GAM Holding AG
Annual Report 2005

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 5 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) 2005 2004 Net assets applicable to Common Stock - December 31 Net investment income Net realized gain Net increase in unrealized appreciation Distributions to Preferred Stockholders $1,132,941,654 5,408,018 63,024,095 103,638,830 (11,900,000) Per Common Share-December 31 Net asset value Market price Discount from net asset value $39.00 $34.54 -11.4% Common Shares outstanding-Dec. 31 Common Stockholders of record-Dec. 31 Market price range* (high-low) Market volume-shares 29,050,399 4,100 $35.45-$29.37 7,242,000 *Unadjusted for dividend payments. $1,036,393,093 9,253,481 36,774,029 62,361,773 (11,900,000) $35.49 $31.32 -11.7% 29,205,312 4,300 $31.74-$27.88 6,206,400 DIVIDEND SUMMARY (per share) (unaudited) Record Date Payment Date Ordinary Income Long-Term Capital Gain Total Common Stock Nov. 11, 2005 Jan. 30, 2006 Dec. 22, 2005 Feb. 13, 2006 Total from 2005 earnings Nov. 12, 2004 Jan. 31, 2005 Dec. 23, 2004 Mar. 10, 2005 Total from 2004 earnings (a) Includes short-term gain in the amount of $.041294 per share. $.587543 (a) $1.260182 .138000 $1.398182 $.587543 — $1.847725 .138000 $1.985725 $.215327 .002000 $.217327 $.684673 .272000 $.956673 $.900000 .274000 $1.174000 Preferred Stock Mar. 7, 2005 Jun. 7, 2005 Sep. 7, 2005 Dec. 7, 2005 Total for 2005 Mar. 8, 2004 Jun. 7, 2004 Sep. 7, 2004 Dec. 7, 2004 Total for 2004 Mar. 24, 2005 Jun. 24, 2005 Sep. 26, 2005 Dec. 27, 2005 Mar. 24, 2004 Jun. 24, 2004 Sep. 24, 2004 Dec. 27, 2004 $.102969 .102969 .102969 .102969 $.268906 .268906 .268906 .268906 $.411876 (b) $1.075624 $.083947 .083947 .083947 .083947 $.335788 $.287928 .287928 .287928 .287928 $1.151712 $.371875 .371875 .371875 .371875 $1.487500 $.371875 .371875 .371875 .371875 $1.487500 (b) Includes short-term gain in the amount of $.028844 ($.007211 per quarter). 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 third consecutive year, gaining 4.8% in the 12 months ended December 31, 2005, 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 16.2%. The return to our Common Stockholders was 17.4%, reflecting a slight nar- rowing in the discount at which our shares trade, which, at year end, was 11.4%. 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 17.5% 4.3 16.4 14.8 17.4 12.9 14.3% 0.5 9.0 11.9 12.7 10.3 The share repurchase program, a part of our continuing effort to maximize NAV, continues apace. During 2005, the Company purchased 1,222,404 of its Common Shares in the open market at an average discount to NAV of 12.4%. The Board of Directors has authorized repur- chases of Common Shares when they are trading at a discount in excess of 8% of NAV. Markets rallied again last year, continuing the trend that began in 2003. Earnings rose meaningfully, and interest rates remained at relatively modest levels by historic standards, not withstanding the Federal Reserve’s ongo- ing tightening campaign. While mirroring economic trends, the relatively muted performance of stocks reflected the compression in valuation multiples (price to earnings ratios) that generally attends a maturing business cycle. Our performance last year benefited importantly from the portfolio's exposure to the shares of oil and natural gas producers and their service providers. Other contrib- utors included financial services, biotech and cement companies. As in the past, our investments were focused on companies with strong financial characteristics and powerful positions in growing industries. Both operating costs relative to average net assets and portfolio turnover remained well below the equity mutual fund industry norm. We enter 2006 with cautious optimism, encouraged by robust global growth and the resiliency of our economy in the face of rising interest rates and higher energy costs. While there is currently little evidence of decelerat- ing spending, we fear that consumer demand for durables like cars and housing is unlikely to rise appreciably. It would appear that consumers have been spending more than they make for some time, while other sources of liquidity, like home equity loans, will probably contract, even assuming that the Fed stops rais- ing rates this year. With the unemployment rate below 5% and labor shortages, especially among skilled workers, increasingly common, corporations may well supplement flagging consumer demand with increased expenditure on productivity-enhancing capital goods. They have been reluctant spenders in this business cycle, continuing to cut costs and rationalize facilities in the face of lower-cost Asian competition. As corporate earnings have continued to grow, market valuations have become more reasonable, but not gener- ally compelling. Inflation appears to be rising steadily, if not spectacularly, which together with