================================================================================
CENTRAL SECURITIES CORPORATION
----------
SEVENTY-FOURTH ANNUAL REPORT
2002
================================================================================
SIGNS OF THE TIMES
"There'll be about 3 million more Americans per year for a decade. We'll
reach 310 million by 2010, up from about 288 million now. That's over 20 million
more people to house, feed, clothe, transport, doctor, entertain, etc., this
decade...good news for most businesses.
"From 2010 to 2030, the gain will be even higher: 3.6 million a year on
average. In 30 years, the U.S. population will top 380 million. Even more
dramatic, growth from now to 2050 will total about 170 million. That's more
people than lived in the entire country 50 years ago.
"Ours is one of a few advanced nations with a growing population. Germany,
Japan, Italy and others will have fewer people. Same for Russia and AIDS-ravaged
Africa. Like the U.S., the U.K., France and Canada will see population increases
that get a major boost from immigration." (The Kiplinger Letter, December 27,
2002)
----------
"America's incarceration rate was roughly constant from 1925 to 1973, with
an average of 110 people behind bars for every 100,000 residents. By 2000,
however, the rate of incarceration in state and federal prisons had more than
quadrupled, to 478. America has overtaken Russia as the world's most aggressive
jailer. When local jails are included in the American tally, the United States
locks up nearly 700 people per 100,000, compared with 102 for Canada, 132 for
England and Wales, 85 for France and a paltry 48 in Japan. Roughly 2m Americans
are currently behind bars, with some 4.5m on parole or on probation (the
probationers are on suspended sentences). Another 3m Americans are ex-convicts
who have served their sentences and are no longer under the control of the
justice system." (The Economist, August 10, 2002)
----------
"The United States cannot seem to decide whether to post `Do Not Trespass'
or `Help Wanted' signs along its southern border. We criminalize entry without a
permit, direct the Border Patrol to seal the frontier, then eagerly hire the
migrants who are successful in running the gantlet...There are now an estimated
eight million illegal immigrants in the United States." (Andres Martinez, The
New York Times, October 14, 2002)
----------
"Everybody is in on the act. The Financial Accounting Standards Board has,
at last count, enshrined generally accepted accounting principles into three
volumes comprising some 4,530 pages. Some of the FASB rules run to over 700
pages on how to book a single transaction. It should surprise no one that two
skilled accountants, looking at the booking of the same transaction and using
their knowledge of the same rules, come out with different results.
"It happens all the time in legal matters. Learned judges hearing the same
testimony and reading the same briefs often render split opinions of 5-4 or 2-1.
It is rare that they are castigated by the media or Congress for failing to
agree unanimously, but in the accounting profession a difference of opinion is
often reported as if a fraud has been committed.
"Congress, which suddenly has become expert on the nearly 5,000 pages of
rules governing private-sector accounting, prevents our own government from
using GAAP. The reason for this hypocrisy is clear. If GAAP were used by the
federal government, the reported surplus last year of $170 billion would have to
be reported as a deficit of $580 billion. Off-balance-sheet financing, a la
Enron, is more the rule than the exception in government." (Walter Wriston, The
Wall Street Journal, August 5, 2002)
[ 2 ]
SIGNS OF THE TIMES
"The dollar's performance during this cyclical downturn provides evidence
that the international financial system is operating on a de facto dollar
standard. No asset since gold in the 19th century enjoys such broad acceptance
as both a medium of exchange and a store of value as the dollar. ...Almost 50%
of all U.S. Treasury bonds are held as reserves by foreign central banks and
national governments that are reluctant to sell them for fear of undermining the
competitiveness of their own currencies. As long as the U.S. inflation rate
remains low, any run on the dollar by individuals is likely to be offset by
foreign central banks accumulating dollars to prevent their own currencies from
appreciating." (Laura D'Andrea Tyson, BusinessWeek, October 28, 2002)
----------
"The Telecom Act of 1996 had encouraged the creation of hundreds of new
phone companies, which incorrectly believed that the new legislation would
guarantee them access to the copper lines in homes and businesses controlled by
the regional Bell operating companies. When they failed to gain access, they
were unable to generate adequate cash flow to service their debt. The telecom
industry has a $100 billion investment in new fiberoptic systems with a
utilization rate of only 2%. As a result of the inability of government to
provide a "level playing field," the telecom investment boom of 1996 - 2000 was
the greatest misallocation of capital in American history." (David Hale,
Barron's, December 30, 2002)
----------
"The struggle to understand developments in the economy and financial
markets since the mid-1990s has been particularly challenging for monetary
policymakers. We were confronted with forces that none of us had personally
experienced. Aside from the then recent experience of Japan, only history books
and musty archives gave us clues to the appropriate stance for policy. We at the
Federal Reserve considered a number of issues related to asset bubbles-that is,
surges in prices of assets to unsustainable levels. As events evolved, we
recognized that, despite our suspicions, it was very difficult to definitively
identify a bubble until after the fact-that is, when its bursting confirmed its
existence.
