UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act File Number 811-179
Name of registrant as specified in charter: Central Securities Corporation
Address of principal executive offices:
630 Fifth Avenue
Suite 820
New York, New York 10111
Name and address of agent for service:
Central Securities Corporation, Wilmot H. Kidd, President
630 Fifth Avenue
Suite 820
New York, New York 10111
Registrant's telephone number, including area code: 212-698-2020
Date of fiscal year end: December 31, 2004
Date of reporting period: December 31, 2004
Item 1. Reports to Stockholders.
================================================================================
CENTRAL SECURITIES CORPORATION
----------
SEVENTY-SIXTH ANNUAL REPORT
2004
================================================================================
SIGNS OF THE TIMES
"Economists have long predicted that education will be the fuel that
drives the global economy. Well, many nations have already begun to rev their
engines, while America's is stalled.
"Several Latin American governments now provide monthly stipends to poor
parents who keep their children in school rather than sending them to work in
factories or on the streets. Some 20 million people in Mexico, Honduras, and
Nicaragua already participate in such programs. By 2006, 11.4 million families
in Brazil will participate in the stipend program. That's more than 45 million
people, or about a quarter of the country's population.
"Meanwhile, other nations are quickly becoming the world's leading
providers of higher education. College enrollments may be booming here in the
U.S., but China graduates twice as many students with Bachelor's degrees and six
times as many engineering majors as the U.S., and India and Singapore are
pumping out scientists through top-notch undergraduate programs. In 2001, India
graduated almost a million more students from college than the U.S. did,
including 100,000 more in the sciences and 60,000 more in engineering." (Craig
R. Barrett, The Wall Street Journal, March 4, 2004)
----------
"A currency can be anything that all members of society agree it should
be. The current boom in plastic is one of those rare moments in history when
that agreement shifts and one payment form overtakes another as the preferred
way to pay. The first such change came sometime between the 10th and 6th
centuries B.C., when Greece and India each introduced metal coins, which
surpassed barter or the shell currencies of earlier times.
"Coins dominated trade for the next 2000 years, until the introduction of
checks by Italian merchants in the Middle Ages. In 1690, Massachusetts became
the first of the colonies to introduce paper money. Cash took decades to gain
broad acceptance, but eventually became the standard of payment for the next
three centuries....
"Last year, cash was used in 32% of retail transactions, down from 39% in
1999. Credit card usage has remained stable, accounting for about 21% of
purchases during that time. Meanwhile debit cards, which take money out of
checking accounts immediately after each purchase, shot up to 31% of purchases
last year, from 21% in 1999." (Jathon Sapsford, The Wall Street Journal, July
23, 2004)
----------
"Social Security was developed at a time when the number of workers paying
into the system greatly outnumbered those who were receiving funds, and thus the
promise made by government was easily kept. But times change while policies
atrophy, and Social Security has evolved into a system that places an
increasingly onerous burden on the young; the ratio of workers to elderly has
shifted from 41-to-1 in the 1930's, to 3-to-1 today." (Edward C. Prescott, The
Wall Street Journal, December 29, 2004)
----------
[ 2 ]
SIGNS OF THE TIMES
"...There can be no doubt that the world is getting warmer. Temperatures
have already risen by 0.7(degree)C over the past century, and the ten hottest
years on record have all occurred since 1991. It's the fastest rise in
temperatures in the northern hemisphere for a thousand years.
"This temperature rise has meant a rise in sea level that, if it continues
as predicted, will mean hundreds of millions of people increasingly at risk from
flooding. And climate change means more than warmer weather: other extreme,
increasingly unpredictable, weather events such as rainstorms and droughts will
also have a heavy human and economic cost.
"It is true, of course, that some scientists still contest the reasons for
these changes. But it would be false to suggest that scientific opinion is
equally split. It is not. The overwhelming view of experts is that climate
change, to a greater or lesser extent, is man-made and, without action, will get
worse. And as the evidence gets stronger by the day, the skeptics dwindle in
number." (Tony Blair, The Economist, January 1, 2005)
----------
"PCs are roughly a quarter-century old. People who think of them as mature
commodities might have thought the same thing about televisions in the 1970s -
when TV was in fact on the brink of all sorts of revolutions. The airplane was
25 years old in the late 1920s; luckily, airplane companies kept inventing,
developing and selling new types. The automobile turned a quarter-century old in
the early `20s - and Henry Ford did consign it to Commodity Limbo. He figured
that the Model T was grown-up, settled-down, fully-evolved. He almost wrecked
his business, but finally got the message and produced the Model A and a long
line of subsequent new designs. Obviously there are big differences between the
PC and these technologies. But there is also a big similarity: all were (or are)
destined to take a lot longer than 25 years to reach maturity." (David
Gelernter, The Wall Street Journal, December 9, 2004)
----------
"In 1980, America was the largest creditor nation in the world, with a
$360 billion surplus in net international investment. It is now the largest
debtor nation, with a net deficit of $2.7 trillion." (Stephen Roach, Barrons,
December 6, 2004)
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"Interest income that once went to lenders within the United States now
seeps overseas to foreign lenders. Foreigners own more than 40 percent of all
Treasury securities, up from less than 15 percent a decade ago. They purchase
these securities with the dollars American consumers pay for imports, in effect
lending the dollars back to Americans for more purchases. The money collected
through the Treasury sales finds its way back to the public through the Bush
administration's deficit spending, and the cycle of purchasing on credit
continues." (Louis Uchitelle, The Wall Street Journal, September 18, 2004)
[ 3 ]
CENTRAL SECURITIES CORPORATION
(Organized on October 1, 1929 as an investment company, registered
as such with the Securities and Exchange Commission under
the provisions of the Investment Company Act of 1940.)
