<PAGE> 1
SCIOTO INVESTMENT COMPANY
COLUMBUS, OHIO
ANNUAL REPORT
YEAR ENDED
DECEMBER 31, 1997
<PAGE> 2
SCIOTO INVESTMENT COMPANY
c/o 4561 Lanes End Street, Columbus, Ohio 43220-4254
- --------------------------------------------------------------------------------
Directors:
Stephen Kellough Marilyn B. Kellough Arthur D. Herrmann
Brooks P. Julian Donald C. Fanta Kent K. Rinker
John Josephson
Officers:
Stephen Kellough, President and Treasurer
Marilyn B. Kellough, Vice President and Secretary
Transfer Agent and Registrar for Scioto Investment Company's Class A Common
Stock: National City Bank, Stock Transfer Department, Corporate Trust
Operations, 4100 West 150th Street, 3rd Floor, Cleveland, Ohio 44135-1385
<TABLE>
<CAPTION>
U.S. Average Annual
Inflation Rate, Based
upon the Consumer Price
Index, as a Per Cent,
for Each Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1976 4.8
- ----------------------------------------
1977 6.8
- ----------------------------------------
1978 9.0 Weighted Average Class A Common
- ---------------------------------------- Maturity Term of Stock Market
1981 8.9 the Company's Bond Price per Share,
- ---------------------------------------- Portfolio, in Years, in Dollars,
1984 3.9 at December 31 Bid at December 31
- ------------------------------------------------------------------------------------------------------------------------
1985 3.8 7.1 7.00
- ------------------------------------------------------------------------------------------------------------------------
1986 1.1 7.0 7.50
- ----------------------------------------------------------------------------------------------------
1987 4.4 6.2 7.50
- ----------------------------------------------------------------------------------------------------
1988 4.4 6.0 8.20
- ----------------------------------------------------------------------------------------------------
1989 4.6 3.8 9.00 Asked
- ------------------------------------------------------------------------------------------------------------------------
1990 6.1 3.3 12.00
- ----------------------------------------------------------------------------------------------------
1991 3.1 3.0 12.00 15.00
- ------------------------------------------------------------------------------------------------------------------------
1992 2.9 2.8 11.50 14.50
- ------------------------------------------------------------------------------------------------------------------------
1993 2.7 2.0 11.00 15.00
- ------------------------------------------------------------------------------------------------------------------------
1994 2.7 1.4 12.00 14.00
- ------------------------------------------------------------------------------------------------------------------------
1995 2.5 1.4 11.50 14.00
- ------------------------------------------------------------------------------------------------------------------------
1996 3.0 2.0 8.00 *
- ------------------------------------------------------------------------------------------------------------------------
1997 1.7 1.4 8.00 *
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Bid price is estimated, there is no active trading market for the Company's
Common Stock.
<PAGE> 3
SCIOTO INVESTMENT COMPANY
-------------------------
c/o 4561 LANES END STREET
COLUMBUS, OHIO 43220-4254
Dear Fellow Shareholders:
Director Brooks P. Julian has indicated that he is retiring from the
Company's Board of Directors this year and is not standing for re-election as a
Director at the Company's annual meeting of shareholders to be held in June,
1998. On behalf of Scioto Investment Company, I would like to take this
opportunity to thank Mr. Julian for his twenty-two years of outstanding service
to the Company since his original election to the Board in 1976. We will greatly
miss his thoughtful advice and counsel.
Scioto Investment Company earned net investment income of $0.53 per
share in 1997 compared to $0.58 per share in 1996. Dividends paid to
shareholders in 1997 were $0.52 per share versus $0.58 per share in 1996. The
Company's net asset value per share of $17.04 at December 31, 1997 was virtually
unchanged from the $17.03 value at December 31, 1996, while the unrealized
change in value of investments for 1997 was $0.00 per share compared to
unrealized depreciation of $0.05 per share for 1996. Please refer to the
accompanying 1997 financial statements and schedules as audited by Deloitte &
Touche LLP for the additional financial information relating to the Company.
