087 10,636
----------- -----------
123,812 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 (11,159) 1,730
Unrealized (depreciation) appreciation
of investments 109,419 46,353
----------- -----------
Total Stockholders' Equity
(equivalent to $287.05 per
share at 10/31/98 and 285.12
per share at 10/31/97 7,699,366 7,647,459
----------- -----------
$ 7,823,178 $ 7,740,069
=========== ===========
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,
1998 1997
INVESTMENT INCOME:
INCOME:
Interest income $342,877 $352,080
Interest income - tax refund 2,078 0
-------- --------
$344,955 $352,080
-------- --------
EXPENSES:
Custodial fees (note 4) 6,421 6,750
Audit fees 2,500 2,500
Legal fees 11,204 16,002
Taxes other than income taxes(net refund) (22,098) 12,010
Office expense 7,111 6,835
Printing and stationery 806 623
Filing and director's fees 250 850
Insurance 4,002 3,998
--------- ---------
10,196 49,568
--------- ---------
INVESTMENT INCOME 334,759 302,512
Net realized gain (loss) from
investment transactions (12,989) (1,053)
--------- ---------
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 321,770 301,459
Less: Federal income taxes 1,678 229
--------- ---------
NET INVESTMENT INCOME 320,092 301,230
Less: Dividends paid 331,251 299,500
--------- ---------
UNDISTRIBUTED NET INCOME (LOSS) $ (11,159) $ 1,730
========= =========
UNREALIZED APPRECIATION OF INVESTMENTS 109,419 46,353
========= =========
The accompanying notes are an integral part of these financial statements.
-3-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31,
1998 1997
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 333,081 $ 302,283
Net realized gain (loss) on investments (12,989) (1,053)
Change in unrealized appreciation 63,066 26,558
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 383,158 327,788
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME 331,251 299,500
---------- ----------
TOTAL INCREASE (DECREASE) 51,907 28,288
NET ASSETS BEGINNING OF PERIOD 7,647,459 7,619,171
---------- ----------
NET ASSETS END OF PERIOD (including
undistributed net loss of $11,159
undistributed net income of $1,730
respectively) $7,699,366 $7,647,459
========== ==========
DIVIDENDS PER SHARE $ 12.35 $ 11.17
========== ==========
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,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $320,092 $301,230
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized (gain) loss from investment
transactions included in net income 12,989 1,053
Changes in assets and liabilities:
(Increase) Decrease in securities
at fair market value 48,726 195,226
(Increase) Decrease in NationsBank tax
exempt fund 0 18,266
(Increase) Decrease in HSBC NY tax free fund (117,816) (226,551)
(Increase) Decrease in interest receivable 18,796 3,726
(Increase) Decrease in prepaid expenses 27 (8)
Increase (Decrease) in accrued expenses (549) 4,346
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 282,265 297,288
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized
of investments 63,066 26,555
Realized gain (loss) from investment
transactions (12,989) (1,053)
-------- --------
NET CASH USED BY
INVESTING ACTIVITIES 50,077 25,502
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (299,500) (319,644)
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 32,842 3,146
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,230 3,084
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 39,072 $ 6,230
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ 100 $ 0
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, 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.
-6-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
(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.
(g) Unrealized appreciation (depreciation) of investments is stated as the
difference between amortized cost and fair market value at October 31, 1998:
Unrealized appreciation of bonds totaled $ 144,128
Unrealized depreciation of bonds totaled (34,709)
---------
Net unrealized appreciation of investments $ 109,419
---------
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
Securities purchased by the Company amounted to $3,792,2955 (which included
purchases of HSBC NY tax exempt fund of $1,396,804) for the year ended
October 31, 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 $3,640,938 (which included sales of HSBC NY tax exempt fund of
$120,130 and sales of NationsBank tax exempt fund of $1,278,988) for the
year ended October 31, 1998 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.
-7-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
3. DISTRIBUTIONS
The Company distributed income of $331,251 ($12.35 per share) as of October
31, 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, 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 charge is $1,000. Additional charges will include $20 for each
security transaction.
During the year ended October 31, 1998, the Company was charged an
aggregate of $6,241 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 and $600 for the
years ended October 31, 1998 and 1997.