TEN YEAR HISTORICAL DATA
Per Share of Common Stock
---------------------------------------------
Total Convertible Net Net Net realized Unrealized
net Preference asset investment Divi- Distribu- investment appreciation
Year assets Stock(A) value income(B) dends(C) tions(C) gain of investments
---- ------ ----------- ----- ---------- -------- --------- ------------ --------------
1994 $226,639,144 $9,687,575 $17.60 $109,278,788
1995 292,547,559 9,488,350 21.74 $.31 $.33 $1.60 $20,112,563 162,016,798
1996 356,685,785 9,102,050 25.64 .27 .28 1.37 18,154,136 214,721,981
1997 434,423,053 9,040,850 29.97 .24 .34 2.08 30,133,125 273,760,444
1998 476,463,575 8,986,125 31.43 .29 .29 1.65 22,908,091 301,750,135
1999 590,655,679 -- 35.05 .26 .26 2.34 43,205,449 394,282,360
2000 596,289,086 -- 32.94 .32 .32 4.03 65,921,671 363,263,634
2001 539,839,060 -- 28.54 .18 .22 1.58* 13,662,612 304,887,640
2002 361,942,568 -- 18.72 .14 .14 1.11 22,869,274 119,501,484
2003 478,959,218 -- 24.32 .09 .11 1.29 24,761,313 229,388,141
2004 529,468,675 -- 26.44 .11 .11 1.21 25,103,157 271,710,179
----------
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 under the symbol
CET. On December 31, 2004 the market quotations were: $22.66 low, $22.95 high
and $22.85 last sale.
Central's results to December 31, 2004 versus the S&P 500:
Central's Central's Standard &
Average Annual Total Return NAV Return Market Return Poor's 500
--------------------------- ---------- ------------- ----------
One Year............................... 15.4% 16.2% 10.9%
Five Year.............................. 2.6% 4.8% (2.3%)
Ten Year............................... 13.8% 12.9% 11.9%
Fifteen Year........................... 14.9% 15.4% 10.8%
[ 4 ]
To the Stockholders of
CENTRAL SECURITIES CORPORATION:
Financial statements for the year 2004, as reported upon by our
independent registered auditors, and other pertinent information are submitted
herewith.
Comparative net assets are as follows:
December 31, December 31,
2004 2003
---- ----
Net assets...................................... $529,468,675 $478,959,218
Net assets per share of Common Stock............ 26.44 24.32
Shares of Common Stock outstanding.......... 20,023,209 19,692,777
Comparative operating results are as follows:
Year 2004 Year 2003
--------- ---------
Net investment income........................... $ 2,073,746 $ 1,740,024
Per share of Common Stock................... .11* .09*
Net realized gain on sale of investments........ 25,103,157 24,761,313
Increase in net unrealized appreciation
of investments.............................. 42,322,038 109,886,657
Increase in net assets resulting from
operations.................................. 69,498,941 136,387,994
----------
* 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 2004,
a cash dividend of $.15 per share paid on June 25 and an optional distribution
of $1.17 per share in cash, or one share of Common Stock for each 18 shares
held, paid on December 27. The Corporation has been advised that of the $1.32
paid in 2004, $.11 represents ordinary income and $1.21 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 47% of the
outstanding shares of Common Stock elected stock, and they received 507,232
Common shares.
During 2004 the Corporation repurchased 176,800 shares of its Common Stock
on the American Stock Exchange and in private transactions with stockholders at
an average price per share of $21.90. 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.
[ 5 ]
The Plymouth Rock Company is currently Central's largest holding and it
contributed a significant portion of Central's increase in net assets last year.
A review of the history of the Plymouth Rock investment is therefore in order.
In December 1982, Central financed a new company founded by James M. Stone,
Keith Rodney and James N. Bailey. The team's leader, James Stone, had been
Insurance Commissioner of Massachusetts and Chairman of the Commodities Futures
Trading Commission under President Jimmy Carter. The new company obtained a
license and began writing personal lines (automobile and homeowners insurance)
in Massachusetts. It became profitable after two years in a difficult
environment. During the decade of the 1980's, the company rapidly expanded its
personal lines business and began to develop diversification plans. Since then
the company has continued to grow geographically and by acquisition. It began
paying dividends on its common stock in 1993. Further, an outstanding management
team of breadth and depth is being developed under the astute aegis of CEO James
Stone.
Although audited financial statements will not be available for Plymouth
Rock until March, (the 2003 annual report is available on Plymouth Rock's
website at www.prac.com), it appears that the company had an excellent 2004 with
net income increasing by more than 50%. Under reasonably favorable industry
conditions, Plymouth Rock should continue to be able to produce enough net
income to fund dividends for stockholders and reinvestment opportunities,
including possible geographic expansion. There are challenges, however. Among
them are an uncertain regulatory environment in Massachusetts and more
competition in New Jersey. In addition, the company is undertaking a costly
information technology project that will take several years to complete.
