<PAGE> 1
SCIOTO INVESTMENT COMPANY
COLUMBUS, OHIO
ANNUAL REPORT
YEAR ENDED
DECEMBER 31, 1999
<PAGE> 2
SCIOTO INVESTMENT COMPANY
c/o 4561 Lanes End Street, Columbus, Ohio 43220-4254
- --------------------------------------------------------------------------------
Directors:
Stephen Kellough Marilyn B. Kellough Donald C. Fanta
Kent. K. Rinker John Josephson Paul D. Trott
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
- ------------------------
1979 13.3
- ------------------------
1980 12.4
- ------------------------
1981 8.9
- ------------------------ Class A Common Stock
1982 3.8 Weighted Average Market Price per Share, in
- ------------------------ Maturity Term of the Dollars, at December 31
1983 3.8 Company's Bond ----------------------------
- ------------------------ Portfolio, in Years, at
1984 3.9 December 31 Bid
- ------------------------ ----------------------- -----
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
- ----------------------------------------------------------------------------------------------------------------
1998 1.6 3.5
- ----------------------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
SCIOTO INVESTMENT COMPANY
c/o 4561 LANES END STREET
COLUMBUS, OHIO 43220-4254
Dear Fellow Shareholders:
For 1999, Scioto Investment Company earned net investment income of
$0.45 per share, down from $0.53 per share for 1998. The Company distributed
dividends of $0.44 per share in 1999 compared to dividends of $0.53 per share in
1998. Net asset value per share decreased by $0.37 to $16.70 at December 31,
1999 from $17.07 at December 31, 1998. Unrealized depreciation of investments
was $0.38 per share in 1999 versus unrealized appreciation of $0.03 per share in
1998. A financial highlights summary of the per share data for the last five
years is included in Note 2 to the financial statements.
Scioto Investment Company invests principally in state and municipal
bonds, all within Ohio, which are exempt from federal income tax (and which are
also exempt from the Ohio and local income taxes of Ohio residents). Normally
the bonds when purchased are rated "A" or better by Moody's Investors Service,
Inc. before the effect of insurance coverage, if any. The Company's investment
portfolio as of December 31, 1999 and 1998 is as shown on the schedules of
investments at pages 8 and 9 of this report.
Since 1976, Scioto Investment Company has qualified as both a regulated
investment company under the Internal Revenue Code and a non-diversified
closed-end management company under the Investment Company Act of 1940. Since it
is expected that the Company will again so qualify in calendar year 2000, it is
expected that substantially all of Scioto Investment Company's 2000 net
investment income will be distributed to shareholders as quarterly federal
income tax-exempt interest dividends in 2000.
Sincerely,
SCIOTO INVESTMENT COMPANY
by Stephen Kellough, Chairman,
President, CEO, and Treasurer, May 3, 2000
<PAGE> 4
DELOITTE &
TOUCHE LOGO Deloitte & Touche LLP Telephone: (614) 221-1000
155 East Broad Street Facsimile: (614) 229-4647
Columbus, Ohio 43215-3611
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,
1999 and 1998, 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, 1999. 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 confirmation by correspondence with the
custodian of securities owned at December 31, 1999 and 1998. 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 referred to
above present fairly, in all material respects, the financial position of Scioto
Investment Company at December 31, 1999 and 1998, 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, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 18, 2000
<PAGE> 5
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
ASSETS:
Investments in money market funds and securities - at quoted market value
(amortized cost, 1999 - $7,583,929; 1998 - $7,548,716)
(see accompanying schedules) $7,447,958 $7,582,830
Interest receivable 38,250 43,653
Cash 673 27,579
Prepaid expenses 583 584