an aging econom- ic expansion may continue to pressure the multiple awarded earnings and, consequently, market prices. We remain encouraged, however, by the earnings and cash flow characteristics of our portfolio companies and high- ly confident that our staff will continue to perform to its customary high standard. As mentioned in the mid-year report, Eugene L. DeStaebler, Jr., who had been an officer of the Company for thirty years, retired as Vice-President, Administration, on June 30, 2005. Mr. DeStaebler continued to serve as Chief Compliance Officer, under a consultancy arrange- ment, through December 31, 2005. Effective January 1, 2006, Eugene S. Stark, Vice-President, Administration, as- sumed the additional responsibilities of Chief Compliance Officer. We are pleased to report that on December 14, 2005, Dr. Sally Lynch, who has been employed as a securities ana- lyst at the Company since 1997, and Mr. Jesse Stuart, CFA, who has also been employed as a securities analyst since 2003, were appointed Vice-Presidents of the Company, both effective January 1, 2006. We are saddened to report that Dr. William O. Baker, our esteemed colleague and Director Emeritus, died on October 31, 2005. Dr. Baker, a prominent scientist, for- mer Chairman of the Board of Bell Laboratories, and an adviser to five presidents on scientific affairs, served as a director of the Company for 13 years, and as Director Emeritus since 1996. His counsel and support will be missed. Information about the Company, including our investment objectives, 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 18, 2006 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 page 20. 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 and published on the Company’s website daily (on an unaudited basis) and is furnished upon request. It is also available on most electronic quotation services using the symbol "XGAMX." The figure 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. During 2005, the stock sold at discounts from net asset value which ranged from 9.8% (November 9) to 14.9% (July 5). At December 31, the price of the stock was at a discount of 11.4% as compared with a discount of 11.7% a year ear- lier. “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 and Distribution Policy The Company’s dividend and distribution policy is to distrib- ute to stockholders before year-end substantially all ordi- nary income estimated for the full year and capital gains realized during the ten-month period ended 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 and distributions on shares of Preferred Stock are paid quarterly. Distributions from capital gains and dividends from 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 distributions in varying amounts have been paid for each of the years 1943-2005 (except for the year 1974). (A table listing dividends and distributions paid during the 20-year period 1986-2005 is shown at the bottom of page 6.) To the extent that shares can be issued, dividends and distributions are paid to Common Stockholders in additional shares of Common Stock unless the stockhold- er specifically requests payment in cash. Spill-over dividends and distributions of nomi- nal 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, 2005 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 www.generalamericaninvestors.com and (3) on the Securities and Exchange Commission’s website at www.sec.gov. Direct Registration The Company makes available 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, 2005 T he investment return for a Common Stockholder of General American Investors (GAM) over the 20 years ended December 31, 2005 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 1986. The Stockholder Return is the return a Common Stockholder of GAM would have achieved assuming reinvestment of all dividends and distributions at the actual rein- vestment price and 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 and distributions. 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 STANDARD & POOR’S 500 STOCKHOLDER RETURN NET ASSET VALUE RETURN RETURN CUMULATIVE INVESTMENT ANNUAL RETURN CUMULATIVE INVESTMENT ANNUAL RETURN CUMULATIVE INVESTMENT ANNUAL RETURN 1986 $11,117 11.17% $11,117 11.17% $11,869 18.69% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 9,326 11,309 16,805 17,477 32,332 37,111 31,203 28,751 34,851 41,640 59,371 77,960 1999 108,536 2000 129,266 2001 134,864 2002 2003 2004 2005 98,167 124,682 135,642 159,243 -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 17.40 11,398 13,401 18,475 19,710 31,752 32,879 32,303 31,418 38,827 46,580 61,509 83,124 113,381 133,381 131,781 101,445 129,241 142,643 165,751 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 16.20 12,491 14,556 19,158 18,566 24,210 26,048 28,684 29,048 39,941 49,092 65,454 84,141 101,777 