- --------------------------------------------------------------------------------
C E N T R A L S E C U R I T I E S C O R P O R A T I O N
-----------
SEVENTIETH ANNUAL REPORT
1998
- --------------------------------------------------------------------------------
<PAGE>
SIGNS OF THE TIMES
"It was about the year 1688 that the word stockjobber was first heard in
London. In the short space of four years a crowd of companies, every one of
which confidently held out to subscribers the hope of immense gains, sprang
into existence: the Insurance Company, the Paper Company, the Lutestring
Company, the Pearl Fishery Company, the Glass Bottle Company, the Alum Company,
the Blythe Coal Company, the Swordblade Company. . . .
"Extensive combinations were formed, and monstrous fables were circulated,
for the purpose of raising or depressing the price of shares. Our country
witnessed for the first time those phenomena with which a long experience has
made us familiar. A mania of which the symptoms were essentially the same with
those of the mania of 1720, of the mania of 1825, of the mania of 1845, seized
the public mind. An impatience to be rich, a contempt for those slow but sure
gains which are the proper reward of industry, patience and thrift, spread
through society." (Thomas Babington Macaulay, HISTORY OF ENGLAND.)
-----------
[Excerpts from an interview of George Soros by Jeff Madrick]
"JM: You call the current faith in free-market ideology `market
fundamentalism.' That has overtones of religiosity, absolutism, coercion.
"GS: Because we are disappointed with the policies of governments -- and
with plenty of justification -- we tend to idealize the market as something
that can take care of everything. And just as Marx claimed communism was based
on a scientific theory of history, market fundamentalism relies on an allegedly
scientific economic theory. Basically, I think it was Ronald Reagan and
Margaret Thatcher who were the main movers in adopting a vulgarized version of
laissez-faire economics, turning it into a kind of fundamentalist position.
"JM: What do you mean by vulgarized?
"GS: Simplified, in the sense that Reagan spoke of the magic of the
marketplace, and distorted, because it claims that markets are perfect.
Equilibrium applies BEST only to markets which deal with known quantities. But
financial markets deal with quantities that are not only largely unknown but
unknowable. They discount a future which is contingent on how the financial
markets ASSESS it at present. The appropriate concept, in my view, is
reflexivity, not equilibrium. Reflexive processes are not just unpredictable,
they are genuinely indeterminate because the outcomes depend on the predictions
that investors have made. The process may be self-correcting, in which case you
tend toward equilibrium, or it can be initially self-reinforcing but eventually
self-defeating, in which case you have a boom and a bust." ("The International
Crisis: An Interview," THE NEW YORK REVIEW, January 14, 1999.)
[ 2 ]
<PAGE>
SIGNS OF THE TIMES
"The present crisis is not the result of market failure. Rather, it is the
result of governments intervening in or seeking to supersede the market, both
internally via loans, subsidies, or taxes and other handicaps, and externally
via the IMF, the World Bank and other international agencies. We do not need
more powerful government agencies spending still more of the taxpayers' money,
with limited or nonexistent accountability. That would simply be throwing good
money after bad. We need government, both within the nations and
internationally, to get out of the way and let the market work. The more that
people spend or lend their own money, and the less they spend or lend taxpayer
money, the better." (Milton Friedman, THE WALL STREET JOURNAL, October 13,
1998.)
-----------
"They were the world's richest and shrewdest investors, and they rode a
wave of globalization to buy bonds in a promising developing country. When the
country defaulted, they were livid.
"`There should be lunatic asylums for nations as well as individuals,' one
investor wrote in The Morning Post of London, denouncing the defaulting country
as `a nation with whom no contracts can be made.'
"It all sounds a bit familiar, but the year was 1842 and the developing
country was the United States. After defaults by Maryland, Pennsylvania,
Mississippi and Louisiana, the entire United States was blacklisted and scorned
on global markets, with Americans barred from the best London clubs and the
Rothschilds warning bitterly that America would be unable to `borrow a dollar,
not a dollar.'