Scioto Investment Company generally invests in state and municipal
bonds which are exempt from federal income tax and rated "A" or betters by
Moody's Investors Service, Inc. before the effect of insurance coverage on the
bonds, if any. Since the company's changeover to an investment company in 1976,
it has paid out virtually all of its net investment income each year to its
shareholders in the form of quarterly dividend distributions.
As described in Note 3 to the accompanying financial statements, Scioto
Investment Company could be liable for the payment of certain non-cancelable
lease obligations should The Penn Traffic Company (TPTC), the lessee under
certain applicable lease agreements, fail to pay the required rents. TPTC's
common stock is publicly traded on the New York Stock Exchange, closing at $4
per share Tuesday, February 24, 1998. TPTC's 9.625% outstanding bond issue
maturing in 2005 closed yesterday at $452.50 per $1,000 bond on the New York
Exchange, indicating a current yield of 21.3%.
Since 1976, Scioto Investment Company has been both (1) registered as a
non-diversified closed-end management company under the Investment Company Act
of 1940, and (2) qualified as a regulated investment company under the Internal
Revenue Code. Since it is expected that the Company will again so qualify in
1998, it is expected that all of Scioto Investment Company's 1998 net investment
income will be paid out to shareholders as quarterly federal income tax-exempt
interest dividend distributions in 1998.
Sincerely,
SCIOTO INVESTMENT COMPANY
/s/ Stephen Kellough
by Stephen Kellough, Chairman,
President and CEO, February 25, 1998
<PAGE> 4
- --------------------------------------------------------------------------------
Scioto Investment Company
Financial Statements for the Years
Ended December 31, 1997 and 1996
and Independent Auditors' Report
<PAGE> 5
[DELOITTE AND TOUCHE LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Scioto Investment Company:
We have audited the accompanying statements of assets and liabilities of Scioto
Investment Company, including the schedules of investments, as of December 31,
1997 and 1996, and the related statements of operations and of changes in net
assets, and the financial highlights for each of the five years in the period
ended December 31, 1997. These financial statements and the financial highlights
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
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 and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included either physical counting, or confirmation by
correspondence with the custodian, of securities owned at December 31, 1997 and
1996. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Scioto Investment
Company at December 31, 1997 and 1996, and the results of its operations, the
changes in its net assets, and the financial highlights for each of the five
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE
February 2, 1998
<PAGE> 6
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997 AND 1996
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments in money market funds and securities - at quoted market value
(amortized cost, 1997 - $7,580,871;
1996 - $7,551,747) see accompanying schedules $ 7,600,388 $ 7,572,439
Interest receivable 39,531 42,301
Cash 2,455 23,237
Prepaid expenses 584 784
----------- -----------
Total assets 7,642,958 7,638,761