We are often asked how we value Plymouth Rock stock since it is not
publicly traded. It is valued by Central's Board of Directors. We start with an
independent appraisal commissioned by Plymouth Rock to determine the fair market
value of the stock. We then compare Plymouth Rock with other insurance and
insurance service companies. In addition, we evaluate management, corporate
governance, the company and industry outlooks, marketability and other factors
including any recent private transactions to come up with our value.
Overall equity market returns last year were somewhat above the long-term
trend of 8-10%. As measured by the S&P 500, the stock market increased by 10.9%.
The Russell 2000, an index of smaller companies, increased by 18.3%. Central's
15.4% increase was positively affected by a number of our investments in the
energy, industrial and financial sectors. Investments in the technology sector
detracted from results. Our investment activity as measured by portfolio
turnover (16%) was slightly greater than it has been in recent years, with seven
new investments and the sale of ten. At year end we had 38 holdings. The ten
largest, shown on page eight, accounted for 56% of net assets. Short-term
commercial paper and Treasury bills amounted to 8.3%. Investments in the
technology sector represented 28% of net assets down from 37% last year. The
financial sector represented 32% up from 27% one year ago. The comparable
percentages for the S&P 500 Index were: 16% in technology and 21% in the
financial sector.
[ 6 ]
In the past few years the number of hedge funds has increased
dramatically. Computer-aided trading strategies now account for more than fifty
percent of the trading volume on the New York Stock Exchange. The practice of
"benchmarking" in which investors try to match the results of a particular index
has, also, become more prevalent. These investors can have the effect of pushing
markets to extremes in the short run, making investing an even more challenging
endeavor.
Our investment approach continues to be based on the long-term view. We
look for companies with good economic fundamentals, and the potential for an
increase in value. It is important to be able to make investments at a
reasonable if not a bargain price. We attempt to estimate the probable value of
a company over a period of three to five years into the future. Many, if not
most, investors have a shorter time horizon, and we believe that our ability to
take a long-term view has been a great advantage to Central's stockholders. The
integrity of the management of the companies in which we invest is a most
important consideration. This point has been made brutally clear by the many
scandals which have come to light in the past few years.
Our long-standing practice has been to keep about one half of our assets
in a small number of companies, with the remainder in a general market
portfolio. We believe the risk associated with this approach can be reduced
through knowledge of the companies in which we invest. Ideally we want to hold
growing, profitable companies for extended periods of time. The period of
significant growth for any particular company will not last indefinitely and
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
630 Fifth Avenue
New York, NY 10111
January 26, 2005
[ 7 ]
TEN LARGEST INVESTMENTS
December 31, 2004
----------------- Percent of Year First
Cost Value Net Assets Acquired
------ ----- ---------- ----------
(millions)
The Plymouth Rock Company, Inc...................................................... $ 2.2 $93.0 17.6% 1982
Brady Corporation................................................................... 2.3 31.6 6.0 1984
Capital One Financial Corporation................................................... 1.8 30.7 5.8 1994
Convergys Corporation............................................................... 28.1 25.3 4.8 1998
Murphy Oil Corporation.............................................................. 3.7 24.1 4.6 1974
Intel Corporation................................................................... 0.4 22.9 4.3 1986
Unocal Corporation.................................................................. 14.7 17.3 3.3 2004
Flextronics International Ltd....................................................... 3.8 16.7 3.2 1996
The Bank of New York Company, Inc................................................... 3.3 16.7 3.2 1993
SunGard Data Systems Inc............................................................ 6.4 16.1 3.1 1999
DIVERSIFICATION OF INVESTMENTS
December 31, 2004
Percent of
Net Assets
December 31
------------
Issues Value Cost 2004 2003
------ ----- ---- ---- ----
Common Stocks:
Insurance............................................................. 4 $107,276,200 $12,861,609 20.3% 16.3%
Information Technology Services....................................... 7 83,277,200 69,563,913 15.7 19.5
Energy................................................................ 5 69,258,400 38,731,561 13.1 7.5
Electronics........................................................... 6 64,695,444 16,378,776 12.2 17.7
Banking and Finance................................................... 3 60,927,150 20,335,450 11.5 10.3
Manufacturing......................................................... 3 51,185,500 15,448,272 9.7 10.6
Health Care........................................................... 5 20,669,000 20,027,285 3.9 4.5
Chemicals............................................................. 2 18,865,500 13,068,047 3.6 3.6
Transportation........................................................ 1 4,483,558 1,262,500 0.9 0.8
Communications........................................................ 1 3,735,000 5,247,171 0.7 1.1
Retail Trade.......................................................... 1 280,000 18,190 0.1 0.7
Short-Term Investments.................................................. 3 43,992,621 43,992,621 8.3 7.3
[ 8 ]
PRINCIPAL PORTFOLIO CHANGES
October 1 to December 31, 2004
(Common Stock unless specified otherwise)
Number of Shares
--------------------------------------------
Held
Purchased Sold December 31, 2004
--------- ---- -----------------
ArvinMeritor, Inc................................................................. 600,000 --
Brady Corporation................................................................. 10,000 505,000
CarMax Inc........................................................................ 100,000 --
Cincinnati Bell Inc............................................................... 100,000 900,000
Convergys Corporation............................................................. 60,000 1,690,000
Freescale Semiconductor, Inc...................................................... 22,083(a) 22,083
McMoRan Exploration Co............................................................ 53,000 320,000
Merck & Co., Inc.................................................................. 50,000 100,000 100,000
Pfizer Inc........................................................................ 100,000 100,000
PolyOne Corporation............................................................... 22,400 1,350,000
Primus Guaranty, Ltd.............................................................. 250,000 --
Roper Industries, Inc............................................................. 40,000 205,000
The TriZetto Group, Inc........................................................... 106,000 1,243,000
Wind River Systems, Inc........................................................... 277,000 50,000
----------
(a) Shares received in a distribution from Motorola, Inc.