"Moreover, it was far from obvious that bubbles, even if identified early,
could be preempted short of the central bank inducing a substantial contraction
in economic activity-the very outcome we would be seeking to avoid.
"Prolonged periods of expansion promote a greater rational willingness to
take risks, a pattern very difficult to avert by a modest tightening of monetary
policy. In fact, our experience over the past fifteen years suggests that
monetary tightening that deflates stock prices without depressing economic
activity has often been associated with subsequent increases in the level of
stock prices.
"For example, stock prices rose following the completion of the more than
300 basis-point rise in the federal funds rate in the twelve months ending in
February 1989. And during the year beginning in February 1994, the Federal
Reserve raised the federal funds target 300 basis points. Stock prices initially
flattened, but as soon as that round of tightening was completed, they resumed
their marked upward advance. From mid-1999 through May 2000, the federal funds
rate was raised 150 basis points. However, equity price increases were largely
undeterred during that period despite what now, in retrospect, was the exhausted
tail of a bull market.
"Such data suggest that nothing short of a sharp increase in short-term
rates that engenders a significant economic retrenchment is sufficient to check
a nascent bubble. The notion that a well-timed incremental tightening could have
been calibrated to prevent the late 1990s bubble is almost surely an illusion."
(Alan Greenspan, Jackson Hole, Wyoming, August 30, 2002)
[ 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
---- ------ ----------- ----- ---------- -------- --------- ------------ ---------------
1992 $165,599,864 $10,019,000 $14.33 $ 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
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
----------
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,
2002 the market quotations were as follows:
Common Stock .............................. $16.35 high, $16.20 low and
$16.28 last sale
[ 4 ]
To the Stockholders of
CENTRAL SECURITIES CORPORATION:
Financial statements for the year 2002, as reported upon by our
independent auditors, and other pertinent information are submitted herewith.
Comparative net assets are as follows:
December 31, December 31,
2002 2001
---- ----
Net assets ................................... $361,942,568 $539,839,060
Net assets per share of Common Stock ......... 18.72 28.54
Shares of Common Stock outstanding ......... 19,337,284 18,914,599
Comparative operating results are as follows:
Year 2002 Year 2001
--------- ---------
Net investment income ........................ $ 2,592,249 $ 3,335,304
Per share of Common Stock .................. .14* .18*
Net realized gain on sale of
investments ................................ 22,869,274 13,662,612
Decrease in net unrealized appreciation
of investments ............................. (185,386,156) (58,375,994)
Decrease in net assets resulting
from operations ............................ (159,924,633) (41,378,078)
----------
* 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 2002,
a cash dividend of $.10 per share paid on June 21 and an optional distribution
of $1.15 per share in cash, or one share of Common Stock for each 14 shares
held, paid on December 26. The Corporation has been advised that of the $1.25
paid in 2002, $.14 represents ordinary income and $1.11 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 57% of the
outstanding shares of Common Stock elected to receive stock, and 752,785 Common
shares were issued.