"Globalization, in other words, may not be quite as fresh as it sometimes
seems. Since at least the 13th century, when Florentine merchants lent money to
the English to pay for King Edward I's wars, international capital has roamed
the world in search of high returns. (The start was inauspicious: England
defaulted, causing the collapse of two Florentine banks.)" (Nicholas D.
Kristof, THE NEW YORK TIMES, September 20, 1998.)
-----------
"Finally, there is somewhat of a silver lining, if one can call it that,
in the debilitating set of crises we have experienced in the past eighteen
months. First, while over the longer run, it will be essential to have
significantly improved systems to oversee lending and borrowing by financial
intermediaries, and incentives to dissuade excess leverage in general, in the
short run, there will be little need. If anything, lenders are likely to be
overcautious.
"Secondly, some of the spectacular equity-driven American and European
capital gains of the middle 1990s diversified as unproductive capital flows to
some emerging market economies. Such capital flows, arguably a key factor in
the crisis, are unlikely to be repeated in the near future." (Alan Greenspan,
November 5, 1998.)
[ 3 ]
<PAGE>
CENTRAL SECURITIES CORPORATION
(Organized on October 1, 1929 as an investment company, registered as such with
the Securitiesand 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
Preference declared investment
Total Stock at Net Net from net gains or Net realized Unrealized
net liquidation asset investment investment capital investment appreciation
Year assets preference value income(A) income surplus gains (losses) of investments
- ------ --------------- ------------- ----------- ------------ ------------ ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $118,930,727 $10,072,150 $ 11.77 $ 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
1998 476,463,575 8,986,125 31.43 .29 .29 1.65 22,908,091 301,750,135
</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, 1998, the market quotations were as follows:
<TABLE>
<S> <C>
Convertible Preference Stock, $2.00 Series D ......... 88 5/8 bid, 104 3/8 asked
Common Stock ......................................... 23 7/8 low, 24 3/8 high and
last sale
</TABLE>
[ 4 ]
<PAGE>
TO THE STOCKHOLDERS OF
CENTRAL SECURITIES CORPORATION:
Financial statements for the year 1998, 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,
1998 1997
---------------- ---------------
<S> <C> <C>
Net assets ........................................................... $476,463,575 $434,423,053
Convertible Preference Stock at liquidation preference ............... (8,986,125) (9,040,850)
------------ ------------
Net assets applicable to Common Stock ................................ $467,477,450 $425,382,203
============ ============
Net asset coverage per share of Convertible Preference Stock ......... $ 1,325.55 $ 1,201.28
Net assets per share of Common Stock ................................. 31.43 29.97
Pro forma net assets per share, reflecting conversion of the
Convertible Preference Stock ....................................... 29.44 28.14
Shares of Convertible Preference Stock outstanding ................ 359,445 361,634
Shares of Common Stock outstanding ................................ 14,872,742 14,191,745
</TABLE>
Comparative operating results are as follows:
<TABLE>
<CAPTION>
Year 1998 Year 1997
--------------- ---------------
<S> <C> <C>
Net investment income .......................................... $4,775,728 $3,965,412
Number of times Preferred dividend earned ................... 6.6 5.5
Per share of Common Stock ................................... .29* .24*
Net realized gain on sale of investments ....................... 22,908,091 30,133,125
Increase in net unrealized appreciation of investments ......... 27,989,691 59,038,462
Increase in net assets resulting from operations ............... 55,673,510 93,136,999
Total net asset per share investment return .................... 13.8% 26.1%
</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 1998,
a cash dividend of $.20 per share paid on June 26 and an optional distribution
of $1.74 per share in cash, or one share of Common Stock for each 12 1/2 shares
held, paid on December 21. The Corporation has been advised that of the $1.94
paid in 1998, $.29 represents ordinary income and the balance of $1.65
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.
