UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REOPRT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act File Number 811-179
Name of registrant as specified in charter: Central Securities Corporation
Address of principal executive offices:
375 Park Avenue
Suite 3404
New York, New York 10152
Name and address of agent for service:
Central Securities Corporation, Wilmot H. Kidd, President
375 Park Avenue
Suite 3404
New York, New York 10152
Registrant's telephone number, including area code: 212-688-3011
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
Item 1. Reports to Stockholders.
================================================================================
CENTRAL SECURITIES CORPORATION
----------
SEVENTY-FIFTH ANNUAL REPORT
2003
================================================================================
SIGNS OF THE TIMES
"Unlike so many industrial technologies - railroads, say, or the telegraph
- the stored-program computer is a general-purpose tool, animated by software, a
medium without material constraints. The unrelenting pace of improvement in
processing speeds, data storage and miniaturization means the tools are more
powerful and smaller; people then figure out things to do with them.
"Indeed, innovation continues apace, despite the downturn. Advances are
evident in a range of technologies - wireless, data center automation, speech
recognition, intelligent software, telephone service over the Internet, sensors,
natural language processing, and on and on.
"Underestimating the potential for computing has proved a common pitfall
over the years, from Thomas J. Watson at I.B.M. in 1943 ('I think there is a
world market for maybe five computers') Ken Olsen at Digital Equipment in 1977
('There is no reason anyone would want a computer in their home').
"Jim Gray, a computer scientist, has worked in the industry for more that
30 years. For his pioneering research on databases and transaction processing at
I.B.M. and elsewhere, he won the 1999 A.M. Turing Award, sometimes called the
Nobel of computer science. 'I've seen the 'end' at least twice in my career -
only to be surprised by the next wave,' said Mr. Gray, who now works for
Microsoft. 'My guess is that this computer thing has just gotten stared.'"
(Steve Lohr, The New York Times, May 4, 2003)
----------
"Americans spend an average of four hours a day watching TV, an hour of
that enduring ads. That adds up to an astounding 10% of total leisure time; at
current rates, a typical viewer fritters away three years of his life getting
bombarded with commercials." (Scott Woolley, Forbes, September 29, 2003)
----------
"Economic liberalism, much like political liberalism, puts great weight on
checks and balances, on limits to power and hence to abuses of power. In
economics, the most potent checking force bar none is competition. Bosses,
shareholders and pro-business politicians all loathe it. They stand to gain, in
one way or another, from conspiring to gull the public into regarding
competition as a threat to the greater good, rather than to themselves. This is
the context in which to think of free trade, an obsession of ours since we
started. Liberal trade is nothing but enhanced competition. Anti-globalists have
the logic exactly backwards. Far from empowering global fat cats, free trade
holds corporate power in check and assaults the excess profits that
protectionism, courtesy of pro-business politicians, gouges from the public."
(The Economist, June 28, 2003)
----------
"There are just 18 computers per 1,000 people in the Arab region today,
compared with the global average of 78.3 per 1,000, and only 1.6 percent of the
Arab population has Internet access. In 1995-96 alone, 25 percent of all
graduates from Arab universities with B.A. degrees emigrated, while 15,000
medical doctors left the Arab world from 1998 to 2000.
"The number of scientists and engineers working in R.&D. in the Arab
region is 371 per million citizens, compared with a global rate of 979 per
million. Although the Arab region represents 5 percent of world population, it
produces only 1.1 percent of the books in the world." (Thomas L. Friedman, The
New York Times, October 19, 2003)
[2]
SIGNS OF THE TIMES
o "Wal-Mart's U.S. market share (percent of all sales through food,
drug, and mass-merchandisers.)
Dog food 36% Toothpaste 26%
Disposable diapers 32% Pain remedies 21%
Photographic film 30%
o Wal-Mart's sales on one day last fall--$1.42 billion--were larger
than the GDPs of 36 countries.
o It is the biggest employer in 21 states, with more people in uniform
than the U.S. Army.
o If the estimated $2 billion it loses through theft each year were
incorporated as a business, it would rank No. 694 on the Fortune
1,000.
What this means for Wal-Mart's low profile CEO, Lee Scott, is that he runs
what is arguably the world's most powerful company. What it means for corporate
America is a bit more bracing. It means, for one, that Wal-Mart is not just
Disney's biggest customer but also Procter & Gamble's and Kraft's and Revlon's
and Gillette's and Campbell Soup's and RJR's and on down the list of America's
famous branded manufacturers. It means, further, that the nation's biggest
seller of DVDs is also its biggest seller of groceries, toys, guns, diamonds,
CDs, apparel, dog food, detergent, jewelry, sporting goods, videogames, socks,
bedding, and toothpaste--not to mention its biggest film developer, optician,
private truck-fleet operator, energy consumer, and real estate developer. It
means, finally, that the real market clout in many industries no longer resides
in Hollywood or Cincinnati or New York City, but in the hills of northwestern
Arkansas." (Jerry Useem, Fortune, February 18, 2003)
----------
"The explosion of litigation and liability claims in the United States is
the biggest issue for the domestic property-casualty industry and a great threat
to the U.S. economy. According to a study by the U.S. Council of Economic
Advisors, litigation costs have grown, from 0.6 percent of GDP in 1950, to 1.3
percent of GDP in 1970, to 1.8 percent of GDP currently. The U.S. tort liability
system is the most expensive in the world. If current trends continue, 2.4
percent of U.S. GDP will be devoted to litigation costs and claims by 2005,
adding $1,000 to the cost of goods and services purchased annually by the
average American family. To combat this problem, we will work very hard with the
administration, Congress, the business community and consumers who recognize
that they pay the price for senseless litigation." (M.R. Greenberg, American
International Group, Inc., Annual Report, March 21, 2003)
----------
"Health spending accounts for nearly 15 percent of the nation's economy,
the largest share on record, the Bush administration said on Thursday.