[ 9 ]
STATEMENT OF INVESTMENTS
December 31, 2004
PORTFOLIO SECURITIES 91.5%
STOCKS (COMMON UNLESS SPECIFIED OTHERWISE)
Prin.Amt.
Or Shares Value
--------- -----
Banking and Finance 11.5%
500,000 The Bank of New York Company, Inc.............. $ 16,710,000
365,000 Capital One Financial Corporation.............. 30,736,650
285,000 Fifth Third Bancorp............................ 13,480,500
------------
60,927,150
------------
Chemicals 3.5%
1,350,000 PolyOne Corporation(a)......................... 12,231,000
150,000 Rohm and Haas Company.......................... 6,634,500
------------
18,865,500
------------
Communications 0.7%
900,000 Cincinnati Bell Inc.(a)........................ 3,735,000
------------
Electronics 12.2%
430,000 Analog Devices, Inc............................ 15,875,600
1,210,000 Flextronics International Ltd.(a).............. 16,722,200
22,083 Freescale Semiconductor, Inc. Class B(a)....... 405,444
980,000 Intel Corporation.............................. 22,922,200
200,000 Motorola, Inc.................................. 3,440,000
1,000,000 Solectron Corporation(a)....................... 5,330,000
------------
64,695,444
------------
Energy 13.1%
160,000 EnCana Corporation............................. 9,129,600
220,000 Kerr-McGee Corporation......................... 12,713,800
320,000 McMoRan Exploration Co.(a)..................... 5,984,000
300,000 Murphy Oil Corporation......................... 24,135,000
400,000 Unocal Corporation............................. 17,296,000
------------
69,258,400
------------
Health Care 3.9%
100,000 Abbott Laboratories............................ 4,665,000
100,000 Merck & Co., Inc. ............................. 3,214,000
100,000 Pfizer Inc..................................... 2,689,000
450,000 Schering-Plough Corporation.................... 9,396,000
150,000 Vical Inc.(a).................................. 705,000
------------
20,669,000
------------
Information Technology Services 15.7%
400,000 Accenture Ltd.(a).............................. 10,800,000
400,000 Ceridian Corporation(a)........................ 7,312,000
1,690,000 Convergys Corporation(a)....................... 25,333,100
570,000 SunGard Data Systems Inc.(a)................... 16,148,100
1,243,000 The TriZetto Group, Inc.(a).................... 11,808,500
1,100,000 Unisys Corporation(a).......................... 11,198,000
50,000 Wind River Systems, Inc.(a).................... 677,500
------------
83,277,200
------------
[ 10 ]
Prin.Amt.
Or Shares Value
--------- -----
Insurance 20.3%
150,000 American International Group, Inc.............. $ 9,850,500
100,000 Arch Capital Group Ltd.(a)..................... 3,870,000
10,000 Erie Indemnity Co. Class A..................... 525,700
70,000 The Plymouth Rock Company, Inc. Class A(b)(c).. 93,030,000
------------
107,276,200
------------
Manufacturing 9.7%
505,000 Brady Corporation Class A...................... 31,597,850
170,000 Dover Corporation.............................. 7,129,800
205,000 Roper Industries, Inc.......................... 12,457,850
------------
51,185,500
------------
Retail Trade 0.1%
Grumman Hill Investments, L.P.(a)(c)........... 280,000
------------
Transportation 0.8%
533,757 Transport Corporation of America, Inc.
Class B(a)(b)................................ 4,483,558
------------
Total Portfolio Securities
(cost $212,942,773).......................... 484,652,952
------------
SHORT-TERM INVESTMENTS 8.3%
Commercial Paper 4.7%
$16,626,000 DaimlerChrysler Corporation 2.1235% - 2.1855%
due 1/5/05 - 1/26/05......................... 16,610,140
8,267,000 General Electric Capital Corporation
2.0140% - 2.1355% due 1/5/05 - 2/9/05 8,253,799
------------
24,863,939
------------
U.S. Treasury Bills 3.6%
19,183,000 U.S. Treasury Bills 1.7447% - 2.0058%
due 2/17/05 - 3/10/05........................ 19,128,682
------------
Total Short-Term Investments
(cost $43,992,621)....................... 43,992,621
------------
Total Investments (cost $256,935,394)
(99.8%).................................. 528,645,573
Cash, receivables and other assets
less liabilities (0.2%).................. 823,102
------------
Net Assets (100%).......................... $529,468,675
============
----------
(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.