[ 5 ]
<PAGE>
In the optional distribution paid in December, the holders of 62% of the
outstanding shares of Common Stock elected to receive stock, and 705,475 Common
shares were issued. As a result of the 1998 distributions to Common
stockholders, the conversion rate of the Series D Preference Stock was
increased to 3.652 in accordance with the provisions of the Certificate of
Incorporation. During the year, 2,189 shares of Convertible Preference Stock
were converted into 7,522 shares of Common Stock.
During 1998 the Corporation repurchased 32,000 shares of its Common Stock
on the American Stock Exchange at an average price per share of $23.91. 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.
-----------
Last year investors encountered a number of remarkable events including a
collapse of commodity prices, the Russian default, the rescue of Long Term
Capital Management (a firm with two Nobel Prize winners), an internet stock
mania and the impeachment of the President. Against this background, stock
market results were mixed. The S&P 500 Composite, dominated by the largest U.S.
companies, increased by 28.6%. The Russell 2000 Index, which measures smaller
companies below the top 1000, declined by 2.6%. The average domestic stock fund
increased by 13.4%. More stocks declined than increased. The equity market
reflected the demands of large mutual funds seeking to balance liquidity and
diversification needs. They find investing in small companies cumbersome
because of percentage ownership restrictions and the desire to limit their
holdings to a manageable number of companies. So they have focused on large
companies. As their new funds have flowed into the market, the prices of large
company stocks have increased and attracted "momentum-following" investors. The
stock market also reflected the prosperity of information or knowledge
businesses. In contrast, industrial cyclical companies in the chemical, paper,
steel and petroleum industries struggled. They were adversely affected by
excess capacity and competitive pricing related, at least in part, to the Asian
economic situation. In a larger context, this dichotomy may be related to the
much discussed long-term evolution of the U.S. economy to an
information/technology base, much as the industrial revolution replaced an
agrarian society with factories.
Central's investment turnover was low. We maintained significant
weightings in the financial and technology sectors of the U.S. economy. Nine of
our top ten holdings (see page 8) remained the same, although the rankings
changed somewhat. The DII Group replaced M. A. Hanna, which was negatively
affected by a number of issues including soft pricing for its plastic resins
and colorants. In a management change late in the year former CEO Skip Walker
returned to Hanna. We have confidence that he will be able to straighten things
out. A significant management change also occurred at Plymouth Rock Assurance
Co. Keith Rodney, one of the founders, chose to leave after sixteen years. We
owe a sincere "thank you" to Keith for his contribution to the creation of
significant intrinsic value for Central
[ 6 ]
<PAGE>
and the other Plymouth Rock stockholders. We wish him good fortune in his new
endeavors. His duties have been taken up by Hal Belodoff, who had been running
Palisades, Plymouth Rock's New Jersey subsidiary. We have been impressed with
Hal's marketing savvy and cost-conscious approach. Founder Jim Stone remains in
charge of Plymouth Rock but devotes much of his time to its investments in
Direct Response Corporation and Homeowners Direct Corporation.
Central made five new investments last year, the most significant of which
were CalEnergy Company and Cincinnati Bell Inc. CalEnergy develops and owns
power generation facilities worldwide. Our bet and management's is that the
company can provide good shareholder returns, expanding as utility deregulation
spreads. Cincinnati Bell is a local exchange carrier, which at year end spun
off its outsourced billing and customer management subsidiary, Convergys
Corporation. Our main interest like most investors is in Convergys, which has
an opportunity for growth serving the wireless telecommunications industry.
However, we hope Cincinnati Bell will prove to be a sleeper. Other additions,
reductions and eliminations were set forth in shareholder reports.
