GAM Holding AG
Annual Report 2004

Plain-text annual report

G E N E R A L A M E R I C A N I N V E S T O R S 2 0 0 4 A N N U A L R E P O R T GENERAL AMERICAN INVESTORS COMPANY, INC. Established in 1927, the Company is a closed-end investment company listed on the New York Stock Exchange. Its objective is long-term capital appreciation through investment in companies with above average growth potential. FINANCIAL SUMMARY (unaudited) 2004 2003 Net assets applicable to Common Stock - December 31 Net investment income Net realized gain Net increase in unrealized appreciation Distributions to Preferred Stockholders $1,036,393,093 9,253,481 36,774,029 62,361,773 (11,900,000) Per Common Share-December 31 Net asset value Market price Discount from net asset value $35.49 $31.32 -11.7% Common Shares outstanding-Dec. 31 Common Stockholders of record-Dec. 31 Market price range* (high-low) Market volume-shares 29,205,312 4,300 $31.74-$27.88 6,206,400 *Unadjusted for dividend payments. $986,335,111 1,139,240 28,144,510 200,469,430 (11,075,000) $33.11 $29.73 -10.2% 29,789,263 4,500 $29.78-$21.95 6,280,700 DIVIDEND SUMMARY (per share) (unaudited) Record Date Payment Date Ordinary Income Long-Term Capital Gain Total Common Stock Nov. 12, 2004 Jan. 31, 2005 Dec. 23, 2004 Mar. 10, 2005 Total from 2004 earnings $.215327 $.684673 .002 .272 $.217327 $.956673 $.90 .274 $1.174 Nov. 14, 2003 Jan. 26, 2004 Dec. 23, 2003 Feb. 9, 2004 Total from 2003 earnings $.00761 .013 $.02061 $.49239 .097 $.58939 $.50 .11 $.61 Preferred Stock Mar. 8, 2004 Jun. 7, 2004 Sep. 7, 2004 Dec. 7, 2004 Total for 2004 Mar. 6, 2003 Jun. 6, 2003 Sep. 8, 2003 Dec. 8, 2003 Total for 2003 Mar. 24, 2004 Jun. 24, 2004 Sep. 24, 2004 Dec. 27, 2004 Mar. 24, 2003 Jun. 23, 2003 Sep. 23, 2003 Dec. 24, 2003 $.083947 .083947 .083947 .083947 $.335788 $.01485 .01485 .01485 .012272 $.056822 $.287928 .287928 .287928 .287928 $1.151712 $.43515 .43515 .43515 .359603 $1.665053 $.371875 .371875 .371875 .371875 $1.4875 $.45 .45 .45 .371875 $1.721875 General American Investors Company, Inc. 450 Lexington Avenue, New York, NY 10017 (212) 916-8400 (800) 436-8401 E-mail: InvestorRelations@gainv.com www.generalamericaninvestors.com 1 T O T H E S T O C K H O L D E R S G e n e r a l A m e r i c a n I n v e s t o r s The U.S. stock market rose for the second consecu- tive year, gaining 10.8% in the 12 months ended December 31, 2004, as measured by our benchmark, the Standard & Poor's 500 Stock Index (in- cluding income). General American Investors’ net asset value (NAV) per Common Share (assuming reinvestment of all dividends) increased 10.4%. The return to our Common Stockholders was 8.8%, reflecting a widening in the discount at which our shares trade which, at year end, was 11.7%. The table that follows, which compares our returns on an annualized basis with the S&P 500, illustrates that over many years General American has produced superi- or investment results. Years Stockholder Return S&P 500 3 5 10 20 30 40 0.2% 4.6 16.8 15.2 17.3 12.9 3.5% - 2.3 12.0 13.2 13.7 10.5 During 2004, the Company purchased 1,092,800 of its Common Shares in the open market at an average discount to NAV of 10.3%. The Board of Directors has authorized repurchases of Common Shares when they are trading at a discount in excess of 8% of NAV. While the market rallied last year, reflecting stronger profits than expected and lower interest rates than feared, most of the gain came in the final two months as the economy - along with labor markets - appeared to firm, signs of pricing power at the corporate level emerged, and merger and acquisition activity accelerat- ed. Prior thereto, concerns regarding the twin deficits (budget and trade), the weakened dollar, rising energy costs, and the struggle in Iraq, among others, appeared to weigh on investor confidence. Unquestionably, the deficits impart instability to the financial system. Should foreign entities lose enthusiasm for holding the dollar- denominated assets that have come into their possession as a result of deficit finance, the stock and bond markets could be adversely affected. While we doubt that global imbalances can be resolved in the near term, the ongo- ing orderly decline in the dollar may help in that regard. It should increase exports and encourage American households to buy U.S. sourced goods at the same time. With respect to energy, prices of oil and natural gas, having risen dramatically, may have peaked. Normalized future prices, however, could be meaningfully higher than in the past decade notwithstanding the volatility that attends, notably, unseasonable weather conditions. The world's consumption of hydrocarbons is expected to continue to grow, having shown little sensitivity to high- er prices. Supply is constrained, meanwhile, by the need for greater capital investment to sustain output from ma- ture fields and to explore in areas characterized by significant geopolitical uncertainty. Therefore, energy se- curities have become an increasingly significant part of our portfolio with an accompanying decline in cash reserves. Corporate cash flows, furthermore, and their translation into dividends and share buybacks, have risen in importance as a portfolio metric. Dividends have been advantaged by the law change reducing the tax on them to 15% - the same rate as is applicable to long-term capi- tal gains. We enter 2005 with economic expansion more securely in place and anticipate modest, but healthy, growth in corporate results. Inflation remains subdued, though dol- lar weakness, historically, has led to its acceleration. Since roughly 40% of corporate earnings come from abroad, however, measured advances in prices can be beneficial thereto. Interest rates on long-dated bonds are not likely to decline again as they did last year, in the face of the Fed's seemingly inexorable march toward a 3% or higher Funds level. As rates increase, the consumer's ability to sustain spending, based on rising household wealth in the form of securities and real estate, may prove suspect in the context of low savings and the threat of unemployment. However, the combination of constrained capacity and pricing power should enable the corporate sector to importantly augment if not replace the consumer as the chief engine of economic growth. Congressional support for the Bush agenda is likely to be tempered by the record budget deficit and Americans may become less tolerant of economic disparities, more- over, in the face of growing income inequality. But the U.S. should remain the destination of choice for capital and barring a dollar crisis the economy is likely to keep growing. In this environment, companies with relatively high, stable returns and low debt should continue to prosper, which augers well for General American's future returns. We are pleased to announce that, on December 8, 2004, Craig A. Grassi, who has been an employee since 1991, was elected Assistant Vice-President of the Company and Maureen E. LoBello, an employee since 1992, was elected Assistant Secretary of the Company, both effective January 1, 2005. We are also pleased to report that, on January 19, 2005, Peter E. de Svastich was elected Vice-President of the Company. Prior to joining the Company in November 2004, Mr. de Svastich had been a senior executive and/or chief financial officer of several investment management and financial services organizations over the past 35 years. Information about the Company, including our investment objective, operating policies and procedures, investment results, record of dividend payments, finan- cial reports and press releases, etc., is available on our website which can be accessed at www.generalamericaninvestors.com. By Order of the Board of Directors, Spencer Davidson President and Chief Executive Officer January 19, 2005 2 T H E C O M P A N Y G e n e r a l A m e r i c a n I n v e s t o r s Corporate Overview General American Investors, established in 1927, is one of the nation’s oldest closed- end investment companies. It is an