92,526 81,525 63,475 81,603 90,408 94,775 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 4.83 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 ASSUMING AN INITIAL INVESTMENT OF $10,000 CUMULATIVE VALUE OF INVESTMENT $180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 COMPARATIVE ANNUALIZED INVESTMENT RESULTS YEARS ENDED DECEMBER 31, 2005 STOCKHOLDER RETURN GAM NET ASSET VALUE S&P 500 STOCK INDEX 1 year 5 years 10 years 15 years 20 years 17.4 % 16.2 % 4.8 % 4.3 16.4 15.9 14.8 4.4 15.6 15.3 15.1 0.5 9.0 11.5 11.9 GAM STOCKHOLDER RETURN GAM NET ASSET VALUE S&P 500 STOCK INDEX 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 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 5 ( 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 ADDITIONS Cytokinetics, Incorporated MFA Mortgage Investments, Inc. Patterson-UTI Energy, Inc. Talisman Energy Inc. Weatherford International Ltd. ELIMINATIONS REDUCTIONS DECREASES Central Securities Corporation CIENA Corporation Millenium Pharmaceuticals, Inc. Reinsurance Group of America, Incorporated Silicon Genesis Corporation American International Group, Inc. Annaly Mortgage Management, Inc. Bank of America Corporation Brooks Automation, Inc. Devon Energy Corporation Everest Re Group, Ltd. Genentech, Inc. The Home Depot, Inc. Microsoft Corporation PartnerRe Ltd. Pfizer Inc * Excludes transactions in Stocks-Miscellaneous-Other. (a) Includes shares received in conjunction with a stock split. (b) Includes shares received from dividend payments. SHARES 54,900 375,000 250,000 208,700 185,000 102,809 (b) 550,000 120,000 200,000 144,000 5,000 175,000 35,000 168,500 582,000 10,000 35,000 225,000 125,000 25,000 50,000 SHARES HELD DECEMBER 31, 2005 604,900 1,300,000 1,000,000 1,000,000 1,220,000 (a) — — — — — 345,000 500,000 280,000 323,000 758,000 540,000 330,000 1,695,000 1,400,000 375,000 1,250,000 D I V I D E N D S A N D D I S T R I B U T I O N S P E R C O M M O N S H A R E ( 1 9 8 6 - 2 0 0 5 ) ( U N A U D I T E D ) EARNINGS SOURCE SHORT-TERM LONG-TERM EARNINGS SOURCE SHORT-TERM LONG-TERM YEAR INCOME CAPITAL GAINS CAPITAL GAINS YEAR INCOME CAPITAL GAINS CAPITAL GAINS 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 $.36 .35 .29 .21 .21 .09 .03 .06 .06 .10 — — — $.02 — — — — — .03 $2.15 1.54 1.69 1.56 1.65 3.07 2.93 2.34 1.59 2.77 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $.20 .21 .47 .42 .48 .37 .03 .02 .217 .547 $.05 — — .62 1.55 .64 — — — .041 $2.71 2.95 4.40 4.05 6.16 1.37 .33 .59 .957 1.398 The following table shows aggregate dividends and distribu- tions paid per share on the Company’s Common Stock for each year during the 20-year period 1986-2005. Amounts shown include payments made after year-end attributable to income and gain in each respective year. 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, 2005, shown on pages 12 and 13 includes 53 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. 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 cost containment, the company’s free cash flow should continue to increase, supporting a positive long-term outlook. 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 growth opportunities. 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 growth. TALISMAN ENERGY INC. Talisman, headquartered in Calgary, Alberta, is an upstream oil and gas producer with global operations. The company is focusing on larger, deep gas opportunities in North America and large international projects which should lead to faster production growth and higher returns. DEVON ENERGY CORPORATION One of the largest independent oil and gas exploration and production companies, Devon operates both domestically and internationally. Recent opportunistic acquisitions have enhanced production and improved the company's exploration profile. APACHE CORPORATION Apache is a large independent oil and gas company. The company has a long history of growing production and creating value for shareholders. The company’s operations are primarily focused in North America, the North Sea and Egypt. WEATHERFORD INTERNATIONAL LTD. Weatherford supplies a broad range of oil field services through its Drilling Methods, Well Construction, Drilling Tools and Intervention Services divisions on a worldwide basis. Its focus on increasing production from existing fields and synergies from the acquisition of assets from Precision Drilling should lead to earnings growth. SHARES VALUE 1,695,000 $68,613,600 % COMMON NET ASSETS* 6.1% 1,143,041 67,816,623 6.0 2,500,000 58,075,000 5.1 540,000 54,189,000 4.8 1,000,000 52,880,000 4.7 758,000 47,405,320 4.2 665,000 45,565,800 4.0 1,220,000 44,164,000 3.9 REPUBLIC SERVICES, INC. Republic Services is 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. EOG RESOURCES, INC. EOG is rapidly growing its reserves and production of natural gas. The company’s assets are primarily in North America and Trinidad. The company earns among the highest returns on capital in its industry. *Net assets applicable to the Company’s Common Stock. 