"The Department of Health and Human Services said that health care
spending shot up 9.3 percent in 2002, the largest increase in 11 years, to a
total of $1.55 trillion. That represents an average of $5,440 for each person in
the United States.
"Hospital care and prescription drugs accounted for much of the overall
increase, which outstripped the growth in the economy for the fourth year in a
row, the report said.
"Complete data on health care spending in 2003 are not yet available, and
some experts say the rapid growth of the last few years may be slowing." (Robert
Pear, The New York Times, January 8, 2004)
[3]
CENTRAL SECURITIES CORPORATION
(Organized on October 1, 1929 as an investment company, registered as such with
the Securities and Exchange Commission under the provisions of the
Investment Company Act of 1940.)
TEN YEAR HISTORICAL DATA
Per Share of Common Stock
-----------------------------------
Total Convertible Net Net Net realized Unrealized
net Preference asset investment Divi- Distribu- investment appreciation
Year assets Stock(A) value income(B) dends(C) tions(C) gain of investments
---- ------ ----------- ----- --------- -------- --------- ---------- --------------
1993 $218,868,360 $9,960,900 $17.90 $111,304,454
1994 226,639,144 9,687,575 17.60 $.23 $.22 $1.39 $ 16,339,601 109,278,788
1995 292,547,559 9,488,350 21.74 .31 .33 1.60 20,112,563 162,016,798
1996 356,685,785 9,102,050 25.64 .27 .28 1.37 18,154,136 214,721,981
1997 434,423,053 9,040,850 29.97 .24 .34 2.08 30,133,125 273,760,444
1998 476,463,575 8,986,125 31.43 .29 .29 1.65 22,908,091 301,750,135
1999 590,655,679 -- 35.05 .26 .26 2.34 43,205,449 394,282,360
2000 596,289,086 -- 32.94 .32 .32 4.03 65,921,671 363,263,634
2001 539,839,060 -- 28.54 .18 .22 1.58* 13,662,612 304,887,640
2002 361,942,568 -- 18.72 .14 .14 1.11 22,869,274 119,501,484
2003 478,959,218 -- 24.32 .09 .11 1.29 24,761,313 229,388,141
----------
A- At liquidation preference.
B- Excluding gains or losses realized on sale of investments and the dividend
requirement on the Convertible Preference Stock which was redeemed August
1, 1999.
C- Computed on the basis of the Corporation's status as a "regulated
investment company" for Federal income tax purposes. Dividends are from
undistributed net investment income. Distributions are from long-term
investment gains.
* Includes a non-taxable return of capital of $.55.
The Common Stock is listed on the American Stock Exchange. On December 31,
2003 the market quotations were as follows:
Common Stock.......................$20.75 low, $20.89 high and last sale
Central's performance versus the S&P 500:
Annual Total Return Central's Central's Standard &
to December 31, 2003 NAV Return Market Return Poor's 500
-------------------- ---------- ------------- ---------
One Year............................. 39.3% 36.2% 28.7%
Five Year............................ 5.3% 6.0% (0.6%)
Ten Year............................. 13.4% 12.8% 11.1%
Fifteen Year......................... 14.8% 15.4% 12.2%
[4]
To the Stockholders of
CENTRAL SECURITIES CORPORATION:
Financial statements for the year 2003, as reported upon by our
independent auditors, and other pertinent information are submitted herewith.
Comparative net assets are as follows:
December 31, December 31,
2003 2002
------------ ------------
Net assets................................................. $478,959,218 $361,942,568
Net assets per share of Common Stock....................... 24.32 18.72
Shares of Common Stock outstanding................... 19,692,777 19,337,284
Comparative operating results are as follows:
Year 2003 Year 2002
---------------- ----------------
Net investment income...................................... $ 1,740,024 $ 2,592,249
Per share of Common Stock.............................. 09* .14*
Net realized gain on sale of investments................... 24,761,313 22,869,274
Increase (decrease) in net unrealized appreciation
of investments........................................... 109,886,657 (185,386,156)
Increase (decrease) in net assets resulting from operations... 136,387,994 (159,924,633)
----------
* Per-share data are based on the average number of Common shares
outstanding during the year.
The Corporation made two distributions to holders of Common Stock in 2003,
a cash dividend of $.12 per share paid on June 20 and an optional distribution
of $1.28 per share in cash, or one share of Common Stock for each 15 shares
held, paid on December 29. The Corporation has been advised that of the $1.40
paid in 2003, $.11 represents ordinary income and $1.29 represents long-term
capital gains. For Federal income tax purposes, separate notices have been
mailed to stockholders. With respect to state and local taxes, the status of
distributions may vary. Stockholders should consult with their tax advisors on
this matter.
In the optional distribution paid in December, the holders of 52% of the
outstanding shares of Common Stock elected to receive stock, and 661,093 Common
shares were issued.
During 2003 the Corporation repurchased 305,600 shares of its Common Stock
on the American Stock Exchange at an average price per share of $17.67. The
Corporation may from time to time purchase Common Stock in such amounts and at
such prices as the Board of Directors may deem advisable in the best interests
of stockholders. Purchases may be made on the American Stock Exchange or in
transactions directly with stockholders.