[ 11 ]
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004
ASSETS:
Investments:
General portfolio securities at market value
(cost $209,480,287) (Note 1).......................... $387,139,394
Securities of affiliated companies (cost $3,462,486)
(Notes 1, 5 and 6).................................... 97,513,558
Short-term investments (cost $43,992,621)............... 43,992,621 $528,645,573
------------
Cash, receivables and other assets:
Cash.................................................... 148,086
Dividends and interest receivable....................... 280,467
Office equipment and leasehold improvements, net........ 538,889
Other assets............................................ 164,775 1,132,217
------------ ------------
Total Assets........................................ 529,777,790
LIABILITIES:
Accrued expenses and reserves............................... 309,115
------------
Total Liabilities................................... 309,115
------------
NET ASSETS...................................................... $529,468,675
============
NET ASSETS are represented by:
Common Stock $1 par value: authorized
30,000,000 shares; issued 20,023,209 (Note 2)............. $ 20,023,209
Surplus:
Paid-in................................................... $234,314,820
Undistributed net gain on sale of investments............. 3,322,783
Undistributed net investment income....................... 97,684 237,735,287
------------
Net unrealized appreciation of investments.................. 271,710,179
------------
NET ASSETS...................................................... $529,468,675
============
NET ASSET VALUE PER COMMON SHARE
(20,023,209 shares outstanding)............................. $26.44
======
See accompanying notes to financial statements.
[ 12 ]
STATEMENT OF OPERATIONS
For the year ended December 31, 2004
INVESTMENT INCOME
Income:
Dividends (net of foreign withholding taxes of $9,587)..... $ 4,262,668
Interest................................................... 592,202 $ 4,854,870
-----------
Expenses:
Investment research........................................ 759,500
Administration and operations.............................. 741,096
Rent and utilities......................................... 314,775
Franchise and miscellaneous taxes.......................... 139,192
Employees' retirement plans................................ 129,489
Directors' fees............................................ 105,500
Insurance.................................................. 101,189
Listing, software and sundry fees.......................... 93,453
Legal, auditing and tax fees............................... 72,355
Depreciation and amortization.............................. 61,109
Stationery, supplies, printing and postage................. 58,341
Travel and telephone....................................... 41,873
Transfer agent and registrar fees and expenses............. 40,543
Custodian fees............................................. 29,426
Publications and miscellaneous............................. 93,283 2,781,124
----------- -----------
Net investment income.......................................... 2,073,746
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions................. 25,103,157
Net increase in unrealized appreciation of investments......... 42,322,038
-----------
Net gain on investments.................................... 67,425,195
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... $69,498,941
===========
See accompanying notes to financial statements.
[ 13 ]
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2004 and 2003
2004 2003
---- ----
FROM OPERATIONS:
Net investment income ........................................................ $ 2,073,746 $ 1,740,024
Net realized gain on investments ............................................. 25,103,157 24,761,313
Net increase in unrealized appreciation
of investments ............................................................. 42,322,038 109,886,657
------------- -------------
Increase in net assets resulting from
operations ............................................................... 69,498,941 136,387,994
------------- -------------
DIVIDENDS TO STOCKHOLDERS FROM:
Net investment income ........................................................ (2,177,537) (2,050,627)
Net realized gain from investment transactions ............................... (23,622,634) (24,612,727)
------------- -------------
Decrease in net assets from distributions .................................. (25,800,171) (26,663,354)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS: (Note 2)
Distribution to stockholders reinvested in
Common Stock ............................................................... 10,682,306 12,692,986
Cost of shares of Common Stock repurchased ................................... (3,871,619) (5,400,976)
------------- -------------
Increase in net assets from capital share transactions ..................... 6,810,687 7,292,010
------------- -------------
Total increase in net assets ......................................... 50,509,457 117,016,650
NET ASSETS:
Beginning of year ............................................................ 478,959,218 361,942,568
------------- -------------
End of year (including undistributed net investment
income of $97,684 and $40,072, respectively) ............................... $ 529,468,675 $ 478,959,218
============= =============
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 and U.S.
Treasury bills are valued at amortized cost, which approximates market
value. Securities for which no ready market exists, including The
Plymouth Rock Company, Inc. Class A Common Stock, are valued at
estimated fair value by the Board of Directors.
Federal Income Taxes--It is the Corporation's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
stockholders. Therefore, no Federal income taxes have been accrued.
Use of Estimates--The preparation of financial statements in accordance
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported. Actual
results may differ from those estimates.
Other--Security transactions are accounted for as of 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 176,800 shares of its Common
Stock in 2004 at an average price of $21.90 per share representing an average
discount from net asset value of 13.58%. 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 2004,
a cash dividend of $.15 per share paid on June 25 and an optional distribution
of $1.17 per share in cash, or one share of Common Stock for each 18 shares
held, paid on December 27. In the optional distribution, 176,800 shares of
Common Stock held as treasury shares by the Corporation were distributed, and
330,432 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,
2004, excluding short-term investments, were $75,903,742 and $102,190,732,
respectively.
[ 15 ]
NOTES TO FINANCIAL STATEMENTS -- Continued
As of December 31, 2004, based on cost for Federal income tax purposes,
the aggregate gross unrealized appreciation and depreciation for all securities
were $283,905,384 and $12,195,205, respectively.
4. Operating Expenses--The aggregate remuneration paid during the year
ended December 31, 2004 to officers and directors amounted to $1,421,500, of
which $105,500 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, 2004 was $114,989.
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 $1,066,100 from affiliates during
the year ended December 31, 2004. Unrealized appreciation related to affiliates
increased by $34,703,821 for the year 2004 to $94,051,073.
6. Restricted Securities--The Corporation from time to time invests in
securities the resale of which is restricted. On December 31, 2004 such
investments had an aggregate value of $93,310,000, which was equal to 17.6% of
the Corporation's net assets. Investments in restricted securities at December
31, 2004, including acquisition dates and cost, were:
Company Shares Security Date Purchased Cost
---------------------------------- -------- ------------------- -------------- ----------
Grumman Hill Investments, L.P. Limited Partnership 9/11/85 $ 18,190
Interest
The Plymouth Rock Company, Inc. 70,000 Class A Common 12/15/82 1,500,000
Stock 6/9/84 699,986
The Corporation does not have the right to demand registration of the
restricted securities. Unrealized appreciation related to restricted securities
increased by $34,227,572 for the year ended December, 31, 2004 to $91,091,824.