1,175,000 44,121,250 3.9 600,000 44,022,000 3.8 $526,852,593 46.5% 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) 2005 2004 DECEMBER 31, 2005 PERCENT COMMON NET ASSETS* DECEMBER 31 The diversification of the Company’s net assets applicable to its securities by industry group as of December 31, 2005 and 2004 is shown in the following table. Oil and Natural Gas (Including Services) Finance and Insurance Banking Insurance Other Retail Trade Health Care Pharmaceuticals Medical Instruments and Devices Communications and Information Services Building and Real Estate Consumer Products and Services Environmental Control (Including Services) Computer Software and Systems Miscellaneous** Technology Electronics Semiconductors Special Holdings Short-Term securities Total investments Cash, receivables and other assets less liabilities Preferred Stock Net assets applicable to Common Stock $207,050 $335,962 29.7% 18.3% 18,171 67,625 16,084 101,880 74,945 50,789 10,484 61,273 53,830 30,441 62,733 26,227 41,604 42,347 25,690 12,287 4,709 3,003 748,019 3,823 $751,842 99,890 179,443 12,880 292,213 202,530 90,856 25,906 116,762 68,706 67,817 66,602 44,121 43,620 42,466 27,835 13,525 5,509 — 1,327,668 3,823 1,331,491 1,451 (200,000) 8.8 15.8 1.1 25.7 17.9 8.0 2.3 10.3 6.1 6.0 5.9 3.9 3.8 3.7 2.5 1.2 0.5 — 117.2 0.3 117.5 0.1 (17.6) 10.1 18.5 2.1 30.7 20.7 10.6 2.1 12.7 7.3 3.9 3.8 3.8 5.5 4.4 — 1.8 0.9 0.1 113.9 5.6 119.5 (0.2) (19.3) $1,132,942 100.0% 100.0% * Net assets applicable to the Company’s Common Stock. ** Securities which have been held for less than one year, not previously disclosed and not restricted. 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 and preferred stocks DECEMBER 31, 2005 2004 (cost $714,895,565 and $691,689,451, respectively) $1,301,855,069 $1,167,272,723 Corporate note (cost $33,123,366 and $12,326,060, respectively) Corporate discount notes (cost for 2004 $58,487,897) Money Market Fund (cost for 2005 $3,822,949) Total investments (cost $751,841,880 and $762,503,408, respectively) CASH, RECEIVABLES AND OTHER ASSETS Cash Receivable for securities sold Deposit with broker for securities sold short Deposit with broker for options written Dividends, interest and other receivables Prepaid pension cost Prepaid expenses and other assets TOTAL ASSETS LIABILITIES 25,812,500 — 3,822,949 13,225,252 58,487,897 — 1,331,490,518 1,238,985,872 13,298 5,733,693 — — 1,028,867 7,714,456 214,022 176,980 — 3,070,685 188,519 1,081,136 7,478,936 294,166 1,346,194,854 1,251,276,294 Payable for securities purchased Preferred dividend accrued but not yet declared Securities sold short, at value (proceeds for 2004 $3,070,685) (note 1a) Outstanding options written, at value (premiums received $188,519 for 2004) (note 1a) Accrued pension expense Accrued expenses and other liabilities TOTAL LIABILITIES 1,468,214 231,389 411,300 231,389 — 3,608,280 — 5,699,484 5,854,113 13,253,200 123,580 5,484,775 5,023,877 14,883,201 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 - 29,050,399 and 29,205,312 shares, respectively (note 2) $1,132,941,654 $1,036,393,093 NET ASSET VALUE PER COMMON SHARE $39.00 $35.49 NET ASSETS APPLICABLE TO COMMON STOCK Common Stock, 29,050,399 and 29,205,312 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 $29,050,399 518,972,693 3,969,333 1,531,980 (231,389) $29,205,312 521,985,714 7,864,450 1,559,198 (231,389) 579,648,638 476,009,808 NET ASSETS APPLICABLE TO COMMON STOCK $1,132,941,654 $1,036,393,093 (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 $490,458 and $222,175, respectively) Interest TOTAL INCOME EXPENSES Investment research Administration and operations Office space and general Directors’ fees and expenses Auditing and legal fees Transfer agent, custodian and registrar fees and expenses Stockholders’ meeting and reports Miscellaneous taxes TOTAL EXPENSES NET INVESTMENT INCOME YEAR ENDED DECEMBER 31, 2005 2004 $16,403,240 2,318,112 $18,010,297 2,538,401 18,721,352 20,548,698 8,695,758 3,236,737 537,671 218,402 216,600 176,854 129,857 101,455 7,257,447 2,685,811 535,685 187,539 172,200 179,102 169,197 108,236 13,313,334 11,295,217 5,408,018 9,253,481 REALIZED GAIN (LOSS) 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 63,646,612 (755,114) 132,597 39,187,387 (2,512,348) 98,990 (long-term except for $14,501,035 for 2005) 63,024,095 36,774,029 Net increase in unrealized appreciation NET GAIN ON INVESTMENTS DISTRIBUTIONS TO PREFERRED STOCKHOLDERS INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 103,638,830 62,361,773 166,662,925 99,135,802 (11,900,000) (11,900,000) $160,170,943 $96,489,283 (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 short-term capital gains From