CENTRAL SECURITIES CORPORATION
SIXTY-NINTH ANNUAL REPORT
1997
<PAGE>
SIGNS OF THE TIMES
"We are now living in the midst of the third great revolution in history.
When the principle of the lever was applied to make a plow, the agricultural
revolution was born, and the power of nomadic tribal chiefs declined. When
centuries later, men substituted the power of water, steam, and electricity for
animal muscle, the Industrial Revolution was born. Both of these massive changes
took centuries to unfold. Each caused a shift in the power structure. Today, the
marriage of computers and telecommunications has ushered in the Information Age,
which is as different from the Industrial Age as that period was from the
Agricultural Age. Information technology has demolished time and distance.
Instead of validating Orwell's vision of Big Brother watching the citizen, the
third revolution enables the citizen to watch Big Brother. And so the virus of
freedom, for which there is no antidote, is spread by electronic networks to the
four corners of the earth.
"History is strewn with wonderful inventions. Most of them were designed to
solve specific problems: the wheel to move things, engines to supply power,
clocks and compasses to tell time and direction. The inventions that made
possible the information revolution were different. They changed the way we
solve problems. When Johann Gutenberg pioneered movable type in Europe in 1436,
and when Intel designed the integrated circuit in the 1970s, the way we record,
store, access, and peruse knowledge made quantum leaps forward and affected not
only how we do our jobs, but what we do.
"These two events were just as important as they sound. Gutenberg broke the
monopoly of the monks who copied manuscripts by hand and guarded them jealously.
They understood that knowledge was power and sometimes chained books to the
shelves. In THE DISCOVERERS, Daniel Boorstin cites a 12th-century manuscript
inscription: "This book belongs to the monastery of St. Mary of Robert's Bridge,
who ever shall steal it from this house, or mutilate it let him be forever
cursed. Amen.' Contrast that mindset with the ability of a researcher anywhere
in the world with a computer and a modem to tap into the entire database of the
Library of Congress, the BIBLIOTHEQUE DE FRANCE, or the British Library. In
today's parlance, this change constitutes a paradigm shift." (Walter B. Wriston,
"Bits, Bytes, and Diplomacy," FOREIGN AFFAIRS, September/October 1997.)
"For good or ill, globalisation has become the economic buzz-word of the
1990s. National economies are undoubtedly becoming steadily more integrated as
cross-border flows of trade, investment and financial capital increase.
"Two forces have been driving these increased flows of goods and money. The
first is technology. With the costs of communication and computing falling
rapidly, the natural barriers of time and space that separate national markets
have been falling too. The cost of a three-minute telephone call between New
York and London has fallen from $300 (in 1996 dollars) in 1930 to $1 today. The
cost of computer processing power has been falling by an average of 30% a year
in real terms over the past couple of decades.
[ 2 ]
<PAGE>
SIGNS OF THE TIMES
"The second driving force has been liberalisation. As a result of both the
GATT negotiations and unilateral decisions, almost all countries have lowered
barriers to foreign trade. Most countries have welcomed international capital as
well." (THE ECONOMIST, October 18, 1997.)
"It is often said that capitalism -- that is, a market economy -- is
morally obnoxious because its "trickle-down economics' inevitably creates
inequality of income and wealth. Now it is certainly true that "trickle-down
economics' has that effect. It is also true, however, that if you want economic
growth and greater affluence for all, there is simply no alternative to
"trickle-down economics,' which is just another name for growth economics.
"The world has yet to see a successful version of "trickle-up economics,'
an egalitarian society in which the state ensures that the fruits of economic
growth are universally and equally shared. The trouble with this idea -- it is,
of course, the socialist ideal -- is that it does not produce those fruits in
the first place. Economic growth is promoted by entrepreneurs and innovators,
whose ambitions, when realized, create inequality. No one with any knowledge of
human nature can expect such people not to want to be relatively rich, and if
they are too long frustrated they will cease to be productive. Nor can the state
substitute for them, because the state simply cannot engage in the "creative
destruction' that is an essential aspect of innovation. The state cannot and
should not be a risk-taking institution, since it is politically impossible for
any state to cope with the inevitable bankruptcies associated with economic risk
taking." (Irving Kristol, "Income Inequality Without Class Conflict," THE WALL
STREET JOURNAL, December 18, 1997.)