7. Operating Lease Commitment--The Corporation has entered into an
operating lease for office space which expires in 2014 and provides for future
minimum rental payments in the aggregate amount of approximately $3.1 million.
The lease agreement contains escalation clauses relating to operating costs and
real property taxes. Minimum rental commitments under the lease are $314,241 per
year for 2005 through 2008 and $329,172 for 2009.
[ 16 ]
FINANCIAL HIGHLIGHTS
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of year .................... $ 24.32 $ 18.72 $ 28.54 $ 32.94 $ 35.05
Net investment income* ................................ .11 .09 .14 .18 .32
Net realized and unrealized gain (loss)
on securities ....................................... 3.33 6.91 (8.71) (2.78) 1.92
-------- -------- -------- -------- --------
Total from investment operations ................ 3.44 7.00 (8.57) (2.60) 2.24
Less:
Dividends from net investment income** ................ .11 .11 .14 .22 .32
Distributions from capital gains** .................... 1.21 1.29 1.11 1.03 4.03
Return of capital** ................................... -- -- -- .55 --
-------- -------- -------- -------- --------
Total distributions ............................. 1.32 1.40 1.25 1.80 4.35
-------- -------- -------- -------- --------
Net asset value, end of year .......................... $ 26.44 $ 24.32 $ 18.72 $ 28.54 $ 32.94
======== ======== ======== ======== ========
Per share market value, end of year ................... $ 22.85 $ 20.89 $ 16.28 $ 25.31 $ 28.25
Total return based on market(%) ....................... 16.16 36.22 (31.23) (2.42) 17.75
Total return based on NAV(%) .......................... 15.40 39.32 (29.43) (6.54) 7.02
Ratios/Supplemental Data:
Net assets, end of year(000) .......................... $529,469 $478,959 $361,943 $539,839 $596,289
Ratio of expenses to average net assets(%) ............ .55 .56 .50 .45 .38
Ratio of net investment income to average
net assets(%) ....................................... .41 .42 .57 .60 .83
Portfolio turnover rate(%) ............................ 16.72 12.90 19.50 10.32 13.54
----------
* Per-share data are based on the average number of shares outstanding
during the year.
** Computed on the basis of the Corporation's status as a "regulated
investment company" for Federal income tax purposes.
See accompanying notes to financial statements.
----------
Proxy Voting Policies and Procedures
The policies and procedures used by the Corporation to determine how to
vote proxies relating to portfolio securities and the Corporation's proxy voting
record for the twelve-month period ended June 30, 2004 are available: (1)
without charge, upon request, by calling us at our toll-free telephone number
(1-866-593-2507), (2) on the Corporation's website at www.centralsecurities.com
and (3) on the Securities and Exchange Commission's website at www.sec.gov.
Quarterly Portfolio Information
The Corporation files its complete schedule of portfolio holdings with the
SEC for the first quarter and the third quarter of each fiscal year on Form N-Q.
The Corporation's Form N-Q filings are available on the SEC's website at
www.sec.gov. Those forms may be reviewed and copied at the SEC's Public
Reference Room in Washington D.C. Information on the operation of the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
[ 17 ]
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CENTRAL SECURITIES CORPORATION
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Central Securities Corporation (the
"Corporation") as of December 31, 2004, 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 the standards of the Public
Company Accounting Oversight Board (United States). 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, 2004 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, 2004, 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, 2004 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 26, 2005
--------------------------------------------------------------------------------
[ 18 ]
BOARD OF DIRECTORS AND OFFICERS
Principal Occupations (last five years)
Independent Directors Age and Position with the Corporation (if any)
--------------------- ----- ------------------------------------------
DONALD G. CALDER 67 President, G.L. Ohrstrom & Co. Inc.
Director since 1982 (private investment firm); Director of
Brown-Forman Corporation, Carlisle
Companies Incorporated and Roper
Industries, Inc. (manufacturingcompanies)
JAY R. INGLIS 70 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 65 President, Young & Franklin Inc. (private
Director since 1984 manufacturing company)
C. CARTER WALKER, JR. 70 Private investor
Director since 1974
Interested Director
-------------------
WILMOT H. KIDD 63 Investment and research--President,
Director since 1972 Central Securities Corporation
------------------
CHARLES N. EDGERTON 60 Vice President and Treasurer,Central
Securities Corporation
MARLENE A. KRUMHOLZ 41 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,
630 Fifth Avenue, New York, New York 10111.
[ 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
630 Fifth Avenue
New York, NY 10111
212-698-2020
866-593-2507 (toll-free)
www.centralsecurities.com
CUSTODIAN
UMB Bank, N.A.
P.O. Box 419226, Kansas City, MO 64141-6226
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company
P.O. Box 43069, Providence, RI 02940-3069
781-575-2724
www.equiserve.com
INDEPENDENT REGISTERED AUDITORS
KPMG LLP
757 Third Avenue, New York, NY 10017
[ 20 ]
Item 2. Code of Ethics. The Registrant has adopted a code of ethics that applies
to its principal executive officer and principal financial officer. This code of
ethics is filed as an attachment on this form.
