GAM Holding AG
Annual Report 2006

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 6 A N N U A L R E P O R T 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 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) Net assets applicable to Common Stock - December 31 Net investment income Net realized gain Net increase in unrealized appreciation Distributions to Preferred Stockholders Per Common Share-December 31 Net asset value Market price Discount from net asset value 2006 2005 $1,199,453,088 10,007,624 86,176,349 51,196,338 (11,900,000) $1,132,941,654 5,408,018 63,024,095 103,638,830 (11,900,000) $40.54 $37.12 -8.4% $39.00 $34.54 -11.4% 29,050,399 4,100 $35.45-$29.37 7,242,000 Common Shares outstanding-Dec. 31 Common Stockholders of record-Dec. 31 Market price range* (high-low) Market volume-shares 29,589,198 4,006 $39.47-$34.80 6,313,300 *Unadjusted for dividend payments. DIVIDEND SUMMARY (per share) (unaudited) Record Date Payment Date Ordinary Income Long-Term Capital Gain Total Common Stock Nov. 10, 2006 Dec. 21, 2006 $.333952 $2.666048 $3.000000 Nov. 11, 2005 Jan. 30, 2006 Dec. 22, 2005 Feb. 13, 2006 Total from 2005 earnings (a) Includes short-term gains in the amount of $.041294 per share. $.587543 (a) $1.260182 .138000 $1.398182 — $.587543 Preferred Stock Mar. 7, 2006 Jun. 7, 2006 Sep. 7, 2006 Dec. 7, 2006 Total for 2006 Mar. 7, 2005 Jun. 7, 2005 Sep. 7, 2005 Dec. 7, 2005 Total for 2005 Mar. 24, 2006 Jun. 26, 2006 Sep. 25, 2006 Dec. 26, 2006 Mar. 24, 2005 Jun. 24, 2005 Sep. 26, 2005 Dec. 27, 2005 $.039403 .039403 .039403 .039403 $.157612 $.332472 .332472 .332472 .332472 $1.329888 $.102969 .102969 .102969 .102969 $.268906 .268906 .268906 .268906 $.411876 (b) $1.075624 (b) Includes short-term gains 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 $1.847725 .138000 $1.985725 $.371875 .371875 .371875 .371875 $1.487500 $.371875 .371875 .371875 .371875 $1.487500 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 a fourth consecutive year, gaining 15.7% in the 12 months ended December 31, 2006, 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 12.2%. The return to our Common Stockholders was 16.8%, reflecting a decrease in the discount at which our shares trade, which, at year end, was 8.4%. 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 14.3% 6.6 16.1 15.1 16.8 13.8 10.3% 6.1 8.4 11.8 12.5 11.0 The share repurchase program, a part of our continuing effort to maximize NAV, continues. In 2006, the Company purchased 787,700 of its Common Shares on the open market at an average discount to NAV of 9.0%. The Board of Directors has authorized repurchases of Common Shares when they are trading at a discount to NAV in excess of 8%. Coming on the heels of an exceptional year in 2005, last year's results were less satisfying, although consistent with our record of long-term performance. Curiously, bad news in Iraq and the renewed threat of nuclear pro- liferation were accompanied by good markets and relatively strong economic activity. Trouble in the hous- ing market, as reflected in weakening prices and declining building activity, did not appear to affect the rest of the economy. With inflation contained, seeming- ly, and abundant liquidity as evidenced by the relatively low cost of money, and the ease with which it could be borrowed, consumer spending continued to support cor- porate profits and share prices. As the new year unfolds, the sanguine investment climate that characterized the past few years is showing signs of strain. The economy is likely to continue slow- ing and corporate profits, generally, are expected to moderate. While the Fed appears to have stopped raising interest rates, the prospect of decreases in the immediate future is far from clear. Because consumer spending, the main driver of GDP growth, remains asset-dependent, a protracted downturn in housing could create the poten- tial for collateral damage to other parts of the economy. Globalization and its progeny, outsourcing, have held back real wages and employment growth, thus buttress- ing corporate profits. However, the risk of more persistent inflation, as labor costs rise in a low unemployment set- ting, cannot be ruled out. Should our trading partners weary of funding the current account deficit by continu- ing to invest the bulk of their receipts in U.S. securities, dollar weakness would likely ensue. The rise in interest rates that would likely attend such a decline could have a seriously destabilizing effect on the capital markets. While the investment climate may be more volatile this year, equities should be supported by relatively reasonable valuations and interest rates that remain