During 2002 the Corporation repurchased 330,100 shares of its Common Stock
on the American Stock Exchange at an average price per share of $20.68. 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 ]
Central's investment results are shown below together with those of the
leading market indexes:
To December Central's Dow Jones Standard &
31, 2002 Market Return Industrials Poor's 500
----------- ------------- ----------- ----------
Quarter ...................... 4.8% 10.5% 8.4%
Year ......................... -31.2% -15.0% -22.1%
Ten Years (annualized) ....... 13.4% 12.1% 9.3%
The economic recovery which began in the fourth quarter of 2001 continued
in 2002, sustained by consumer spending. Government tax cuts and the refinancing
of home equity loans at low interest rates stimulated personal consumption.
Stock market returns, on the other hand, were dismal. In recent years, stock
markets have suffered one of their biggest falls in history. Last year Central
experienced its most severe decline since the recession of the mid-1970's, over
twenty-five years ago. Our results were adversely affected in large part by
price declines in a number of our major investments in information technology
and financial companies, including Flextronics, Intel, Convergys, Analog
Devices, Capital One, Household International and Bank of New York.
The divergence between the overall economy and the stock market is related
to the nature of the recession in 2001. It was not a typical consumer led
recession. It was led by a slump in business investment which has not yet begun
a sustained recovery, especially with respect to information technology. The
average technology mutual fund declined by over 40% last year. While not
pleasant, the price declines of 2002 are unfortunately part of long-term
investing in technology companies. As opposed to the larger and more stable
consumer segment, the capital spending area of the economy is subject to
periodic bouts of over-expansion and over-valuation in the stock market,
followed by under-valuation in many cases. With respect to technology
investments, the current condition will ultimately reverse itself as innovation
offers new opportunities for productivity gains. The timing and magnitude of a
lasting upturn, however, are not predictable.
Central's investment portfolio turnover was just under 20%, somewhat more
than has been the case in recent years but less than that of the average mutual
fund. At year end, 32% of our holdings were classified as information technology
investments compared with 39% at the end of 2001. The financial sector accounted
for 25%, the same as last year. The comparable percentages for the Standard and
Poor's 500 Index were 15% in information technology and 21% in financial
companies. Central had 39 holdings at year end, up from 31 at the start of the
year. The ten largest, shown on page eight, constituted 51% of assets.
Short-term commercial paper amounted to 13.6% of assets. This percentage has
been higher in the past two years than Central's norm, reflecting our caution in
the face of high equity prices. It is not an indication that we are changing our
policy of remaining generally fully invested.
We reduced the carrying value of our largest investment, Plymouth Rock, at
year end by 13% to reflect the price at which the company has the opportunity to
repurchase a substantial block of its own stock. We have been pleased with the
improved operating performance at Plymouth Rock and believe that it is well
positioned to take advantage of opportunities in its major markets.
[ 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. We think that
many, if not most, investors have a shorter time horizon and that our ability to
take a long-term view has been a great advantage to Central. 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, we are
especially interested in the integrity of management and the alignment of its
interests with those of stockholders.
