KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
APRIL 30, 1999
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 6-14
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.
New York, New York
We have reviewed the accompanying statements of assets, liabilities and
capital securities of Kala Investment Corp. as of April 30, 1999 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, 1998 were audited by
us, and we expressed an unqualified opinion on them in our report dated
December 8, 1998, but we have not performed any auditing procedures since
that date.
STUART M. FRIED, CPA
W. Caldwell, New Jersey
June 23, 1999
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
SIX MONTHS YEAR ENDED
ENDED 4/30/99 OCTOBER 31,
(Unaudited) 1998
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,342,581 and $7,181,921 $ 7,422,987 $ 7,291,343
Investment in HSBC NY tax free fund 156,669 344,367
Cash and cash equivalents 1,779 39,072
Interest receivable 145,125 144,518
Prepaid expense 1,768 3,878
----------- -----------
$ 7,728,328 $ 7,823,178
=========== ===========
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 0 $ 113,725
Accrued expenses 5,087 10,087
----------- -----------
5,087 123,812
----------- -----------
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 7,555,320 7,566,479
Undistributed net income 52,888 (11,159)
Unrealized appreciation (depreciation)
of investments 80,406 109,419
----------- -----------
Total Stockholders' Equity
(equivalent to $287.94 per
share at 4/30/99 and 287.05
per share at 10/30/98 7,723,241 7,699,366
----------- -----------
$ 7,728,328 $ 7,823,178
=========== ===========
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 4/30/99 OCTOBER 31,
(UNAUDITED) 1998
INVESTMENT INCOME:
INCOME:
Interest income $166,259 $342,877
Interest income - tax refund 0 2,078
------- --------
$166,259 $344,955
-------- --------
EXPENSES:
Custodial fees (note 4) 3,310 6,421
Audit fees 2,000 2,500
Legal fees 3,051 11,204
Taxes other than income taxes (net refund) (546) (22,098)
Office expense 1,875 7,111
Printing and stationery 672 806
Filing and director's fees 125 250
Insurance 1,990 4,002
--------- ---------
12,477 10,196
--------- ---------
INVESTMENT INCOME 153,782 334,759
Net realized gain (loss) from
investment transactions 2,600 (12,989)
--------- ---------
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 156,382 321,770
Less: Federal income taxes (net refund) (1,380) (1,678)
--------- ---------
NET INVESTMENT INCOME 157,762 320,092
Less: Dividends paid 104,874 331,251
--------- ---------
UNDISTRIBUTED NET INCOME (LOSS) $ 52,888 $ (11,159)
========= =========
UNREALIZED APPRECIATION OF INVESTMENTS $ 80,406 $ 109,419
========= =========
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 4/30/99 OCTOBER 31,
(Unaudited) 1998
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 155,162 $ 333,081
Net realized gain (loss) on investments 2,600 (12,989)
Change in unrealized appreciation (29,013) 63,066
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 128,749 383,158
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME 104,874 331,251
---------- ----------
TOTAL INCREASE (DECREASE) 23,875 51,907
NET ASSETS BEGINNING OF YEAR 7,699,366 7,647,459
---------- ----------
NET ASSETS END OF PERIOD (including
undistributed net income of $52,888
and undistributed net loss of $11,159 $7,723,241 $7,699,366
respectively) ========== ==========
DIVIDENDS PER SHARE $ 3.91 $ 12.35
========== ==========
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 4/30/99 OCTOBER 31,
(Unaudited) 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $157,762 $320,092
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized (gain) loss from investment
transactions included in net income (2,600 12,989
Changes in assets and liabilities:
(Increase) Decrease in securities
at fair market value (131,644) 48,726
(Increase) Decrease in MSBC NY tax free fund (187,698) (117,816)
(Increase) Decrease in interest receivable (607) 18,796
(Increase) Decrease in prepaid expenses 2,110 27
Increase (Decrease) in accrued expenses (5,000) (549)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 207,719 282,265
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized
of investments (29,013) 63,066
Realized gain (loss) from investment
transactions 2,600 (12,989)
-------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (26,413) 50,077
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (218,599) (299,500)
-------- --------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (37,293) 32,842
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 39,072 6,230
-------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,779 $ 39,072
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ 100 $ 100
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 exempt
obligations, provided it designates such 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, 1999
(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 April 30,
1999:
Unrealized appreciation of bonds totalled $ 130,454
Unrealized depreciation of bonds totalled (50,048)
---------
Net unrealized depreciation of investments $ 80,406
=========
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
----------------------------------------------
Securities purchased by the Company amounted to $1,482,478 (which included
purchases of HSBC NY tax exempt fund of $566,676) for the six months
ended April 30, 1999 and $3,792,295 (which included purchases of HSBC NY
tax exempt fund of $1,396,804 for the year ended October 31, 1998. Sales of
securities (including maturities) amounted to $1,447,742 (which included
sales of HSBC NY tax exempt fund of $755,142) for the six months ended
April 30, 1999 and $3,640,938 (which included sales of HSBC NY tax exempt
fund of $120,130) for the year ended October 31, 1998.
