STUART M. FRIED CPA
KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999 AND 1998
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
REPORT TO STOCKHOLDERS
FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31,1999 AND 1998
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
973-226-4006
INDEPENDENT AUDITOR'S REPORT
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, 1999 and 1998, 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, 1999 and 1998, 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
West Caldwell, New Jersey
December 13, 1999
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF ASSETS, LIABILITIES
AND CAPITAL SECURITIES
ASSETS
YEAR ENDED OCTOBER 31,
1999 1998
INVESTMENT IN SECURITIES, at
market value (amortized cost
$7,287,925 and $7,181,921) $7,196,192 $7,291,343
Investment in HSBC NY tax free fund
(average interest rate 2.67%) 249,227 344,367
Cash and cash equivalents 8,246 39,072
Interest receivable 144,101 144,518
Prepaid expense 3,883 3,878
$7,601,649 $7,823,178
LIABILITIES AND CAPITAL SECURITIES
LIABILITIES
Dividends payable $ 94,145 $ 113,725
Accrued expenses 4,762 10,087
$ 98,907 $ 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 issued - no par 34,627 34,627
Retained earnings 7,555,320 7,566,479
Undistributed net income 4,528 (11,159)
Unrealized appreciation (depreciation)
of investments (91,733) 109,419
Total stockholders' equity
(equivalent to $279.72 per
share at 10/31/99 and $287.05
per share at 10/31/98) 7,502,742 7,699,366
$7,601,649 $7,823,178
The accompanying notes are an integral part of these financial statements.
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STUART M. FRIED, CPA
KALA INVESTMENT CORP.
STATEMENTS OF OPERATIONS,
UNDISTRIBUTED NET INCOME (LOSS)
YEAR ENDED OCTOBER 31,
1999 1998
INVESTMENT INCOME:
INCOME:
Interest income $ 337,500 $ 342,877
Interest income - tax refund 0 2,078
$ 337,500 $ 344,955
EXPENSES:
Custodial fees (note 4) 6,531 6,421
Audit fees 4,000 2,500
Legal fees 8,105 11,204
Taxes other than income taxes (net refund) (546) (22,098)
Office expense 6,153 7,111
Printing and stationery 687 806
Filing and director's fees 250 250
Insurance 4,000 4,002
29,180 10,196
INVESTMENT INCOME 308,320 334,759
Net realized gain (loss) from
investment transactions 6,500 (12,989)
NET INVESTMENT INCOME BEFORE
FEDERAL INCOME TAX 314,820 321,770
Less: Federal income taxes (refund) (1,380) 1,678
NET INVESTMENT INCOME 316,200 320,092
Less: Dividends paid 311,672 331,251
UNDISTRIBUTED NET INCOME (LOSS) $ 4,528 $ (11,159)
UNREALIZED APRECIATION (DEPRECIATION)
OF INVESTMENTS $ (91,733) $ 109,419
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,
1999 1998
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Investment income - net $ 309,700 $ 333,081
Net realized gain (loss) on investments 6,500 (12,989)
Change in unrealized appreciation (201,152) 63,066
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 115,048 383,158
DISTRIBUTION TO SHAREHOLDERS FROM
NET INVESTMENT INCOME 311,672 331,251
TOTAL INCREASE (DECREASE) (196,624) 51,907
NET ASSETS BEGINNING OF YEAR 7,699,366 7,647,459
NET ASSETS END OF YEAR (including
undistributed net income of $4,528 and
undistributed net loss of $11,159
respectively) $7,502,742 $7,699,366
DIVIDENDS PER SHARE $ 11.62 $ 12.35
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,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 316,200 $ 320,092
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized (gain) loss from investment
transactions included in net income (6,500) 12,989
Changes in assets and liabilities:
(Increase) Decrease in securities
at fair market value 95,151 48,726
(Increase) Decrease in HSBC NY tax free fund 95,140 (117,816)
(Increase) Decrease in interest receivable 417 18,796
(Increase) Decrease in prepaid expenses (5) 27
Increase (Decrease) in accrued expenses (5,326) (549)
NET CASH PROVIDED BY OPERATING ACTIVITIES 495,077 282,265
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (Decrease) in unrealized appreciation
of investments (201,152) 63,066
Realized gain (loss) from investment transactions 6,500 (12,989)
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (194,652) 50,077
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (331,251) (299,500)
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (30,826) 32,842
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 39,072 6,230
CASH AND CASH EQUIVALENTS - END OF YEAR $ 8,246 $ 39,072
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 0 $ 100
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, 1999
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
OCTOBER 31, 1999
(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 October 31, 1999:
Unrealized appreciation of bonds totalled $ 33,780
Unrealized depreciation of bonds totalled (125,513)
Net unrealized appreciation of investments $ (91,733)
2. PURCHASES, SALES AND REDEMPTIONS OF SECURITIES
Securities purchased by the Company amounted to $1,964,313 (which included
purchases of HSBC NY tax exempt fund of $839,993) for the year ended October
31, 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
amounted to $1,826,633 (which included sales of HSBC NY tax exempt fund of
$935,133) for the year ended October 31, 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
OCTOBER 31, 1999
3. DISTRIBUTIONS
The Company distributed income of $311,672 ($11.62 per share) as of October 31,
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, 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 year ended October 31, 1999, the Company was charged an aggregate
of $6,531 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 $0 for the
years ended October 31, 1999 and 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
OCTOBER 31, 1999
NOTE 6 - YEAR 2000 READINESS (UNAUDITED)
Many existing computer systems and applications, and other control devices, use
only two digits to identify a year in the date field, without considering the
impact of the upcoming changes in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so they
can process data related to the year 2000. The Company relies on its systems
applications and devices in operating and monitoring all major aspects of its
business, including financial systems, infrastructure, embedded computer chips,
networks and telecommunication equipment. The Company also relies, directly
and indirectly, on external systems of other companies and organizations such
as suppliers, creditors, financial service organizations and governmental
entities for accurate exchange of data. The Company's current estimate is
the costs associated with the year 2000 issue will not have a material
adverse effect on the results of operations or financial position of the
Company in any given year. However, despite the Company's efforts to
address the year 2000 impact on its internal system, the Company has not
fully identified such impact or whether it can resolve it without disruption
of its activities and without incurring significant expense. In addition,
even if the internal systems of the Company are not materially affected by
the year 2000 issue, the Company could be affected through disruption in the
operation of the enterprises with which the Company interacts.