Our practice has been to keep about one half our assets in a small number
of investments, with the remainder in a general market portfolio. We believe
that the risk associated with this approach can be reduced through intimate
knowledge of the companies in which we invest. Ideally we want to hold for
extended periods of time investments in companies with high returns on capital,
high margins and sustained growth. We recognize, however, that the period of
significant growth for a 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 29, 2003
[ 7 ]
TEN LARGEST INVESTMENTS
December 31, 2002 % of Year
----------------- Net First
Cost Value Assets Acquired
------------------ ------ --------
(millions)
The Plymouth Rock Company, Inc. ....... $ 2.2 $42.0 11.6% 1982
American Management Systems, Inc. ..... 22.2 19.4 5.4 1984
Murphy Oil Corporation ................ 5.3 18.0 5.0 1974
Intel Corporation ..................... 0.5 17.4 4.8 1986
Brady Corporation Class A ............. 2.4 17.3 4.8 1984
Capital One Financial Corporation ..... 2.5 14.9 4.1 1994
The Bank of New York Company, Inc. .... 4.4 14.4 4.0 1993
Analog Devices, Inc. .................. 0.7 14.3 4.0 1987
SunGard Data Systems, Inc. ............ 6.7 13.9 3.8 1999
Convergys Corporation ................. 16.7 13.3 3.7 1998
PRINCIPAL PORTFOLIO CHANGES
October 1 to December 31, 2002
(Common Stock unless specified otherwise)
Number of Shares
---------------------------------------
Held
Purchased Sold December 31, 2002
--------- ---- -----------------
Accenture Ltd. ........................ 10,000 280,000
American Management Systems, Inc. ..... 120,000 1,620,000
ArvinMeritor, Inc. .................... 220,000 520,000
AT&T Wireless Services, Inc. .......... 130,000 200,000
The Bank of New York Company, Inc. .... 20,000 600,000
Brady Corporation Class A ............. 40,400 520,000
Broadwing Inc. ........................ 100,000 1,000,000
Capital One Financial Corporation ..... 10,000 500,000
Convergys Corporation ................. 100,000 880,000
Duke Energy Corporation ............... 100,000 100,000
EnCana Corporation .................... 160,000 160,000
Household International, Inc. ......... 200,000 200,000
Murphy Oil Corporation ................ 210,000(a) 30,000 420,000
Schering-Plough Corporation ........... 160,000 160,000
Solectron Corporation ................. 100,000 800,000
The TriZetto Group, Inc. .............. 165,300 430,000
Unisys Corporation .................... 50,000 1,150,000
----------
(a) Stock Split
[ 8 ]
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2002
ASSETS:
Investments:
General portfolio securities
at market value (cost $189,652,547)
(Note 1) ................................. $268,001,108
Securities of affiliated companies
(cost $3,462,486) (Notes 1, 5 and 6) ..... 44,615,409
Short-term investments (cost $49,181,437) .. 49,181,437 $361,797,954
------------
Cash, receivables and other assets:
Cash ....................................... 63,920
Dividends receivable ....................... 233,200
Office equipment, net ...................... 30,936
Other assets ............................... 39,050 367,106
------------ ------------
Total Assets ............................. 362,165,060
LIABILITIES:
Accrued expenses and reserves .............. 222,492
------------
Total Liabilities ........................ 222,492
------------
NET ASSETS ..................................... $361,942,568
============
NET ASSETS are represented by:
Common Stock $1 par value: authorized
30,000,000 shares; issued
19,347,284 (Note 2) ...................... $ 19,347,284
Surplus:
Paid-in .................................. $221,065,405
Undistributed net gain on
sale of investments .................... 2,174,359
Undistributed net investment
income ................................. 24,386 223,264,150
------------
Net unrealized appreciation of
investments .............................. 119,501,484
Treasury stock, at cost (10,000 shares
of Common Stock) (Note 2) ................ (170,350)
------------
NET ASSETS ..................................... $361,942,568
============
NET ASSET VALUE PER COMMON SHARE
(19,337,284 shares outstanding) ............ $18.72
======
See accompanying notes to financial statements.
[ 9 ]
STATEMENT OF OPERATIONS
For the year ended December 31, 2002
INVESTMENT INCOME
Income:
Dividends .................................... $ 3,623,342
Interest ..................................... 1,234,312 $ 4,857,654
------------
Expenses:
Administration and operations ................ 654,429
Investment research .......................... 617,251
Rent and utilities ........................... 174,561
Employees' retirement plans .................. 124,602
Franchise and miscellaneous taxes ............ 114,264
Directors' fees .............................. 97,500
Listing, software and sundry fees ............ 85,553
Legal, auditing and tax fees ................. 78,040
Insurance .................................... 76,628
Stationery, supplies, printing and postage ... 50,098
Transfer agent and registrar fees and
expenses ................................... 35,571
Travel and telephone ......................... 27,317
Custodian fees ............................... 26,387
Publications and miscellaneous ............... 103,204 2,265,405
----------- -------------
Net investment income .......................... 2,592,249
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain from investment
transactions ................................. 22,869,274
Net decrease in unrealized
appreciation of investments .................. (185,386,156)
------------
Net loss on investments ...................... (162,516,882)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................... ($159,924,633)
=============
See accompanying notes to financial statements.