independent organi- zation, internally managed. For regulatory purposes, the Company is classified as a diversified, closed-end management invest- ment company; it is registered under and subject to the regulatory provisions of the Investment Company Act of 1940. Investment Policy The primary objective of the Company is long-term capi- tal appreciation. Lesser emphasis is placed on current income. In seeking to achieve its primary objective, the Company invests principally in common stocks believed by its management to have better than average growth potential. The Company’s investment approach focuses on the selection of individual stocks, each of which is expected to meet a clearly defined portfolio objective. A con- tinuous investment research program, which stresses fundamental security analy- sis, is carried on by the officers and staff of the Company under the oversight of the Board of Directors. A listing of the directors with their principal affiliations, showing a broad range of experience in business and financial affairs, is on the inside back cover of this report. Portfolio Manager Mr. Spencer Davidson has been responsible for the management of General American’s portfolio since he was elected President and Chief Executive Officer of the Company in August 1995. Mr. Davidson, who joined the Company in 1994 as senior investment counselor, has spent his entire business career on Wall Street since first joining an investment and banking firm in 1966. “GAM” Common Stock As a closed-end investment company, General American Investors does not offer its shares continuously. The Common Stock is listed on The New York Stock Exchange (symbol, GAM) and can be bought or sold with commissions deter- mined in the same manner as all listed stocks. Net asset value is computed daily (on an unau- dited basis) and is furnished upon request. It is also available on most electronic quotation services using the symbol "XGAMX." The fig- ure for net asset value per share, together with the market price and the percentage discount or premium from net asset value as of the close of each week, is published in The New York Times, The Wall Street Journal and Barron’s. The ratio of market price to net asset value has shown considerable variation over a long period of time. While shares of GAM usually sell at a discount from their underlying net asset value, as do the shares of most other domestic equity closed-end investment companies, they, occasionally, sell at a premium over net asset value. The last time the Company’s shares sold at a premium for a prolonged period was the year-long period from March 1992 through April 1993. During 2004, the stock sold at discounts from net asset value which ranged from 8.2% (March 11) to 12.6% (September 21). At December 31, the price of the stock was at a discount of 11.7% as compared with a discount of 10.2% a year earlier. “GAM Pr B” Preferred Stock On September 24, 2003, the Company issued and sold in an underwritten offering 8,000,000 shares of its 5.95% Cumulative Preferred Stock, Series B with a liquidation preference of $25 per share ($200,000,000 in the aggregate). The Preferred Shares are noncallable for 5 years, are rated "aaa" by Moody’s Investors Service, Inc. and are listed and traded on The New York Stock Exchange (symbol, GAM Pr B). 3 T H E C O M P A N Y G e n e r a l A m e r i c a n I n v e s t o r s The preferred capital is available to leverage the investment performance of the Common Stockholders. As is the case for leverage in general, it may also result in higher market volatility for the Common Stockholders. Dividend Policy The Company’s dividend policy is to distribute to stock- holders before year-end substantially all ordinary income estimated for the full year and capital gains realized during the ten- month period ending October 31 of that year. If any additional capital gains are realized or ordinary income is earned during the last two months of the year, a "spill-over" distribution of these amounts will be paid early in the following year to Common Stockholders. Dividends on shares of Preferred Stock are paid quarterly. Distributions from capital gains and ordinary income are allocated proportionately among holders of shares of Common Stock and Preferred Stock. Dividends from income have been paid continuously on the Common Stock since 1939 and capital gain dividends in varying amounts have been paid for each of the years 1943-2004 (except for the year 1974). (A table listing dividends paid during the 20-year peri- od 1985-2004 is shown at the bottom of page 6.) To the extent that shares can be issued, dividends are paid to Common Stockholders in additional shares of Common Stock unless the stockholder specifically requests payment in cash. Spill-over dividends of very nominal amounts may be paid in cash only. Proxy Voting Policies, Procedures and Record The policies and procedures used by General American Investors to determine how to vote proxies relating to port- folio securities and the Company’s proxy voting record for the 12- month period ended June 30, 2004 are available: (1) without charge, upon request, by calling the Company at its toll-free number (1- 800-436-8401), (2) on the Company’s website at http://www.generalamericaninvestors.com and (3) on the Securities and Exchange Commission’s website at http://www.sec.gov. Direct Registration In 2002, the Company imple- mented direct registration for its Common Shareholders. Direct registration, which is an element of the Investors Choice Plan administered by our transfer agent, is a system that allows for book-entry ownership and the electronic transfer of our Common Shares. Accordingly, when Common Shareholders, who hold their shares directly, receive new shares resulting from a purchase, transfer or dividend payment, they will receive a statement showing the credit of the new shares as well as their Plan account and certificated share balances. A brochure which describes the features and benefits of the Investors Choice Plan, including the abili- ty of shareholders to deposit certificates with our transfer agent, can be obtained by calling American Stock Transfer & Trust Company at 1-800-413-5499, calling the Company at 1- 800-436-8401 or visiting our website: www.generalamericaninvestors.com - click on Dividends & Reports, then Report Downloads. Privacy Policy and Practices General American Investors collects nonpublic personal in- formation about its customers (stockholders) with respect to their transactions in shares of the Company’s securities but only for those stockholders whose shares are registered in their names. This information includes the stockholder’s address, tax identification or Social Security number and dividend elections. We do not have knowledge of, nor do we collect personal information about, stockhold- ers who hold the Company’s securities at financial institutions such as brokers or banks in “street name” registration. We do not disclose any nonpublic personal in- formation about our stockholders or former stockholders to anyone, except as permitted by law. We restrict access to nonpublic personal infor- mation about our stockholders to those employees who need to know that information to provide services to our stockholders. We maintain physical, electron- ic and procedural safeguards that comply with federal standards to guard our stockholders’ nonpublic personal information. 