"Asset prices are inherently volatile, in part because expected returns
from real assets can vary for a wide variety of reasons, some of which may be
only tangentially related to the state of the economy and monetary policy.
Nonetheless, a drop in the prices of existing assets can feed back onto real
economic activity, not only by changing incentives to consume and invest, but
also by impairing the health of financial intermediaries -- as we experienced in
the early 1990s and many Asian countries are learning now. But historically, it
has been very rapid asset price declines -- in equity and real estate,
especially -- that have held the potential to be a virulently negative force in
the economy. I emphasize rapid declines because, in most circumstances, slowly
deflating asset prices probably can be absorbed without the marked economic
disruptions that frequently accompany sharp corrections. The severe economic
contraction of the early 1930s, and the associated persistent declines in
product prices, could probably not have occurred apart from the steep asset
price deflation that started in 1929." (Alan Greenspan, speaking at the Annual
Meeting of the American Economic Association, January 3, 1998.)
[ 3 ]
<PAGE>
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
<TABLE>
<CAPTION>
Per Share of Common Stock
Distribu-
tions(B)
declared
Divi- from
Convertible dends(B) long-term Net
Preference declared investment realized
Total Stock at Net Net from net gains or investment Unrealized
net liquidation asset investment investment capital gains appreciation
Year assets preference value income(A) income surplus (losses) of investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $ 110,629,270 $ 10,145,300 $ 11.36 $ 15,056,016
1988 118,930,727 10,072,150 11.77 $.16 $.16 $ .92 $ 2,292,807 25,718,033
1989 129,376,703 10,034,925 12.24 .17 .35 .65* 661,161 38,661,339
1990 111,152,013 10,027,050 10.00 .17 .20 .50* (2,643,394) 25,940,819
1991 131,639,511 10,022,100 11.87 .14 .14 .56* 7,321,233 43,465,583
1992 165,599,864 10,019,000 14.33 .12 .20 .66 8,304,369 70,586,429
1993 218,868,360 9,960,900 17.90 .14 .18 1.42 16,407,909 111,304,454
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
</TABLE>
A - Excluding gains or losses realized on sale of investments.
B - Computed on the basis of the Corporation's status as a "regulated
investment company" for Federal income tax purposes.
* Includes a non-taxable return of capital of $.56 in 1989, $.47 in 1990 and
$.11 in 1991.
The Preference and Common Stocks are listed on the American Stock Exchange.
On December 31, 1997, the market quotations were as follows:
<TABLE>
<CAPTION>
<S> <C>
Convertible Preference Stock, $2.00 Series D................. 94 bid, 104 asked
Common Stock................................................. 29 11/16 low, 30 high and
last sale
</TABLE>
[ 4 ]
<PAGE>
TO THE STOCKHOLDERS OF
CENTRAL SECURITIES CORPORATION:
Financial statements for the year 1997, as reported upon by our independent
auditors, and other pertinent information are submitted herewith.
Comparative market values of net assets are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Net assets........................................................... $434,423,053 $356,685,785
Convertible Preference Stock at liquidation preference............... (9,040,850) (9,102,050)
-------------- -------------
Net assets applicable to Common Stock................................ $425,382,203 $347,583,735
============== =============
Net asset coverage per share of Convertible Preference Stock......... $ 1,201.28 $ 979.69
Net assets per share of Common Stock................................. 29.97 25.64
Pro forma net assets per share, reflecting conversion of the
Convertible Preference Stock....................................... 28.14 24.21
Shares of Convertible Preference Stock outstanding.............. 361,634 364,082
Shares of Common Stock outstanding.............................. 14,191,745 13,555,021
</TABLE>
Comparative operating results are as follows:
<TABLE>
<CAPTION>
Year 1997 Year 1996
<S> <C> <C>
Net investment income................................................ $ 3,965,412 $ 4,252,357
Number of times Preferred dividend earned....................... 5.5 5.6
Per share of Common Stock....................................... .24* .27*
Net realized gain on sale of investments............................. 30,133,125 18,154,136
Increase in net unrealized appreciation of investments............... 59,038,462 52,705,184
Increase in net assets resulting from operations..................... 93,136,999 75,111,677
</TABLE>
* Per-share data are based on the average number of Common shares outstanding
during the year and are after recognition of the dividend requirement on the
Convertible Preference Stock.