[ 10 ]
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2002 and 2001
2002 2001
---- ----
FROM OPERATIONS:
Net investment income ...................... $ 2,592,249 $ 3,335,304
Net realized gain on investments ........... 22,869,274 13,662,612
Net decrease in unrealized
appreciation of investments .............. (185,386,156) (58,375,994)
------------ ------------
Decrease in net assets
resulting from operations .............. (159,924,633) (41,378,078)
------------ ------------
DIVIDENDS TO STOCKHOLDERS FROM:
Net investment income ...................... (2,571,208) (3,956,197)
Net realized gain from
investment transactions .................. (20,694,915) (18,650,364)
Return of capital .......................... -- (9,911,422)
------------ ------------
Decrease in net assets
from distributions ..................... (23,266,123) (32,517,983)
------------ ------------
FROM CAPITAL SHARE
TRANSACTIONS: (Note 2)
Distribution to stockholders
reinvested in Common Stock ............... 12,119,838 18,466,903
Cost of shares of Common Stock
repurchased .............................. (6,825,574) (1,020,868)
------------ ------------
Increase in net assets from
capital share transactions ............. 5,294,264 17,446,035
------------ ------------
Total decrease in net assets ........... (177,896,492) (56,450,026)
NET ASSETS:
Beginning of year .......................... 539,839,060 596,289,086
------------ ------------
End of year (including undistributed
net investment income of $24,386
and $0, respectively) .................... $361,942,568 $539,839,060
============ ============
See accompanying notes to financial statements.
[ 11 ]
STATEMENT OF INVESTMENTS
December 31, 2002
PORTFOLIO SECURITIES 86.4%
STOCKS (COMMON UNLESS SPECIFIED OTHERWISE)
Prin. Amt.
or Shares Value
---------- -----
Banking and Finance 10.3%
600,000 The Bank of New York Company, Inc. .............. $14,376,000
500,000 Capital One Financial Corporation ............... 14,860,000
100,000 FleetBoston Financial Corporation ............... 2,430,000
200,000 Household International, Inc. ................... 5,562,000
-----------
37,228,000
-----------
Business Services 1.1%
100,000 Concord EFS, Inc.(a) ............................ 1,574,000
240,000 ProBusiness Services, Inc.(a) ................... 2,400,000
-----------
3,974,000
-----------
Chemicals 4.2%
1,372,400 PolyOne Corporation ............................. 5,379,808
300,000 Rohm and Haas Company ........................... 9,744,000
-----------
15,123,808
-----------
Computer Software & Services 18.8%
280,000 Accenture Ltd.(a) ............................... 5,037,200
1,620,000 American Management Systems, Inc.(a) ............ 19,423,800
880,000 Convergys Corporation(a) ........................ 13,332,000
200,000 Peerless Systems Corporation(a) ................. 278,000
590,000 SunGard Data Systems Inc.(a) .................... 13,900,400
430,000 The TriZetto Group, Inc.(a) ..................... 2,640,200
1,150,000 Unisys Corporation(a) ........................... 11,385,000
500,000 Wind River Systems, Inc.(a) ..................... 2,050,000
-----------
68,046,600
-----------
Electronics 13.4%
600,000 Analog Devices, Inc.(a) ......................... 14,322,000
1,350,000 Flextronics International Ltd.(a) ............... 11,056,500
1,120,000 Intel Corporation ............................... 17,438,400
330,000 Motorola, Inc. .................................. 2,854,500
800,000 Solectron Corporation(a) ........................ 2,840,000
-----------
48,511,400
-----------
Energy 9.6%
100,000 Duke Energy Corporation ......................... 1,954,000
160,000 EnCana Corporation .............................. 4,976,000
220,000 Kerr-McGee Corporation .......................... 9,746,000
420,000 Murphy Oil Corporation .......................... 17,997,000
-----------
34,673,000
-----------
[ 12 ]
Prin. Amt.