[5]
The economic recovery continued last year. Business spending, which
declined sharply in 2001 and recovered only tentatively in 2002, began to expand
in 2003. Consumer spending remained healthy as it has been over the past three
years. The Federal Reserve kept interest rates low (the Federal funds rate is
1%), while Congress cut taxes and increased federal spending. These monetary and
fiscal measures have stimulated both business and consumer spending. Investors
have noted the recent economic strength, and stock market results last year were
quite good. The Standard and Poor's 500 Index increased by 28.7% while the
stocks of smaller companies as measured by the Russell 2000 Index increased by
47.5%. While GDP growth was good, certain imbalances are a cause for concern.
The United States has a large Federal budget deficit and our international trade
deficit has recently been at record levels. In addition, unemployment has been
persistently high. Probably the question foremost in investors' minds is whether
or not the growth in business spending is sustainable. Other issues include the
decline in the dollar, the Middle East situation, and the emergence of China as
a factor in world trade. Nonetheless, most investors are optimistic about the
coming year, but some of the more seasoned are concerned with the level of
speculative activity in the stock market.
Central's results were positively affected by increases in a number of our
long-term investments in the information technology and financial sectors of the
economy, including Intel, Plymouth Rock, Capital One, Analog Devices, and
Flextronics. Our one significant disappointment last year was Impath which
encountered managerial and financial difficulties.
Our investment activity as measured by portfolio turnover was low when
compared with most mutual funds but about the same as it has been in recent
years. Purchases included new positions in AIG, Marsh & McLennan, Roper, Dover,
and an increase in our holding in Schering-Plough. We reduced our holdings in
Murphy Oil, Analog Devices, Intel and Capital One, and sold all of Everest Re.
At year-end investments in the information technology sector represented 37% of
our assets up from 32% last year. This increase, it should be noted, resulted
from price appreciation not net new investment. The financial sector represented
27% of assets up from 25% one year ago. The comparable percentages for the
Standard and Poor's 500 Index were: 18% in information technology and 21% in the
financial sector. Central had 41 investments at year-end. The ten largest, shown
on page eight, accounted for 54% of assets. Short-term commercial paper and
Treasury bills amounted to 7.3% of assets.
Last year was an important one for our largest investment, Plymouth Rock.
In March it completed the repurchase of 19% of its stock. Central was not a
party to the transaction but, as a result, now owns 38% of Plymouth Rock on a
fully diluted basis. In November, Plymouth Rock's affiliate, The Palisades
Group, acquired the New Jersey property and casualty unit of Prudential
Financial, Inc. The acquired company, renamed High Point, will operate as a part
of the Palisades reciprocal family. With direct written premium volume of over
$500 million, High Point is about equal in size to all the other Plymouth Rock
companies combined. Palisades has acquired a number of books of business in the
past few years but this acquisition is larger and it will require more
management time and attention. Continuing to provide excellent policyholder
service is now the first order of business. Over time and under reasonably
favorable industry conditions, Palisades has the potential to contribute
substantial income to Plymouth Rock. In the meantime, although final audited
results will not be available until March 2004, it appears that Plymouth Rock's
overall results in 2003 were good. Jim Stone, Hal Belodoff and Gerry Wilson all
deserve credit for the special accomplishments of the past year at Plymouth
Rock.
[6]
Our investment approach continues to be based on the long-term view. We
look for companies with good economic fundamentals and the capacity for growth.
We are sensitive to valuation. It is important to be able to make investments at
a reasonable if not a bargain price. We attempt to estimate the probable value
of a company over a period of three to five years into the future. Many, if not
most, investors have a shorter time horizon, and we believe that our ability to
take a long-term view has been a great advantage to Central's stockholders. Our
best results have come from holding investments in companies that grow
significantly over a number of years, not from active trading for short-term
gains. Finally, the integrity of the management of the companies in which we
invest is a most important consideration. This point has been made brutally
clear by the many scandals which have come to light in the past few years. In
addition, the alignment of management's interest with that of stockholders is
vital.
Our practice in recent years has been to keep about one half of our assets
in a small number of companies, with the remainder in a general market
portfolio. We believe the risk associated with this approach can be reduced
through knowledge of the companies in which we invest. We have held most of our
largest investments for many years. Ideally we want to hold profitable growth
companies for extended periods of time. We recognize, however, that the period
of significant growth for any particular company will not last indefinitely and
that over time the composition of our assets will change as long-term
investments are reduced or sold and the proceeds redeployed.
It is our goal to provide shareholders with investment management that
will be judged as excellent over the long-term. We are confident that under
reasonably favorable economic conditions our investment approach will continue
to provide satisfactory results.
Shareholder inquiries are welcome.