The Corporation made two distributions to holders of Common Stock in 1997,
a cash dividend of $.20 per share paid on June 27 and an optional stock
distribution of $2.22 per share, or one share of Common Stock for each 13 shares
held, paid on December 19. The Corporation has been advised that of the $2.42
paid in 1997, $.34 represents ordinary income and the balance of $2.08 consists
of $1.05 of long and mid-term gains taxable at a maximum rate of 28% and $1.03
of long-term gains taxable at a maximum rate of 20%. For Federal income tax
purposes, separate notices have been mailed to stockholders. With
[ 5 ]
<PAGE>
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 60% of the
outstanding shares of Common Stock elected to receive stock, and 628,801 Common
shares were issued. As a result of the 1997 distributions to Common
stockholders, the conversion rate of the Series D Preference Stock was increased
to 3.439 in accordance with the provisions of the Certificate of Incorporation.
During the year, 2,448 shares of Convertible Preference Stock were converted
into 7,923 shares of Common Stock.
The Corporation did not repurchase any of its Common or Preference Stock
during 1997. However, it may from time to time purchase Common or Preference
Stock in such amounts and at such prices as the Board of Directors may deem
advisable in the best interests of stockholders.
Investors enjoyed another good year in 1997. The two most popular indices,
the Standard and Poor's 500 and the Dow Jones Industrials, were up by 33.4% and
24.9%, respectively. Central's net assets increased by 26.1%. Much of Central's
increase was attributable to bank and insurance stocks. Our technology stocks,
after extraordinary performance over the past few years, did less well in 1997.
We made relatively few investment changes during the year. Two, however,
are of note. We substantially increased our holdings of American Management
Systems, which provides consulting, systems integration, and other information
technology services to a broad client base in the telecommunications and
financial service industries as well as the Federal government and a number of
state and local entities. Over the past eighteen months AMS has encountered some
problems with two telecommunications contracts, which have adversely affected
its operating results. Also, Charles Rossotti, who had been CEO for many years,
was appointed head of the Internal Revenue Service. We like his successor, Paul
Brands, and think he will provide excellent leadership. Since 1984, when we
first became owners, AMS has grown steadily and produced superb results for
shareholders. We believe the current problems are transitory as management
focuses on monitoring and controlling its operations. In addition, we became
First Union Corp. shareholders when it acquired Signet Banking Corp. in
November. First Union has been one of the major forces consolidating the banking
industry. Its aggressive acquisition prices have had a near-term dilutive effect
on earnings, and we believe there may be upside as these acquisitions are
digested.
[ 6 ]
<PAGE>
Shown below are Central's ten largest investments, accounting for 55% of
net assets.
<TABLE>
<CAPTION>
December 31, 1997 Year first
Cost Value acquired
<S> <C> <C> <C>
(millions)
Intel Corp.
(Microprocessors).............................................. $ 1.0 $37.9 1986
The Bank of New York Company
(Banking and Processing Services).............................. 8.1 34.7 1993
The Plymouth Rock Company
(Insurance).................................................... 2.2 31.5 1982
M.A. Hanna Company
(Specialty Chemicals).......................................... 12.9 25.3 1992
Analog Devices, Inc.
(Semiconductors)............................................... 2.1 20.5 1987
Household International, Inc.
(Consumer Finance and Credit Cards)............................ 3.4 19.4 1992
W.H. Brady Co.
(Industrial Labeling Systems).................................. 2.8 18.6 1984
American Management Systems, Inc.
(Consulting and Systems Integration)........................... 10.6 18.0 1984
Capital One Financial
(Credit Cards)................................................. 5.1 17.6 1994
First Union Corp.
(Banking)...................................................... 4.7 16.6 1994
</TABLE>
Central's investment objective is growth of capital. In pursuing this
objective, we invest in growing businesses with good economic fundamentals and
shareholder-oriented managements. The character and capability of management is
a very important consideration. Our focus is on companies with medium and small
market capitalizations. Central uses a long-term approach in making investments,
looking out three to five years. Over the past five years, portfolio turnover
has averaged less than 15%. Our practice has been to keep a substantial portion
of the Corporation's assets in a small number of situations, with the balance
invested in a broad, general market portfolio. We believe the risk associated
with this approach can be reduced through intimate knowledge of our companies.
We add new companies when we think we have found good opportunities. There
are many patterns for successful investing. For example, companies spending
heavily on new products often provide opportunities if their stocks are
depressed. In the past few years, situations benefitting from industry
consolidations have been rewarding. The declining cost of computing power
("Moore's Law") has also fostered many good investments. We look primarily at
individual companies in the context of industrial or economic trends. Sales are
[ 7 ]
<PAGE>
made based on business fundamentals, relative valuation, and portfolio balance
considerations. Your management believes it can best serve shareholders by
buying interests in good businesses at sensible prices and holding for long
periods, as opposed to employing a trading philosophy which holds that switches
from a fully invested position to substantial cash holdings, and vice versa,
should occur according to the general market outlook.
Perspective is important to successful long-term investing. Not only have
equity returns been extraordinary for the past few years, they have also been
well above average for the past fifteen. Low inflation, productivity
improvements, and international expansion have combined to produce a very good
environment for equity investing. The question facing investors who, quite
rightly, are interested in the future, is "How long will this benign environment
last?" The recent turmoil in many Asian financial markets is an indication that
some financial imbalances have developed which must be addressed. Their ultimate
severity and effect on our economy and financial markets are uncertain, though
we see the environment as a challenging one. Over the past twenty-five years we
have witnessed the brutal "bear market" of 1974 as well as the fifteen-year
"bull market" since 1982, admittedly with sharp corrections in 1987 and 1990.
With this in mind, we are confident that, although market corrections will
occur, our approach to investing will continue to provide good long-term
returns.
Shareholders' inquiries are welcome.
CENTRAL SECURITIES CORPORATION
WILMOT H. KIDD, PRESIDENT
375 Park Avenue
New York, NY 10152
February 4, 1998
[ 8 ]
<PAGE>
PRINCIPAL PORTFOLIO CHANGES
October 1 to December 31, 1997
(Common Stock unless specified otherwise)
<TABLE>
<CAPTION>
Number of Shares
Held
Purchased Sold December 31, 1997
<S> <C> <C> <C>
American Management Systems, Inc..................... 25,000 925,000
Deltic Timber Corporation............................ 5,714 75,000
First Data Corporation............................... 100,000 100,000
First Union Corporation.............................. 324,500(a) 324,500
Household International, Inc......................... 8,000 152,000
IXC Communications Corporation....................... 118,451(b) 175,356
IXC Communications Corporation 7 1/4% Junior Conv.
Pfd. Due 2007...................................... 187(c) 10,552
Mutual Risk Management Ltd........................... 133,333(d) 266,666
Nextel Communications, Inc. Class A.................. 20,000 400,000
Peerless Systems Corporation......................... 6,129 175,000
Petroleum Geo-Services ASA ADR....................... 15,000 --
Provident Companies, Inc............................. 50,000 250,000
Watkins-Johnson Company.............................. 149,100 425,000
</TABLE>
(a) Received in exchange for 295,000 shares of Signet Banking Corporation in a
merger.
(b) 4,641 of which were received on conversion of 93.11 shares of 10% Cum. Pfd.
Stock, and 113,810 of which were received from Grumman Hill Investments,
L.P.
(c) Received as a dividend.
(d) Stock split.