----------- -----------
LIABILITIES:
Accrued expenses - professional and transfer agent fees 11,680 8,299
----------- -----------
Total liabilities 11,680 8,299
----------- -----------
NET ASSETS (net asset value per common share based on 447,950 common shares
outstanding, 1997 - $17.04;
1996 - $17.03) $ 7,631,278 $ 7,630,462
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 7
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994, AND 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Nontaxable interest
(net of bond premium amortization and discount
accretion, 1997 - $30,280; 1996 - $21,513;
1995 - $43,899; 1994 - $33,494; 1993 - $22,782;
1992 - $40,508;) (Note 1) $ 311,905 $ 319,450 $ 332,004 $ 343,179 $ 369,159
Taxable interest 6 6 6 4 3
--------- --------- --------- --------- ---------
Total investment income 311,911 319,456 332,010 343,183 369,162
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Professional services:
Accounting and bookkeeping 17,840 16,245 16,550 17,810 15,433
Audit and tax 13,479 14,800 13,250 17,400 12,950
Legal 20,411 11,101 18,139 35,622 16,967
Transfer agent fees 7,352 7,135 6,207 6,341 6,538
Directors' fees 9,500 8,500 8,000 8,000 8,000
Miscellaneous 4,863 3,631 2,514 2,455 2,053
--------- --------- --------- --------- ---------
Total operating expenses 73,445 61,412 64,660 87,628 61,941
--------- --------- --------- --------- ---------
INVESTMENT INCOME - NET 238,466 258,044 267,350 255,555 307,221
--------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS - Unrealized
appreciation (depreciation) of investments (1,132) (22,324) 65,933 (182,473) (24,126)
--------- --------- --------- --------- ---------
Net gain (loss) on investments (1,132) (22,324) 65,933 (182,473) (24,126)
--------- --------- --------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 237,334 $ 235,720 $ 333,283 $ 73,082 $ 283,095
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994, AND 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Investments income - net $ 238,466 $ 258,044 $ 267,350 $ 255,555 $ 307,221
Realized and unrealized appreciation
(depreciation) of investments (1,132) (22,324) 65,933 (182,473) (24,126)
---------- ---------- ---------- ---------- ----------
Net increase in net assets
resulting from operations 237,334 235,720 333,283 73,082 283,095
DIVIDENDS TO SHAREHOLDERS FROM INVESTMENT INCOME - Net 236,518 258,019 (261,603) (253,988) (306,846)
---------- ---------- ---------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 816 (22,299) 71,680 (180,906) (23,751)
NET ASSETS AT BEGINNING OF YEAR 7,630,462 7,652,761 7,581,081 7,761,987 7,785,738
---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR (Including undistributed net
investment income, 1997 - $187,121; 1996 - $185,172;
1995 - $185,147; 1994 - $179,400; 1993 - $177,832) $7,631,278 $7,630,462 $7,652,761 $7,581,081 $7,761,987
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 8
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
SCHEDULES OF INVESTMENTS
DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
----------------------------------------------------------------------------------
MOODY'S
INVESTORS YIELD TO
SERVICE, INC. MOODY'S MATURITY
BOND RATING INVESTORS (BASED ON ANNUAL
BEFORE SERVICE, INC. QUOTED COUPON COUPON
NAME OF ISSUER AND INSURANCE BOND RATING MARKET INTEREST DUE PRINCIPAL INTEREST