---------- ----------
Total assets 7,487,464 7,654,646
---------- ----------
LIABILITIES:
Accrued expenses - professional and transfer agent fees 8,724 7,128
---------- ----------
Total liabilities 8,724 7,128
========== ==========
NET ASSETS (net asset value per common share based on 447,950 common shares
outstanding, 1999 - $16.70; 1998 - $17.07) $7,478,740 $7,647,518
========== ==========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 6
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
SCHEDULES OF INVESTMENTS
DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
---------------------------------------------------------------------------------------
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 5.05% 5.05% Demand $ 156 $ 8
Cardinal Tax-Exempt Money Fund 3.01% 3.01% Demand 1,486,020 44,729
---------- --------
Total unaffiliated money market funds 1,486,176 44,737
---------- --------
UNAFFILIATED MUNICIPAL BONDS:
Clermont County, Ohio Hospital FACS-B Aaa Aa3 4.83 4.850 9/1/00 300,000 14,550
Napoleon, Ohio CSD NR NR 4.15 4.150 12/1/00 100,000 4,150
Dublin, Ohio CSD Aaa A1 5.19 5.250 12/1/00 150,000 7,875
Dublin, Ohio Local School District (LSD) Aaa A1 6.93 7.125 12/1/00 200,000 14,250
Liberty, Ohio Aaa NR 4.14 4.150 12/1/00 100,000 4,150
Delaware County, Ohio Sewer Dist. Aaa Aa3 3.32 3.300 12/1/00 340,000 (1) 11,220
Montgomery County, Ohio Beaver Creek Sewer Aaa NR 4.86 4.900 9/1/01 200,000 9,800
Cleveland, Ohio Aaa A1 3.75 3.700 10/1/01 650,000 24,050
Big Walnut, Ohio LSD Aaa NR 4.21 4.200 12/1/01 100,000 4,200
Akron, Ohio Sewer Systems Aaa NR 4.03 4.000 12/1/01 200,000 8,000
Dayton, Ohio G/O FGIC Aaa A2 3.66 3.600 12/1/01 300,000 10,800
Dayton, Ohio G/O FGIC Aaa A2 3.76 3.650 12/1/02 400,000 14,600
Wooster, Ohio CSD NR NR 4.33 4.300 12/1/02 100,000 4,300
Columbus, Ohio Mun. Arpt. Aaa A2 4.54 4.500 1/1/03 200,000 9,000
Ohio State PUB FACS Commn. NR Aa2 4.53 4.500 12/1/03 300,000 13,500
Hamilton County, Ohio Waste Water System NR NR 4.41 4.300 10/15/04 200,000 8,600
Barberton, Ohio CSD Aaa A3 4.45 4.350 11/1/04 300,000 13,050
Hamilton County, Ohio Sewer System Aaa Aa3 6.12 6.400 12/1/05 125,000 8,000
University of Cincinnati, Ohio Aaa A1 4.54 4.400 12/1/05 400,000 17,600
Ohio State PUB FACS Commn. Higher Aaa Aa2 4.31 4.000 6/1/06 300,000 12,000
Ohio State PUB FACS Commn. Higher Aaa Aa2 4.45 4.100 6/1/07 200,000 8,200
Ohio State PUB FACS Commn. Higher NR Aa2 5.09 5.000 12/1/09 900,000 (1) 45,000
Columbus, Ohio RFDG-C 4.550 9/15/99 (2)
Findlay, Ohio Water REV RFDG 4.400 11/1/99 (2)
Hilliard, Ohio City School District (CSD)
Series A 4.000 12/1/99 (2)
Big Walnut, Ohio LSD 4.000 12/1/99 (2)
Toledo, Ohio SER-A RFDG 4.100 12/1/99 (2)
Youngstown, Ohio 7.000 12/1/99 (2)
--------- --------
Total unaffiliated municipal bonds 6,065,000 266,895
--------- --------
TOTAL $7,551,176 $311,632
========== ========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
----------------------------------------------------------------------------------------
% 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)
<S> <C> <C> <C> <C> <C> <C> <C>
UNAFFILIATED MONEY MARKET FUNDS:
Cardinal Government Securities Trust $ 156 $ 156 $ 149 $ 149 $ 149
Cardinal Tax-Exempt Money Fund 1,486,020 1,486,020 19.95% 1,336,367 1,336,367 1,336,367 17.63%
---------- ---------- ------- ---------- ---------- ---------- ------
Total unaffiliated money market funds 1,486,176 1,486,176 19.95 1,336,516 1,336,516 1,336,516 17.63
---------- ---------- ------ ---------- ---------- ---------- ------
UNAFFILIATED MUNICIPAL BONDS:
Clermont County, Ohio Hospital FACS-B 301,280 301,218 4.04 300,000 303,200 306,573 4.04
Napoleon, Ohio CSD 100,000 99,953 1.34 100,000 100,000 101,406 1.34
Dublin, Ohio CSD 151,572 151,547 2.03 150,000 153,288 155,131 2.04
Dublin, Ohio Local School District (LSD) 204,886 205,384 2.76 200,000 210,216 213,468 2.82
Liberty, Ohio 100,000 100,047 1.34 100,000 100,000 101,391 1.34
Delaware County, Ohio Sewer Dist. 340,292 337,103 4.52
Montgomery County, Ohio Beaver Creek Sewer 204,133 201,432 2.71 200,000 206,945 206,610 2.73