[ 9 ]
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments:
General portfolio securities at market value
(cost $122,702,987) (Note 1)............................. $ 361,998,049
Securities of affiliated companies (cost $16,464,729)
(Notes 1, 5 and 6)....................................... 50,930,111
Short-term debt securities at cost plus accrued interest... 22,099,266 $ 435,027,426
Cash and receivables: -------------
Cash....................................................... 26,967
Dividends receivable....................................... 184,840
Prepaid expenses........................................... 4,337 216,144
-------------
Office equipment and leasehold improvements, net................ 17,731
------------
Total Assets.......................................... 435,261,301
LIABILITIES:
Payable for securities purchased................................ 481,250
Accrued expenses and reserves................................... 356,998
------------
Total Liabilities..................................... 838,248
----------------
NET ASSETS........................................................... $ 434,423,053
NET ASSETS are represented by: ================
$2.00 Series D Convertible Preference Stock
without par value at liquidation preference,
$25.00 per share, authorized 750,000 shares;
issued 361,634 (Note 2)....................................... $ 9,040,850
Common Stock at par value, $1.00 per share, authorized
20,000,000 shares; issued 14,191,745 (Note 2)................. 14,191,745
Surplus:
Paid-in.................................................... $ 135,207,485
Undistributed net investment income........................ 98,593
Undistributed net gain on sales of investments............. 2,123,936 137,430,014
------------
Net unrealized appreciation of investments...................... 273,760,444
---------------
NET ASSETS........................................................... $ 434,423,053
===============
NET ASSET VALUE PER COMMON SHARE..................................... $29.97
======
</TABLE>
See accompanying notes to financial statements.
[ 10 ]
<PAGE>
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends......................................................... $ 4,041,467
Interest.......................................................... 2,016,364
Miscellaneous income.............................................. 87,500 $ 6,145,331
------------- -------------
Expenses:
Investment research............................................... 613,560
Administration and operations..................................... 599,369
Employees' retirement plans....................................... 95,587
Custodian fees.................................................... 71,010
Franchise and miscellaneous taxes................................. 124,340
Transfer agent's and registrar's fees and expenses................ 48,418
Rent and utilities................................................ 154,895
Listing, software and sundry fees................................. 86,786
Legal, auditing and tax fees...................................... 82,823
Stationery, supplies, printing and postage........................ 48,006
Travel and telephone.............................................. 38,075
Directors' fees................................................... 56,200
Insurance......................................................... 86,266
Publications and miscellaneous.................................... 74,584 2,179,919
------------- -----------
Net investment income.................................................. 3,965,412
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain from security transactions........................... 30,133,125
Net increase in unrealized appreciation of investments................. 59,038,462
--------------
Net gain on investments........................................... 89,171,587
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $ 93,136,999
===============
</TABLE>
See accompanying notes to financial statements.
[ 11 ]
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1997
and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
FROM OPERATIONS:
Net investment income........................................... $ 3,965,412 $ 4,252,357
Net realized gain on investments................................ 30,133,125 18,154,136
Net increase in unrealized appreciation of investments.......... 59,038,462 52,705,184
------------- -------------
Increase in net assets resulting from operations........... 93,136,999 75,111,677
DIVIDENDS TO STOCKHOLDERS FROM: -------------- ------------
Net investment income:
Preference Stock........................................... (724,462) (753,623)
Common Stock............................................... (4,601,457) (3,643,403)
Net realized gain from investment transactions.................. (28,220,809) (17,907,647)
-------------- --------------
Decrease in net assets from distributions.................. (33,546,728) (22,304,673)
--------------- ---------------
FROM CAPITAL SHARE TRANSACTIONS: (Note 2)
Distribution to stockholders reinvested in Common Stock......... 18,147,197 11,331,622
Other capital transactions...................................... (200) (400)
------------- ------------
Increase in net assets from capital share transactions..... 18,146,997 11,331,222
------------- --------------
Total increase in net assets.......................... 77,737,268 64,138,226
NET ASSETS:
Beginning of year............................................... 356,685,785 292,547,559
------------- ------------
End of year..................................................... $434,423,053 $356,685,785
============= =============
</TABLE>
See accompanying notes to financial statements.