4 I N V E S T M E N T R E S U L T S ( U N A U D I T E D ) G e n e r a l A m e r i c a n I n v e s t o r s Total return on $10,000 investment 20 years ended December 31, 2004 T he investment return for a Common Stockholder of General American Investors (GAM) over the 20 years ended December 31, 2004 is shown in the table below and in the accompanying chart. The return based on GAM’s net asset value (NAV) per Common Share in comparison to the change in the Standard & Poor’s 500 Stock Index (S&P 500) is also displayed. Each illustra- tion assumes an investment of $10,000 at the beginning of 1985. The Stockholder Return is the return a Common Stockholder of GAM would have achieved assuming reinvestment of all optional dividends at the actual reinvestment price and reinvestment of all cash dividends at the average (mean between high and low) market price on the ex-dividend date. The GAM Net Asset Value (NAV) Return is the return on shares of the Company’s Common Stock based on the NAV per share, including the reinvestment of all dividends. The S&P 500 Return is the time-weighted total rate of return on this widely-recognized, unmanaged index which is a measure of general stock market performance, including dividend income. The results illustrated are a record of past performance and may not be indicative of future results. GENERAL AMERICAN INVESTORS STOCKHOLDER RETURN NET ASSET VALUE RETURN STANDARD & POOR’S 500 RETURN CUMULATIVE INVESTMENT ANNUAL RETURN CUMULATIVE INVESTMENT ANNUAL RETURN CUMULATIVE INVESTMENT ANNUAL RETURN 1985 $12,481 24.81% $13,500 35.00% $13,177 31.77% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 13,875 11,640 14,114 20,974 21,813 40,354 46,319 38,945 35,884 43,498 51,971 74,101 97,302 1999 135,464 2000 161,337 2001 2002 2003 2004 168,323 122,523 155,616 169,295 11.17 -16.11 21.26 48.60 4.00 85.00 14.78 -15.92 -7.86 21.22 19.48 42.58 31.31 39.22 19.10 4.33 -27.21 27.01 8.79 15,008 15,388 18,091 24,941 26,609 42,865 44,386 43,610 42,415 52,416 62,884 83,038 112,217 153,064 180,065 177,904 136,951 174,475 192,568 11.17 2.53 17.57 37.86 6.69 61.09 3.55 -1.75 -2.74 23.58 19.97 32.05 35.14 36.40 17.64 -1.20 -23.02 27.40 10.37 15,640 16,459 19,180 25,245 24,465 31,902 34,323 37,797 38,277 52,631 64,688 86,249 110,873 134,112 121,921 107,425 83,641 107,529 119,131 18.69 5.24 16.53 31.62 -3.09 30.40 7.59 10.12 1.27 37.50 22.91 33.33 28.55 20.96 -9.09 -11.89 -22.14 28.56 10.79 5 I N V E S T M E N T R E S U L T S ( U N A U D I T E D ) G e n e r a l A m e r i c a n I n v e s t o r s 20-YEAR INVESTMENT RESULTS(cid:13) ASSUMING AN INITIAL (cid:13) INVESTMENT OF $10,000 CUMULATIVE VALUE(cid:13) OF INVESTMENT $200,000 COMPARATIVE ANNUALIZED INVESTMENT RESULTS YEARS ENDED DECEMBER 31, 2004 STOCKHOLDER RETURN GAM NET ASSET VALUE S&P 500 STOCK INDEX 1 year 5 years 10 years 15 years 20 years 8.8 % 10.4 % 10.8 % 4.6 16.8 14.9 15.2 4.7 16.3 14.6 15.9 -2.3 12.0 10.9 13.2 GAM STOCKHOLDER RETURN GAM NET ASSET VALUE S&P 500 STOCK INDEX 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000(cid:16)(cid:16)(cid:16)(cid:16) 6 M A J O R S T O C K C H A N G E S * : T H R E E M O N T H S E N D E D D E C E M B E R 3 1 , 2 0 0 4 ( U N A U D I T E D ) G e n e r a l A m e r i c a n I n v e s t o r s INCREASES NEW POSITIONS Telecom Corporation of New Zealand Limited Unocal Corporation ADDITIONS American International Group, Inc. Apache Corporation CEMEX, S.A. de C.V. ADR Total S.A. ADR 4,600,000 500,000 70,000 275,000 150,000 28,000 SHARES OR PRINCIPAL AMOUNT SHARES OR PRINCIPAL AMOUNT HELD DECEMBER 31, 2004 4,600,000 700,000 (a) 335,000 665,000 1,100,000 275,000 (c) — — $1,314,000 600,000 500,000 625,000 620,000 525,000 310,000 400,000 160,000 475,000 1,275,000 385,000 275,000 133,500 DECREASES ELIMINATIONS Baxter International Inc. Cox Communications, Inc. Class A 825,000 620,000 (b) REDUCTIONS American Tower Corporation 9 3/8% due 2/1/09 Annaly Mortgage Management, Inc. Annuity and Life Re (Holdings), Ltd. Everest Re Group, Ltd. Golden West Financial Corporation Halliburton Company M&T Bank Corporation MetLife, Inc. Montpelier Re Holdings Ltd. PartnerRe Ltd. Pfizer Inc Reinsurance Group of America, Incorporated Transatlantic Holdings, Inc. Verisign, Inc. $1,007,000 175,000 125,000 25,000 15,000 75,000 20,000 35,000 15,000 25,000 50,000 60,000 6,250 100,000 * Excludes transactions in Stocks-Miscellaneous-Other. (a) Includes shares purchased in prior period and previously carried under Stocks-Miscellaneous-Other. (b) Includes shares disposed of in conjunction with a tender offer. (c) Includes shares received in conjunction with a stock split. D I V I D E N D S P E R C O M M O N S H A R E ( 1 9 8 5 - 2 0 0 4 ) ( U N A U D I T E D ) The following table shows aggregate dividends paid per share on the Company’s Common Stock for each year during the 20-year period 1985-2004. Amounts shown include payments made after year-end attributable to income and gain in each respective year. YEAR 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 DIVIDEND FROM INCOME# LONG-TERM CAPITAL GAINS $.47 .36 .35 .29 .23 .21 .09 .03 .06 .06 $1.07 2.15 1.54 1.69 1.56 1.65 3.07 2.93 2.34 1.59 YEAR 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 DIVIDEND FROM INCOME# LONG-TERM CAPITAL GAINS $.13 .25 .21 .47 1.04 2.03 1.01 .03 .02 .217 $2.77 2.71 2.95 4.40 4.05 6.16 1.37 .33 .59 .957 #Includes short-term capital gains per share which amounted to $.12 in 1985, $.02 in 1989, $.03 in 1995, $.05 in 1996, $.62 in 1999, $1.55 in 2000 and $.64 in 2001. 7 T E N L A R G E S T I N V E S T M E N T H O L D I N G S ( U N A U D I T E D ) G e n e r a l A m e r i c a n I n v e s t o r s The statement of investments as of December 31, 2004, shown on pages 12, 13 and 14 includes 59 security issues. Listed here are the ten largest holdings on that date. THE HOME DEPOT, INC. The largest company in home center retailing, Home Depot’s proven merchandising capabilities and strong financial structure should provide the basis for continuing growth. THE TJX COMPANIES, INC. Through its T.J. Maxx and Marshalls divisions, TJX is a leading off-price retailer. The continued growth of these divisions, along with expansion into related U.S. and foreign off-price formats, provide ongoing opportunities. DEVON ENERGY CORPORATION One of the largest independent oil and gas exploration and production companies, Devon operates both domestically and internationally. Recent opportunistic acquisitions enhanced production volumes and improved the company's exploration profile. EVEREST RE GROUP, LTD. The largest independent U.S. property/casualty reinsurer which generates annual premiums of approximately $4.7 billion and has a high quality, well-reserved AA balance sheet. This Bermuda domiciled company has a strong management team that exercises prudent underwriting discipline and efficient expense control, resulting in above-average earnings progress. SHARES VALUE 1,920,000 $82,060,800 % COMMON NET ASSETS* 7.9% 2,500,000 62,825,000 6.1 1,600,000 62,272,000 6.0 625,000 55,975,000 5.4 MICROSOFT CORPORATION The largest software company in the world, Microsoft has pricing power, substantial financial resources and a commitment to research and development, all of which provide significant competitive advantages and support long-term growth. CEMEX, S.A. de C.V. ADR Domiciled in Mexico, CEMEX is the third largest cement producer in the world. With the expansion of its operations into related construction materials and additional geographic areas, as well as its focus on production cost containment, the company’s free cash flow should continue to increase supporting a positive long-term outlook. REPUBLIC SERVICES, INC. A leading provider of non-hazardous solid waste collection and disposal services in the U.S. The efficient operation of its routes and facilities combined with appropriate pricing enable Republic Services to generate significant free cash flow. The high probability of additional contracts and the expectation that economic activity will continue to improve should result in higher waste volumes for the company. 1,525,000 40,748,000 3.9 1,100,000 40,062,000 3.9 1,175,000 39,409,500 3.8 GOLDEN WEST FINANCIAL CORPORATION A savings and loan holding company with approximately $106 billion in assets headquartered in Oakland, CA. It has a strong, conservative management with a high level of insider ownership. Excellent asset quality, tight expense control and efficient capital management help produce above-average earnings increases. WAL-MART STORES, INC. A policy of serving the mass market with everyday low prices, supported by the lowest cost structure has made Wal-Mart the world’s largest retailer with ongoing growth opportunities in the U.S. and overseas. PFIZER INC Well established as a leader in the pharmaceutical industry, Pfizer continues its commitment to research and development and its ability to effectively market products. Pfizer remains dedicated to optimizing its corporate structure and is streamlining the company. 