Item 3. Audit Committee Financial Experts. The Board of Directors of the
Corporation has determined that none of the members of its Audit Committee (the
"Committee") meet the definition of "Audit Committee Financial Expert" as the
term has been defined by the Securities and Exchange Commission ("SEC"). The
Board of Directors considered the possibility of adding a member that would
qualify as an Audit Committee Financial Expert, but has determined that the
Committee has sufficient expertise to perform its duties. In addition, the
Committee's charter authorizes the Committee to engage a financial expert should
it determine that such assistance is required.
Item 4. Principal Accountant Fees and Services.
2004 2003
Audit fees............................ $34,000(1) $33,050(1)
Audit-related fees.................... 0 0
Tax fees.............................. 14,250(2) 13,500(2)
All other fees........................ 0 0
------- -------
Total fees............................ $48,250 $46,550
======= =======
(1) Includes fees for review of the semi-annual report to stockholders
and audit of the annual report to stockholders.
(2) Includes fees for services performed with respect to tax compliance
and tax planning.
Pursuant to its charter, the Audit Committee is responsible for recommending the
selection, approving compensation and overseeing the independence,
qualifications and performance of the independent accountants. The Audit
Committee's policy is to pre-approve all audit and permissible non-audit
services provided by the independent accountants. In assessing requests for
services by the independent accountants, the Audit Committee considers whether
such services are consistent with the auditor's independence; whether the
independent accountants are likely to provide the most effective and efficient
service based upon their familiarity with the Corporation; and whether the
service could enhance the Corporation's ability to manage or control risk or
improve audit quality. The Audit Committee may delegate pre-approval authority
to one or more of its members. Any pre-approvals by a member under this
delegation are to be reported to the Audit Committee at its next scheduled
meeting.
All of the audit and tax services provided by KPMG LLP in fiscal year 2004
(described in the footnotes to the table above) and related fees were approved
in advance by the Audit Committee.
Item 5. Audit Committee of Listed Registrants. The registrant has a
separately-designated standing audit committee. Its members are: Donald G.
Calder, Jay R. Inglis, Dudley D. Johnson and C. Carter Walker, Jr.
Item 6. Schedule of Investments. Schedule is included as a part of the report to
shareholders filed under Item 1 of this Form.
Item 7. Disclose Proxy Voting Policies and Procedures for Closed-End Management
Companies.
CENTRAL SECURITIES CORPORATION
PROXY VOTING GUIDELINES
Central Securities Corporation is involved in many matters of corporate
governance through the proxy voting process. We exercise our voting
responsibilities with the primary goal of maximizing the long-term value of our
investments. Our consideration of proxy issues is focused on the investment
implications of each proposal.
Our management evaluates and votes each proxy ballot that we receive. We do not
use a proxy voting service. Our Board of Directors has approved guidelines in
evaluating how to vote a particular proxy ballot. We recognize that a company's
management is entrusted with the day-to-day operations of the company, as well
as longer term strategic planning, subject to the oversight of the company's
board of directors. Our guidelines are based on the belief that a company's
shareholders have a responsibility to evaluate company performance and to
exercise the rights and duties pertaining to ownership.
When determining whether to invest in a particular company, one of the key
factors we consider is the ability and integrity of its management. As a result,
we believe that recommendations of management on any issue, particularly routine
issues, should be given substantial weight in determining how proxies should be
voted. Thus, on most issues, our votes are cast in accordance with the company's
recommendations. When we believe management's recommendation is not in the best
interests of our stockholders, we will vote against management's recommendation.
Due to the nature of our business and our size, it is unlikely that conflicts of
interest will arise in our voting of proxies of public companies. We do not
engage in investment banking nor do we have private advisory clients or any
other businesses. In the unlikely event that we determine that a conflict does
arise on a proxy voting issue, we will defer that proxy vote to our independent
directors.
We have listed the following, specific examples of voting decisions for the
types of proposals that are frequently presented. We generally vote according to
these guidelines.
We may, on occasion, vote otherwise when we believe it to be in the best
interest of our stockholders:
Election of Directors - We believe that good governance starts with an
independent board, unfettered by significant ties to management, in which all
members are elected annually. In addition, key board committees should be
entirely independent.
o We support the election of directors that result in a board made up
of a majority of independent directors who do not appear to have
been remiss in the performance of their oversight responsibilities.
o We will withhold votes for non-independent directors who serve on
the audit, compensation or nominating committees of the board.
o We consider withholding votes for directors who missed more than
one-fourth of the scheduled board meetings without good reason in
the previous year.
o We generally oppose the establishment of classified boards of
directors and will support proposals that directors stand for
election annually.
o We generally oppose limits to the tenure of directors or
requirements that candidates for directorships own large amounts of
stock before being eligible for election.
Compensation - We believe that appropriately designed equity-based compensation
plans can be an effective way to align the interests of long-term shareholders
and the interests of management, employees, and directors. We are opposed to
plans that substantially dilute our ownership interest in the company, provide
participants with excessive awards, or have inherently objectionable structural
features without offsetting advantages to the company's stockholders. We
evaluate proposals related to compensation on a case-by case basis.
o We generally support stock option plans that are incentive based and
not excessive.
o We generally oppose the ability to re-price options without
compensating factors when the underlying stock has fallen in value.
o We support measures intended to increase the long-term stock
ownership by executives including requiring stock acquired through
option exercise to be held for a substantial period of time.
o We generally support stock purchase plans to increase company stock
ownership by employees, provided that shares purchased under the
plan are acquired for not less than 85% of their market value.
o We generally oppose change-in-control provisions in non-salary
compensation plans, employment contracts, and severance agreements
which benefit management and would be costly to shareholders if
triggered.