agreeable. Additionally, share buybacks, increasing divi- dends, and felicitous mergers and acquisitions, all resulting from the current elevated level of corporate profits, are likely to buoy share prices. Our investments remain focused on well-managed companies with strong financial characteristics that can generate consistent earnings growth and cash flow. We are confident that our portfolio reflects these attributes, which should result in continuing superior performance on a long-term basis. We are pleased to announce that, on December 13, 2006, Andrew V. Vindigni was promoted to Senior Vice- President of the Company. Mr. Vindigni has been a Vice-President of the Company since 1995 and has been employed in a research capacity with the Company since 1988. Mr. Lawrence B. Buttenwieser, Chairman since 1995 and a Director since 1967, will not be standing for re-election at the annual meeting on April 11, 2007. His wisdom and judgment have been invaluable to the Board. We ex- press our gratitude and deepest appreciation for his long and distinguished service to the Company. We are saddened to report that Richard R. Pivirotto, our esteemed colleague and Director, died on January 8, 2007. Mr. Pivirotto, was a director of Associated Community Bancorp, Inc. and Immunomedics, Inc., a Trustee of General Theological Seminary and Greenwich Hospital Corporation, and Charter Trustee Emeritus of Princeton University. He served as a director of the Company for more than 35 years. His counsel and sup- port 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 17, 2007 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 also 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 Barron’s and The Wall Street Journal. 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 2006, the stock sold at discounts from net asset value which ranged from 6.1% (March 9 and November 2) to 13.2% (January 4). At December 31, the price of the stock was at a discount of 8.4% as compared with a discount of 11.4% 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 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 1943-2006 (except for the year 1974). (A table listing dividends and distributions paid during the 20-year period 1987-2006 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, 2006 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 ability 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 Distribution & 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 col- lect personal information about, stockholders 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, electronic 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, 2006 T he investment return for a Common Stockholder of General American Investors (GAM) over the 20 years ended December 31, 2006 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 1987. 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 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 $8,389 10,173 15,116 15,721 29,084 33,382 28,068 25,862 31,350 37,457 53,406 70,127 97,631 2000 116,278 2001 121,313 2002 88,304 2003 2004 2005 2006 112,155 122,013 143,243 167,279 -16.11% $10,253 2.53% $10,524 5.24% 21.26 48.60 4.00 85.00 14.78 -15.92 -7.86 21.22 19.48 42.58 31.31 12,054 16,618 17,730 28,561 29,575 29,058 28,261 34,926 41,900 55,329 74,772 39.22 101,989 19.10 4.33 -27.21 27.01 8.79 17.40 16.78 119,980 118,540 91,252 116,255 128,311 149,097 167,347 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 12.24 12,264 16,141 15,643 20,398 21,946 24,167 24,474 33,652 41,361 55,147 70,892 85,751 77,956 68,687 53,480 68,753 76,172 79,851 92,356 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 15.66 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, 2006 STOCKHOLDER RETURN GAM NET ASSET VALUE S&P 500 STOCK INDEX 1 year 5 years 10 years 15 years 20 years 16.8 % 12.2 % 15.7 % 6.6 16.1 12.4 15.1 7.1 14.9 12.5 15.1 6.1 8.4 10.6 11.8 GAM STOCKHOLDER RETURN GAM NET ASSET VALUE S&P 500 STOCK INDEX 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 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 6 ( 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 Cephalon, Inc. Epoch Holding Corporation Series A Convertible Preferred 4.6% QUALCOMM Incorporated Rio Tinto plc ADR Wachovia Corporation ADDITIONS Dollar General Corporation PepsiCo, Inc. Xerox Corporation DECREASES SHARES — 10,000 700,000 — 614,864 (b) 901,000 50,000 350,000 ELIMINATIONS Golden West Financial Corporation Standard MEMS, Inc. Series A Convertible Preferred 585,000 (b) 546,000 REDUCTIONS Alkermes, Inc. American International Group, Inc. Annaly Capital Management, Inc. Everest Re Group, Ltd. MFA Mortgage Investments, Inc. Microsoft Corporation Pfizer Inc The TJX Companies, Inc. VeriSign, Inc. 65,000 15,000 105,000 35,000 150,000 80,000 389,100 240,000 20,000 SHARES HELD DECEMBER 31, 2006 150,000 10,000 700,000 65,000 614,864 (a) (a) 2,500,000 225,000 2,250,000 — — 175,000 360,000 550,000 500,000 925,000 720,000 1,347,900 2,100,000 113,500 * Excludes transactions in Common and Preferred Stocks-Miscellaneous-Other. (a) Securities purchased in prior period and previously carried under Common and Preferred Stocks-Miscellaneous-Other. (b) 614,864 shares of Wachovia Corporation were received in exchange for 585,000 shares of Golden West Financial Corporation in conjunction with a merger. 