620,000 38,080,400 3.7 675,000 35,653,500 3.4 1,275,000 34,284,750 3.3 *Net assets applicable to the Company’s Common Stock. $491,370,950 47.4% 8 P O R T F O L I O D I V E R S I F I C A T I O N ( U N A U D I T E D ) G e n e r a l A m e r i c a n I n v e s t o r s INDUSTRY CATEGORY COST(000) VALUE(000) 2004 2003 DECEMBER 31, 2004 PERCENT COMMON NET ASSETS* DECEMBER 31 The diversification of the Company’s net assets applicable to its Common Stock by industry group as of December 31, 2004 and 2003 is shown in the following table. Finance and Insurance Banking Insurance Other Retail Trade Oil and Natural Gas (Including Services) Health Care Pharmaceuticals Medical Instruments and Devices Health Care Services Communications and Information Services Computer Software and Systems Miscellaneous** Building and Real Estate Environmental Control (Including Services) Consumer Products and Services Electronics Semiconductors Special Holdings Short-Term Securities Total Investments Liabilities in excess of Other Assets - Net Preferred Stock Net Assets Applicable to Common Stock $21,698 80,245 16,846 118,789 68,036 143,024 79,965 10,484 — 90,449 69,016 53,801 43,897 29,122 26,227 28,303 15,451 9,890 8,010 704,015 58,488 $762,503 $103,949 192,006 21,444 317,399 214,426 188,817 110,044 22,352 — 132,396 76,576 57,301 45,363 40,062 39,409 39,094 19,055 9,151 1,449 1,180,498 58,488 1,238,986 (2,593) (200,000) 10.1% 18.5 2.1 30.7 20.7 18.3 10.6 2.1 — 12.7 7.3 5.5 4.4 3.9 3.8 3.8 1.8 0.9 0.1 113.9 5.6 119.5 (0.2) (19.3) 9.5% 19.7 2.3 31.5 18.8 5.5 15.8 2.2 2.3 20.3 5.6 1.0 0.7 1.2 3.0 2.8 2.1 2.3 0.2 95.0 25.3 120.3 (0.1) (20.2) $1,036,393 100.0% 100.0% * Net assets applicable to the Company’s Common Stock. ** Securities which have been held for less than one year. 9 S T A T E M E N T O F A S S E T S A N D L I A B I L I T I E S G e n e r a l A m e r i c a n I n v e s t o r s ASSETS INVESTMENTS, AT VALUE (NOTE 1a) Common stocks DECEMBER 31, 2004 2003 (cost $691,689,451 and $512,775,431, respectively) $1,167,272,723 $927,510,131 Convertible corporate notes (cost $12,326,060 and $9,714,002, respectively) Corporate discount notes (cost $58,487,897 and $149,931,413, respectively) U.S. Treasury bills (cost $99,546,882 for 2003) Total investments (cost $762,503,408 and $771,967,728, 13,225,252 10,250,000 58,487,897 — 149,931,413 99,546,882 respectively) 1,238,985,872 1,187,238,426 CASH, RECEIVABLES AND OTHER ASSETS Cash (including margin account balance of $681 for 2004) Receivable for securities sold Deposit with broker for securities sold short Deposit with broker for options written Dividends, interest and other receivables Prepaid expenses Other TOTAL ASSETS LIABILITIES 176,980 — 3,070,685 188,519 1,081,136 7,511,301 261,801 54,695 2,731,429 13,684,582 — 2,093,543 6,979,584 321,045 1,251,276,294 1,213,103,304 Payable for securities purchased Preferred dividend accrued but not yet declared Securities sold short, at value (proceeds $3,070,685 and $13,684,582, respectively) (note 1a) Outstanding options written, at value (premiums received $188,519 for 2004) (note 1a) Accrued expenses and other liabilities TOTAL LIABILITIES 411,300 231,389 1,480,264 231,389 3,608,280 15,307,245 123,580 10,508,652 14,883,201 — 9,749,295 26,768,193 5.95% CUMULATIVE PREFERRED STOCK, SERIES B - 8,000,000 shares at a liquidation value of $25 per share (note 2) 200,000,000 200,000,000 NET ASSETS APPLICABLE TO COMMON STOCK - 29,205,312 and 29,789,263 shares, respectively (note 2) $1,036,393,093 $986,335,111 NET ASSET VALUE PER COMMON SHARE $35.49 $33.11 NET ASSETS APPLICABLE TO COMMON STOCK Common Stock, 29,205,312 and 29,789,263 shares at par value, respectively (note 2) Additional paid-in capital (note 2) Undistributed realized gain on investments (note 2) Undistributed net investment income (note 2) Unallocated distributions on Preferred Stock Unrealized appreciation on investments, securities sold short and options $29,205,312 521,985,714 7,864,450 1,559,198 (231,389) $29,789,263 538,582,843 2,951,398 1,594,961 (231,389) 476,009,808 413,648,035 NET ASSETS APPLICABLE TO COMMON STOCK $1,036,393,093 $986,335,111 (see notes to financial statements) 1 0 S T A T E M E N T O F O P E R A T I O N S G e n e r a l A m e r i c a n I n v e s t o r s INCOME Dividends (net of foreign withholding taxes of $222,175 in 2004) Interest TOTAL INCOME EXPENSES Investment research Administration and operations Office space and general Directors’ fees and expenses Transfer agent, custodian and registrar fees and expenses Auditing and legal fees Stockholders’ meeting and reports Miscellaneous taxes TOTAL EXPENSES NET INVESTMENT INCOME YEAR ENDED DECEMBER 31, 2004 2003 $18,010,297 2,538,401 $7,810,852 4,168,048 20,548,698 11,978,900 7,257,447 2,685,811 535,685 187,539 179,102 172,200 169,197 108,236 6,804,863 2,750,817 554,237 160,213 176,626 188,250 118,874 85,780 11,295,217 10,839,660 9,253,481 1,139,240 REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS (NOTES 1f AND 4) Net realized gain on investments: Long transactions Short sale transactions (note 1b) Option transactions (note 1c) Net realized gain on investments (long-term) Net increase in unrealized appreciation NET GAIN ON INVESTMENTS DISTRIBUTIONS TO PREFERRED STOCKHOLDERS INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 39,187,387 (2,512,348) 98,990 36,774,029 28,586,216 (441,706) — 28,144,510 62,361,773 200,469,430 99,135,802 228,613,940 (11,900,000) (11,075,000) $96,489,283 $218,678,180 (see notes to financial statements) 1 1 S T A T E M E N T O F C H A N G E S I N N E T A S S E T S G e n e r a l A m e r i c a n I n v e s t o r s OPERATIONS Net investment income Net realized gain on investments Net increase in unrealized appreciation Distributions to Preferred Stockholders: From net income From long-term capital gains Decrease in net assets from Preferred distributions YEAR ENDED DECEMBER 31, 2004 2003 $9,253,481 36,774,029 62,361,773 $1,139,240 28,144,510 200,469,430 (2,686,304) (9,213,696) (11,900,000) (365,476) (10,709,524) (11,075,000) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 96,489,283 218,678,180 DISTRIBUTIONS TO COMMON STOCKHOLDERS From net income From long-term capital gains DECREASE IN NET ASSETS FROM COMMON DISTRIBUTIONS (6,602,940) (22,647,281) (531,570) (15,572,788) (29,250,221) (16,104,358) CAPITAL SHARE TRANSACTIONS Value of Common Shares issued in payment of dividends (note 2) Cost of Common Shares purchased (note 2) Underwriting discount and other expenses associated with the issuance of Preferred Stock (note 2) DECREASE IN NET ASSETS - CAPITAL TRANSACTIONS NET INCREASE IN NET ASSETS NET ASSETS APPLICABLE TO COMMON STOCK 15,781,952 9,724,118 (32,963,032) (28,454,956) — (6,700,000) (17,181,080) (25,430,838) 50,057,982 177,142,984 BEGINNING OF YEAR 986,335,111 809,192,127 END OF YEAR (including undistributed net investment income of $1,559,199 and $1,594,961, respectively) $1,036,393,093 $986,335,111 (see notes to financial statements) 1 2 S T A T E M E N T O F I N V E S T M E N T S D E C E M B E R 3 1 , 2 0 0 4 G e n e r a l A m e r i c a n I n v e s t o r s BUILDING AND REAL ESTATE (3.9%) COMMUNICATIONS AND INFORMATION SERVICES (7.2%) COMMON STOCKS SHARES OR PRINCIPAL AMOUNT 1,100,000 CEMEX, S.A. de C.V. ADR (COST $29,121,764) 550,000 American Tower Corporation (a) 550,000 CIENA Corporation (a) 900,000 Cisco Systems, Inc. (a) 150,000 Juniper Networks, Inc. (a) 500,000 Lamar Advertising Company Class A (a) 4,600,000 Telecom Corporation of New Zealand Limited COMPUTER SOFTWARE AND SYSTEMS (5.5%) 300,000 EMC Corporation (a) 1,525,000 Microsoft Corporation 623,000 NetIQ Corporation (a) 133,500 VeriSign, Inc. (a) CONSUMER PRODUCTS AND SERVICES (3.8%) 350,000 Diageo plc ADR 275,000 Ethan Allen Interiors Inc. 150,000 PepsiCo, Inc. (COST $67,633,399) (COST $53,801,539) (COST $28,303,579) VALUE (NOTE 1a) $40,062,000 10,120,000 1,837,000 17,388,000 4,078,500 21,390,000 20,378,000 75,191,500 4,461,000 40,748,000 7,606,830 4,485,600 57,301,430 20,258,000 11,005,500 7,830,000 39,093,500 ELECTRONICS (1.8%) 715,000 Molex Incorporated Class A (COST $15,450,691) 19,054,750 ENVIRONMENTAL CONTROL (INCLUDING SERVICES) (3.8%) 1,175,000 Republic Services, Inc. (COST $26,227,380) 39,409,500 FINANCE AND INSURANCE (30.7%) BANKING (10.1%) 368,000 Bank of America Corporation 620,000 Golden West Financial Corporation 310,000 M&T Bank Corporation 205,000 SunTrust Banks, Inc. INSURANCE (18.5%) 335,000 American International Group, Inc. 500,000 Annuity and Life Re (Holdings), Ltd. (a) 300 Berkshire Hathaway Inc. Class A (a) 625,000 Everest Re Group, Ltd. 400,000 MetLife, Inc. 160,000 Montpelier Re Holdings Ltd. 475,000 PartnerRe Ltd. 385,000 Reinsurance Group of America, Incorporated 275,000 Transatlantic Holdings, Inc. OTHER (2.1%) 600,000 Annaly Mortgage Management, Inc. 95,194 Central Securities Corporation 850,000 MFA Mortgage Investments, Inc. (COST $21,697,463) (COST $80,245,273) (COST $16,846,447) (COST $118,789,183) 17,292,320 38,080,400 33,430,400 15,145,400 103,948,520 21,999,450 227,500 26,370,000 55,975,000 16,204,000 6,152,000 29,421,500 18,653,250 17,003,250 192,005,950 11,772,000 2,175,183 7,497,000 21,444,183 317,398,653 1 3 S T A T E M E N T O F I N V E S T M E N T S D E C E M B E R 3 1 , 2 0 0 4 - c o n t i n u e d G e n e r a l A m e r i c a n I n v e s t o r s COMMON STOCKS (Continued) SHARES OR PRINCIPAL AMOUNT HEALTH CARE (12.7%) PHARMACEUTICALS (10.6%) 340,000 Alkermes, Inc. (a) 250,000 Biogen Idec Inc. (a) 300,000 Bristol-Myers Squibb Company 75,000 Cytokinetics, Incorporated (a) 270,000 Genaera Corporation (a) 560,000 Genentech, Inc. (a) 375,000 Genta Incorporated (a) 455,000 MedImmune, Inc. (a) 120,000 Millennium Pharmaceuticals, Inc. (a) 1,275,000 Pfizer Inc MEDICAL INSTRUMENTS AND DEVICES (2.1%) 450,000 Medtronic, Inc. VALUE (NOTE 1a) $4,790,600 16,652,500 7,686,000 768,750 923,400 30,486,400 660,000 12,335,050 1,456,800 34,284,750 110,044,250 22,351,500 132,395,750 (COST $79,964,902) (COST $10,483,716) (COST $90,448,618) MISCELLANEOUS (4.4%) Other (b) (COST $43,896,672) 45,362,730 OIL AND NATURAL GAS (INCLUDING SERVICES) (17.1%) 665,000 Apache Corporation 1,600,000 Devon Energy Corporation 525,000 Halliburton Company 275,000 Total S.A. ADR 700,000 Unocal Corporation RETAIL TRADE (20.7%) 700,000 Costco Wholesale Corporation 1,920,000 The Home Depot, Inc. (c) 2,500,000 The TJX Companies, Inc. 675,000 Wal-Mart Stores, Inc. SEMICONDUCTORS (0.9%) 491,500 Brooks Automation, Inc. (a) 197,000 EMCORE Corporation (a) (COST $132,080,537) (COST $68,036,225) (COST $9,890,144) SPECIAL HOLDINGS (a)(d) (NOTE 5) (0.1%) 200,000 Cytokinetics, Incorporated 144,000 Silicon Genesis Corporation 546,000 Standard MEMS, Inc. Series A Convertible Preferred (COST $8,009,720) 33,629,050 62,272,000 20,601,000 30,206,000 30,268,000 176,976,050 33,887,000 82,060,800 62,825,000 35,653,500 214,426,300 8,463,630 687,530 9,151,160 1,435,000 14,400 — 1,449,400(e) TOTAL COMMON STOCKS (112.6%) (COST $691,689,451) 1,167,272,723 CONVERTIBLE CORPORATE NOTES $1,314,000 American Tower Corporation 9 3/8% due 2/1/09 (COST $1,382,859) 1,384,627 $22,500,000 El Paso Corporation 0% due 2/28/21 (COST $10,943,201) 11,840,625 TOTAL CONVERTIBLE CORPORATE NOTES (1.3%) (COST $12,326,060) 13,225,252 COMMUNICATIONS AND INFORMATION SERVICES (0.1%) OIL & NATURAL GAS (INCLUDING SERVICES) (1.2%) 1 4 S T A T E M E N T O F I N V E S T M E N T S D E C E M B E R 3 1 , 2 0 0 4 - c o n t i n u e d G e n e r a l A m e r i c a n I n v e s t o r s SHORT-TERM SECURITIES AND OTHER ASSETS PRINCIPAL AMOUNT $19,900,000 18,200,000 12,500,000 8,000,000 American Express Credit Corporation notes due 1/3-1/13/05; 2.09%-2.24% American General Finance Corporation notes due 1/10-1/20/05; 2.28%-2.31% General Electric Capital Corporation notes due 1/6-1/25/05; 2.13%-2.28% Prudential Funding, LLC note due 1/18/05; 2.24% TOTAL SHORT-TERM SECURITIES (5.6%) (COST $58,487,897) (COST $762,503,408) TOTAL INVESTMENTS (f) (119.5%) Liabilities in excess of cash, receivables and other assets (-0.2%) PREFERRED STOCK (-19.3%) NET ASSETS APPLICABLE TO COMMON STOCK (100%) VALUE (NOTE 1a) $19,861,908 18,163,437 12,478,979 7,983,573 58,487,897 1,238,985,872 (2,592,779) 1,236,393,093 (200,000,000) $1,036,393,093 (a) Non-income producing security. (b) Securities which have been held for less than one year. (c) 1,000,000 shares held by custodian in a segregated custodian account as collateral for open short positions. (d) Restricted security. (e) Fair value of each holding in the opinion of the directors. (f) At December 31, 2004: (1) the cost of investments for Federal income tax purposes was the same as the cost for financial reporting purposes, (2) aggregate gross unrealized appreciation was $515,997,743, (3) aggregate gross unrealized depreciation was $39,515,279, and (4) net unrealized appreciation was $476,482,464. STATEMENT OF SECURITIES SOLD SHORT DECEMBER 31, 2004 G e n e r a l A m e r i c a n I n v e s t o r s COMMON STOCKS Electronic Arts Inc. (PROCEEDS $3,070,685) VALUE (NOTE 1a) $3,608,280 STATEMENT OF OPTIONS WRITTEN DECEMBER 31, 2004 G e n e r a l A m e r i c a n I n v e s t o r s SHARES 58,500 CONTRACTS (100 SHARES EACH) COMMON STOCKS/EXPIRATION DATE/EXERCISE PRICE VALUE (NOTE 1a) CALL OPTIONS COMMUNICATIONS AND INFORMATION SERVICES 539 Cox Communications, Inc. Class A/January 05/$32.50 (PREMIUMS RECEIVED $90,021) $118,580 PUT OPTIONS OIL & NATURAL GAS (INCLUDING SERVICES) 500 Apache Corporation/January 05/$45 (PREMIUMS RECEIVED $98,498) TOTAL OPTIONS (PREMIUMS RECEIVED $188,519) 5,000 _____________ $123,580 _____________ _____________ (see notes to financial statements) 1 5 N O T E S T O F I N A N C I A L S T A T E M E N T S G e n e r a l A m e r i c a n I n v e s t o r s 1. SIGNIFICANT ACCOUNTING POLICIES General American Investors Company, Inc. (the “Company”), established in 1927, is registered under the Investment Company Act of 1940 as a closed-end, diversified management investment company. It is internally managed by its officers under the direction of the Board of Directors. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain prior year financial statement items have been reclassified, from Other Comprehensive Income to a reduc- tion of Expenses and an increase in Net Investment Income, to conform to the current year presentation. a. SECURITY VALUATION Securities traded on a national securities exchange are valued at the last reported sales price on the last business day of the period. Securities reported on the NASDAQ national market are valued at the official closing price on that day. Listed and NASDAQ securities for which no sales are reported on that day and other securities traded in the over-the-counter market are valued at the last bid price (asked price for open short posi- tions and options written) on the valuation date. Securities traded primarily in foreign markets are generally valued at the preceding closing price of such securities on their respective exchanges or markets. If, after the close of the foreign market, conditions change significantly, the price of certain foreign securities may be adjusted to reflect fair value as of the time of the valuation of the portfolio. Corporate discount notes are valued at amortized cost, which approximates market value. Special holdings (restricted securities) and other securities for which quotations are not readily available are valued at fair value determined in good faith pursuant to procedures established by and under the general supervision of the Board of Directors. b. SHORT SALES The Company may make short sales of securities for either speculative or hedging