The words bubble, mania, crisis and collapse appeared more often last year
than in any in recent memory. Monetary policy has been stimulative and fiscal
policy neutral; the money supply has been growing at a ten-percent-plus rate
and the Federal Government budget is balanced. Excess industrial capacity
exists worldwide and inflation is low. The ratio of money to economic activity
is high and redundant funds have been flowing into the financial markets. Some
observers believe this has created an overvalued equity market and that the
Federal Reserve should "burst the bubble" by raising interest rates. They
suggest this course of action on the theory that a smaller decline now is
better than a larger one later. Others, including Federal Reserve Governor
Roger Ferguson, say that
...the Fed cannot target specific levels in equity markets. Equity prices
are set by the give and take of supply and demand, with participants
buying and selling based on their own information. Investors can and
should be influenced by several factors, including expectations of
corporate earnings, attractiveness of alternative investments, both
domestic and international, differing valuations of underlying assets, and
differing appetite for `ownership' risk as opposed to `creditor' risk.(1)
In light of the above, we have been somewhat cautious. We continue,
however, to search for good companies at sensible prices where we believe there
is an opportunity for a substantial gain over a three- to five-year period. Our
investment approach is one of investing in real businesses as opposed to
trading stocks. We look for companies with good economic fundamentals and
shareholder-oriented management. Our practice has been to keep a substantial
portion of our assets in a small number of companies, with the balance
- ---------
(1) Remarks by Roger W. Ferguson, Member, Board of Governors, Federal Reserve
System, January 3, 1999.
[ 7 ]
<PAGE>
invested in a broad general market portfolio. We believe the risk associated
with this approach can be reduced through intimate knowledge of the companies
in which we invest.
Stockholders' inquiries are welcome.
CENTRAL SECURITIES CORPORATION
WILMOT H. KIDD, PRESIDENT
375 Park Avenue
New York, NY 10152
February 2, 1999
------------------
CENTRAL'S TEN LARGEST INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1998
--------------------- Year first
Cost Value acquired
-------- ---------- -----------
(millions)
<S> <C> <C> <C>
Intel Corporation
(Microprocessors) ............................ $ .8 $ 49.8 1986
The Bank of New York Company, Inc.
(Banking and Processing Services) ............ 6.7 40.3 1993
American Management Systems, Inc.
(Consulting and Systems Integration) ......... 11.5 39.0 1984
The Plymouth Rock Company, Inc.
(Insurance) .................................. 2.2 35.0 1982
Analog Devices, Inc.
(Semiconductors) ............................. 2.1 23.2 1987
Capital One Financial Corporation
(Credit Cards) ............................... 3.0 23.0 1994
First Union Corporation
(Banking) .................................... 4.3 18.2 1994
Household International, Inc.
(Consumer Finance and Credit Cards) .......... 3.4 17.8 1992
Brady Corporation
(Identification Products) .................... 2.8 16.2 1984
The DII Group Incorporated
(Electronic Manufacturing Services) .......... 7.2 13.8 1996
</TABLE>
[ 8 ]
<PAGE>
PRINCIPAL PORTFOLIO CHANGES
October 1 to December 31, 1998
(Common Stock unless specified otherwise)
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------
Held
Purchased Sold December 31, 1998
------------- --------- ------------------
<S> <C> <C> <C>
The Bank of New York Company, Inc. ......... 100,000 1,000,000
Cabletron Systems, Inc. .................... 20,000 200,000
CalEnergy Company, Inc. .................... 200,000 200,000
Capital One Financial Corporation .......... 2,000 200,000
Cincinnati Bell Inc. ....................... 150,000 150,000
Convergys Corporation ...................... 150,000* 150,000
First Union Corporation .................... 24,500 300,000
Intel Corporation .......................... 30,000 420,000
Kerr-McGee Corporation ..................... 50,000 50,000
Martin Color-Fi, Inc. ...................... 220,000 --
Morrison Knudsen Corporation ............... 228,000 600,000
Peerless Systems Corporation ............... 127,500 400,000
Vesta Insurance Group, Inc. ................ 120,000 200,000
</TABLE>
- ---------
* Received in a spin-off from Cincinnati Bell Inc.
