STUART M. FRIED CPA
KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
APRIL 30, 2000
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
APRIL 30, 2000
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
INDEPENDENT AUDITOR'S REPORT
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, 2000, and the
related statements of operations, undistributed net income (loss),
changes in net assets and cash flows for the six months then ended, in
accordance with Statements for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information 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, 1999 were audited by
us, and we expressed an unqualified opinion on them in our report dated
December 13, 1999, but we have not performed any auditing procedures since
that date.
STUART M. FRIED, CPA
West Caldwell, New Jersey
June 19, 2000
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
SIX-MONTHS YEAR ENDED
ENDED 4/30/00 10/31/99
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,020,881 and $7,287,925) $6,878,482 $7,196,192
Investment in HSBC NY tax free fund
(average interest rate 3.34%) 481,770 249,227
Cash and cash equivalents 6,444 8,246
Interest receivable 142,572 144,101
Prepaid expense 1,783 3,883
$7,511,051 $7,601,649
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 0 $ 94,145
Accrued expenses 10,201 4,762
$ 10,201 $ 98,907
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 issued - no par 34,627 34,627
Retained earnings 7,454,974 7,555,320
Undistributed net income 153,648 4,528
Unrealized appreciation (depreciation)
of investments (142,399) (91,733)
Total stockholders' equity
(equivalent to $279.65 per
share at 4/30/00 and $279.72
per share at 10/31/99) 7,500,850 7,502,742
$7,511,051 $7,601,649
See accompanying notes and accountant's report.
-2-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF OPERATIONS,
UNDISTRIBUTED NET INCOME (LOSS)
SIX MONTHS YEAR ENDED
ENDED 4/30/00 10/31/99
INVESTMENT INCOME:
INCOME:
Interest income $ 172,136 $ 337,500
EXPENSES:
Custodial fees (note 4) 3,159 6,531
Audit fees 2,300 4,000
Legal fees 6,172 8,105
Taxes other than income taxes (net refund) 100 (546)
Office expense 3,262 6,153
Printing and stationery 792 687
Filing and director's fees 725 250
Insurance 1,978 4,000
18,488 29,180
INVESTMENT INCOME 153,648 308,320
Net realized gain (loss) from
investment transactions 0 6,500
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 153,648 314,820
Less: Federal income taxes (refund) 0 (1,380)
NET INVESTMENT INCOME 153,648 316,200
Less: Dividends paid 0 311,672
UNDISTRIBUTED NET INCOME (LOSS) $ 153,648 $ 4,528
UNREALIZED APRECIATION (DEPRECIATION)
OF INVESTMENTS $(142,399) $ (91,733)
See accompanying notes and accountant's report.
-3-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS YEAR ENDED
ENDED 4/30/00 10/31/99
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 153,648 $ 309,700
Net realized gain (loss) on investments 0 6,500
Change in unrealized appreciation (50,666) (201,152)
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 102,982 115,048
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME 104,874 311,672
TOTAL INCREASE (DECREASE) (1,892) (196,624)
NET ASSETS BEGINNING OF YEAR 7,502,742 7,699,366
NET ASSETS END OF YEAR (including
undistributed net income of $153,648 and
undistributed net loss of $4,528
respectively) $7,500,850 $7,502,742
DIVIDENDS PER SHARE $ 3.91 $ 11.62
See accompanying notes and accountant's report.
-4-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED
ENDED 4/30/00 10/31/99
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 153,648 $ 316,200
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized (gain) loss from investment
transactions included in net income 0 (6,500)
Changes in assets and liabilities:
(Increase) Decrease in securities
at fair market value 317,710 95,151
(Increase) Decrease in HSBC NY tax free fund (232,543) 95,140
(Increase) Decrease in interest receivable 1,529 417
(Increase) Decrease in prepaid expenses 2,100 (5)
Increase (Decrease) in accrued expenses 5,439 (5,326)
NET CASH PROVIDED BY OPERATING ACTIVITIES 247,883 495,077
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized appreciation
of investments (50,666) (201,152)
Realized gain (loss) from investment transactions 0 6,500
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (50,666) (194,652)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (199,019) (331,251)
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,802) (30,826)
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 8,246 39,072
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,444 $ 8,246
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 0 $ 0
See accompanying notes and accountant's report.
-5-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
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.
-6-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30 2000
(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.
(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, 2000:
Unrealized appreciation of bonds totalled $ 9,987
Unrealized depreciation of bonds totalled 152,386
Net unrealized depreciation of investments $(142,399)
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
Securities purchased by the Company amounted to $357,285 (which included
purchases of HSBC NY tax exempt fund of $357,285) for the six months ended
April 30, 2000 and $1,964,313 (which included purchases of HSBC NY tax exempt
fund of $839,993) for the year ended October 31, 1999. Sales of securities
amounted to $324,743 (which included sales of HSBC NY tax exempt fund of
$124,743) for the six months ended April 30, 2000 and $1,826,633 (which
included sales of HSBC NY tax exempt fund of $124,743) for the year ended
October 31, 1999.
-7-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
3. DISTRIBUTIONS
The Company distributed income of $104,874 ($3.91 per share) as of April 30,
2000 and $311,672 ($11.62 per share) for the year ended October 31, 1998 in the
form of dividends.
4. CUSTODIAL FEES
On August 15, 1997, the custodial agreement was transferred to HSBC. HSBC (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 six months ended April 30, 2000, the Company was charged an
aggregate of $3,159 and $6,531 for the year ended October 31, 1999.