purposes. When the Company makes a short sale, it borrows the securities sold short from a broker; in addition, the Company places cash with that broker and securities in a segregated account with the custodian, both as collateral for the short posi- tion. The Company may be required to pay a fee to borrow the securities and may also be obligated to pay any divi- dends declared on the borrowed securities. The Company will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the Company replaces the borrowed securities. c. OPTIONS The Company may purchase and write (sell) put and call options. The risk associated with purchasing an option is that the Company pays a premium whether or not the option is exercised. Additionally, the Company bears the risk of loss of the premium and a change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Company has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis for the securities purchased by the Company. The Company as writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option. d. FEDERAL INCOME TAXES The Company’s policy is to fulfill the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all taxable income to its stockholders. Accordingly, no provision for Federal income taxes is required. e. INDEMNIFICATIONS In the ordinary course of business, the Company enters into contracts that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had prior claims or losses pursuant to these indemnification provisions and expects the risk of loss thereunder to be remote. f. OTHER As customary in the investment company industry, securities transactions are recorded as of the trade date. Dividend income and distributions to stockholders are recorded as of the ex-dividend dates. Interest income, adjusted for amortization of discount and premium on investments, is earned from settlement date and is recognized on the accrual basis. Cost of short-term investments represents amortized cost. 2. CAPITAL STOCK AND DIVIDEND DISTRIBUTIONS The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $1.00 par value, and 10,000,000 shares of Preferred Stock, $1.00 par value, of which 29,205,312 shares and 8,000,000 shares, respectively, were outstanding at December 31, 2004. On September 23, 2003, the Company redeemed all of its then outstanding 6,000,000 shares of 7.20% Tax- Advantaged Cumulative Preferred Stock, Series A, at a redemption price of $25.00 per share. The Series A Preferred Shares were issued originally on June 19,1998. On September 24, 2003, the Company issued and sold 8,000,000 shares of its 5.95% Cumulative Preferred Stock, Series B in an underwritten offering. The Preferred Shares are noncallable for 5 years and have a liquidation prefer- ence of $25.00 per share plus an amount equal to accumulated and unpaid dividends to the date of redemption. The underwriting discount and other expenses associated with the Preferred Stock offering amounted to $6,700,000 and were charged to paid-in capital. The Company is required to allocate distributions from long-term capital gains and other types of income propor- tionately among holders of shares of Common Stock and Preferred Stock. To the extent that dividends on the shares of Preferred Stock are not paid from long-term capital gains, they will be paid from ordinary income or net short- term capital gains or will represent a return of capital. 1 6 N O T E S T O F I N A N C I A L S T A T E M E N T S - c o n t i n u e d G e n e r a l A m e r i c a n I n v e s t o r s 2. CAPITAL STOCK AND DIVIDEND DISTRIBUTIONS - (Continued from bottom of previous page.) Under the Investment Company Act of 1940, the Company is required to maintain an asset coverage of at least 200% for the Preferred Stock. In addition, pursuant to the Rating Agency Guidelines, the Company is required to maintain a certain discounted asset coverage for its portfolio that equals or exceeds the Basic Maintenance Amount under the guidelines established by Moody’s Investors Service, Inc. The Company has met these requirements since the issuance of the Preferred Stock. If the Company fails to meet these requirements in the future and does not cure such failure, the Company may be required to redeem, in whole or in part, shares of Preferred Stock at a redemption price of $25.00 per share plus accumulated and unpaid dividends (whether or not earned or declared). In addition, the Company’s failure to meet the foregoing asset coverage requirements could restrict its ability to pay dividends on shares of Common Stock and could lead to sales of portfolio securities at inopportune times. The holders of Preferred Stock have voting rights equivalent to those of the holders of Common Stock (one vote per share) and, generally, vote together with the holders of Common Stock as a single class. At all times, holders of Preferred Stock will elect two members of the Company’s Board of Directors and the holders of Preferred and Common Stock, voting as a single class, will elect the remaining directors. If the Company fails to pay dividends on the Preferred Stock in an amount equal to two full years’ dividends, the holders of Preferred Stock will have the right to elect a majority of the directors. In addition, the Investment Company Act of 1940 requires that approval of the holders of a majority of any outstanding Preferred Shares, voting separately as a class, would be required to (a) adopt any plan of reorganization that would adversely affect the Preferred Stock and (b) take any action requiring a vote of security holders, including, among other things, changes in the Company’s subclassifica- tion as a closed-end investment company or changes in its fundamental investment policies. The Company classifies its Preferred Stock pursuant to the requirements of EITF D-98, Classification and Measurement of Redeemable Securities, which require that preferred stock for which its redemption is outside of the company’s control should be presented outside of net assets in the statement of assets and liabilities. Transactions in Common Stock during 2004 and 2003 were as follows: SHARES AMOUNT 2004 2003 2004 2003 Shares issued in payment of dividends (includes 508,849 and 334,507 shares issued from treasury, respectively) Increase in paid-in capital Total increase Shares purchased (at an average discount from net asset value of 10.3% and 9.7%, respectively) Decrease in paid-in capital Total decrease Net decrease 508,849 334,507 $508,849 15,273,103 15,781,952 $334,507 9,389,611 9,724,118 1,092,800 1,106,600 (1,092,800) (31,870,232) (32,963,032) ($17,181,080) (1,106,600) (27,348,356) (28,454,956) ($18,730,838) At December 31, 2004, the Company held in its treasury 2,026,251 shares of Common Stock with an aggregate cost in the amount of $49,417,395. Distributions for tax and book purposes are substantially the same. As of December 31, 2004, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income Undistributed long-term gains Unrealized appreciation $43,964 7,897,333 476,009,808 $483,951,105 3. OFFICERS’ COMPENSATION The aggregate compensation paid by the Company during 2004 and 2003 to its officers amounted to $4,872,000 and $4,994,000, respectively. 4. PURCHASES AND SALES OF SECURITIES Purchases and sales of securities and securities sold short (other than short-term securities and options) during 2004 amounted to on long transactions $317,603,409 and $175,264,718, respectively, and on short sale transactions $16,196,930 and $3,070,685, respectively. 5. RESTRICTED SECURITIES Cytokinetics, Incorporated Silicon Genesis Corporation Standard MEMS, Inc. Series A Convertible Preferred Total DATE ACQUIRED 3/21/03 2/16/01 12/17/99 COST $2,000,000 3,006,720 3,003,000 $8,009,720 VALUE (NOTE 1a) $1,435,000 14,400 — $1,449,400 6. PENSION BENEFIT PLANS The Company has both a funded (Qualified) and an unfunded (Supplemental) noncontributory defined benefit pen- sion plans that cover substantially all of its employees. The plans provide defined benefits based on years of service and final average salary with an offset for a portion of social security covered compensation. The Company also has funded and unfunded contributory defined contribution thrift plans that cover substantially all employees. The aggregate cost of such plans for 2004 and 2003 was $626,307 and $768,050, respec- tively. The unfunded liability included in other liabilities at December 31, 2004 and 2003 was $2,541,127 and $2,131,642, respectively. 