long-term capital gains Decrease in net assets from Preferred distributions YEAR ENDED DECEMBER 31, 2005 2004 $5,408,018 63,024,095 103,638,830 172,070,943 $9,253,481 36,774,029 62,361,773 108,389,283 (845,368) (2,449,640) (8,604,992) (11,900,000) (2,686,304) — (9,213,696) (11,900,000) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 160,170,943 96,489,283 DISTRIBUTIONS TO COMMON STOCKHOLDERS From net income From short-term capital gains From long-term capital gains DECREASE IN NET ASSETS FROM COMMON DISTRIBUTIONS CAPITAL SHARE TRANSACTIONS (note 2) (4,333,771) (12,389,129) (43,672,026) (6,602,940) — (22,647,281) (60,394,926) (29,250,221) Value of Common Shares issued in payment of distributions Cost of Common Shares purchased 36,584,716 15,781,952 (39,812,172) (32,963,032) DECREASE IN NET ASSETS - CAPITAL TRANSACTIONS NET INCREASE IN NET ASSETS NET ASSETS APPLICABLE TO COMMON STOCK (3,227,456) (17,181,080) 96,548,561 50,057,982 BEGINNING OF YEAR 1,036,393,093 986,335,111 END OF YEAR (including undistributed net investment income of $1,531,980 and $1,559,198, respectively) $1,132,941,654 $1,036,393,093 (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 5 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 (6.0%) SHARES COMMON AND PREFERRED STOCKS VALUE (NOTE 1a) 1,143,041 CEMEX, S.A. de C.V. ADR (COST $30,440,830) $67,816,623 COMMUNICATIONS AND INFORMATION SERVICES (6.1%) 675,000 American Tower Corporation (a) 900,000 Cisco Systems, Inc. (a) 350,000 Lamar Advertising Company Class A (a) 4,600,000 Telecom Corporation of New Zealand Limited COMPUTER SOFTWARE AND SYSTEMS (3.8%) 300,000 EMC Corporation (a) 1,400,000 Microsoft Corporation 133,500 VeriSign, Inc. (a) CONSUMER PRODUCTS AND SERVICES (3.6%) 350,000 Diageo plc ADR 275,000 Ethan Allen Interiors Inc. 175,000 PepsiCo, Inc. 18,292,500 15,408,000 16,145,500 18,860,000 68,706,000 4,086,000 36,610,000 2,923,650 43,619,650 20,405,000 10,045,750 10,339,000 40,789,750 (COST $53,829,770) (COST $41,604,314) (COST $29,609,424) ELECTRONICS (1.2%) 550,000 Molex Incorporated Class A (COST $12,287,441) 13,524,500 ENVIRONMENTAL CONTROL (INCLUDING SERVICES) (3.9%) 1,175,000 Republic Services, Inc. (COST $26,227,380) 44,121,250 FINANCE AND INSURANCE (25.7%) BANKING (8.8%) 280,000 Bank of America Corporation 585,000 Golden West Financial Corporation 310,000 M&T Bank Corporation 200,000 SunTrust Banks, Inc. INSURANCE (15.8%) 345,000 American International Group, Inc. 500,000 Annuity and Life Re (Holdings), Ltd. (a) 350,000 Arch Capital Group Ltd. (a) 300 Berkshire Hathaway Inc. Class A (a) 540,000 Everest Re Group, Ltd. 285,000 MetLife, Inc. 375,000 PartnerRe Ltd. 250,000 Transatlantic Holdings, Inc. OTHER (1.1%) 500,000 Annaly Mortgage Management, Inc. 1,300,000 MFA Mortgage Investments, Inc. HEALTH CARE (10.3%) PHARMACEUTICALS (8.0%) 265,000 Alkermes, Inc. (a) 180,000 Biogen Idec Inc. (a) 604,900 Cytokinetics, Incorporated (a) 330,000 Genentech, Inc. (a) 400,000 MedImmune, Inc. (a) 1,250,000 Pfizer Inc MEDICAL INSTRUMENTS AND DEVICES (2.3%) 450,000 Medtronic, Inc. 12,922,000 38,610,000 33,805,500 14,552,000 99,889,500 23,539,350 575,000 19,162,500 26,586,000 54,189,000 13,965,000 24,626,250 16,800,000 179,443,100 5,470,000 7,410,000 12,880,000 292,212,600 5,066,800 8,150,400 3,956,046 30,525,000 14,008,000 29,150,000 90,856,246 (COST $18,170,793) (COST $67,625,042) (COST $16,084,154) (COST $101,879,989) (COST $50,789,396) (COST $10,483,716) (COST $61,273,112) 25,906,500 116,762,746 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 5 - 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 SHARES COMMON AND PREFERRED STOCKS (Continued) VALUE (NOTE 1a) MISCELLANEOUS (3.7%) Other (b) (COST $42,346,406) $42,466,400 OIL AND NATURAL GAS (INCLUDING SERVICES) (29.7%) 665,000 Apache Corporation 758,000 Devon Energy Corporation 600,000 EOG Resources, Inc. 440,000 Halliburton Company 1,000,000 Patterson-UTI Energy, Inc. 1,000,000 Talisman Energy Inc. 330,000 Total S.A. ADR 1,220,000 Weatherford International Ltd. (a) RETAIL TRADE (17.9%) 700,000 Costco Wholesale Corporation 750,000 Dollar General Corporation 1,695,000 The Home Depot, Inc. (c) 2,500,000 The TJX Companies, Inc. 575,000 Wal-Mart Stores, Inc. SEMICONDUCTORS (0.5%) 323,000 Brooks Automation, Inc. (a) 197,000 EMCORE Corporation (a) 45,565,800 47,405,320 44,022,000 27,262,400 32,950,000 52,880,000 41,712,000 44,164,000 335,961,520 34,629,000 14,302,500 68,613,600 58,075,000 26,910,000 202,530,100 4,047,190 1,461,740 5,508,930 (COST $207,050,041) (COST $74,944,941) (COST $4,709,063) SPECIAL HOLDING (a)(d) (0.0%) 546,000 Standard MEMS, Inc. Series A Convertible Preferred (COST $3,003,000) — TECHNOLOGY (2.5%) 1,900,000 Xerox Corporation (a) (COST $25,689,854) 27,835,000 TOTAL COMMON AND PREFERRED STOCKS (114.9%) (COST $714,895,565) 1,301,855,069 CONSUMER PRODUCTS AND SERVICES (2.3%) PRINCIPAL AMOUNT CORPORATE NOTE $35,000,000 General Motors Nova Scotia Finance Company 6.85% Guaranteed Notes Due 10/15/08 (COST $33,123,366) 25,812,500 SHARES SHORT-TERM SECURITY AND OTHER ASSETS 3,822,949 SSgA Prime Money Market Fund (0.3%) (COST $3,822,949) 3,822,949 TOTAL INVESTMENTS (e) (117.5%) Cash, receivables and other assets less liabilities (0.1%) PREFERRED STOCK (-17.6%) NET ASSETS APPLICABLE TO COMMON STOCK (100%) (COST $751,841,880) 1,331,490,518 1,451,136 1,332,941,654 (200,000,000) $1,132,941,654 (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 acquired 12/17/99. Fair value in the opinion of the directors. (e) At December 31, 2005: (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 $602,842,012, (3) aggregate gross unrealized depreciation was $23,193,374, and (4) net unrealized appreciation was $579,648,638. 1 4 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. 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. Investments in money market funds are valued at their net asset 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 29,050,399 shares and 8,000,000 shares, respectively, were outstanding at December 31, 2005. 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 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 - 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 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 requires 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 2005 and 2004 were as follows: SHARES AMOUNT 2005 2004 2005 2004 Shares issued in payment of dividends (includes 1,067,491 and 508,849 shares issued from treasury, respectively) 1,067,491 508,849 Increase in paid-in capital Total increase Shares purchased (at an average discount from net asset value of 12.4% and 10.3%, respectively) Decrease in paid-in capital Total decrease Net decrease 1,222,404 1,092,800 $1,067,491 35,517,225 36,584,716 $508,849 15,273,103 15,781,952 (1,222,404) (38,589,768) (39,812,172) ($3,227,456) (1,092,800) (31,870,232) (32,963,032) ($17,181,080) At December 31, 2005, the Company held in its treasury 2,181,164 shares of Common Stock with an aggregate cost in the amount of $60,890,513. Distributions for tax and book purposes are substantially the same. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: Undistributed long-term gains Unrealized appreciation $3,969,333 579,648,638 $583,617,971 To reflect reclassification arising from permanent “book/tax” differences for the year ended December 31, 2004 undistributed net investment income was decreased by $96,483, undistributed realized gain on investments was in- creased by $32,883, and additional paid-in capital was increased by $63,600. These differences are primarily due to reclassification of dividends for tax purposes and non-deductible expenses. Net assets were not affected by this reclassification. To reflect reclassification arising from permanent “book/tax” differences for the year ended December 31, 2005 undistributed net investment income was decreased by $159,614, undistributed realized gain on investments was in- creased by $163,692, and additional paid-in capital was decreased by $4,078. These differences are primarily due to reclassification of dividends for tax purposes and non-deductible expenses. Net assets were not affected by this reclassification. 3. OFFICERS’ COMPENSATION The aggregate compensation paid by the Company during 2005 and 2004 to its officers amounted to $5,881,000 and $4,872,000, respectively. 4. PURCHASES AND SALES OF SECURITIES Purchases and sales of securities and securities sold short (other than short-term securities and options) during 2005 amounted to $254,596,163 and $274,239,355, on long transactions, respectively, and $3,825,799, with respect to short sale purchase transactions. 5. 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 defined contribution thrift plans that cover substantially all employees. The aggregate cost of such plans for 2005 and 2004 was $815,088 and $626,307, respectively. The unfunded liability included in other liabilities at December 31, 2005 and 2004 was $2,598,357 and $2,541,127, respectively. 