CENTRAL SECURITIES CORPORATION
WILMOT H. KIDD, President
375 Park Avenue
New York, NY 10152
January 28, 2004
[7]
TEN LARGEST INVESTMENTS
December 31, 2003
----------------- % of Year First
Cost Value Net Assets Acquired
----- ----- ---------- ----------
(millions)
The Plymouth Rock Company, Inc...................... $ 2.2 $58.9 12.3% 1982
Intel Corporation................................... 0.4 31.4 6.6 1986
Capital One Financial Corporation................... 2.1 26.4 5.5 1994
American Management Systems, Inc.................... 22.2 24.4 5.1 1984
Analog Devices, Inc................................. 0.5 21.0 4.4 1987
Brady Corporation Class A........................... 2.3 21.0 4.4 1984
Murphy Oil Corporation.............................. 3.1 19.6 4.1 1974
The Bank of New York Company, Inc................... 4.1 18.5 3.9 1993
Flextronics International Ltd....................... 3.8 17.9 3.7 1996
Convergys Corporation............................... 18.6 17.5 3.6 1998
PRINCIPAL PORTFOLIO CHANGES
October 1 to December 31, 2003
(Common Stock unless specified otherwise)
Number of Shares
--------------------------------------------
Held
Purchased Sold December 31, 2003
--------- ---- -----------------
American International Group, Inc................. 50,000 150,000
Analog Devices, Inc............................... 30,000 460,000
Arch Capital Group Ltd............................ 10,000 100,000
Brady Corporation Class A......................... 5,000 515,000
Convergys Corporation............................. 120,000 1,000,000
Duke Energy Corporation........................... 130,000 --
Everest Re Group Ltd.............................. 50,000 --
Flextronics International Ltd..................... 20,000 1,210,000
Intel Corporation................................. 20,000 980,000
Marsh & McLennan Companies, Inc................... 30,000 100,000
Medco Health Solutions, Inc....................... 12,060 --
Roper Industries, Inc............................. 40,000 124,700
The TriZetto Group, Inc........................... 100,000 1,000,000
[8]
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2003
ASSETS:
Investments:
General portfolio securities at market value
(cost $210,664,119) (Note 1).......................... $380,705,008
Securities of affiliated companies (cost $3,462,486)
(Notes 1, 5 and 6) ................................... 62,809,738
Short-term investments (cost $35,140,497)............... 35,140,497 $478,655,243
------------
Cash, receivables and other assets:
Cash.................................................... 70,759
Dividends receivable.................................... 217,350
Office equipment and leasehold improvements, net........ 20,816
Other assets............................................ 238,311 547,236
------------ ------------
Total Assets........................................ 479,202,479
LIABILITIES:
Accrued expenses and reserves............................... 243,261
------------
Total Liabilities................................... 243,261
-----------
NET ASSETS...................................................... $478,959,218
============
NET ASSETS are represented by:
Common Stock $1 par value: authorized
30,000,000 shares; issued 19,692,777 (Note 2)............. $ 19,692,777
Surplus:
Paid-in................................................... $227,838,315
Undistributed net gain on sale of investments............. 1,999,913
Undistributed net investment income....................... 40,072 229,878,300
------------
Net unrealized appreciation of investments.................. 229,388,141
------------
NET ASSETS...................................................... $478,959,218
============
NET ASSET VALUE PER COMMON SHARE
(19,692,777 shares outstanding)............................. $24.32
======
See accompanying notes to financial statements.
[9]
STATEMENT OF OPERATIONS
For the year ended December 31, 2003
INVESTMENT INCOME
Income:
Dividends (net of foreign withholding taxes of $7,031)..... $ 3,572,693
Interest................................................... 483,070 $ 4,055,763
------------
Expenses:
Administration and operations.............................. 656,554
Investment research........................................ 633,833
Rent and utilities......................................... 178,500
Employees' retirement plans................................ 121,662
Franchise and miscellaneous taxes.......................... 112,617
Legal, auditing and tax fees............................... 102,469
Directors' fees............................................ 102,000
Insurance.................................................. 87,408
Listing, software and sundry fees.......................... 87,359
Stationery, supplies, printing and postage................. 48,178
Transfer agent and registrar fees and expenses............. 37,076
Travel and telephone....................................... 24,637
Custodian fees............................................. 23,946
Publications and miscellaneous............................. 99,500 2,315,739
------------ ------------
Net investment income.......................................... 1,740,024
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain from investment transactions................. 24,761,313
Net increase in unrealized appreciation of investments......... 109,886,657
------------
Net gain on investments.................................... 134,647,970
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................................... $136,387,994
============
See accompanying notes to financial statements.
[10]
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2003 and 2002
2003 2002
---- ----
FROM OPERATIONS:
Net investment income..................................... $ 1,740,024 $ 2,592,249
Net realized gain on investments.......................... 24,761,313 22,869,274
Net increase (decrease) in unrealized appreciation
of investments.......................................... 109,886,657 (185,386,156)
------------ ------------
Increase (decrease) in net assets resulting from
operations............................................ 136,387,994 (159,924,633)
------------ ------------
DIVIDENDS TO STOCKHOLDERS FROM:
Net investment income..................................... (2,050,627) (2,571,208)
Net realized gain from investment transactions............ (24,612,727) (20,694,915)
------------ ------------
Decrease in net assets from distributions............... (26,663,354) (23,266,123)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS: (Note 2)
Distribution to stockholders reinvested in
Common Stock............................................ 12,692,986 12,119,838
Cost of shares of Common Stock repurchased................ (5,400,976) (6,825,574)
------------ ------------
Increase in net assets from capital share transactions.. 7,292,010 5,294,264
------------ ------------
Total increase (decrease) in net assets........... 117,016,650 (177,896,492)
NET ASSETS:
Beginning of year......................................... 361,942,568 539,839,060
------------ ------------
End of year (including undistributed net investment
income of $40,072 and $24,386, respectively)............ $478,959,218 $361,942,568
============ ============
See accompanying notes to financial statements.