TITLE OF ISSUE (UNAUDITED) (UNAUDITED) VALUE) RATE DATE AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C> <C>
UNAFFILIATED MONEY MARKET FUNDS:
Cardinal Government Securities Trust 4.73% 4.73 Demand $ 142 $ 7
Cardinal Tax-Exempt Money Fund 2.75% 2.75 Demand 1,241,166 34,132
---------- --------
Total unaffiliated money market funds 1,241,308 34,139
---------- --------
UNAFFILIATED MUNICIPAL BONDS
LISTED IN ORDER OF MATURITY:
Lucas County, Ohio, Improvement Revenue Baa1 AAA 3.56 5.250 2/1/98 120,000 (3) 6,300
Ohio State FACS Vern Riffe A Aa3 AAA 3.67 4.000 10/1/98 700,000 28,000
Montgomery County, Ohio Waste B/E N/A AAA 3.75 4.100 11/1/98 100,000 4,100
Cuyohoga County, Ohio, LTGO B/E AA AAA 3.69 4.100 11/15/98 300,000 12,300
Toledo Ohio Waterworks REV B/E N/A AAA 3.79 4.250 11/15/98 200,000 8,500
Marietta, Ohio Water REV N/A AAA 3.72 4.300 12/1/98 100,000 4,300
Canton, Ohio Waterworks System Import Baa AAA 3.74 5.000 12/1/98 115,000 5,750
Montgomery County, Ohio N/A AAA 3.76 5.300 12/1/98 200,000 10,600
Westerville, Ohio City School District A AAA 3.72 4.250 12/1/98 200,000 8,500
Springfield, Ohio LSD IMPT UT N/A N/A 3.59 6.125 12/1/98 250,000 15,313
Columbus, Ohio CSD RFDG B/E A3 AAA 3.75 4.450 12/1/98 300,000 13,350
Springboro Community City School District, Ohio Baa1 AAA 3.75 3.800 12/1/98 300,000 11,400
Hilliard, Ohio City School District Series A B/E Aa3 AAA 3.71 3.900 12/1/98 400,000 15,600
Upper Arlington, Ohio City School District A1 AAA 3.75 3.800 12/1/98 600,000 22,800
Hilliard, Ohio City School District Series A B/E Aa3 AAA 3.93 4.000 12/1/99 300,000 12,000
Clermont County, Ohio Hospital FACS-B Aa3 AAA 4.05 4.850 9/1/00 300,000 14,550
Napoleon, Ohio City School District B/E/O N/A AAA 3.95 4.150 12/1/00 100,000 4,150
Dublin, Ohio CSD UT GO BDS A1 AAA 4.06 5.250 12/1/00 150,000 7,875
Dublin, Ohio LSD UT A1 AAA 4.07 7.125 12/1/00 200,000 14,250
Hamilton County, Ohio Sewer System A Aa3 N/A 4.99 6.400 6/1/01 125,000 8,000
Big Walnut Ohio LSD Delaware NR AAA 3.98 4.000 12/1/99 100,000 (2) 4,000
Big Walnut Ohio LSD Delaware NR AAA 4.10 4.200 12/1/01 100,000 (2) 4,200
Columbus, Ohio RFDG-C B/E/O NR AAA 3.86 4.550 9/15/99 300,000 (2) 13,650
Findlay, Ohio Water REV RFDG NR AAA 3.94 4.400 11/1/99 125,000 (2) 5,500
Liberty, Ohio Local School District N/R AAA 9.07 4.150 12/1/00 100,000 (2) 4,150
Toledo Ohio SER-A RFDG Baa1 AAA 3.93 4.100 12/1/99 300,000 (2) 12,300
Youngstown, Ohio IMPT Baa3 AAA 4.18 7.000 12/1/99 200,000 (2) 14,000
Flat Rock Michigan, I.D.R. 5.375 9/1/97 (1)
Blue Ash, Ohio LTGO Road Improvement 4.450 11/1/97 (1)
Grandview Heights, Ohio CSD BEO 7.500 12/1/97 (1)
Belmont County, Ohio Various Purpose 3.550 12/1/97 (1)
Ottawa County, Ohio 4.700 12/1/97 (1)
Delaware County, Ohio LTGO B/E 4.450 12/1/97 (1)
Ohio State Higher Education Series II-A 5.300 12/1/97 (1)
Dublin, Ohio, City School District 4.650 12/1/97 ----------- (1)
Total unaffiliated municipal bonds 6,285,000 285,438
----------- ---------
TOTAL $ 7,526,308 $ 319,577
=========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 December 31, 1996
------------------------------------- -------------------------------------------
% OF TOTAL % OF TOTAL
PORTFOLIO PORTFOLIO
(BASED ON (BASED ON
QUOTED QUOTED QUOTED QUOTED
NAME OF ISSUER AND AMORTIZED MARKET MARKET PRINCIPAL AMORTIZED MARKET MARKET
TITLE OF ISSUE COST VALUE VALUE) AMOUNT COST VALUE VALUE)
UNAFFILIATED MONEY MARKET FUNDS:
Cardinal Government Securities Trust $ 142 $ 142 $ 136 $ 136 $ 136
Cardinal Tax-Exempt Money Fund 1,241,166 1,241,166 16.33% 585,528 585,528 585,528 7.73%
---------- ---------- ------ -------- -------- -------- -----
Total unaffiliated money market funds 1,241,308 1,241,308 16.33 585,664 585,664 585,664 7.73
---------- ---------- ------ -------- -------- -------- -----
UNAFFILIATED MUNICIPAL BONDS
LISTED IN ORDER OF MATURITY:
Lucas County, Ohio, Improvement Revenue 119,966 120,168 1.58 160,000 159,407 160,274 2.12
Ohio State FACS Vern Riffe A 698,751 701,638 9.23 700,000 697,086 702,730 9.28
Montgomery County, Ohio Waste B/E 100,077 100,281 1.32 100,000 100,169 100,281 1.32
Cuyohoga County, Ohio, LTGO B/E 300,000 301,029 3.97 300,000 300,000 301,170 3.98
Toledo Ohio Waterworks REV B/E 200,000 200,780 2.64 200,000 200,000 200,780 2.65
Marietta, Ohio Water REV 100,000 100,515 1.32 100,000 100,000 100,671 1.33
Canton, Ohio Waterworks System Import 115,000 116,294 1.53 115,000 115,000 117,209 1.55
Montgomery County, Ohio 202,149 202,750 2.67 200,000 204,494 204,842 2.71
Westerville, Ohio City School District 200,000 200,936 2.64 200,000 200,000 201,186 2.66
Springfield, Ohio LSD IMPT UT 253,934 255,663 3.36 250,000 258,214 260,938 3.45
Columbus, Ohio CSD RFDG B/E 301,148 301,875 3.97 300,000 302,400 302,763 3.99
Springboro Community City School District, Ohio 300,000 300,138 3.95 300,000 300,000 299,154 3.95
Hilliard, Ohio City School District Series A B/E 400,000 400,684 5.26 400,000 400,000 400,000 5.28
Upper Arlington, Ohio City School District 600,000 600,276 7.90 600,000 600,000 598,308 7.90
Hilliard, Ohio City School District Series A B/E 300,000 300,375 3.95 300,000 300,000 299,013 3.95
Clermont County, Ohio Hospital FACS-B 305,120 305,904 4.02 300,000 307,040 305,859 4.04
Napoleon, Ohio City School District B/E/O 100,000 100,546 1.32 100,000 100,000 99,750 1.32
Dublin, Ohio CSD UT GO BDS 155,004 154,992 2.04 150,000 156,720 154,827 2.04
Dublin, Ohio LSD UT 215,546 216,656 2.85 200,000 220,876 219,468 2.90
Hamilton County, Ohio Sewer System A 134,844 136,386 1.79 125,000 137,725 137,168 1.81
Big Walnut Ohio LSD Delaware 100,000 100,031 1.32
Big Walnut Ohio LSD Delaware 100,000 100,359 1.32
Columbus, Ohio RFDG-C B/E/O 302,617 303,375 4.00
Findlay, Ohio Water REV RFDG 125,870 125,995 1.66
Liberty, Ohio Local School District 100,000 100,218 1.32
Toledo Ohio SER-A RFDG 300,000 300,936 3.97
Youngstown, Ohio IMPT 209,537 210,280 2.77
Flat Rock Michigan, I.D.R. 100,000 99,892 100,265 1.32
Blue Ash, Ohio LTGO Road Improvement 150,000 150,533 151,382 2.00
Grandview Heights, Ohio CSD BEO 100,000 102,172 103,562 1.37
Belmont County, Ohio Various Purpose 150,000 149,737 150,047 1.98
Ottawa County, Ohio 150,000 151,287 151,547 2.00
Delaware County, Ohio LTGO B/E 250,000 250,000 251,990 3.33
Ohio State Higher Education Series II-A 400,000 403,331 406,436 5.37
Dublin, Ohio, City School District 500,000 500,000 505,155 6.67
---------- ---------- ------ --------- --------- --------- ------
Total unaffiliated municipal bonds 6,339,563 6,359,080 83.67 6,900,000 6,966,083 6,986,775 92.27
---------- ---------- ------ --------- --------- --------- ------
TOTAL $ 7,580,871 $ 7,600,388 100.00% $ 7,485,664 $7,551,747 $7,572,439 100.00%
=========== =========== ======= =========== ========== ========== =======
</TABLE>
Ratings shown have not been audited by Deloitte & Touche LLP.