Cleveland, Ohio 653,792 639,951 8.59 650,000 655,987 651,157 8.58
Big Walnut, Ohio LSD 100,000 99,541 1.34 100,000 100,000 101,798 1.34
Akron, Ohio Sewer Systems 200,000 198,256 2.66 200,000 200,000 202,196 2.66
Dayton, Ohio G/O FGIC 300,493 294,549 3.96 300,000 300,000 300,324 3.96
Dayton, Ohio G/O FGIC 400,745 387,352 5.20 400,000 400,000 399,268 5.26
Wooster, Ohio CSD 102,028 99,094 1.34 100,000 102,724 102,015 1.35
Columbus, Ohio Mun. Arpt. 201,066 197,844 2.66 200,000 201,421 203,816 2.69
Ohio State PUB FACS Commn. 309,071 297,567 4.00 300,000 311,387 308,796 4.07
Hamilton County, Ohio Waste Water System 200,000 194,682 2.61 200,000 200,000 203,666 2.69
Barberton, Ohio CSD 300,000 292,812 3.93 300,000 300,000 306,282 4.04
Hamilton County, Ohio Sewer System 129,082 130,530 1.75 125,000 131,963 135,225 1.78
University of Cincinnati, Ohio 402,239 386,900 5.20 400,000 402,617 407,736 5.38
Ohio State PUB FACS Commn. Higher 300,000 277,911 3.73 300,000 300,000 297,522 3.92
Ohio State PUB FACS Commn. Higher 201,242 184,012 2.47 200,000 201,410 198,728 2.62
Ohio State PUB FACS Commn. Higher 895,832 884,097 11.87
Columbus, Ohio RFDG-C 300,000 301,085 303,276 4.00
Findlay, Ohio Water REV RFDG 125,000 125,396 126,443 1.67
Hilliard, Ohio City School District (CSD)
Series A 300,000 300,000 302,712 3.99
Big Walnut, Ohio LSD 100,000 100,000 100,867 1.33
Toledo, Ohio SER-A RFDG 300,000 300,000 302,964 4.00
Youngstown, Ohio 200,000 204,561 206,944 2.73
---------- ---------- ------ ---------- ---------- ---------- ------
Total unaffiliated municipal bonds 6,097,753 5,961,782 80.05 6,150,000 6,212,200 6,246,314 82.37
---------- ---------- ------ ---------- ---------- ---------- ------
TOTAL $7,583,929 $7,447,958 100.00% $7,486,516 $7,548,716 $7,582,830 100.00%
========== ========== ====== ========== ========== ========== ======
</TABLE>
Ratings shown have not been audited by Deloitte & Touche LLP.
(1) Total principal amount of 1999 purchases - $1,240,000.
(2) Total principal amount of 1999 maturities - $1,325,000.
See notes to financial statements.
-3-
<PAGE> 7
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996, AND 1995
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Nontaxable interest (net of bond premium amortization and discount accretion,
1999 - $27,088; 1998 - $26,421;
1997 - $30,280; 1996 - $21,513; 1995 - $43,899) (Note 1) $ 280,559 $303,234 $311,905 $319,450 $332,004
Taxable interest 2 6 6 6
--------- -------- -------- -------- --------
Total investment income 280,559 303,236 311,911 319,456 332,010
--------- -------- -------- -------- --------
OPERATING EXPENSES:
Professional services:
Accounting and bookkeeping 18,320 16,775 17,840 16,245 16,550
Audit and tax 23,582 17,793 13,479 14,800 13,250
Legal 16,149 13,010 20,411 11,101 18,139
Transfer agent fees 8,428 4,705 7,352 7,135 6,207
Directors' fees 11,750 9,000 9,500 8,500 8,000
Miscellaneous 5,225 4,285 4,863 3,631 2,514
--------- -------- -------- -------- --------
Total operating expenses 83,454 65,568 73,445 61,412 64,660
--------- -------- -------- -------- --------
INVESTMENT INCOME - NET 197,105 237,668 238,466 258,044 267,350
--------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS -
Unrealized appreciation (depreciation) of investments (168,785) 13,298 (1,132) (22,324) 65,933
--------- -------- -------- -------- --------
Net gain (loss) on investments (168,785) 13,298 (1,132) (22,324) 65,933
--------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 28,320 $250,966 $237,334 $235,720 $333,283
========= ======== ======== ======== ========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 8
SCIOTO INVESTMENT COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Investments income - net $ 197,105 $ 237,668 $ 238,466 $ 258,044 $ 267,350
Realized and unrealized appreciation (depreciation)
of investments (168,785) 13,298 (1,132) (22,324) 65,933
---------- ---------- ---------- ---------- ----------
Net increase in net assets resulting from operations 28,320 250,966 237,334 235,720 333,283