-7-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
3. DISTRIBUTIONS
The Company distributed income of $104,874 ($3.91 per share) as of April 30,
1999 and $331,251 ($12.35 per share) for the year ended October 31, 1998 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, 1999, the Company was charged an
aggregate of $3,310 and $6,241 for the year ended October 31, 1998.
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
six months ended April 30, 1999 and the year ended October 31, 1998.
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
APRIL 30 1999
SIX MONTHS YEAR ENDED
ENDED 4/30/99 OCTOBER 31,
(Unaudited) 1998
Investment income $ 6.20 $ 12.86
Operating expenses, net of tax refund .47 .38
---------- ----------
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 5.73 12.48
FEDERAL INCOME TAX (.05) .06
---------- ----------
INVESTMENT INCOME - NET 5.78 12.42
Dividends to shareholders 3.91 12.35
---------- ----------
1.87 .07
Realized and unrealized gain
(loss) on investments - net (1.00) 1.88
---------- ----------
CHANGE IN NET VALUE .87 1.95
NET ASSET VALUE:
Beginning of year 287.07 285.12
---------- ----------
End of year $ 287.94 $ 287.07
========== ==========
Ratio of operating expenses
to average net assets .002% .001%
Ratio of investment income
net to average net assets 2.04% 4.32%
Portfolio turnover 8.92% 30.61%
Number of shares outstanding
at end of period 26,822 26,822
-9-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
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 $262,168 $266,220
Austin Tex Util Sys Rev Ser A
DTD 4/15/86 8.00% Due 11/15/16
Comb Pr Lien
Prerefunded 8/15/01 @ 100.00 100,000 106,552 108,656
Bexar Cnty Tex CTFS Oblig Tax & Rev
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100.00 620,000 643,161 665,880
Dallas Tex Wtrwks & SWR Sys Rev
DTD 9/01/96 8.0% Due 10/01/01
RFD6 & Impt-Non Callable 250,000 268,518 274,770
Dallas Tex Wtrwks & SWR Sys Rev
DTD 4/01/95 7.5% 4/01/03
RFDG & Impt-Callable 4/01/02 @ 101.50 150,000 163,860 166,900
Garland Tex MB1A
DTD 3/15/97 7.125% Due 2/15/03
Book Entry Only-Non Callable 205,00 220,540 228,452
Illinois Health Facs Auth Rev
DTD 1/01/90 9.50% Due 11/15/19
Hinsdale Hosp-C-Book Entry Only
Prerefunded 11/15/00 @ 102.00 495,000 591,499 548,712
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Laredo Texas Ser A MBIA
DTD 11/01/94 8.625% Due 8/15/03
Book Entry Only-Non Callable 295,000 333,236 349,823
Massachusetts St. Health & EDL FACS
Auth Rev DTD 5/01/90 7.5%
Book Entry Only-SBJ to Spec Rdmpt
DTD 5/01/90 7.5% 7/01/10
Pre-refunded 7/01/00 @ 102.00 130,000 142,029 138,536
Massachusetts St. Health & EDL FAC
Auth Rev Salem Hosp Ser B
DTD 1/01/89 8.15% Due 7/01/14
Book Entry Only
Pre-refunded 7/1/99 @ 102.00 195,000 196,073 200,456
Municipal Assistance Corp. for City
New York NY RFDG-ser L-Book Entry
DTD 6/15/97 6.00% Due 7/1/04
Non Callable 200,000 215,797 219,282
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 250,000 269,757 267,977
Nebro Utah Sch Dist FGIC
DTD 6/15/94 9.75% Due 6/15/01
Book Entry Only-Non Callable 210,000 226,245 235,824
New York NY Ser G Book Entry O.I.D.