[ 12 ]
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1997
PORTFOLIO SECURITIES 95.0%
STOCKS (COMMON UNLESS SPECIFIED OTHERWISE)
<TABLE>
<CAPTION>
PRIN. AMT. MARKET
OR SHARES VALUE
<S> <C> <C>
BANKING AND FINANCE 20.3%
600,000 The Bank of New York Company, Inc................. $ 34,687,500
325,000 Capital One Financial Corporation................. 17,610,938
324,500 First Union Corporation........................... 16,630,625
152,000 Household International, Inc...................... 19,399,000
------------
88,328,063
-------------
BUILDING PRODUCTS 1.6%
75,000 Deltic Timber Corporation......................... 2,053,125
100,000 USG Corporation(a)................................ 4,900,000
-------------
6,953,125
--------------
BUSINESS SERVICES 3.5%
600,000 The Reynolds and Reynolds Company
Class A......................................... 11,062,500
150,000 UniFirst Corporation.............................. 4,209,375
--------------
15,271,875
-------------
CHEMICALS 8.3%
1,000,000 Hanna (M. A.) Company............................. 25,250,000
230,000 Martin Color-Fi, Inc.(a).......................... 1,092,500
100,000 Rohm and Haas Company............................. 9,575,000
-------------
35,917,500
-------------
COMMUNICATIONS 4.0%
175,356 IXC Communications Corporation(a)................. 5,501,794
10,552 IXC Communications Corporation 7 1/4%
Junior Conv. Pfd. Due 2007(a)(b)................ 1,543,230
400,000 Nextel Communications, Inc. Class A(a)............ 10,400,000
-------------
17,445,024
-------------
COMPUTER SOFTWARE & SERVICES 8.4%
925,000 American Management Systems, Inc.(a).............. 18,037,500
300,000 Electronic Data Systems Corporation............... 13,181,250
100,000 First Data Corporation............................ 2,925,000
175,000 Peerless Systems Corporation(a)................... 2,253,125
-------------
36,396,875
------------
</TABLE>
[ 13 ]
<PAGE>
<TABLE>
<CAPTION>
PRIN. AMT. MARKET
OR SHARES VALUE
<S> <C> <C>
CONSUMER PRODUCTS AND SERVICES 2.4%
366,100 Church & Dwight Co., Inc.......................... $ 10,273,681
------------
ELECTRONICS 19.1%
740,000 Analog Devices, Inc.(a)........................... 20,488,750
500,000 The DII Group Incorporated........................ 13,625,000
540,000 Intel Corporation................................. 37,935,000
425,000 Watkins-Johnson Company(c)........................ 11,023,438
-------------
83,072,188
-------------
ENERGY 3.8%
300,000 Mercantile International Petroleum Inc.(a)........ 168,000
300,000 Murphy Oil Corporation............................ 16,256,250
Steuart Petroleum Company Warrant to
Purchase Common Stock(a)(b)..................... 0
-------------
16,424,250
--------------
HEALTH CARE 0.1%
150,000 MGI Pharma, Inc.(a)............................... 571,875
70,000 RKS Health Ventures Corporation(a)(b)(c).......... 0
15,950 RKS Health Ventures Corporation Series A
Conv. Pfd.(a)(b)(c)............................. 0
9,009 RKS Health Ventures Corporation Series C
Conv. Pfd.(a)(b)(c)............................. 0
--------------
571,875
--------------
INDUSTRIAL EQUIPMENT 4.3%
600,000 Brady (W.H.), Inc................................. 18,600,000
---------------
INSURANCE 15.4%
120,000 Allmerica Financial Corporation................... 5,992,500
50,000 Gallagher (Arthur J.) & Co........................ 1,721,875
266,666 Mutual Risk Management Ltd........................ 7,983,313
70,000 The Plymouth Rock Company, Inc.
Class A(b)(c)................................... 31,500,000
250,000 Provident Companies, Inc.......................... 9,656,250
170,000 Vesta Insurance Group, Inc........................ 10,093,750
--------------
66,947,688
--------------
LIMITED PARTNERSHIP 0.2%
Grumman Hill Investments, L.P.(a)(b).............. 713,093
---------------
METALS AND MINING 1.7%
300,000 Cyprus Amax Minerals Company...................... 4,612,500
300,000 Morrison Knudsen Corporation(a)................... 2,925,000
-------------
7,537,500
-------------
</TABLE>
[ 14 ]
<PAGE>
<TABLE>
<CAPTION>
PRIN. AMT. MARKET
OR SHARES VALUE
<S> <C> <C>
TRANSPORTATION 1.9%
533,757 Transport Corporation of America, Inc.
Class B(a)(c)................................... $ 8,406,673
------------
MISCELLANEOUS
5,000 Southeast Publishing Ventures, Inc.