[ 9 ]
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments:
General portfolio securities at market value
(cost $112,603,831) (Note 1).................................... $380,015,200
Securities of affiliated companies (cost $16,540,693)
(Notes 1, 5 and 6) ............................................. 50,879,459
Short-term debt securities at cost plus accrued interest ......... 46,319,871 $477,214,530
------------
Cash and receivables:
Cash ............................................................. 15,889
Dividends receivable ............................................. 210,300 226,189
------------
Office equipment and leasehold improvements, net .................... 10,725
------------
Total Assets ................................................. 477,451,444
LIABILITIES:
Payable for securities purchased .................................... 667,686
Accrued expenses and reserves ....................................... 320,183
------------
Total Liabilities ............................................ 987,869
------------
NET ASSETS ............................................................. $476,463,575
============
NET ASSETS are represented by:
$2.00 Series D Convertible Preference Stock
without par value at liquidation preference,
$25.00 per share, authorized 4,000,000 shares;
issued 359,445 (Note 2) ........................................... $ 8,986,125
Common Stock at par value, $1.00 per share, authorized
30,000,000 shares; issued 14,904,742 (Note 2) ..................... 14,904,742
Surplus:
Paid-in .......................................................... $149,891,022
Undistributed net investment income .............................. 105,958
Undistributed net gain on sales of investments ................... 1,590,583 151,587,563
------------
Net unrealized appreciation of investments .......................... 301,750,135
Treasury stock, at cost (32,000 shares of
Common Stock) (Note 2) ............................................ (764,990)
------------
NET ASSETS ............................................................. $476,463,575
============
NET ASSET VALUE PER COMMON SHARE ....................................... $ 31.43
============
</TABLE>
See accompanying notes to financial statements.
[ 10 ]
<PAGE>
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends ................................................... $4,436,805
Interest .................................................... 2,517,895
Miscellaneous income ........................................ 43,750 $ 6,998,450
----------
Expenses:
Investment research ......................................... 614,836
Administration and operations ............................... 614,285
Employees' retirement plans ................................. 97,220
Custodian fees .............................................. 73,064
Franchise and miscellaneous taxes ........................... 112,075
Transfer agent and registrar fees and expenses .............. 42,260
Rent and utilities .......................................... 165,112
Listing, software and sundry fees ........................... 121,698
Legal, auditing and tax fees ................................ 67,284
Stationery, supplies, printing and postage .................. 61,135
Travel and telephone ........................................ 35,386
Directors' fees ............................................. 73,100
Insurance ................................................... 67,858
Publications and miscellaneous .............................. 77,409 2,222,722
---------- -----------
Net investment income .......................................... 4,775,728
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain from security transactions ................... 22,908,091
Net increase in unrealized appreciation of investments ......... 27,989,691
----------
Net gain on investments ..................................... 50,897,782
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ................................................... $55,673,510
===========
</TABLE>
See accompanying notes to financial statements.
[ 11 ]
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ............................................. $ 4,775,728 $ 3,965,412
Net realized gain on investments .................................. 22,908,091 30,133,125
Net increase in unrealized appreciation of investments ............ 27,989,691 59,038,462
------------ ------------
Increase in net assets resulting from operations ............... 55,673,510 93,136,999
------------ ------------
DIVIDENDS TO STOCKHOLDERS FROM:
Net investment income:
Preference Stock ............................................... (721,149) (724,462)
Common Stock ................................................... (4,049,386) (4,601,457)
Net realized gain from investment transactions .................... (23,441,444) (28,220,809)
------------ ------------
Decrease in net assets from distributions ...................... (28,211,979) (33,546,728)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS: (Note 2)
Distribution to stockholders reinvested in Common Stock ........... 15,344,081 18,147,197
Cost of shares of Common Stock repurchased ........................ (764,990) --
Other capital transactions ........................................ (100) (200)
------------ ------------
Increase in net assets from capital share transactions ......... 14,578,991 18,146,997
------------ ------------
Total increase in net assets ............................... 42,040,522 77,737,268
NET ASSETS:
Beginning of year ................................................. 434,423,053 356,685,785
------------ ------------
End of year (including undistributed net investment income
of $105,958 and $98,593, respectively) .......................... $476,463,575 $434,423,053
============ ============
</TABLE>
See accompanying notes to financial statements.