* Represents average yield for 1997.
(1) Total principal amount of 1997 maturities - $1,800,000.
(2) Total principal amount of 1997 purchases - $1,225,000
(3) Total principal amount of 1997 sales - $40,000.
See notes to financial statements.
-4-
<PAGE> 9
SCIOTO INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
ORGANIZATION - The Company was incorporated in 1933 in Ohio. In September
1976 the Company registered under the Investment Company Act of 1940 and
presently operates as a non-diversified, closed-end management company.
See Note 3 regarding sale of Company assets on August 30, 1976, change of
business and name.
SECURITY VALUATION - Investments in municipal bonds are stated at the bid
price as of the end of the year. The bid price (used to determine quoted
market value in the accompanying schedule of investments) is determined
from written quotations received from a reputable broker. Investments in
money market funds are stated at cost which equals market value. At
December 31, 1997, unrealized appreciation of investments of $19,517
consisted of $19,529 of unrealized gains and $12 of unrealized losses.
Cost of investments is the same for Federal income tax purposes.
SECURITY TRANSACTIONS - Security transactions are accounted for on the
trade date. Purchases and sales (including maturities) of investments,
excluding money market funds, for the year ended December 31, 1997 were
$1,225,000 and $1,840,000, respectively. Cost of securities sold is
determined using the identified amortized cost basis.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FEDERAL INCOME TAX - The Company's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies, principally Sections 851 and 852 of Subchapter M,
and to annually distribute substantially all of its investment income to
its shareholders; accordingly, no Federal income tax provision is required
on net investment income. Realized capital gains are subject to Federal
income tax at regular corporate capital gains tax rates. Realized capital
losses can only be used to offset capital gains.
The Tax Reform Act of 1984 permits certain regulated investment companies
to be personal holding companies as defined in Section 542 of the Internal
Revenue Code. The Company will be able to retain regulated investment
company status for Federal income tax purposes even if it is a personal
holding company. As a personal holding company, the Company is permitted
to invest in taxable investments. If, at the close of each quarter of its
taxable year, at least 50 percent of the value of the total assets of the
Company consist of tax exempt obligations, a pro-rata portion of the
Company's distributions will qualify as exempt interest dividends.
INCOME AND EXPENSE RECOGNITION - Interest income and related expenses are
recognized on the accrual basis. Amortization of bond premiums and
accretion of bond discounts, calculated by the straight-line method, are
charged or credited against interest income over the term of the bond.
