United States

Securities and Exchange Commission

Washington, DC 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF

REGISTERED MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number 811-00179

 

Central Securities Corporation

(Exact name of registrant as specified in charter)

630 Fifth Avenue, Eighth Floor

New York, N.Y. 10111

(Address of principal executive offices)

 

Registrant’s telephone number including area code: 212-698-2020

 

Date of fiscal year end: December 31

Date of reporting period: September 30, 2016

 

 

 

 

 

 

Item 1. Schedule of Investments.

 

CENTRAL SECURITIES CORPORATION

Statement of Investments

September 30, 2016

(Unaudited)

 

COMMON STOCKS 90.7%

 

Shares       Value
      Banks 6.4%    
  400,000   Citigroup Inc.  $18,892,000
200,000   JPMorgan Chase & Co.   13,318,000
200,000   Wells Fargo & Company   8,856,000
        41,066,000
      Commercial Services 1.5%    
700,000   Heritage-Crystal Clean, Inc. (a)   9,296,000
         
      Consumer Durables 1.4%    
700,000   TRI Pointe Group, Inc. (a)   9,226,000
         
      Diversified Financial 9.3%    
150,000   American Express Company   9,606,000
400,000   The Bank of New York Mellon Corporation   15,952,000
10   Berkshire Hathaway Inc. Class A (a)   2,162,200
290,000   Capital One Financial Corporation   20,830,700
210,000   The Charles Schwab Corporation   6,629,700
200,000   Encore Capital Group, Inc. (a)   4,496,000
        59,676,600
         
      Diversified Industrial 6.2%    
500,000   Brady Corporation Class A   17,305,000
250,000   General Electric Company   7,405,000
80,000   Roper Technologies, Inc.   14,597,600
        39,307,600
         
      Energy 2.5%    
230,000   Murphy Oil Corporation   6,992,000
125,000   Occidental Petroleum Corporation   9,115,000
        16,107,000
         
      Health Care 6.2%    
70,000   Johnson & Johnson   8,269,100
220,000   Medtronic plc   19,008,000
200,000   Merck & Co. Inc.   12,482,000
        39,759,100
         
      Insurance 21.2%    
12,000   AIA Group Ltd. ADR   323,400
21,000   Alleghany Corporation (a)   11,025,420
28,424   The Plymouth Rock Company, Inc. Class A (b)(c)   119,380,800
160,000   Progressive Corporation   5,040,000
        135,769,620

 

 

 

 

Shares         Value
       Media 5.0%    
 18,000   Cable One, Inc.  $ 10,512,000
 200,000   John Wiley & Sons, Inc. Class A    10,322,000
 200,000   Liberty Global plc Class C (a)    6,608,000
 170,000   Liberty Global plc LiLAC Class C (a)    4,768,500
          32,210,500
           
       Metals and Mining 0.3%    
 150,000   Freeport-McMoRan Inc. (a)    1,629,000
           
       Real Estate Investment Trusts 2.9%    
 700,000   Rayonier Inc.    18,578,000
           
       Retailing 2.9%    
 13,000   Amazon.com, Inc. (a)    10,885,030
 100,000   Tiffany & Co.    7,263,000
          18,148,030
           
       Semiconductor 9.7%    
 450,000   Analog Devices, Inc.    29,002,500
 880,000   Intel Corporation    33,220,000
          62,222,500
           
       Software and Services 2.2%    
 10,000   Alphabet Inc. Class A (a)    8,040,600
 100,000   Microsoft Corporation    5,760,000
          13,800,600
           
       Technology Hardware and Equipment 13.0%    
 425,000   Coherent, Inc. (a)    46,979,500
 310,000   Keysight Technologies, Inc. (a)    9,823,900
 300,000   Motorola Solutions, Inc.    22,884,000
 467,612   Sonus Networks, Inc. (a)    3,638,021
          83,325,421
           
       Total Common Stocks (cost $302,993,757)   580,121,971
            
       SHORT-TERM INVESTMENTS 7.0%    
            
Principal   U.S. Treasury Bills 7.0%     
$45,000,000   U.S. Treasury Bills 0.21% - 0.24%, due 10/6/16 – 10/20/16 (d)    44,996,950
           
       Total Short-term Investments (cost $44,996,950)   44,996,950
            
       Total Investments (cost $347,990,707) (e)(97.7%)   625,118,921
            
       Cash, receivables and other assets less liabilities (2.3%)   14,903,798
            
       Net Assets (100%)  $640,022,719

(a) Non-dividend paying.

(b) Affiliate as defined in the Investment Company Act of 1940. See Note 4.

(c) Valued based on Level 3 Inputs. See Note 2.

(d) Valued based on Level 2 Inputs. See Note 2.

(e) Aggregate cost for Federal tax purposes is substantially the same.

 

See accompanying notes to statement of investments.