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 $0 for the
six months ended April 30, 2000 and year ended October 31, 1999.
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, 2000
SIX MONTHS YEAR ENDED
ENDED 4/30/00 10/31/99
Investment income $ 6.42 $ 12.58
Operating expenses, net of tax refund .69 1.08
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 5.73 11.50
FEDERAL INCOME TAX (REFUND) 0 (.05)
INVESTMENT INCOME - NET 5.73 11.55
Dividends to shareholders 3.91 11.62
1.82 (.07)
Realized and unrealized gain
(loss) on investments - net (1.89) (7.28)
CHANGE IN NET VALUE (.07) (7.35)
NET ASSET VALUE:
Beginning of year 279.72 287.07
End of year $279.65 $279.72
Ratio of operating expenses
to average net assets .002% .004%
Ratio of investment income
net to average net assets 2.30% 4.39%
Portfolio turnover 0% 11.51%
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, 2000
7. 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 $251,480 $250,343
Austin Tex Util Sys Rev Ser A
DTD 4/15/86 8.00% Due 11/15/16
Comb Pr Lien
Prerefunded 8/15/01 @ 100.00 100,000 103,344 103,556
Bexar Cnty Tex CTFS Oblig Tax & Rev
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100.00 620,000 635,545 637,335
Dallas Tex Wtrwks & SWR Sys Rev
DTD 9/01/96 8.0% Due 10/01/01
RFD6 & Impt-Non Callable 250,000 260,858 261,053
Dallas Tex Wtrwks & SWR Sys Rev
DTD 4/01/95 7.5% 4/01/03
RFDG & Impt-Callable 4/01/02 @ 101.50 150,000 160,324 158,853
Garland Tex MB1A
DTD 3/15/97 7.125% Due 2/15/03
Book Entry Only-Non Callable 205,000 216,439 216,308
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 @ 102.00 495,000 586,803 517,953
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
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 295,000 324,328 326,721
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
Prerefunded 7/01/00 @ 102.00 130,000 140,953 133,272
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 200,000 212,741 207,588
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 250,000 267,001 252,733
Nebo Utah Sch Dist FGIC
DTD 6/15/94 9.75% Due 6/15/01
Book Entry Only-Non Callable 210,000 218,601 221,523
New York City Mun Wtr Fin
Auth Wtr & Swr Sys Rev Ser A
DTD 8/16/95 6.00% Due 6/15/25
Callable 6/15/05 @101, 6/15/07 @100 190,000 207,799 199,966
New York NY City Mun Wtr Fin
Auth Wtr & Swr Sys Rev
DTD 11/17/93 Var rate
Due 6/15/09
Opt Put Subj no
Opt Rdmpt @100 250,000 250,000 250,000
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
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 50,017 50,136
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 15,064 15,172
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 85,383 85,766
New York St Crossover RFDG
DTD 07/15/92 7.50% Due 11/15/01
Book Entry Only-Non Callable 245,000 255,974 254,724
New York St Crossover RFDG
DTD 7/15/92 7.00% Due 11/15/02
Non-Callable Book Entry Only 175,000 186,831 183,608
New York St TWY Auth
HWY & Brdg TR FD
Ser A MBIA Book Entry Only
DTD 7/1/95 6.25% Due 4/1/04 250,000 269,045 261,000
New York NY
Ser A Book Entry Only
DTD 8/15/91 7.750% Due 8/15/05
Prerefunded 8/15/01 @ 101.50 100,000 109,026 105,360
New York NY Ser B Book Entry O.I.D.
DTD 10/29/92 7.00% Due 10/01/14
Prerefunded 10/01/02 @101.5 245,000 262,919 260,697
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
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 @101.5 235,000 250,190 248,559
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 @102.00 100,000 103,124 104,304
New York NY Ser F Book Entry O.I.D.
DTD 05/15/91 8.25% Due 11/15/16
Prerefunded 11/15/01 @101.5 100,000 106,420 106,686
New York St Loc Govt Assistance Corp
Ser D MBIA IBC MBIA IND 0BD CTF OID
DTD 12/1/91 7.00% Due 4/1/18
Prerefunded 4/1/02 @102 110,000 116,639 116,486
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 @ 102 190,000 200,592 200,737
New York St Dorm Auth Revs
Upstate Cmmty Colleges - Ser A
DTD 10/1/95 6.20% Due 7/1/15
Prerefunded 7/1/05 @ 102 250,000 278,259 267,500
New York St. Pwr Auth
Revs Gen Purp Ser w-RFDG -O.I.D
DTD 12/1/96 6.70% Due 1/1/04 100,000 109,233 105,806
New York St Dorm auth
Revs City Univ. Sys Cons - Ser I
DTD 10/15/97 5.5% Due 7/1/05
Non Callable 250,000 266,533 255,047
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
Puerto Rico Comwlth RFDG Impt
DTD 7/01/93 4.90% Due 7/01/00
Book Entry Only-Non Callable-O.I.D 200,000 200,009 200,202
San Antonio Tex RFDG & Gen Impt
DTD 8/01/93 8.0% Due 8/1/02
Book Entry Only-Non Callable 300,000 319,407 319,488
Total Investment - 91.7% $6,580,000 $7,020,881 $6,878,482
Other Assets Less Liabilities - 8.3% 622,368
Net Assets - 100% $7,500,850
Net Asset Value Per Share $ 279.65
Outstanding shares at Aril 30, 2000 26,822
-14-