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, 1998
YEAR ENDED OCTOBER 31,
1998 1997
Investment income $ 12.86 $ 13.12
Operating expenses .38 1.84
---------- ----------
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 12.48 11.28
FEDERAL INCOME TAX .06 0
---------- ----------
INVESTMENT INCOME - NET 12.42 11.28
Dividends to shareholders 12.35 11.17
---------- ----------
.07 .11
Realized and unrealized gain
(loss) on investments - net 1.88 .95
---------- ----------
CHANGE IN NET VALUE 1.95 1.06
NET ASSET VALUE:
Beginning of period 285.12 284.06
---------- ----------
End of period $ 287.07 $ 285.12
========== ==========
Ratio of operating expenses
to average net assets .001% .64%
Ratio of investment income
net to average net assets 4.32% 4.60%
Portfolio turnover 30.61% 20.57%
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, 1998
8. INVESTMENT IN SECURITIES
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Austin Tex Util Sys Rev MBIA
DTD 7/15/89 9.25% Due 11/15/01
Unrefunded balance-Comb Pr Lien
Non Callable 235,000 267,512 272,020
Austin Tex Util Sys Rev MBIA
DTD 4/15/86 8.00% Due 11/15/16
Comb Pr Lien 100,000 108,156 110,542
Battery Pk City Auth NY Rev-RFDG
Ser B-book Entry Only
DTD 11/15/93 4.50% Due 11/01/98
Non Callable 275,000 275,000 275,011
Bexar County Texas CTFS Oblig
Go Bond- PRFD
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100 620,000 649,969 671,882
Dallas Texas Wtrwks & Swr Sys Rev
DTD 4/01/95 7.50% Due 4/01/03
RFDG & Impt-Non Callable 150,000 165,628 169,535
Dallas Texas Wtrwks & Swr Sys Rev
DTD 9/01/96 8.00% Due 10/01/01
RFDG & Impt-Callable 4/01/02 @ 101.50 250,000 272,348 279,477
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Garland Tex MBIA
DTD 3/15/97 7.125% Due 2/15/03
Book Entry Only-Non Callable 205,000 222,590 231,648
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 @ 102.00 495,000 593,847 562,241
Laredo Texas Ser A MBIA
DTD 11/01/94 8.625% Due 8/15/03
Book Entry Only-Non Callable 295,000 337,690 355,357
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 7/01/14 195,000 199,291 205,510
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 @ 102.00 130,000 142,567 140,872
Municipal Assisstance Corp. for City
New York NY RFDG-Ser L- Book Entry
DTD 6/15/97 6.00% Due 7/1/04
Non Callable 200,000 217,325 220,738
Nassau Cnty NY Rfdg-Comb Swr Dists
Ser F-MBIA Book Entry Only
DTD 6/10/93 5.30% Due 7/1/06
Non Callable 250,000 271,135 269,727
Nebo Utah School Dist FGIC
DTD 6/15/94 9.75% Due 6/15/01
Book Entry Only-Non Callable 210,000 230,067 241,477
New York St Twy Auth Svc Contract
Rev Loc Hwy & Brdg
Book Entry Only
DTD 9/15/93 4.60% Due 4/01/99
Non Callable 150,000 150,196 151,019
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
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
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
New York NY Ser G
DTD 1/09/96 5.10% Due 2/01/00
Book Entry Only-Non Callable-OID 190,000 190,226 193,737
New York NY Ser G
DTD 1/09/96 5.10% Due 2/01/00
Escrowed to MATY 10,000 10,012 10,207
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
New York St Crossover RFDG
DTD 07/15/92 7.50% Due 11/15/01
Book Entry Only-Non Callable 245,000 266,648 271,396
New York St. Crossover RFDG
DTD 7/15/92 7.00% Due 11/15/02
Non Callable-Book Entry Only 175,000 193,815 195,585
New York St. Loc Gov't assist
Ser D MBIA IBC MBIA IND 0BD CTF OID
DTD 12/1/91 7.00% Due 4/1/18
Prerefunded 4/1/02 @ 102 110,000 123,559 122,296
New York St Local Gov't Assist
DTD 2/01/91 7.00% Due 4/01/16
Ser A-MBIA-IBC O.I.D.
Prerefunded 4/01/01 @ 102.00 100,000 109,948 109,240
New York St Twy Auth
Hwy & Brdg TR FD
Ser A MBIA Book Entry Only
DTD 7/1/95 6.25% Due 4/01/04 250,000 276,335 277,410
New York NY
Ser A Book Entry Only
DTD 8/15/91 7.750% Due 8/15/05
Prerefunded 8/15/01 @ 101.50 100,000 111,589 112,264
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
New York NY Ser B Book Entry O.I.D.
DTD 10/29/92 7.00% Due 10/01/14
Prerefunded 10/01/02 @ 101.5 245,000 273,671 277,181
New York NY Ser B Book Entry O.I.D.
DTD 10/29/92 6.75% Due 10/01/15
Prerefunded 10/1/02 @ 101.5 235,000 259,623 263,834
New York NY Ser F Book Entry O.I.D.
DTD 05/15/91 8.25% Due 11/15/16
Prerefunded 11/15/01 @ 101.5 100,000 112,666 114,580
New York St Dorm Auth Revs St
Univ EDL FACS-A-MBIA-IBC MBIA-
INSD BD CTF-O-O.I.D.
DTD 12/1/91 6.75% Due 5/15/21
Prerefunded 5/15/02 @ 102 190,000 208,374 212,471
Puerto Rico Commonwealth RFDG Impt
DTD 7/01/93 4.90% Due 7/1/00
Book Entry Only-Non Callable-OID 200,000 200,135 204,460
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 135,000 135,004 135,063
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
San Antonio Tex RFDG & Gen Impt
DTD 8/01/93 8.00% Due 8/01/02
Book Entry Only- Non Callable 300,000 332,349 344,220
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 @ 102.00 130,000 130,000 132,616
---------- ---------- ---------
Total Investment - 94.7% $6,625,000 $7,181,921 7,291,343
========== ==========
Other Assets Less Liabilities - 5.3% 408,023
----------
Net Assets - 100% $7,699,366
==========
Net Asset Value Per Share $ 287.05
==========
Outstanding shares at October 31, 1998 26,822
==========
-14-