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 7 - 2 0 0 6 ) ( 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 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 $.35 .29 .21 .21 .09 .03 .06 .06 .10 .20 — — $.02 — — — — — .03 .05 $1.54 1.69 1.56 1.65 3.07 2.93 2.34 1.59 2.77 2.71 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 $.21 .47 .42 .48 .37 .03 .02 .217 .547 .334 — — $.62 1.55 .64 — — — .041 — $2.95 4.40 4.05 6.16 1.37 .33 .59 .957 1.398 2.666 This table shows dividends and distribu- tions on the Company’s Common Stock for the prior 20-year period. Amounts shown are based upon the year in which the income was earned, not the year paid. Spill-over payments made after year-end are attributable to income and gain earned in the prior 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, 2006, shown on pages 12 and 13 includes 54 security issues. Listed here are the ten largest holdings on that date. 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. 2,350,862 $79,647,204 6.6% SHARES VALUE % COMMON NET ASSETS* 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 the 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. APACHE CORPORATION Apache is a large independent oil and gas company with 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. 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. EVEREST RE GROUP, LTD. One of the largest independent U.S. property/casualty reinsurers, generates annual premiums of approximately $4 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 and book value growth. 1,570,000 63,051,200 5.3 2,100,000 59,892,000 5.0 825,000 54,870,750 4.6 1,220,000 50,983,800 4.3 3,000,000 50,970,000 4.2 500,000 49,055,000 4.1 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 improved economic activity should result in higher waste volumes for the company. 1,175,000 47,787,250 4.0 DOLLAR GENERAL CORPORATION Dollar General, is the country’s largest dollar store company. It has the opportunity to expand sales by adding new stores and to expand margins by the strategy and tactics of a new management team. 2,500,000 40,150,000 3.3 XEROX CORPORATION Xerox develops, manufactures and finances a broad range of document processing products and services for use in offices worldwide. The growing adoption of color and digital products should lead to growing profitability. 2,250,000 38,137,500 3.2 $534,544,704 44.6% *Net assets applicable to the Company’s Common Stock. 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) 2006 2005 DECEMBER 31, 2006 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, 2006 and 2005 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 Consumer Products and Services Building and Real Estate Miscellaneous** Environmental Control (Including Services) Technology Computer Software and Systems Machinery & Equipment Electronics Mining Semiconductors Short-Term Securities Total Investments Other Assets and Liabilities - Net Preferred Stock Net Assets Applicable to Common Stock $148,725 $206,447 17.2% 29.7% 17,349 87,398 22,878 127,625 86,347 66,003 10,484 76,487 64,261 67,332 31,961 43,663 26,227 31,683 21,197 12,430 12,287 13,421 — 763,646 17,256 $780,902 101,658 217,772 31,330 350,760 226,656 104,218 24,080 128,298 102,828 86,001 79,647 50,017 47,787 38,138 28,189 20,677 15,235 13,811 — 1,394,491 17,256 1,411,747 (12,294) (200,000) 8.5 18.2 2.6 29.3 18.9 8.7 2.0 10.7 8.6 7.2 6.6 4.2 4.0 3.2 2.3 1.7 1.3 1.1 — 116.3 1.4 117.7 (1.0) (16.7) 8.8 15.8 1.1 25.7 17.9 8.0 2.3 10.3 6.1 5.9 6.0 3.7 3.9 2.5 3.8 — 1.2 — 0.5 117.2 0.3 117.5 0.1 (17.6) $1,199,453 100.0% 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, 2006 2005 (cost $729,900,430 and $714,895,565, respectively) $1,359,753,863 $1,301,855,069 Corporate note (cost $33,745,957 and $33,123,366, respectively) Money market fund (cost $17,255,705 and $3,822,949, respectively) Total investments (cost $780,902,092 and $751,841,880, respectively) CASH, RECEIVABLES AND OTHER ASSETS Cash Receivable for