 

 

CENTRAL SECURITIES CORPORATION

NOTES TO STATEMENT OF INVESTMENTS

 

1. Security Valuation – Marketable common stocks are valued at the last or closing sale price or, if unavailable, at the closing bid price. Short-term investments are valued at amortized cost, which approximates fair value. Securities for which no ready market exists are valued at estimated fair value pursuant to procedures adopted by the Board of Directors. The determination of fair value involves subjective judgments. As a result, using fair value to price a security may result in a price materially different from the price used by other investors or the price that may be realized upon the actual sale of the security.

 

As of September 30, 2016, the tax cost of investments was $347,990,707. Net unrealized appreciation was $277,128,214 consisting of gross unrealized appreciation and gross unrealized depreciation of $298,577,849 and $21,449,635, respectively.

 

2. Fair Value Measurements – The Corporation’s investments are categorized below in three broad hierarchical levels based on market price observability as follows:

·Level 1 – Quoted prices in active markets for identical investments;
·Level 2 – Other significant observable inputs obtained from independent sources, for example, quoted prices in active markets for similar investments;
·Level 3 – Significant unobservable inputs including the Corporation’s own assumptions based upon the best information available. The Corporation’s only Level 3 investment is The Plymouth Rock Company, Inc. Class A Common Stock (“Plymouth Rock”).

 

The designated Level for a security is not necessarily an indication of the risk associated with investing in that security.

 

The Corporation’s investments as of September 30, 2016 are classified as follows:

 

   Level 1  Level 2  Level 3  Total
Common stocks  $460,741,171    -   $119,380,800   $580,121,971 
Short-term investments   -   $44,996,950    -    44,996,950 
Total investments  $460,741,171   $44,996,950   $119,380,800   $625,118,921 

The following is a reconciliation of the change in the value of Level 3 investments:

 

Balance at December 31, 2015  $113,696,000 
Net realized gains and change in net unrealized appreciation of investments included in net increase in net assets resulting from operations   5,684,800 
Sales   - 
Balance at September 30, 2016  $119,380,800 

 

Unrealized appreciation of Level 3 investments held as of September 30, 2016 increased by $5,684,800 during the nine months ended September 30, 2016, which is included in the above table.

 

In valuing the Plymouth Rock Level 3 investment as of September 30, 2016, management used a number of significant unobservable inputs to develop a range of possible values for the investment.  It used a comparable company approach that utilized the following valuation multiples from selected publicly traded companies: price-to-book value (range: 0.6 – 2.3); price-to-earnings (range: 11.0 – 28.0); and price-to-revenue (range: 0.6 – 1.3). Management also used a discounted cash flow model based on a forecasted return on equity ranging from 7%-8% and a weighted average cost of capital of 9%.  An independent valuation of Plymouth Rock’s shares was also considered. The value obtained from weighting the three methods described above (with greater weight given to the comparable company approach) was then discounted by 20% and 40% for the lack of marketability, which represents the range of rates management believes market participants would apply.  The resulting range of values, together with the underlying support, other information about Plymouth Rock’s financial condition and results of operations, its corporate governance, the insurance industry outlook and transactions in Plymouth Rock’s shares, were considered by management, which recommended a value for the investment. All of this information was subsequently considered by the Corporation’s directors, who selected the value.

 

 

Significant increases (decreases) in the value of the price-to-book value multiple, price-to-earnings multiple, price-to-revenue multiple and return on equity in isolation would result in a higher (lower) range of fair value measurements.  Significant increases (decreases) in the value of the discount for lack of marketability or weighted average cost of capital in isolation would result in a lower (higher) range of fair value measurements.

 

3. Restricted Securities - The Corporation may from time to time invest in securities the resale of which is restricted. On September 30, 2016, the Corporation’s only restricted security consisted of 28,424 shares of Plymouth Rock Class A stock that were acquired on December 15, 1982 at a cost of $710,600. This security had a value of $119,380,800 at September 30, 2016, which was equal to 18.7% of the Corporation’s net assets. The Corporation does not have the right to demand registration of the Plymouth Rock shares.

 

4. Affiliated Companies – Plymouth Rock is an affiliated company as defined in the Investment Company Act of 1940 due to the Corporation’s ownership of 5% or more of Plymouth Rock’s outstanding voting shares. During the nine months ended September 30, 2016, the Corporation received dividends of $2,683,226 from Plymouth Rock. The President of the Corporation is a director of Plymouth Rock.

 

 

Item 2. Controls and Procedures.


(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers have concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

(b) Internal Control Over Financial Reporting. During the last fiscal quarter, there was no significant change in the Registrant’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

 

 

Item 3. Exhibits.

(a) Certifications.

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CENTRAL SECURITIES CORPORATION

 

By: /s/ Wilmot H. Kidd  
    President

 

Date: November 3, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: /s/ Wilmot H. Kidd  
    President  

 

Date: November 3, 2016

By: /s/ Lawrence P. Vogel  
    Vice President and Treasurer

 

Date: November 3, 2016