Series A Pfd.(a)(b)(c).......................... 0
Other investments................................. 68,750
--------------
68,750
--------------
Total Portfolio Securities.............. 412,928,160
-------------
SHORT-TERM DEBT INVESTMENTS 5.1%
$15,234,000 Ford Motor Credit Corp. 5.83%-5.97%
due 1/05/98-1/20/98............................. 15,256,129
6,832,000 General Electric Capital Corp.
5.97%-6.02% due 1/12/98......................... 6,843,137
-------------
Total Short-Term Investments............ 22,099,266
-------------
Total Investments....................... 435,027,426
-------------
Liabilities, less cash, receivables and
other assets (0.1%)................... (604,373)
--------------
Net Assets (100%)....................... $434,423,053
===============
</TABLE>
(a) Non-dividend paying.
(b) Valued at estimated fair value.
(c) Affiliate as defined in the Investment Company Act of 1940.
See accompanying notes to financial statements.
[ 15 ]
<PAGE>
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 on
December 31, 1997 or, if unavailable, at the closing bid price.
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. These estimated values may not reflect amounts
that could be realized upon immediate sale, nor amounts that ultimately
may be realized. The estimated fair values, also, may differ from the
values that would have been used had a liquid market existed, and such
differences could be significant.
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.
OTHER -- Security transactions are accounted for on the date the securities
are purchased or sold, and cost of securities sold is identified by
specific tax lot. Dividend income and distributions to stockholders are
recorded on the ex-dividend date.
2. PREFERENCE STOCK AND COMMON STOCK -- The Convertible Preference Stock
is redeemable at the Corporation's option at $27.50 per share. Dividends are
cumulative. Each share is convertible into 3.439 shares of Common Stock and
1,243,659 authorized but unissued Common shares have been reserved for issuance
upon conversion. The Corporation issued 7,923 shares of Common Stock upon
conversion of shares of Preference Stock in 1997.
In the optional distribution paid on December 19, 1997, 628,801 Common
shares were issued.
The Corporation did not repurchase any of its Common or Preference Stock in
1997. However, it may from time to time purchase Common or Preference 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.
[ 16 ]
<PAGE>
3. INVESTMENT TRANSACTIONS -- The aggregate cost of securities purchased
and the aggregate proceeds of securities sold during the year ended December 31,
1997, excluding short-term investments, were $40,919,782 and $43,900,219,
respectively.
As of December 31, 1997, based on cost for Federal income tax purposes, the
aggregate gross unrealized appreciation and depreciation for all securities were
$280,465,624 and $6,705,180, respectively.
4. OPERATING EXPENSES -- The aggregate remuneration paid during the year
ended December 31, 1997 to officers and directors amounted to $1,129,911, of
which $56,200 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, 1997 was $87,837.
5. AFFILIATES -- The Plymouth Rock Company, Inc., RKS Health Ventures
Corporation, Southeast Publishing Ventures, Inc., Transport Corporation of
America, Inc. and Watkins-Johnson Company are affiliates as defined in the
Investment Company Act of 1940. The Corporation received dividends of $229,508
from affiliates during the year ended December 31, 1997. Unrealized appreciation
related to affiliates increased by $695,180 for the year 1997.
6. RESTRICTED SECURITIES -- The Corporation from time to time invests in
securities the resale of which is restricted. On December 31, 1997 such
investments had an aggregate value of $33,756,323, which was equal to 7.8% of
the Corporation's net assets. Investments in restricted securities at December
31, 1997, including acquisition dates and cost, were: Grumman Hill Investments,
L.P., 9/11/85, $535,857; IXC Communications, Inc., 4/14/97, $1,063,696; The
Plymouth Rock Company, Inc., 12/15/82, $1,500,000 and 6/1/84, $699,986; RKS
Health Ventures Corporation, 12/15/94, $700,000, 7/13/95, $199,375 and 4/3/97,
$100,000; Southeast Publishing Ventures, Inc., 4/5/89, $5,200; and Steuart
Petroleum Company, 6/8/93, $52,500. In general, the Corporation does not have
the right to demand registration of the restricted securities. Unrealized
appreciation related to restricted securities decreased by $2,724,814 for the
year 1997.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Net Realized and
Unrealized
Net Investment Income* Gains on Investments
Investment Per Common Per Common
Income* Amount Share Amount Share
<S> <C> <C> <C> <C> <C>
3 Mos. Ended
3/31/97................. $1,322,278 $ 920,620 $.07 $ 8,192,179 $ .60
6/30/97................. 1,359,731 1,045,989 .08 43,553,795 3.21
9/30/97................. 1,328,480 1,033,553 .07 50,021,279 3.69
12/31/97................. 1,410,379 240,786 .02 (12,595,666) (.93)
</TABLE>
* Net of dividends paid on the Convertible Preference Stock.