[11]
STATEMENT OF INVESTMENTS
December 31, 2003
PORTFOLIO SECURITIES 92.6%
STOCKS (COMMON UNLESS SPECIFIED OTHERWISE)
Prin. Amt.
or Shares Value
---------- -----
Banking and Finance 10.3%
560,000 The Bank of New York Company, Inc............ $ 18,547,200
430,000 Capital One Financial Corporation............ 26,354,700
100,000 FleetBoston Financial Corporation............ 4,365,000
------------
49,266,900
------------
Chemicals 3.6%
1,372,400 PolyOne Corporation(a)....................... 8,769,636
200,000 Rohm and Haas Company........................ 8,542,000
------------
17,311,636
------------
Communications 1.1%
1,000,000 Cincinnati Bell Inc.(a)...................... 5,050,000
------------
Computer Software & Services 19.5%
280,000 Accenture Ltd.(a)............................ 7,369,600
1,620,000 American Management Systems, Inc.(a)......... 24,429,600
1,000,000 Convergys Corporation(a)..................... 17,460,000
590,000 SunGard Data Systems Inc.(a)................. 16,348,900
1,000,000 The TriZetto Group, Inc.(a).................. 6,450,000
1,150,000 Unisys Corporation(a)........................ 17,077,500
500,000 Wind River Systems, Inc.(a).................. 4,380,000
------------
93,515,600
------------
Electronics 17.7%
460,000 Analog Devices, Inc.......................... 20,999,000
100,000 Apple Computer Inc.(a)....................... 2,137,000
1,210,000 Flextronics International Ltd.(a)............ 17,908,000
180,000 Ingram Micro Inc. Class A(a)................. 2,862,000
980,000 Intel Corporation............................ 31,409,000
330,000 Motorola, Inc................................ 4,620,000
800,000 Solectron Corporation(a)..................... 4,728,000
------------
84,663,000
------------
Energy 7.5%
160,000 EnCana Corporation........................... 6,310,400
220,000 Kerr-McGee Corporation....................... 10,227,800
300,000 Murphy Oil Corporation....................... 19,593,000
------------
36,131,200
------------
Health Care 4.5%
100,000 Affymetrix Inc.(a)........................... 2,461,000
490,000 Impath Inc.(a)............................... 1,911,000
110,000 Laboratory Corporation of
America Holdings(a)........................ 4,064,500
100,000 Merck & Co., Inc. ........................... 4,620,000
450,000 Schering-Plough Corporation.................. 7,825,500
150,000 Vical Inc.(a)................................ 738,000
------------
21,620,000
------------
[12]
Prin. Amt.
or Shares Value
---------- -----
Insurance 16.3%
150,000 American International Group, Inc............ $ 9,942,000
100,000 Arch Capital Group Ltd.(a)................... 3,986,000
10,000 Erie Indemnity Co. Class A................... 423,800
100,000 Marsh & McLennan Companies, Inc.............. 4,789,000
70,000 The Plymouth Rock Company, Inc.
Class A(b)(c) ............................. 58,940,000
------------
78,080,800
------------
Manufacturing 10.6%
700,000 ArvinMeritor, Inc............................ 16,884,000
515,000 Brady Corporation Class A.................... 20,986,250
170,000 Dover Corporation............................ 6,757,500
124,700 Roper Industries, Inc........................ 6,142,722
------------
50,770,472
------------
Retail Trade 0.7%
100,000 CarMax, Inc.(a).............................. 3,093,000
------------
Transportation 0.8%
533,757 Transport Corporation of America, Inc.
Class B(a)(b).............................. 3,869,738
------------
Miscellaneous 0.0%
Grumman Hill Investments, L.P.(a)(c)......... 142,400
------------
Total Portfolio Securities
(cost $214,126,605).................... 443,514,746
------------
SHORT-TERM INVESTMENTS 7.3%
Commercial Paper 4.5%
$21,876,000 American Express Credit Corp.
0.8505% - 0.9104% due 1/5/04 - 1/28/04..... 21,868,013
------------
U.S. Treasury Bill 2.8%
13,300,000 U.S. Treasury Bill 0.7744% due 4/8/04........ 13,272,484
------------
Total Short-Term Investments
(cost $35,140,497)..................... 35,140,497
------------
Total Investments
(cost $249,267,102)(99.9%)............. 478,655,243
Cash, receivables and other assets
less liabilities (0.1%)................ 303,975
------------
Net Assets (100%)........................ $478,959,218
============
----------
(a) Non-dividend paying.
(b) Affiliate as defined in the Investment Company Act of 1940.
(c) Valued at estimat ed fair value.
See accompanying notes to financial statements.
[13]
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies--The Corporation is registered under
the Investment Company Act of 1940, as amended, as a non-diversified, closed-end
management investment company. The following is a summary of the significant
accounting policies consistently followed by the Corporation in the preparation
of its financial statements. The policies are in conformity with generally
accepted accounting principles.
Security Valuation--Securities are valued at the last sale price or, if
unavailable, at the closing bid price. Corporate discount notes and U.S.
Treasury bills are valued at amortized cost, which approximates market
value. Securities for which no ready market exists, including The
Plymouth Rock Company, Inc. Class A Common Stock, are valued at
estimated fair value by the Board of Directors.
Federal Income Taxes--It is the Corporation's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
stockholders. Therefore, no Federal income taxes have been accrued.
Use of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported. Actual
results may differ from those estimates.
Other--Security transactions are accounted for on the date the securities
are purchased or sold, and cost of securities sold is determined by
specific identification. Dividend income and distributions to
stockholders are recorded on the ex-dividend date.
2. Common Stock--The Corporation repurchased 305,600 shares of its Common
Stock in 2003 at an average price of $17.67 per share representing an average
discount from net asset value of 14.79%. It may from time to time purchase
Common Stock in such amounts and at such prices as the Board of Directors may
deem advisable in the best interests of the stockholders. Purchases will only be
made at less than net asset value per share, thereby increasing the net asset
value of shares held by the remaining stockholders. Shares so acquired may be
held as treasury stock, available for optional stock distributions, or may be
retired.
The Corporation made two distributions to holders of Common Stock in 2003,
a cash dividend of $.12 per share paid on June 20 and an optional distribution
of $1.28 per share in cash, or one share of Common Stock for each 15 shares
held, paid on December 29. In the optional distribution, 315,600 shares of
Common Stock held as treasury shares by the Corporation were distributed, and
345,493 Common shares were issued.