1 7 N O T E S T O F I N A N C I A L S T A T E M E N T S - c o n t i n u e d G e n e r a l A m e r i c a n I n v e s t o r s 6. PENSION BENEFIT PLANS - (Continued from bottom of previous page.) OBLIGATIONS AND FUNDED STATUS OF DEFINED BENEFIT PLANS: CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year Service cost Interest cost Benefits Paid Actuarial (gains)/losses Plan amendments Benefit obligation at end of year CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year FUNDED STATUS Unrecognized actuarial (gains)/losses Unrecognized prior service cost Net amount recognized AMOUNTS RECOGNIZED IN THE STATEMENT OF ASSETS AND LIABILITIES CONSIST OF: Prepaid benefit cost Accrued benefit liability Net amount recognized Accumulated Benefit Obligation Projected Benefit Obligation Fair value of plan assets WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF FISCAL YEAR Discount rate Expected return on plan assets Salary scale assumption COMPONENTS OF NET PERIODIC BENEFIT COST Service cost Interest cost Expected return on plan assets Amortization of: Prior service cost Recognized net actuarial loss (gain) Net periodic benefit cost 2004 2003 QUALIFIED SUPPLEMENTAL QUALIFIED SUPPLEMENTAL PLAN PLAN TOTAL PLAN PLAN TOTAL $6,793,866 $2,429,480 $9,223,346 $6,271,793 $2,194,060 $8,465,853 151,059 420,507 (427,238) 395,684 153,737 91,900 153,455 242,959 573,962 (127,773) (555,011) 144,698 (1,124) 540,382 152,613 126,315 416,776 (435,820) 414,802 — 80,159 149,129 (127,773) 133,905 — 206,474 565,905 (563,593) 548,707 — 7,487,615 2,690,636 10,178,251 6,793,866 2,429,480 9,223,346 13,029,458 2,023,352 — (427,238) 14,625,572 7,137,957 206,316 134,662 — — 13,029,458 10,005,449 2,023,352 3,459,829 127,773 (127,773) 127,773 (555,011) — (435,820) — 14,625,572 13,029,458 — — 127,773 (127,773) — (2,690,636) 4,447,321 6,235,592 (2,429,480) (352,908) 99,896 (146,592) 234,558 753,634 (35,320) (522,477) 129,585 10,005,449 3,459,829 127,773 (563,593) 13,029,458 3,806,112 231,157 94,265 $7,478,935 ($2,943,648) $4,535,287 $6,953,906 ($2,822,372) $4,131,534 $7,478,935 — $7,478,935 — ($2,943,648) $7,478,935 (2,943,648) ($2,943,648) $4,535,287 $6,953,906 — $6,953,906 — ($2,822,372) ($2,822,372) $6,882,288 $2,295,334 2,690,636 $9,177,622 10,178,251 $6,264,441 $2,046,700 6,793,866 2,429,480 — 14,625,572 13,029,458 — 5.75% N/A 4.25% 6.25% 8.75% 4.25% $91,900 153,455 $242,959 573,962 $126,315 416,776 6.25% N/A 4.25% $80,159 149,129 7,487,615 14,625,572 5.75% 8.75% 4.25% $151,059 420,507 (1,080,350) $6,953,906 (2,822,372) $4,131,534 $8,311,141 9,223,346 13,029,458 $206,474 565,905 — (1,080,350) (1,031,094) — (1,031,094) (16,245) — 28,565 (24,871) 12,320 (24,871) (16,244) — ($525,029) $249,049 ($275,980) ($504,247) 28,564 (37,294) $220,558 12,320 (37,294) ($283,689) WEIGHTED-AVERAGE ASSUMPTIONS FOR DETERMINING NET PERIODIC BENEFIT COST FOR YEARS ENDED DECEMBER 31 Discount rate Expected long-term rate of return on plan assets Rate of salary increase 6.25% 8.75% 4.25% 6.25% N/A 4.25% 6.75% 8.75% 4.25% 6.75% N/A 4.25% The Company’s Pension Committee, based on input from management and an outside consultant, reviews and determines the reasonableness of plan assumptions and the allocation of plan assets. PLAN ASSETS The Company’s qualified pension plan asset allocations at December 31, 2004 and 2003, by asset category, are as follows: ASSET CATEGORY Equity securities Debt securities Total December 31 2004 96.6% 3.4 2003 96.5% 3.5 100.0% 100.0% CASH FLOWS Expected Company Contributions for 2005 to Plan Participants/Total Contributions Estimated Future Benefit Payments: 2005 2006 2007 2008 2009 2010-2014 Qualified Plan Supplemental Plan Total — $192,644 $192,644 $454,107 $192,644 $646,751 456,027 459,003 462,980 462,946 214,642 249,293 290,589 317,475 670,669 708,296 753,569 780,421 2,297,373 1,910,776 4,208,149 7. CALL AND PUT OPTIONS Transactions in written covered call and collateralized put options during the year ended December 31, 2004 were as follows: Options outstanding, December 31, 2003 Options written Options terminated in closing purchase transactions Options exercised Options outstanding, December 31,2004 Covered Calls Collateralized Puts Contracts — 2,245 (971) (735) 539 Premiums — $444,998 (220,471) (134,506) $90,021 Contracts — 750 (250) — 500 Premiums — $172,746 (74,248) — $98,498 1 8 N O T E S T O F I N A N C I A L S T A T E M E N T S - c o n t i n u e d G e n e r a l A m e r i c a n I n v e s t o r s The following table shows per share operating performance data, total investment return, ratios and supplemental data for each year in the five- year period ended December 31, 2004. This information has been derived from information contained in the financial statements and market price data for the Company’s shares. 8. OPERATING LEASE COMMITMENT In July 1992, the Company entered into an operating lease agreement for office space which expires in 2007 and provides for future rental payments in the aggregate amount of approximately $5.6 million. The lease agreement contains a clause whereby the Company received twenty months of free rent beginning in December 1992 and escalation clauses relating to operating costs and real property taxes. Rental expense approximated $296,000 for 2004. Minimum rental commitments under the operating lease are approximately $505,000 per annum in 2005 through 2007. In January 2003, the Company extended a sublease agreement (originally entered into in March 1996) which expires in 2007 and provides for future rental receipts. Minimum rental receipts under the sublease are approximately $254,000 per annum in 2005 through 2007. The Company will also receive its proportionate share of operating expenses and real property taxes under the sublease. 9 SUBSEQUENT EVENT On January 19, 2005, the Board of Directors declared on the Common Stock a dividend of $7,929,239 from net long-term capital gains and a dividend of $58,303 from ordinary income. These dividends are payable in shares of Common Stock, or in cash upon request, on March 10, 2005. F I N A N C I A L H I G H L I G H T S G e n e r a l A m e r i c a n I n v e s t o r s PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year Net investment income Net gain (loss) on securities - realized 2004 2003 2002 2001 2000 $33.11 .32 $26.48 .03 $35.14 .19 $39.91 .41 $41.74 .53 and unrealized 3.48 7.72 (7.88) (.66) 6.12 Distributions on Preferred Stock: Dividends from investment income Distributions from capital gains (.09) (.32) (.41) Total from investment operations 3.39 (.12) (.01) (.23) (.35) (.36) (.35) 7.39 (8.04) (.07)(a) (.29) (.36) (.61) (.11)(b) (.29) (.40) 6.25 Less distributions on Common Stock: Dividends from investment income Distributions from capital gains (.23) (.78) (1.01) (.02) (.52) (.54) (.21)(c) (.41) (.62) (.88)(d) (3.28) (4.16) (2.30)(e) (5.78) (8.08) Capital Stock transaction - effect of Preferred Stock offering Net asset value, end of year Per share market value, end of year TOTAL INVESTMENT RETURN - Stockholder — $35.49 $31.32 (.22) $33.11 $29.73 — $26.48 $23.85 — $35.14 $33.47 — $39.91 $36.00 Return, based on market price per share 8.79% 27.01% (27.21)% 4.33% 19.10% RATIOS AND SUPPLEMENTAL DATA Net assets applicable to Common Stock, end of year (000’s omitted) $1,036,393 $986,335 $809,192 $1,097,530 $1,155,039 Ratio of expenses to average net assets applicable to Common Stock 1.15% 1.23% 0.92% 0.97% 1.05% Ratio of net income to average net assets applicable to Common Stock Portfolio turnover rate 0.94% 16.71% 0.13% 18.62% 0.61% 22.67% 1.15% 23.81% 1.24% 40.61% PREFERRED STOCK Liquidation value, end of year (000’s omitted) Asset coverage Liquidation preference per share Market value per share $200,000 618% $200,000 593% $150,000 639% $150,000 832% $150,000 870% $25.00 $24.97 $25.00 $25.04 $25.00 $25.85 $25.00 $25.90 $25.00 $24.25 (a) Includes short-term capital gain in the amount of $.04 per share. (b) Includes short-term capital gain in the amount of $.09 per share. (c) Includes short-term capital gain in the amount of $.19 per share. (d) Includes short-term capital gain in the amount of $.51 per share. (e) Includes short-term capital gain in the amount of $1.82 per share. 