[ 17 ]
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 25.64 $ 21.74 $ 17.60 $ 17.90 $ 14.33
Net investment income..................... .29 .33 .37 .30 .21
Net realized and unrealized gain on
securities.............................. 6.51 5.28 5.76 1.08 5.03
--------- ------- -------- --------- --------
Total from investment operations... 6.80 5.61 6.13 1.38 5.24
Less:
Dividends from net investment income*
To Preference Stockholders........... .05 .06 .06 .07 .07
To Common Stockholders............... .34 .28 .33 .22 .18
Distributions from capital gains*
To Common Stockholders............... 2.08 1.37 1.60 1.39 1.42
-------- --------- --------- --------- --------
Total distributions................ 2.47 1.71 1.99 1.68 1.67
--------- --------- ---------- --------- ---------
Net asset value, end of period............ $ 29.97 $ 25.64 $ 21.74 $ 17.60 $ 17.90
Per share market value, end of ========== ========= ========== ========= =========
period.................................. $ 29.69 $ 24.13 $ 20.88 $ 15.75 $ 15.50
TOTAL INVESTMENT RETURN,
MARKET(%)............................... 35.60 22.35 45.65 12.30 47.68
TOTAL INVESTMENT RETURN,
NAV(%).................................. 26.08 25.97 34.59 8.62 36.66
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period(000)............ $434,423 $356,686 $292,548 $226,639 $218,868
Ratio of expenses to average net
assets(%)............................... .53 .55 .62 .65 .77
Ratio of net investment income to average
net assets(%)........................... .97 1.32 1.69 1.51 1.17
Portfolio turnover rate(%)................ 10.92 9.89 8.27 11.73 15.14
Average commission rate paid
((cents) per share)..................... 6.88 6.76 6.89 7.11
</TABLE>
* Computed on the basis of the Corporation's status as a "regulated investment
company" for Federal income tax purposes.
[ 18 ]
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CENTRAL SECURITIES CORPORATION
We have audited the accompanying statement of assets and liabilities
and the statement of investments of Central Securities Corporation as of
December 31, 1997, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each
of the years in the five-year period ended December 31, 1997. 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 generally accepted
auditing standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements and 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 of securities owned as of December 31, 1997 by correspondence
with the custodian and broker. 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, 1997, the
results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Also, in our opinion, the information set forth for each of the years
in the ten-year and two-year periods ended December 31, 1997 in the tables
appearing on pages 4 and 5 is fairly stated in all material respects in
relation to the financial statements from which it has been derived.
KPMG PEAT MARWICK LLP
New York, NY
January 23, 1998
[ 19 ]
<PAGE>
BOARD OF DIRECTORS
DONALD G. CALDER DUDLEY D. JOHNSON
President President
G. L. Ohrstrom & Co., Inc. Young & Franklin Inc.
New York, NY Liverpool, NY
JAY R. INGLIS WILMOT H. KIDD
Executive Vice President President
Holt Corporation
New York, NY
C. CARTER WALKER, JR.
Washington, CT
GARDINER S. ROBINSON
Director Emeritus
OFFICERS
WILMOT H. KIDD, President
CHARLES N. EDGERTON, Vice President and
Treasurer
KAREN E. RILEY, Secretary
OFFICE
375 Park Avenue, New York, NY 10152
212-688-3011
www.centralsecurities.com
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 New York Plaza, New York, NY 10004
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York
P.O. Box 2500, Jersey City, NJ 07303-2500
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue, New York, NY 10154
[ 20 ]