DIVIDENDS TO SHAREHOLDERS FROM INVESTMENT
INCOME - Net (197,098) (234,726) (236,518) (258,019) (261,603)
---------- ---------- ---------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (168,778) 16,240 816 (22,299) 71,680
NET ASSETS AT BEGINNING OF YEAR 7,647,518 7,631,278 7,630,462 7,652,761 7,581,081
---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR (Including undistributed
net investment income, 1999 - $190,069;
1998 - $190,062; 1997 - $187,120; 1996 - $185,172;
1995 - $185,147) $7,478,740 $7,647,518 $7,631,278 $7,630,462 $7,652,761
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 9
SCIOTO INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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, 1999, unrealized depreciation of investments of $135,971
consisted of $1,993 of unrealized gains and $137,964 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, 1999 were
$1,240,000 and $1,325,000, 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.
-6-
<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, 1999 is as follows:
<TABLE>
<CAPTION>
PER SHARE DATA: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of year $17.07 $17.04 $17.03 $17.08 $16.92
Income from investment
operations:
Investment income (bond interest) 0.63 0.68 0.69 0.71 0.74
Operating expenses (0.18) (0.15) (0.16) (0.13) (0.15)
------ ------ ------ ------ ------
Investment income - net 0.45 0.53 0.53 0.58 0.59
Unrealized and realized gain
(loss) on investments (0.38) 0.03 .00 (0.05) 0.15
------ ------ ------ ------ ------
Total from investment
operations 0.07 0.56 0.53 0.53 0.74
------ ------ ------ ------ ------
Distributions of investment
income - net (dividends) (0.44) (0.53) (0.52) (0.58) (0.58)
------ ------ ------ ------ ------
Net asset value at end of year $16.70 $17.07 $17.04 $17.03 $17.08
====== ====== ====== ====== ======
Total return (aggregate) 0.37% 3.29% 3.11% 3.08% 4.40%
</TABLE>
<TABLE>
<CAPTION>
RATIOS TO AVERAGE
NET ASSETS: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Operating expenses 1.12% 0.86% 0.96% 0.80% 0.85%
Investment income - net 2.64% 3.11% 3.13% 3.38% 3.51%
SUPPLEMENTAL DATA:
Net assets at end
of year $7,478,740 $7,647,518 $7,631,278 $7,630,462 $7,652,761
Number of shares
outstanding at end
of year 447,950 447,950 447,950 447,950 447,950
Portfolio turnover rate 19.60% 52.86% 16.97% 50.96% 27.71%
</TABLE>
-7-
<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 ("Penn" 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, 1999, the remaining minimum future lease rental commitments
during the non-cancelable lease terms are approximately $2,940,000
($3,400,000 at December 31, 1998) and the total of the non-cancelable
leases plus total option periods minimum future lease rental commitments
are approximately $13,840,000 ($16,920,000 at December 31, 1998), 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 $770,000 ($1,040,000 at
December 31, 1998) in annual minimum rentals at December 31, 1999.
In December 1998 Penn defaulted on its debt obligations. Subsequently,
Penn reached an agreement with its creditors and implemented the
restructuring plan. Based upon the current circumstances and available
information, no losses have been recorded by the Company or any claims
submitted to the Company. Penn Traffic filed a Chapter 11 bankruptcy
petition in U.S. Bankruptcy Court in Delaware on March 1, 1999 and
completed the process emerging from Chapter 11 on June 29, 1999. Penn
Traffic's Chapter 11 restructuring enabled it to cancel $1.13 billion of
debt in exchange for: $100 million of new senior notes; new shares of
common stock; and, warrants to purchase common stock. None of the leases
as to which the Company could have any contingent liability were rejected
in the Chapter 11 reorganization.
4. COMMON SHARES
The status of common shares, stated value of $66 per share, at
December 31, 1999 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
-8-
<PAGE> 12
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.
******
-9-