[ 12 ]
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1998
PORTFOLIO SECURITIES 90.4%
STOCKS (COMMON UNLESS SPECIFIED OTHERWISE)
<TABLE>
<CAPTION>
PRIN. AMT. MARKET
OR SHARES VALUE
- ------------- --------------
<S> <C> <C>
BANKING AND FINANCE 20.8%
1,000,000 The Bank of New York Company, Inc. ............ $40,250,000
200,000 Capital One Financial Corporation ............. 23,000,000
300,000 First Union Corporation ....................... 18,243,750
450,000 Household International, Inc. ................. 17,831,250
-----------
99,325,000
-----------
CHEMICALS 4.5%
1,000,000 Hanna (M. A.) Company ......................... 12,312,500
300,000 Rohm and Haas Company ......................... 9,037,500
-----------
21,350,000
-----------
COMMERCIAL SERVICES 0.7%
150,000 UniFirst Corporation .......................... 3,421,875
-----------
COMPUTER SOFTWARE & SERVICES 11.0%
975,000 American Management Systems, Inc.(a) .......... 39,000,000
200,000 Cabletron Systems, Inc.(a) .................... 1,675,000
150,000 Convergys Corporation(a) ...................... 3,187,500
100,000 Electronic Data Systems Corporation ........... 5,018,750
400,000 Peerless Systems Corporation(a) ............... 3,400,000
-----------
52,281,250
-----------
DATA PROCESSING 2.9%
600,000 The Reynolds and Reynolds Company
Class A ........................................ 13,762,500
-----------
ELECTRONICS 20.2%
740,000 Analog Devices, Inc.(a) ....................... 23,217,500
600,000 The DII Group Incorporated .................... 13,800,000
420,000 Intel Corporation ............................. 49,796,250
465,000 Watkins-Johnson Company(b) .................... 9,474,375
-----------
96,288,125
-----------
ENERGY 3.0%
50,000 Kerr-McGee Corporation ........................ 1,912,500
300,000 Murphy Oil Corporation ........................ 12,375,000
-----------
14,287,500
-----------
ENGINEERING AND CONSTRUCTION 1.2%
600,000 Morrison Knudsen Corporation(a) ............... 5,850,000
-----------
</TABLE>
[ 13 ]
<PAGE>
<TABLE>
<CAPTION>
PRIN. AMT. MARKET
OR SHARES VALUE
- ----------- --------------
<S> <C> <C>
HEALTH CARE 0.3%
150,000 MGI Pharma, Inc.(a) ........................... $ 1,462,500
-----------
HOUSEHOLD PRODUCTS 2.8%
366,100 Church & Dwight Co., Inc. ..................... 13,156,718
-----------
INSURANCE 12.8%
90,000 Allmerica Financial Corporation ............... 5,208,750
266,666 Mutual Risk Management Ltd. ................... 10,433,307
70,000 The Plymouth Rock Company, Inc.
Class A(b)(c) .................................. 35,000,000
220,000 Provident Companies, Inc. ..................... 9,130,000
200,000 Vesta Insurance Group, Inc. ................... 1,200,000
-----------
60,972,057
-----------
MANUFACTURING 3.4%
600,000 Brady Corporation(d) .......................... 16,162,500
-----------
PAPER AND FOREST PRODUCTS 0.2%
50,000 Deltic Timber Corporation ..................... 1,018,750
-----------
TELECOMMUNICATIONS 3.6%
150,000 Cincinnati Bell Inc. .......................... 2,550,000
175,356 IXC Communications Corporation(a) ............. 5,896,346
10,743 IXC Communications Corporation 7 1/4%
Junior Conv. Pfd. Due 2007(c) .................. 1,638,308
300,000 Nextel Communications, Inc. Class A ........... 7,087,500
-----------
17,172,154
-----------
TRANSPORTATION 1.3%
533,757 Transport Corporation of America, Inc.