Corporate Structure and Shareholder Rights - We generally oppose anti-takeover
measures and other proposals designed to limit the ability of shareholders to
act on possible transactions. We support proposals when management can
demonstrate that there are sound financial or business reasons.
o We generally support proposals to remove super-majority voting
requirements and oppose amendments to bylaws which would require a
super-majority of shareholder votes to pass or repeal certain
provisions.
o We will evaluate proposals regarding shareholders rights plans
("poison pills") on a case-by-case basis considering issues such as
the term of the arrangement and the level of review by independent
directors.
o We will review proposals for changes in corporate structure such as
changes in the state of incorporation or mergers individually. We
generally oppose proposals where management does not offer an
appropriate rationale.
o We generally support share repurchase programs.
o We generally support the general updating of or corrective
amendments to corporate charters and by-laws.
o We generally oppose the elimination of the rights of shareholders to
call special meetings.
Approval of Independent Auditors - We believe that the relationship between the
company and its auditors should be limited primarily to the audit engagement and
closely related activities that do not, in the aggregate, raise the appearance
of impaired independence.
o We generally support management's proposals regarding the approval
of independent auditors.
o We evaluate on a case-by-case basis instances in which the audit
firm appears to have a substantial non-audit relationship with the
company or companies affiliated with it.
Social and Corporate Responsibility Issues - We believe that ordinary business
matters are primarily the responsibility of management and should be approved
solely by the corporation's board of directors. Proposals in this category,
initiated primarily by shareholders, typically request that the company disclose
or amend certain business practices. We generally vote with management on these
types of proposals, although we may make exceptions in certain instances where
we believe a proposal has substantial economic implications.
o We generally oppose shareholder proposals which apply restrictions
related to social, political, or special interest issues which
affect the ability of the company to do business or be competitive
and which have significant financial impact.
o We generally oppose proposals which require that the company provide
costly, duplicative, or redundant reports, or reports of a
non-business nature.
Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not
applicable. Item is applicable for annual reports for fiscal years ending on or
after December 31, 2005, and every semi-annual report filed after the first such
annual report.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
-----------------------------------------------------------------------------------------------------------------
(d) Maximum Number (or
(c) Total Number of Approximate Dollar
(a) Total Shares (or Units) Value) of Shares (or
Number of (b) Average Purchased as Part of Units) that May Yet Be
Shares (or Price Paid per Publicly Announced Purchased Under the
Period Units) Purchased Share (or Unit) Plans or Programs Plans or Programs
-----------------------------------------------------------------------------------------------------------------
Month #1 (July 1 25,000 $21.60 NA NA
through July 31)
-----------------------------------------------------------------------------------------------------------------
Month #2 (August 1
through August 31) 10,000 $21.20 NA NA
-----------------------------------------------------------------------------------------------------------------
Month #3 (September 1
through September 30) 8,700 $22.03 NA NA
-----------------------------------------------------------------------------------------------------------------
Month #4 (October 1
through October 31) 25,000 $22.57 NA NA
-----------------------------------------------------------------------------------------------------------------
Month #5 (November 1
through November 30) 0 NA NA NA
-----------------------------------------------------------------------------------------------------------------
Month #6 (December 1
through December 31) 21,800 $22.79 NA NA
-----------------------------------------------------------------------------------------------------------------
Total 90,500 $22.19 NA NA
-----------------------------------------------------------------------------------------------------------------
The 21,800 shares in December 2004 were purchased in private transactions with a
stockholder. All other shares purchased were made in open market transactions as
authorized by the Board of Directors.
Item 10. Submission of Matters to a Vote of Security Holders. There have been no
changes to the procedures by which shareholders may recommend nominees to the
registrant's board of directors since such procedures were last described in the
Corporation's proxy statement dated February 2, 2005.
Item 11. Controls and Procedures.
(a) The Principal Executive Officer and Principal Financial Officer of Central
Securities Corporation (the "Corporation") have concluded that the Corporation's
Disclosure Controls and Procedures (as defined in Rule 30a-2(c) under the
Investment Company Act of 1940) are effective based on their evaluation of the
Disclosure Controls and Procedures as of a date within 90 days of the filing
date of this report.
(b) There have been no changes in the Corporation's internal control over
financial reporting (as defined in Rule 30a-3(d)) under the Investment Company
Act of 1940 that occurred during the second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
Item 12. Exhibits. (a) Any code of ethics, or amendment thereto, that is the
subject of the disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an exhibit.
Attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant as required by Rule 30a-2 under the Act.
Attached hereto.
(c) Any written solicitation to purchase securities under Rule 23c-1 under the
Act sent or given during the period covered by the report by or on behalf of the
registrant to 10 or more persons. Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Central Securities Corporation
By: /s/ Wilmot H. Kidd
-------------------------
Wilmot H. Kidd
President
February 1, 2005
Date
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capabilities and on the
dates indicated.
By: /s/ Wilmot H. Kidd
-------------------------
Wilmot H. Kidd
President
February 1, 2005
Date
By: /s/ Charles N. Edgerton
-------------------------
Charles N. Edgerton
Treasurer
February 1, 2005
Date