or Shares Value
---------- -----
Health Care 5.0%
420,000 Impath Inc.(a) .................................. $ 8,282,400
100,000 Merck & Co. Inc. ................................ 5,661,000
160,000 Schering-Plough Corporation ..................... 3,552,000
150,000 Vical Inc.(a) ................................... 520,500
-----------
18,015,900
-----------
Insurance 14.8%
200,000 Arch Capital Group Ltd.(a) ...................... 6,234,000
50,000 Everest Re Group Ltd. ........................... 2,765,000
50,000 PartnerRe Ltd. .................................. 2,591,000
70,000 The Plymouth Rock Company, Inc.
Class A(b)(c) ................................... 42,000,000
-----------
53,590,000
-----------
Manufacturing 7.2%
520,000 ArvinMeritor, Inc. .............................. 8,668,400
520,000 Brady Corporation Class A ....................... 17,342,000
-----------
26,010,400
-----------
Telecommunications 1.3%
200,000 AT&T Wireless Services, Inc.(a) ................. 1,130,000
1,000,000 Broadwing Inc.(a) ............................... 3,520,000
-----------
4,650,000
-----------
Transportation 0.7%
533,757 Transport Corporation of America, Inc.
Class B(a)(b) ................................... 2,615,409
-----------
Miscellaneous 0.0%
Grumman Hill Investments, L.P.(a)(c) ............ 178,000
-----------
Total Portfolio Securities
(cost $193,115,033) ........................... 312,616,517
-----------
[ 13 ]
SHORT-TERM INVESTMENTS 13.6%
Prin. Amt.
or Shares Value
---------- -----
Commercial Paper 13.6%
$ 2,645,000 American Express Credit Corp. 1.0089%-1.1502%
due 1/3/03 .................................... $ 2,644,846
37,812,000 General Electric Capital Corp.
1.1411%-1.1913% due 1/3/03-1/29/03 ............ 37,789,568
8,750,000 Sears Roebuck Discount Corp.
1.7770% due 1/8/03 ............................ 8,747,023
------------
49,181,437
------------
Total Short-Term Investments
(cost $49,181,437) .......................... 49,181,437
------------
Total Investments
(cost $242,296,470)(100.0%) ................. 361,797,954
Cash, receivables and other assets
less liabilities (0.0%) ..................... 144,614
-----------
Net Assets (100%) ............................. $361,942,568
============
----------
(a) Non-dividend paying.
(b) Affiliate as defined in the Investment Company Act of 1940.
(c) Valued at estimated fair value.
See accompanying notes to financial statements.
[ 14 ]
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 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 330,100 shares of its Common
Stock in 2002 at an average price of $20.68 per share representing an average
discount from net asset value of 12.77%. 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 2002,
a cash dividend of $.10 per share paid on June 21 and an optional distribution
of $1.15 per share in cash, or one share of Common Stock for each 14 shares
held, paid on December 26. In the optional distribution, 583,796 shares of
Common Stock held as treasury shares by the Corporation were distributed, and
168,989 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,
2002, excluding short-term investments, were $80,589,140 and $79,623,294,
respectively. Purchases and sales of U.S. Government securities aggregated
$21,845,171 and $21,940,774, respectively.
[ 15 ]
NOTES TO FINANCIAL STATEMENTS -- Continued
As of December 31, 2002, based on cost for Federal income tax purposes,
the aggregate gross unrealized appreciation and depreciation for all securities
were $154,341,912 and $34,840,428, respectively.
4. Operating Expenses--The aggregate remuneration paid during the year
ended December 31, 2002 to officers and directors amounted to $1,196,500, of
which $97,500 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, 2002 was $109,752.