Class B(a)(b) .................................. 6,405,084
-----------
UTILITIES 1.5%
200,000 CalEnergy Company, Inc. ....................... 6,937,500
-----------
MISCELLANEOUS 0.2%
Grumman Hill Investments, L.P.(a)(c) .......... 1,033,865
5,000 Southeast Publishing Ventures, Inc.
Series A Pfd.(a)(b)(c) ......................... 0
Steuart Petroleum Company One Warrant to
Purchase Common Stock(a)(c) .................... 0
Other investments ............................. 7,281
-----------
1,041,146
-----------
Total Portfolio Securities
(cost $129,144,524)............................. 430,894,659
-----------
</TABLE>
[ 14 ]
<PAGE>
<TABLE>
<CAPTION>
PRIN. AMT. MARKET
OR SHARES VALUE
- ---------------- ----------------
<S> <C> <C>
SHORT-TERM DEBT INVESTMENTS 9.7%
$ 16,020,000 Chevron U.S.A. Inc. 5.37% due 1/25/99 .......... $ 16,029,559
20,660,000 Ford Motor Credit Corp. 4.82% - 5.09% due
1/04/99 - 1/11/99 ............................... 20,718,662
9,556,000 General Electric Capital Corp. 5.36% due
1/19/99 ......................................... 9,571,650
------------
Total Short-Term Investments
(cost $46,319,871)............................... 46,319,871
------------
Total Investments (100.1%)
(cost $175,464,395) ............................. 477,214,530
------------
Liabilities, less cash, receivables and
other assets (0.1%) ............................. (750,955)
------------
Net Assets (100%) ............................... $476,463,575
============
</TABLE>
- ---------
(a) Non-dividend paying.
(b) Affiliate as defined in the Investment Company Act of 1940.
(c) Valued at estimated fair value.
(d) Formerly known as W. H. Brady, Inc.
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, 1998 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 3.652 shares of Common Stock and
1,312,693 authorized but unissued Common shares have been reserved for issuance
upon conversion. The Corporation issued 7,522 shares of Common Stock upon
conversion of shares of Preference Stock in 1998.
In the optional distribution paid on December 21, 1998, 705,475 Common
shares were issued.
The Corporation repurchased 32,000 shares of its Common Stock in 1998 at
an average price of $23.91 per share representing an average discount from net
asset value of 16.5%. 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.
3. INVESTMENT TRANSACTIONS -- The aggregate cost of securities purchased
and the aggregate proceeds of securities sold during the year ended December
31, 1998, excluding short-term investments, were $24,942,184 and $57,873,467,
respectively.
[ 16 ]
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
As of December 31, 1998, based on cost for Federal income tax purposes,
the aggregate gross unrealized appreciation and depreciation for all securities
were $308,268,511 and $6,518,376, respectively.
4. OPERATING EXPENSES -- The aggregate remuneration paid during the year
ended December 31, 1998 to officers and directors amounted to $1,157,005, of
which $73,100 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, 1998 was $89,366.
5. AFFILIATES -- The Plymouth Rock Company, Inc., 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 $402,200 from affiliates during the year
ended December 31, 1998. Unrealized appreciation related to affiliates
decreased by $1,514,844 for the year 1998 to $34,338,766.
6. RESTRICTED SECURITIES -- The Corporation from time to time invests in
securities the resale of which is restricted. On December 31, 1998 such
investments had an aggregate value of $37,672,173, which was equal to 7.9% of
the Corporation's net assets. Investments in restricted securities at December
31, 1998, including acquisition dates and cost, were: Grumman Hill Investments,
L.P., 9/11/85, $84,848; IXC Communications, Inc., 4/14/97, $1,112,879; The
Plymouth Rock Company, Inc., 12/15/82, $1,500,000 and 6/1/84, $699,986;
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 increased by $4,317,676 for the year 1998 to
$34,216,760.