DTD 01/09/96 5.10% Due 02/01/00
Non-Callable 190,000 190,136 192,500
New York NY Ser G-Book Entry O.I.D.
DTD 01/09/96 5.10% Due 02/01/00
Escrowed to MATY 10,000 10,008 10,137
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
New York NY Ser B-Book Entry
DTD 8/14/95 5.3% Due 8/15/00
Non Callable 50,000 50,061 51,176
New York New York Ser A-1
DTD 8/14/95 5.50% Due 8/01/01
Book Entry Only-Escrowed to Maty O.I.D. 15,000 15,120 15,637
New York New York Ser A-1
DTD 8/14/95 5.50% Due 8/01/01
Book Entry Only-Non Callable O.I.D. 85,000 85,695 88,306
New York St Crossover RFDG
DTD 07/15/92 7.50% Due 11/15/01
Book Entry Only-Non Callable 245,000 263,090 267,692
New York St Crossover RFDG
DTD 7/15/92 7.00% Due 11/15/02
Non Callable Book Entry Only 175,000 191,487 193,757
New York St TWY Auth
HWY & Brdg TR FD
Ser A MBIA Book Entry Only
DTD 7/1/95 6.25% Due 4/1/04 250,000 273,905 276,175
New York NY
Ser A Book Entry Only
DTD 8/15/91 7.750% Due 8/15/05
Prerefunded 8/15/01 @ 101.50 100,000 110,735 110,565
New York NY Ser B Book Entry O.I.D.
DTD 10/29/92 7.00% Due 10/01/14
Prerefunded 10/01/02 @ 101.5 245,000 270,087 274,650
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
New York NY Ser B Book Entry O.I.D.
DTD 10/29/92 6.75% Due 10/01/15
Prerefunded 10/1/02 @ 101.5 235,000 256,479 261,245
New York, NY City Mun Wtr
DTD 11/17/93 3.25% Due 6/15/09 250,000 250,000 250,000
New York St Pwr Auth
DTD 12/1/90 6.7% Due 1/1/04 100,000 111,754 112,204
New York St Dorm Auth City
DTD 10/15/97 5.5% Due 7/1/05 250,000 269,733 269,035
New York St Dorm Auth Revs
DTD 10/0/95 6.2% Due 7/1/15
Prerefunded 7/1/05 @ 102 250,000 283,728 282,608
New York St Loc Govt Assistance Corp.
DTD 02/01/91 7.00% Due 04/01/16
Ser A-MBIA-IBC O.I.D.
Prerefunded 4/1/01 @ 102.00 100,000 106,536 108,291
New York NY Ser F Book Entry O.I.D.
DTD 05/15/91 8.25% Due 11/15/16
Prerefunded 11/15/01 @ 101.5 100,000 110,584 112,717
New York St Loc Govt Assistance Corp
Ser D MBIA IBC MBIA IND OBD CTF OID
DTD 12/1/91 7.00% Due 4/1/18
Prerefunded 4/1/02 @ 102 110,000 120,099 122,287
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 6.750% Due 5/15/21
Prerefunded 5/15/02 @ 102 190,000 205,780 210,562
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Puerto Rico Comwith RFDG Impt
DTD 7/01/93 4.90% Due 7/01/00
Book Entry Only-Non Callable O.I.D 200,000 200,093 203,378
San Antonio Tex RFDG & Gen Impt
DTD 8/01/93 8.0% Due 8/1/02
Book Entry Only-Non Callable 300,000 328,035 338,577
------- ------- -------
Total Investment - 96.1% $6,785,000 $7,342,580 7,422,987
Other Assets Less Liabilities - 3.9% 300,254
---------
Net Assets - 100% $ 7,723,241
===========
Net Asset Value Per Share $ 287.94
===========
Outstanding shares at April 30, 1999 26,822
===========
-14-