3. Investment Transactions--The aggregate cost of securities purchased and
the aggregate proceeds of securities sold during the year ended December 31,
2003, excluding short-term investments, were $44,988,515 and $48,738,257,
respectively.
[14]
NOTES TO FINANCIAL STATEMENTS -- Continued
As of December 31, 2003, based on cost for Federal income tax purposes,
the aggregate gross unrealized appreciation and depreciation for all securities
were $249,459,390 and $20,071,249, respectively.
4. Operating Expenses--The aggregate remuneration paid during the year
ended December 31, 2003 to officers and directors amounted to $1,223,000, of
which $102,000 was paid as fees to directors who were not officers. Benefits to
employees are provided through a profit sharing retirement plan. Contributions
to the plan are made at the discretion of the Board of Directors, and each
participant's benefits vest after three years. The amount contributed for the
year ended December 31, 2003 was $106,812.
5. Affiliates--The Plymouth Rock Company, Inc., and Transport Corporation
of America, Inc. are affiliates as defined in the Investment Company Act of
1940. The Corporation received dividends of $461,300 from affiliates during the
year ended December 31, 2003. Unrealized appreciation related to affiliates
increased by $18,194,329 for the year 2003 to $59,347,252.
6. Restricted Securities--The Corporation from time to time invests in
securities the resale of which is restricted. On December 31, 2003 such
investments had an aggregate value of $59,082,400, which was equal to 12.3% of
the Corporation's net assets. Investments in restricted securities at December
31, 2003, including acquisition dates and cost, were:
Company Shares Security Date Purchased Cost
------------------------------- -------- ------------------- -------------- ----------
Grumman Hill Investments, L.P. Limited Partnership 9/11/85 $ 18,162
Interest
The Plymouth Rock Company, Inc. 70,000 Class A Common 12/15/82 1,500,000
Stock 6/9/84 699,986
The Corporation does not have the right to demand registration of the
restricted securities. Unrealized appreciation related to restricted securities
increased by $16,907,885 for the year ended December, 31, 2003 to $56,864,252.
7. Operating Lease Commitment--The Corporation has entered into an
operating lease for office space which expires in 2014 and provides for future
minimum rental payments in the aggregate amount of approximately $3.3 million.
The lease agreement contains escalation clauses relating to operating costs and
real property taxes. Minimum rental commitments under the lease are $220,463 for
2004 and $314,241 per year for 2005 through 2008.
[15]
FINANCIAL HIGHLIGHTS
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of year ............... $ 18.72 $ 28.54 $ 32.94 $ 35.05 $ 31.43
Net investment income* ........................... 09 .14 .18 .32 .30
Net realized and unrealized gain (loss)
on securities .................................. 6.91 (8.71) (2.78) 1.92 5.96
-------- -------- -------- -------- --------
Total from investment operations ........... 7.00 (8.57) (2.60) 2.24 6.26
Less:
Dividends from net investment income**
To Preference Stockholders ................... -- -- -- -- .04
To Common Stockholders ....................... 11 .14 .22 .32 .26
Distributions from capital gains**
To Common Stockholders ....................... 1.29 1.11 1.03 4.03 2.34
Return of capital**
To Common Stockholders ....................... -- -- .55 -- --
-------- -------- -------- -------- --------
Total distributions ........................ 1.40 1.25 1.80 4.35 2.64
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 24.32 $ 18.72 $ 28.54 $ 32.94 $ 35.05
======== ======== ======== ======== ========
Per share market value, end of year .............. $ 20.89 $ 16.28 $ 25.31 $ 28.25 $ 27.25
Total return based on market(%) .................. 36.22 (31.23) (2.42) 17.75 22.96
Total return based on NAV(%) ..................... 39.32 (29.43) (6.54) 7.02 31.79
Ratios/Supplemental Data:
Net assets, end of year(000) ..................... $478,959 $361,943 $539,839 $596,289 $590,656
Ratio of expenses to average net assets
for Common(%) .................................. .56 .50 .45 .38 .45
Ratio of net investment income to average
net assets for Common(%) ....................... .42 .57 .60 .83 .89
Portfolio turnover rate(%) ....................... 12.90 19.50 10.32 13.54 12.06
----------
* Per-share data are based on the average number of Common Shares
outstanding during the year.
** Computed on the basis of the Corporation's status as a "regulated
investment company" for Federal income tax purposes.
See accompanying notes to financial statements.
----------
Proxy Voting Policies and Procedures
The policies and procedures used by the Corporation to determine how to
vote proxies relating to portfolio securities are available: (1) without charge,
upon request, by calling us at our toll-free telephone number (1-866-593-2507),
(2) on the Corporation's website at www.centralsecurities.com and (3) on the
Securities and Exchange Commission's website at www.sec.gov in the Corporation's
most recent Form N-CSR filing.
[16]
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CENTRAL SECURITIES CORPORATION
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Central Securities Corporation (the
"Corporation") as of December 31, 2003, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 2003 by correspondence with 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 and financial highlights referred
to above present fairly, in all material respects, the financial position of
Central Securities Corporation as of December 31, 2003, and the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended in conformity with accounting principles
generally accepted in the United States of America.
The information set forth for each of the years in the ten-year and
two-year periods ended December 31, 2003 appearing in the tables on pages 4 and
5, in our opinion, is fairly stated in all material respects in relation to the
financial statements from which it has been derived.