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 5. PENSION BENEFIT PLANS - (Continued from 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 Miscellaneous Adjustment 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 2005 2004 QUALIFIED SUPPLEMENTAL QUALIFIED SUPPLEMENTAL PLAN PLAN TOTAL PLAN PLAN TOTAL $7,487,615 $2,690,636 $10,178,251 $6,793,866 $2,429,480 $9,223,346 194,771 481,413 (514,291) 1,071,753 180,895 8,902,156 14,625,572 64,946 1,730,760 — (514,291) 15,906,987 7,004,831 407,303 302,322 112,956 166,597 307,727 648,010 151,059 420,507 91,900 153,455 (146,513) (660,804) (427,238) (127,773) 298,925 16,433 1,370,678 197,328 395,684 153,737 144,698 (1,124) 242,959 573,962 (555,011) 540,382 152,613 3,139,034 12,041,190 7,487,615 2,690,636 10,178,251 — — — 14,625,572 13,029,458 64,946 — 1,730,760 2,023,352 — — — 146,513 (146,513) 146,513 (660,804) — (427,238) 127,773 (127,773) 13,029,458 — 2,023,352 127,773 (555,011) — 15,906,987 14,625,572 — 14,625,572 (3,139,034) 3,865,797 7,137,957 (2,690,636) (53,983) 91,890 353,320 394,212 206,316 134,662 (352,908) 99,896 4,447,321 (146,592) 234,558 $7,714,456 ($3,101,127) $4,613,329 $7,478,935 ($2,943,648) $4,535,287 $7,714,456 — $7,714,456 — ($3,101,127) $7,714,456 (3,101,127) ($3,101,127) $4,613,329 $7,478,935 — $7,478,935 — ($2,943,648) ($2,943,648) $8,322,164 $2,725,423 $11,047,587 $6,882,288 $2,295,334 8,902,156 15,906,987 3,139,034 — 12,041,190 15,906,987 7,487,615 14,625,572 2,690,636 — $7,478,935 (2,943,648) $4,535,287 $9,177,622 10,178,251 14,625,572 5.50% 8.75% 4.25% $194,771 481,413 (1,077,936) 5.50% N/A 4.25% 5.75% 8.75% 4.25% $112,956 166,597 $307,727 648,010 $151,059 420,507 5.75% N/A 4.25% $91,900 153,455 $242,959 573,962 — (1,077,936) (1,080,350) — (1,080,350) 13,235 152,996 24,439 — ($235,521) $303,992 37,674 152,996 $68,471 (16,245) — 28,565 (24,871) 12,320 (24,871) ($525,029) $249,049 ($275,980) 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 5.75% 8.75% 4.25% 5.75% N/A 4.25% 6.25% 8.75% 4.25% 6.25% 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 CASH FLOWS Qualified Plan Supplemental Plan Total at December 31, 2005 and 2004, by asset category, are as follows: Expected Company Contributions for 2006 ASSET CATEGORY Equity securities Debt securities Total December 31 2005 97.3% 2.7 2004 96.6% 3.4 100.0% 100.0% to Plan Participants/Total Contributions — $227,632 $227,632 Estimated Future Benefit Payments: 2006 2007 2008 2009 2010 2011-2015 $512,297 $227,632 $739,929 528,066 540,389 549,326 567,641 280,922 329,335 364,876 396,499 808,988 869,724 914,202 964,140 3,069,125 2,393,245 5,462,370 6. CALL AND PUT OPTIONS Transactions in written covered call and collateralized put options during the year ended December 31, 2005 were as follows: Options outstanding, December 31, 2004 Options written Options terminated in closing purchase transactions Options expired Options outstanding, December 31, 2005 Covered Calls Collateralized Puts Contracts 539 4,067 (4,606) — — Premiums $90,021 2,188,984 (2,279,005) — $0 Contracts 500 1,000 (500) (1,000) — Premiums $98,498 263,989 (98,498) (263,989) $0 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 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, 2005. This information has been derived from information contained in the financial statements and market price data for the Company’s shares. 7. 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 $298,200 for 2005. Minimum rental commitments under the operating lease are approximately $505,000 per annum in 2006 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 2006 through 2007. The Company will also receive its proportionate share of operating expenses and real property taxes under the sublease. 8. SUBSEQUENT EVENT On January 18, 2006, the Board of Directors declared on the Common Stock a distribution of $0.138 per share from net long-term capital gains. This distribution is payable in cash on February 13, 2006. 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 2005 2004 2003 2002 2001 $35.49 .19 $33.11 .32 $26.48 .03 $35.14 .19 $39.91 .41 and unrealized 5.85 3.48 7.72 (7.88) (.66) Distributions on Preferred Stock: Dividends from net investment income (.03) Distributions from net short-term (.09) (.01) (.12) capital gains Distributions from net long-term capital gains (.08) (.30) (.41) — (.32) (.41) Total from investment operations 5.63 3.39 — — (.23) (.35) (.36) (.35) 7.39 (8.04) Less distributions on Common Stock: Dividends from investment income Distributions from net short-term capital gains Distributions from net long-term capital gains (.15) (.44) (1.53) (2.12) (.23) (.02) — (.78) (1.01) — (.52) (.54) (.02) (.19) (.41) (.62) (.03) (.04) (.29) (.36) (.61) (.37) (.51) (3.28) (4.16) 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 — $39.00 $34.54 — $35.49 $31.32 (.22) $33.11 $29.73 — $26.48 $23.85 — $35.14 $33.47 Return, based on market price per share 17.40% 8.79% 27.01% (27.21)% 4.33% RATIOS AND SUPPLEMENTAL DATA Net assets applicable to Common Stock, end of year (000’s omitted) $1,132,942 $1,036,393 $986,335 $809,192 $1,097,530 Ratio of expenses to average net assets applicable to Common Stock 1.25% 1.15% 1.23% 0.92% 0.97% Ratio of net income to average net assets applicable to Common Stock Portfolio turnover rate 0.51% 20.41% 0.94% 16.71% 0.13% 18.62% 0.61% 22.67% 1.15% 23.81% PREFERRED STOCK Liquidation value, end of year (000’s omitted) Asset coverage Liquidation preference per share Market value per share $200,000 666% $25.00 $24.07 $200,000 618% $200,000 593% $150,000 639% $150,000 832% $25.00 $24.97 $25.00 $25.04 $25.00 $25.85 $25.00 $25.90 1 8 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, of General American Investors Company, Inc. as of December 31, 2005, 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 financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and finan- cial 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of express- ing an opinion on the effectiveness of the Company’s internal control over financial report- ing. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evi- dence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and sig- nificant estimates made by management, as well as evaluating 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, 2005, 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 18, 2006 1 9 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 (63) 1994 President and Chief Executive Officer of the Company since 1995 Sally A. Lynch, Ph.D. (46) Vice-President of the Company 1997 since 2006 securities analyst (biotechnology industry) Andrew V. Vindigni (46) Vice-President of the Peter P. Donnelly (57) Vice-President of the 1988 Company since 1995 securities analyst (financial services industry) 1974 Company since 1991 securities trader Eugene S. Stark (47) 2005 Vice-President, Administration of the Company since 2005; Principal Financial Officer since 2005; Chief Compliance Officer since 2006; Chief Financial Officer of Prospect Energy Corporation (2005); Vice-President of Prudential Financial, Inc. (1987-2004) Jesse Stuart (39) Vice-President of the Company 2003 since 2006 securities analyst (general industries); securities analyst & portfolio manager of Scudder, Stevens and Clark (1996-2003) Diane G. Radosti (53) Treasurer of the 1980 Company since 1990 Principal Accounting Officer since 2003 Carole Anne Clementi (59) Secretary of the Company 1982 Craig A. Grassi (37) 1991 Maureen E. LoBello (55) 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 page 20. 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 15, 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 at www.generalamericaninvestors.com and 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 call- ing us at 1-800-436-8401. On May 6, 2005, the Company submitted a CEO annual certification to the New York Stock Exchange (“NYSE”) on which the Company’s principal executive officer certified that he was not aware, as of that date, of any violation by the Company of the NYSE’s Corporate Governance list- ing standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Company’s principal executive and principal financial officer made quarterly certifications, included in filings with the SEC on Forms N-CSR and N-Q relating to, among other things, the Company’s disclosure controls and procedures and internal control over financial reporting, as applicable. 2 0 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 NNAAMMEE ((AAGGEE)) DDIIRREECCTTOORR SSIINNCCEE PPRRIINNCCIIPPAALL OOCCCCUUPPAATTIIOONN DDUURRIINNGG PPAASSTT 55 YYEEAARRSS INDEPENDENT (“DISINTERESTED”) DIRECTORS Lawrence B. Buttenwieser (74) 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. (41) 1995 Managing Member Diaz & Altschul Capital Management, LLC (private investment company) Lewis B. Cullman (87) 1961 Managing Member Cullman Ventures LLC Gerald M. Edelman (76) 1976 John D. Gordan, III (60) 1986 Sidney R. Knafel (75) 1994 Member, Professor 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) Richard R. Pivirotto (75) 1971 President Richard R. Pivirotto Co., Inc. (self-employed consultant) OOTTHHEERR DDIIRREECCTTOORRSSHHIIPPSS AANNDD AAFFFFIILLIIAATTIIOONNSS Delta Opportunity Fund, Ltd., Director Medicis Pharmaceutical Corporation, Director Medrium, Inc., Chairman, Board of Directors National Public Radio Foundation, Trustee 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 VirtualScopics, Inc., Director Vocollect, Inc., Director Associated Community Bancorp, Inc., Director General Theological Seminary, Trustee Greenwich Hospital Corporation, Trustee Immunomedics, Inc., Director Princeton University, Charter Trustee Emeritus D. Ellen Shuman (50) 2004 Vice President and Chief Investment Officer Bowdoin College, Trustee Edna McConnell Clark Foundation, Carnegie Corporation of New York Investment Advisor Joseph T. Stewart, Jr. (76) 1987 Corporate director and trustee Foundation of the University of The Investment Fund for Foundations, Director Meristar Hospitality Corporation, Director 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 Raymond S. Troubh (79) 1989 Financial Consultant INSIDE (“INTERESTED”) DIRECTOR Spencer Davidson (63) 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 T. Golden, DIRECTOR EMERITUS 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.generalamericanivestors.com 

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