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 $328,300 from affiliates during the
year ended December 31, 2002. Unrealized appreciation related to affiliates
decreased by $2,280,255 for the year 2002 to $41,152,923.
6. Restricted Securities--The Corporation from time to time invests in
securities the resale of which is restricted. On December 31, 2002 such
investments had an aggregate value of $42,178,000, which was equal to 11.7% of
the Corporation's net assets. Investments in restricted securities at December
31, 2002, including acquisition dates and cost, were:
Company Shares Security Date Purchased Cost
------------------------------- ------ ------------------- -------------- ----------
Grumman Hill Investments, L.P. Limited Partnership 9/11/85 $ 21,647
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
decreased by $2,197,419 for the year ended December, 31, 2002 to $39,956,367.
[ 16 ]
FINANCIAL HIGHLIGHTS
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of year $ 28.54 $ 32.94 $ 35.05 $ 31.43 $ 29.97
Net investment income* .14 .18 .32 .30 .34
Net realized and unrealized gain (loss)
on securities (8.71) (2.78) 1.92 5.96 3.11
-------- -------- -------- -------- --------
Total from investment operations (8.57) (2.60) 2.24 6.26 3.45
Less:
Dividends from net investment income**
To Preference Stockholders -- -- -- .04 .05
To Common Stockholders .14 .22 .32 .26 .29
Distributions from capital gains**
To Common Stockholders 1.11 1.03 4.03 2.34 1.65
Return of capital**
To Common Stockholders -- .55 -- -- --
-------- -------- -------- -------- --------
Total distributions 1.25 1.80 4.35 2.64 1.99
-------- -------- -------- -------- --------
Net asset value, end of year $ 18.72 $ 28.54 $ 32.94 $ 35.05 $ 31.43
======== ======== ======== ======== ========
Per share market value, end of year $ 16.28 $ 25.31 $ 28.25 $ 27.25 $ 24.38
Total return based on market(%) (31.23) (2.42) 17.75 22.96 (11.57)
Total return based on NAV(%) (29.43) (6.54) 7.02 31.79 13.75
Ratios/Supplemental Data:
Net assets, end of year(000) $361,943 $539,839 $596,289 $590,656 $476,464
Ratio of expenses to average net assets
for Common(%) .50 .45 .38 .45 .51
Ratio of net investment income to average
net assets for Common(%) .57 .60 .83 .89 1.09
Portfolio turnover rate(%) 19.50 10.32 13.54 12.06 6.21
----------
* 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.
[ 17 ]
--------------------------------------------------------------------------------
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 as of
December 31, 2002, 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, 2002 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, 2002, 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, 2002 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 29, 2003
--------------------------------------------------------------------------------
[ 18 ]
BOARD OF DIRECTORS AND OFFICERS
Principal Occupations (last five years)
Independent Directors Age and Position with the Corporation (if any)
--------------------- --- ------------------------------------------
DONALD G. CALDER 65 President, G.L. Ohrstrom & Co. Inc.
Director since 1982 (private investment firm); Director of
Brown-Forman Corporation, Carlisle
Companies Incorporated and Roper
Industries, Inc. (manufacturing
companies)
JAY R. INGLIS 68 Executive Vice President, National Marine
Director since 1973 Underwriters (insurance management
company) since 2001; Executive Vice
President, Holt Corporation (insurance
holding company) prior thereto
DUDLEY D. JOHNSON 63 President, Young & Franklin Inc. (private
Director since 1984 manufacturing company)
C. CARTER WALKER, JR. 68 Private investor
Director since 1974
Interested Director
-------------------
WILMOT H. KIDD 61 Investment and research--President,
Director since 1972 Central Securities Corporation
---------------------
CHARLES N. EDGERTON 58 Vice President and Treasurer,
Central Securities Corporation
MARLENE A. KRUMHOLZ 39 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.
[ 19 ]
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
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
[ 20 ]