7. YEAR 2000 READINESS DISCLOSURE (UNAUDITED) -- The Corporation could be
adversely affected if computer systems used by the Corporation, the
Corporation's principal service providers, or other entities that interact
electronically with the Corporation or its service providers fail to properly
process date-related information up to and following January 1, 2000. The
Corporation has taken steps which it believes are reasonably designed to
address the Year 2000 problem with respect to the computer systems it uses, to
obtain assurances that its principal service providers, including the
Corporation's Custodian and its Registrar and Transfer Agent, are preparing to
be Year 2000 compliant, and to develop contingencies to address unexpected
problems. However, at this time there can be no assurance that the steps being
taken by the Corporation will be sufficient to avoid any adverse impact on the
Corporation. For example, the Corporation's Custodian and its Registrar and
Transfer Agent could be materially affected adversely if all of their vendors
are not completely Year 2000 compliant, which could negatively affect the
Corporation.
[ 17 ]
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
In addition, the Corporation could be adversely affected if the issuers of
securities in which the Corporation is invested are negatively affected by the
Year 2000 problem. For this reason the Corporation has taken steps reasonably
designed to obtain assurances from such issuers that they are preparing to be
Year 2000 compliant.
The Corporation did not incur any material costs in addressing the Year
2000 problem in 1998, and it does not reasonably believe that it will incur any
material costs in 1999.
------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ........ $ 29.97 $ 25.64 $ 21.74 $ 17.60 $ 17.90
-------- -------- -------- -------- --------
Net investment income ..................... .34 .29 .33 .37 .30
Net realized and unrealized gain on
securities .............................. 3.11 6.51 5.28 5.76 1.08
-------- -------- -------- -------- --------
Total from investment operations ..... 3.45 6.80 5.61 6.13 1.38
-------- -------- -------- -------- --------
Less:
Dividends from net investment income*
To Preference Stockholders ............. .05 .05 .06 .06 .07
To Common Stockholders ................. .29 .34 .28 .33 .22
Distributions from capital gains*
To Common Stockholders ................. 1.65 2.08 1.37 1.60 1.39
-------- -------- -------- -------- --------
Total distributions .................. 1.99 2.47 1.71 1.99 1.68
-------- -------- -------- -------- --------
Net asset value, end of year .............. $ 31.43 $ 29.97 $ 25.64 $ 21.74 $ 17.60
======== ======== ======== ======== ========
Per share market value, end of
year .................................... $ 24.38 $ 29.69 $ 24.13 $ 20.88 $ 15.75
TOTAL INVESTMENT RETURN,
MARKET(%) ............................... (11.57) 35.60 22.35 45.65 12.30
TOTAL INVESTMENT RETURN,
NAV(%) .................................. 13.75 26.08 25.97 34.59 8.62
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year(000) .............. $476,464 $434,423 $356,686 $292,548 $226,639
Ratio of expenses to average net assets
for Common(%) ........................... .51 .53 .55 .62 .65
Ratio of net investment income to
average net assets for Common(%) ........ 1.09 .97 1.32 1.69 1.51
Portfolio turnover rate(%) ................ 6.21 10.92 9.89 8.27 11.73
</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 of
Central Securities Corporation, including the statement of investments, as
of December 31, 1998, 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, 1998. 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 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, 1998 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, 1998, 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, 1998, 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, 1998 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 LLP
New York, NY
January 22, 1999
[ 19 ]
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<S> <C>
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
</TABLE>
C. CARTER WALKER, JR.
Washington, CT
<TABLE>
<S> <C>
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
UMB Bank, N.A.
P.O. Box 419226, Kansas City, MO 64141-6226
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company, a Division of EquiServe
P.O. Box 2500, Jersey City, NJ 07303-2500
INDEPENDENT AUDITORS
KPMG LLP
345 Park Avenue, New York, NY 10154
</TABLE>
[ 20 ]