KPMG LLP
New York, NY
January 28, 2004
--------------------------------------------------------------------------------
[17]
BOARD OF DIRECTORS AND OFFICERS
Principal Occupations (last five years)
Independent Directors Age and Position with the Corporation (if any)
--------------------- --- ------------------------------------------
DONALD G. CALDER 66 President, G.L. Ohrstrom & Co. Inc. (private investment firm);
Director since 1982 Director of Brown-Forman Corporation, Carlisle Companies Incorporated and
Roper Industries, Inc. (manufacturing
companies)
JAY R. INGLIS 69 Executive Vice President, National Marine Underwriters
Director since 1973 (insurance management company) since 2001; Executive Vice President, Holt
Corporation (insurance holding company) prior thereto
DUDLEY D. JOHNSON 64 President, Young & Franklin Inc. (private manufacturing
Director since 1984 company)
C. CARTER WALKER, JR. 69 Private investor Director since 1974
Interested Director
-------------------
WILMOT H. KIDD 62 Investment and research--President,
Director since 1972 Central Securities Corporation
----------
CHARLES N. EDGERTON 59 Vice President and Treasurer,
Central Securities Corporation
MARLENE A. KRUMHOLZ 40 Secretary, Central Securities Corporation since 2001; Senior
Manager, PricewaterhouseCoopers llp prior thereto
The address of each Director and Officer is c/o Central Securities Corporation,
375 Park Avenue, New York, New York 10152.
[18]
BOARD OF DIRECTORS
Donald G. Calder
Jay R. Inglis
Dudley D. Johnson
Wilmot H. Kidd
C. Carter Walker, Jr.
OFFICERS
Wilmot H. Kidd, President
Charles N. Edgerton, Vice President and Treasurer
Marlene A. Krumholz, Secretary
OFFICE
375 Park Avenue
New York, NY 10152
212-688-3011
866-593-2507 (toll-free)
www.centralsecurities.com
CUSTODIAN
UMB Bank, N.A.
P.O. Box 419226, Kansas City, MO 64141-6226
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company
P.O. Box 43069, Providence, RI 02940-3069
781-575-2724 www.equiserve.com
INDEPENDENT AUDITORS
KPMG LLP
757 Third Avenue, New York, NY 10017
[19]
Item 2. Code of Ethics. The Registrant has adopted a code of ethics that applies
to its principal executive officer and principal financial officer. This code of
ethics is filed as an attachment on this form.
Item 3. Audit Committee Financial Experts. The Board of Directors of the
Corporation has determined that none of the members of its Audit Committee (the
"Committee") meet the definition of "Audit Committee Financial Expert" as the
term has been defined by the Securities and Exchange Commission ("SEC"). The
Board of Directors considered the possibility of adding a member that would
qualify as an Audit Committee Financial Expert, but has determined that the
Committee has sufficient expertise to perform its duties. In addition, the
Committee's charter authorizes the Committee to engage a financial expert should
it determine that such assistance is required.
Item 4. Principal Accountant Fees and Services.
Audit fees ............................. $33,050(1) $32,000(1)
Audit-related fees ..................... 0 0
Tax fees ............................... 13,500(2) 13,000(2)
All other fees ......................... 0 0
------- -------
Total fees ............................. $46,550 $45,000
======= =======
(1) Includes fees for review of the semi-annual report to stockholders
and audit of the annual report to stockholders.
(2) Includes fees for services performed with respect to tax compliance
and tax planning.
Pursuant to its charter, the Audit Committee is responsible for recommending the
selection, approving compensation and overseeing the independence,
qualifications and performance of the independent accountants. The Audit
Committee's policy is to pre-approve all audit and permissible non-audit
services provided by the independent accountants. In assessing requests for
services by the independent accountants, the Audit Committee considers whether
such services are consistent with the auditor's independence; whether the
independent accountants are likely to provide the most effective and efficient
service based upon their familiarity with the Corporation; and whether the
service could enhance the Corporation's ability to manage or control risk or
improve audit quality. The Audit Committee may delegate pre-approval authority
to one or more of its members. Any pre-approvals by a member under this
delegation are to be reported to the Audit Committee at its next scheduled
meeting.
All of the audit and tax services provided by KPMG LLP in fiscal year 2003
(described in the footnotes to the table above) and related fees were approved
in advance by the Audit Committee.
Item 5. Audit Committee of Listed Registrants. The registrant has a
separately-designated standing audit committee. Its members are: Donald G.
Calder, Jay R. Inglis, Dudley D. Johnson and C. Carter Walker, Jr.
Item 6. [Reserved]
Item 7. Disclose Proxy Voting Policies and Procedures for Closed-End Management
Companies.
CENTRAL SECURITIES CORPORATION
PROXY VOTING GUIDELINES
Central Securities Corporation is involved in many matters of corporate
governance through the proxy voting process. We exercise our voting
responsibilities with the primary goal of maximizing the long-term value of our
investments. Our consideration of proxy issues is focused on the investment
implications of each proposal.
Our management evaluates and votes each proxy ballot that we receive. We do not
use a proxy voting service. Our Board of Directors has approved guidelines in
evaluating how to vote a particular proxy ballot. We recognize that a company's
management is entrusted with the day-to-day operations of the company, as well
as longer term strategic planning, subject to the oversight of the company's
board of directors. Our guidelines are based on the belief that a company's
shareholders have a responsibility to evaluate company performance and to
exercise the rights and duties pertaining to ownership.
When determining whether to invest in a particular company, one of the key
factors we consider is the ability and integrity of its management. As a result,
we believe that recommendations of management on any issue, particularly routine
issues, should be given substantial weight in determining how proxies should be
voted. Thus, on most issues, our votes are cast in accordance with the company's
recommendations. When we believe management's recommendation is not in the best
interests of our stockholders, we will vote against management's recommendation.