-5-
<PAGE> 10
2. FINANCIAL HIGHLIGHTS
Selected data for each of the 447,950 common shares of Scioto Investment
Company outstanding for each of the five years in the period ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
PER SHARE DATA: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of year $ 17.03 $ 17.08 $ 16.92 $ 17.33 $ 17.38
Income from Investment
Operations:
Investment income (bond interest) 0.69 0.71 0.74 0.77 0.82
Operating expenses (0.16) (0.13) (0.15) (0.20) (0.14)
-------- -------- -------- -------- -------
Investment income - net 0.53 0.58 0.59 0.57 0.68
Unrealized and realized gain
(loss) on investments .00 (0.05) 0.15 (0.41) (0.05)
-------- -------- -------- -------- -------
Total from Investment
Operations 0.53 0.53 0.74 0.16 0.63
-------- -------- -------- -------- -------
Distributions of investment
income - net (dividends) (0.52) (0.58) (0.58) (0.57) (0.68)
-------- -------- -------- -------- -------
Net asset value at end of year $ 17.04 $ 17.03 $ 17.08 $ 16.92 $ 17.33
======== ======== ======== ======== =======
Total return (aggregate) 3.11% 3.08% 4.40% 0.94% 3.64%
</TABLE>
<TABLE>
<CAPTION>
RATIOS TO AVERAGE
NET ASSETS: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating expenses 0.96% 0.80% 0.85% 1.14% 0.80%
Investment income - net 3.13% 3.38% 3.51% 3.33% 3.95%
SUPPLEMENTAL DATA:
Net assets at end
of year $ 7,630,870 $ 7,630,462 $ 7,652,761 $7,581,081 $7,761,987
Number of shares
outstanding at end
of year 447,950 447,950 447,950 447,950 447,950
Portfolio turnover rate 16.97% 50.96% 27.71% 20.60% 32.52%
</TABLE>
-6-
<PAGE> 11
3. SALE OF COMPANY ASSETS, CHANGES IN BUSINESS, AND LEASE LIABILITIES
UNDERTAKING
Prior to August 30, 1976, the Company operated a chain of 54 supermarkets
and 12 discount department stores in Ohio, West Virginia, and Kentucky in
leased premises. On June 30, 1976, the Company and each of its
subsidiaries (the "Company") entered into an Agreement of Sale, pursuant
to which substantially all of the assets of the Company were sold for
$33.00 per Class A and Class B common share cash and assumption of all of
the liabilities of the Company, however, the Company remains contingently
liable for non-cancelable leases entered into previously that are still in
effect. The Company would only be required to make payments under these
leases in the event of non-payment of rent by the existing tenant, The
Penn Traffic Company, (a Delaware Corporation, Federal ID #25-0716800,
which acquired the Big Bear Stores Company, a Delaware Corporation,
Federal ID #31-0888208), during an existing exercised option period.
Subsequent to the sale consummation on August 30, 1976, the Company's
subsidiaries were liquidated and merged into the Company, and the
Company's name was changed from Big Bear Stores Company, an Ohio
corporation, to Scioto Investment Company, an Ohio corporation (Federal
ID# 31-4128470).
As indicated above, the Company remains contingently liable for
non-cancelable leases entered into prior to the date of sale of
substantially all of the assets of the Company on August 30, 1976. At
December 31, 1997, the remaining minimum future lease rental commitments
during the non-cancelable lease terms are approximately $3,800,000
($4,500,000 at December 31, 1996) and the total of the non-cancelable
leases plus total option periods minimum future lease rental commitments
are approximately $17,900,000 ($23,400,000 at December 31, 1996), before
considering any offsetting rental income the Company might receive if the
Company subsequently directly leases the property to other parties. These
non-cancelable leases require approximately $1,000,000 ($1,200,000 at
December 31, 1996) in annual minimum rentals at December 31, 1997.
4. COMMON SHARES
The status of common shares, stated value of $.66 per share, at
December 31, 1997 follows:
Par Shares
TITLE VALUE AUTHORIZED OUTSTANDING
Class A $.0066-2/3 4,000,000 108,800
Class B $.0066-2/3 1,000,000 339,150
On July 29, 1981, the shareholders approved a 25 for 1 reverse stock split
(this adjusted the post reverse split June 30, 1976 equivalent purchase
price to $825 per share) which was effective August 3, 1981 and fractioned
shares were purchased (total of $119,950) by the Company at the rate of
$23.30 per pre-reverse split share based on the June 30, 1981 book value
per share.
On December 13, 1989, the shareholders approved an amendment to the
Articles of Incorporation to increase the authorized number, and reduce
the par value, of the Company's common shares and to eliminate provisions
relating to the authorization of prior preferred stock and preferred
stock. A 50-for-1 stock split, effective on December 14, 1989 (this
adjusted the post split June 30, 1976 equivalent purchase price to $16.50
per share), was approved by the shareholders. Each share of Class A stock
is entitled to one vote and each share of Class B stock is entitled to ten
votes.
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