1 9 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M G e n e r a l A m e r i c a n I n v e s t o r s TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GENERAL AMERICAN INVESTORS COMPANY, INC. We have audited the accompanying statement of assets and liabilities, including the statements of investments, securities sold short and options written, of General American Investors Company, Inc. as of December 31, 2004, and the related statements of operations and changes in net assets for each of the two years in the period then ended, and financial highlights for each of the five years in the period then ended. These finan- cial statements and financial highlights are the responsibility of the Company’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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evalu- ating the overall financial statement pre- sentation. 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 posi- tion of General American Investors Company, Inc. at December 31, 2004, the results of its oper- ations and 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 U.S. generally accepted accounting principles. New York, New York January 19, 2005 2 0 O F F I C E R S G e n e r a l A m e r i c a n I n v e s t o r s NAME (AGE) EMPLOYEE SINCE PRINCIPAL OCCUPATION DURING PAST 5 YEARS NAME (AGE) EMPLOYEE SINCE PRINCIPAL OCCUPATION DURING PAST 5 YEARS Spencer Davidson (62) 1994 President and Chief Executive Officer of the Company since 1995 Peter P. Donnelly (56) 1974 Vice-President of the Company since 1991 securities trader Andrew V. Vindigni (45) Vice-President of the Diane G. Radosti (52) Treasurer of the 1988 Company since 1995 security analyst (financial services industry) 1980 Company since 1990 Principal Accounting Officer since 2003 Eugene L. DeStaebler, Jr. (66) Vice-President, Administration Carole Anne Clementi (58) Secretary of the Company 1975 of the Company since 1978 Principal Financial Officer since 2002; Chief Compliance Officer since 2004 1982 Peter E. de Svastich (61) 2004 Vice-President of the Company since 2005 administration, finance and operations Partner & CFO of Decision Capital LLC (2002-2004); Partner & CFO of Hawkins McEntee LLC (2000-2001) Craig A. Grassi (36) 1991 Maureen E. LoBello (54) 1992 since 1994 shareholder relations and office management Assistant Vice-President of the Company since 2005; employee since 1991 information technology Assistant Secretary of the Company since 2005; employee since 1992 benefits administration All officers serve for a term of one year and are elected by the Board of Directors at the time of its annual organization meeting on the second Wednesday in April. The address for each officer is the Company’s office. Other directorships and affiliations for Mr. Davidson are shown in the listing of Directors on the inside back cover. S E R V I C E O R G A N I Z A T I O N S COUNSEL Sullivan & Cromwell LLP INDEPENDENT AUDITORS Ernst & Young LLP CUSTODIAN State Street Bank and Trust Company TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 1-800-413-5499 www.amstock.com In addition to purchases of the Company’s Common Stock as set forth in Note 2, on page 16, purchases of Common Stock may be made at such times, at such prices, in such amounts and in such manner as the Board of Directors may deem advisable. In addition to distributing financial statements as of the end of each quarter, General American Investors files a Quarterly Schedule of Portfolio Holdings (Form N-Q) with the Securities and Exchange Commission (SEC) as of the end of the first and third calendar quarters. The Company’s Forms N-Q are available on the SEC’s website: www.sec.gov. Also, Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. A copy of the Company’s Form N-Q may be obtained by calling us at 1-800-436-8401. The Company’s Chief Executive Officer has submitted to the New York Stock Exchange the required annual certification. D I R E C T O R S G e n e r a l A m e r i c a n I n v e s t o r s NAME (AGE) DIRECTOR SINCE PRINCIPAL OCCUPATION DURING PAST 5 YEARS INDEPENDENT (“DISINTERESTED”) DIRECTORS Lawrence B. Buttenwieser (73) CHAIRMAN OF THE BOARD OF DIRECTORS 1967 Counsel 2002-present Partner 1966-2002 Katten Muchin Zavis Rosenman and predecessor firms (lawyers) Arthur G. Altschul, Jr. (40) 1995 Lewis B. Cullman (86) 1961 Managing Member Diaz & Altschul Capital Management, LLC (investments and securities) Managing Member Cullman Ventures LLC (formerly Cullman Ventures, Inc.) Gerald M. Edelman (75) 1976 John D. Gordan, III (59) 1986 Sidney R. Knafel (74) 1994 Richard R. Pivirotto (74) 1971 Member and Chairman of the Department of Neurobiology The Scripps Research Institute Partner Morgan, Lewis & Bockius LLP (lawyers) Managing Partner SRK Management Company (private investment company) President Richard R. Pivirotto Co., Inc. (self-employed consultant) D. Ellen Shuman (49) 2004 Vice President and Chief Investment Officer Carnegie Corporation of New York Joseph T. Stewart, Jr. (75) 1987 Corporate director and trustee Executive Consultant Johnson & Johnson (1990-1999) Raymond S. Troubh (78) 1989 Financial Consultant OTHER DIRECTORSHIPS AND AFFILIATIONS Delta Opportunity Fund, Ltd., Director Medicis Pharmaceutical Corporation, Director Neurosciences Research Foundation, Trustee Chess-in-the-Schools, Chairman, Board of Trustees Metropolitan Museum of Art, Honorary Trustee Museum of Modern Art, Vice Chairman, International Council and Honorary Trustee Neurosciences Research Foundation, Vice Chairman, Board of Trustees The New York Botanical Garden, Senior Vice Chairman, Board of Managers Neurosciences Institute of the Neurosciences Research Foundation, Director and President IGENE Biotechnology, Inc., Director Insight Communications Company, Inc., Chairman, Board of Directors Associated Community Bancorp, Inc., Director General Theological Seminary, Trustee Greenwich Hospital Corporation, Trustee Immunomedics, Inc., Director New York Life Insurance Company, Director Princeton University, Charter Trustee Emeritus Bowdoin College, Trustee The Investment Fund for Foundations, Director Meristar Hospitality Corporation, Director Edna McConnell Clark Foundation, Investment Advisor Foundation of the University of Medicine and Dentistry of New Jersey, Trustee Marine Biological Laboratory, Member, Advisory Council United States Merchant Marine Academy, Trustee, Board of Advisors United States Merchant Marine Academy Foundation, Trustee Diamond Offshore Drilling, Inc., Director Gentiva Health Services, Inc., Director Petrie Stores Liquidating Trust, Trustee Portland General Electric Company, Director Triarc Companies, Inc., Director WHX Corporation, Director INSIDE (“INTERESTED”) DIRECTOR Spencer Davidson (62) 1995 President and Chief Executive Officer General American Investors Company, Inc. since 1995 Medicis Pharmaceutical Corporation, Director Neurosciences Research Foundation, Trustee All Directors serve for a term of one year and are elected by Stockholders at the time of the annual meeting on the second Wednesday in April. The address for each Director is the Company’s office. William O. Baker, DIRECTOR EMERITUS William T. Golden, DIRECTOR EMERITUS General American Investors Company, Inc. 450 Lexington Avenue, New York, NY 10017 (212) 916-8400 (800) 436-8401 E-mail: InvestorRelations@gainv.com www.generalamericaninvestors.com 

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