Due to the nature of our business and our size, it is unlikely that conflicts of
interest will arise in our voting of proxies of public companies. We do not
engage in investment banking nor do we have private advisory clients or any
other businesses. In the unlikely event that we determine that a conflict does
arise on a proxy voting issue, we will defer that proxy vote to our independent
directors.
We have listed the following, specific examples of voting decisions for the
types of proposals that are frequently presented. We generally vote according to
these guidelines. We may, on occasion, vote otherwise when we believe it to be
in the best interest of our stockholders:
Election of Directors - We believe that good governance starts with an
independent board, unfettered by significant ties to management, in which all
members are elected annually. In addition, key board committees should be
entirely independent.
o We support the election of directors that result in a board made up
of a majority of independent directors who do not appear to have
been remiss in the performance of their oversight responsibilities.
o We will withhold votes for non-independent directors who serve on
the audit, compensation or nominating committees of the board.
o We consider withholding votes for directors who missed more than
one-fourth of the scheduled board meetings without good reason in
the previous year.
o We generally oppose the establishment of classified boards of
directors and will support proposals that directors stand for
election annually.
o We generally oppose limits to the tenure of directors or
requirements that candidates for directorships own large amounts of
stock before being eligible for election.
Compensation - We believe that appropriately designed equity-based compensation
plans can be an effective way to align the interests of long-term shareholders
and the interests of management, employees, and directors. We are opposed to
plans that substantially dilute our ownership interest in the company, provide
participants with excessive awards, or have inherently objectionable structural
features without offsetting advantages to the company's stockholders.
We evaluate proposals related to compensation on a case-by case basis.
o We generally support stock option plans that are incentive based and
not excessive.
o We generally oppose the ability to re-price options without
compensating factors when the underlying stock has fallen in value.
o We support measures intended to increase the long-term stock
ownership by executives including requiring stock acquired through
option exercise to be held for a substantial period of time.
o We generally support stock purchase plans to increase company stock
ownership by employees, provided that shares purchased under the
plan are acquired for not less than 85% of their market value.
o We generally oppose change-in-control provisions in non-salary
compensation plans, employment contracts, and severance agreements
which benefit management and would be costly to shareholders if
triggered.
Corporate Structure and Shareholder Rights - We generally oppose anti-takeover
measures and other proposals designed to limit the ability of shareholders to
act on possible transactions. We support proposals when management can
demonstrate that there are sound financial or business reasons.
o We generally support proposals to remove super-majority voting
requirements and oppose amendments to bylaws which would require a
super-majority of
shareholder votes to pass or repeal certain provisions.
o We will evaluate proposals regarding shareholders rights plans
("poison pills") on a case-by-case basis considering issues such as
the term of the arrangement and the level of review by independent
directors.
o We will review proposals for changes in corporate structure such as
changes in the state of incorporation or mergers individually. We
generally oppose proposals where management does not offer an
appropriate rationale.
o We generally support share repurchase programs.
o We generally support the general updating of or corrective
amendments to corporate charters and by-laws.
o We generally oppose the elimination of the rights of shareholders to
call special meetings.
Approval of Independent Auditors - We believe that the relationship between the
company and its auditors should be limited primarily to the audit engagement and
closely related activities that do not, in the aggregate, raise the appearance
of impaired independence.
o We generally support management's proposals regarding the approval
of independent auditors.
o We evaluate on a case-by-case basis instances in which the audit
firm appears to have a substantial non-audit relationship with the
company or companies affiliated with it.
Social and Corporate Responsibility Issues - We believe that ordinary business
matters are primarily the responsibility of management and should be approved
solely by the corporation's board of directors. Proposals in this category,
initiated primarily by shareholders, typically request that the company disclose
or amend certain business practices. We generally vote with management on these
types of proposals, although we may make exceptions in certain instances where
we believe a proposal has substantial economic implications.
o We generally oppose shareholder proposals which apply restrictions
related to social, political, or special interest issues which
affect the ability of the company to do business or be competitive
and which have significant financial impact.
o We generally oppose proposals which require that the company provide
costly, duplicative, or redundant reports, or reports of a
non-business nature.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not Applicable. Effective for periods ending
on or after June 15, 2004.
Item 9. Submission of Matters to a Vote of Security Holders. Not Applicable.
Effective for periods ending after January 1, 2004.
Item 10. Controls and Procedures.
(a) The Principal Executive Officer and Principal Financial Officer of Central
Securities Corporation (the "Corporation") have concluded that the Corporation's
Disclosure Controls and Procedures (as defined in Rule 30a-2(c) under the
Investment Company Act of 1940) are effective based on their evaluation of the
Disclosure Controls and Procedures as of a date within 90 days of the filing
date of this report.
(b) There have been no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 11. Exhibits. (a) Any code of ethics, or amendment thereto, that is the
subject of the disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an exhibit.
Attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant as required by Rule 30a-2 under the Act.
Attached hereto.
(c) Any written solicitation to purchase securities under Rule 23c-1 under the
Act went or given during the period covered by the report by or on behalf of the
registrant to 10 or more persons. Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Central Securities Corporation
By: /s/ Wilmot H. Kidd
---------------------------------
Wilmot H. Kidd
President
February 5, 2004
Date
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capabilities and on the
dates indicated.
By: /s/ Wilmot H. Kidd
---------------------------------
Wilmot H. Kidd
President
February 5, 2004
Date
By: /s/ Charles N. Edgerton
---------------------------------
Charles N. Edgerton
Treasurer
February 5, 2004
Date