-9-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
YEAR ENDED OCTOBER 31,
1999 1998
Investment income $ 12.58 $ 12.86
Operating expenses, net of tax refund 1.08 .38
INVESTMENT INCOME BEFORE FEDERAL
INCOME TAX 11.50 12.48
FEDERAL INCOME TAX (REFUND) (.05) .06
INVESTMENT INCOME - NET 11.55 12.42
Dividends to shareholders 11.62 12.35
(.07) .07
Realized and unrealized gain
(loss) on investments - net (7.28) 1.88
CHANGE IN NET VALUE (7.35) 1.95
NET ASSET VALUE:
Beginning of year 287.07 285.12
End of year $279.72 $287.07
Ratio of operating expenses
to average net assets .004% .001%
Ratio of investment income
net to average net assets 4.39% 4.32%
Portfolio turnover 11.51% 30.61%
Number of shares outstanding at end of period 26,822 26,822
-10-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
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 $256,824 $257,323
Austin Tex Util Sys Rev Ser A
DTD 4/15/86 8.00% Due 11/15/16
Comb Pr Lien
Prerefunded 8/15/01 @ 100.00 100,000 104,948 105,561
Bexar Cnty Tex CTFS Oblig Tax & Rev
DTD 6/15/92 6.20% Due 6/15/12
PRFD 6/15/02 @ 100.00 620,000 639,353 646,747
Dallas Tex Wtrwks & SWR Sys Rev
DTD 9/01/96 8.0% Due 10/01/01
RFD6 & Impt-Non Callable 250,000 264,688 266,973
Dallas Tex Wtrwks & SWR Sys Rev
DTD 4/01/95 7.5% 4/01/03
RFDG & Impt-Callable 4/01/02 @ 101.50 150,000 162,092 161,673
Garland Tex MB1A
DTD 3/15/97 7.125% Due 2/15/03
Book Entry Only-Non Callable 205,000 218,490 220,481
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 @ 102.00 495,000 589,151 532,367
-11-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 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 295,000 328,782 334,822
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 @ 102.00 130,000 141,491 135,598
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 200,000 214,269 210,264
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 250,000 268,379 252,920
Nebo Utah Sch Dist FGIC
DTD 6/15/94 9.75% Due 6/15/01
Book Entry Only-Non Callable 210,000 222,423 227,625
New York NY Ser G Book Entry O.I.D.
DTD 01/09/96 5.10% Due 02/01/00
Non Callable 190,000 190,045 190,565
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 @100 190,000 208,153 202,570
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
-12-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
PRINCIPAL AMORTIZED MARKET
MUNICIPAL BONDS (99%) AMOUNT COST VALUE
ISSUE
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 10,004 10,032
New York NY Ser B-Book Entry
DTD 8/14/95 5.3% Due 8/15/00
Non Callable 50,000 50,039 50,519
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 15,092 15,327
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 85,539 86,525
New York St Crossover RFDG
DTD 07/15/92 7.50% Due 11/15/01
Book Entry Only-Non Callable 245,000 259,531 260,278
New York St Crossover RFDG
DTD 7/15/92 7.00% Due 11/15/02
Non-Callable Book Entry Only 175,000 189,159 187,287
New York St TWY Auth
HWY & Brdg TR FD
Ser A MBIA Book Entry Only
DTD 7/1/95 6.25% Due 4/1/04 250,000 271,475 264,483
New York NY
Ser A Book Entry Only
DTD 8/15/91 7.750% Due 8/15/05
Prerefunded 8/15/01 @ 101.50 100,000 109,881 107,427
New York NY Ser B Book Entry O.I.D.
DTD 10/29/92 7.00% Due 10/01/14
Prerefunded 10/01/02 @101.5 245,000 266,503 265,480
-13-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 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 @101.5 235,000 253,335 252,982
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 @102.00 100,000 104,830 105,679
New York NY Ser F Book Entry O.I.D.
DTD 05/15/91 8.25% Due 11/15/16
Prerefunded 11/15/01 @101.5 100,000 108,502 109,137
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 @102 110,000 118,369 118,451
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 @ 102 190,000 203,186 204,081
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 @ 102 250,000 280,993 271,000
New York St. Pwr Auth
Revs Gen Purp Ser w-RFDG -O.I.D
DTD 12/1/96 6.70% Due 1/1/04 100,000 110,494 107,607
New York St Dorm auth
Revs City Univ. Sys Cons - Ser I
DTD 10/15/97 5.5% Due 7/1/05
Non Callable 250,000 268,133 256,337
-14-
STUART M. FRIED, CPA
KALA INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
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 200,000 200,051 201,356
San Antonio Tex RFDG & Gen Impt
DTD 8/01/93 8.0% Due 8/1/02
Book Entry Only-Non Callable 300,000 323,721 326,715
Total Investment - 95.9% $6,780,000 $7,287,925 $7,196,192
Other Assets Less Liabilities - 4.1% 306,550
Net Assets - 100% $7,502,742
Net Asset Value Per Share $ 279.72
Outstanding shares at October 31, 1999 26,822
-15-