securities sold Dividends, interest and other receivables Pension asset, excess funded Prepaid pension cost Prepaid expenses and other assets TOTAL ASSETS LIABILITIES Payable for securities purchased Preferred dividend accrued but not yet declared Pension benefit liability Accrued pension expense Accrued thrift plan expense Accrued expenses and other liabilities TOTAL LIABILITIES 5.95% CUMULATIVE PREFERRED STOCK, SERIES B - 34,737,500 25,812,500 17,255,705 3,822,949 1,411,747,068 1,331,490,518 34,235 2,875,316 1,430,378 8,656,759 — 149,755 13,298 5,733,693 1,028,867 — 7,714,456 214,022 1,424,893,511 1,346,194,854 13,515,130 231,389 3,320,727 — 2,992,285 5,380,892 25,440,423 1,468,214 231,389 — 3,101,128 2,598,356 5,854,113 13,253,200 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 - 29,589,198 and 29,050,399 shares, respectively (note 2) $1,199,453,088 $1,132,941,654 NET ASSET VALUE PER COMMON SHARE $40.54 $39.00 NET ASSETS APPLICABLE TO COMMON STOCK Common Stock, 29,589,198 and 29,050,399 shares at par value, respectively (note 2) Additional paid-in capital (note 2) Undistributed realized gain (loss) on investments (note 2) Undistributed net investment income (note 2) Accumulated other comprehensive income (note 5) Unallocated distributions on Preferred Stock Unrealized appreciation on investments, securities $29,589,198 538,093,876 (1,715,049) 2,218,917 652,559 (231,389) $29,050,399 518,972,693 3,969,333 1,531,980 — (231,389) sold short and options 630,844,976 579,648,638 NET ASSETS APPLICABLE TO COMMON STOCK $1,199,453,088 $1,132,941,654 (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 $325,061 and $490,458, 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, 2006 2005 $16,065,789 6,301,585 $16,403,240 2,318,112 22,367,374 18,721,352 8,054,383 2,922,014 544,210 286,326 163,000 140,346 134,106 115,365 8,695,758 3,236,737 537,671 218,402 216,600 176,854 129,857 101,455 12,359,750 13,313,334 10,007,624 5,408,018 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 (long-term except for $2,228,817 and $14,501,035, respectively) Net increase in unrealized appreciation NET GAIN ON INVESTMENTS DISTRIBUTIONS TO PREFERRED STOCKHOLDERS INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (see notes to financial statements) 86,808,130 (629,681) (2,100) 63,646,612 (755,114) 132,597 86,176,349 63,024,095 51,196,338 103,638,830 137,372,687 166,662,925 (11,900,000) (11,900,000) $135,480,311 $160,170,943 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, 2006 2005 $10,007,624 86,176,349 51,196,338 147,380,311 $5,408,018 63,024,095 103,638,830 172,070,943 (1,092,608) (168,288) (10,639,104) (11,900,000) (845,368) (2,449,640) (8,604,992) (11,900,000) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 135,480,311 160,170,943 OTHER COMPREHENSIVE INCOME Adjustment to initially apply FAS 158 (note 5) 652,559 — 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) (8,230,843) (1,262,677) (79,790,662) (4,333,771) (12,389,129) (43,672,026) (89,284,182) (60,394,926) Value of Common Shares issued in payment of distributions Cost of Common Shares purchased 48,748,838 36,584,716 (29,086,092) (39,812,172) INCREASE (DECREASE) IN NET ASSETS - CAPITAL TRANSACTIONS 19,662,746 (3,227,456) NET INCREASE IN NET ASSETS 66,511,434 96,548,561 NET ASSETS APPLICABLE TO COMMON STOCK BEGINNING OF YEAR 1,132,941,654 1,036,393,093 END OF YEAR (including undistributed net investment income of $2,218,917 and $1,531,980, respectively) $1,199,453,088 $1,132,941,654 (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 6 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 VALUE (NOTE 1a) 2,350,862 CEMEX, S.A. de C.V. ADR (COST $31,961,056) $79,647,204 BUILDING AND REAL ESTATE (6.6%) COMMUNICATIONS AND INFORMATION SERVICES (8.6%) 775,000 American Tower Corporation (a) 900,000 Cisco Systems, Inc. (a) 350,000 Lamar Advertising Company Class A (a) 700,000 QUALCOMM Incorporated COMPUTER SOFTWARE AND SYSTEMS (2.3%) 300,000 EMC Corporation (a) 720,000 Microsoft Corporation 113,500 VeriSign, Inc. (a) CONSUMER PRODUCTS AND SERVICES (4.3%) 325,000 Constellation Brands, Inc. (a) 350,000 Diageo plc ADR 225,000 PepsiCo, Inc. 28,892,000 24,597,000 22,886,500 26,453,000 102,828,500 3,960,000 21,499,200 2,729,675 28,188,875 9,431,500 27,758,500 14,073,750 51,263,750 (COST $64,260,573) (COST $21,197,130) (COST $33,585,638) ELECTRONICS (1.3%) 550,000 Molex Incorporated Class A (COST $12,287,441) 15,235,000 ENVIRONMENTAL CONTROL (INCLUDING SERVICES) (4.0%) 1,175,000 Republic Services, Inc. (COST $26,227,380) 47,787,250 FINANCE AND INSURANCE (29.3%) BANKING (8.5%) 270,000 Bank of America Corporation 310,000 M&T Bank Corporation 170,000 SunTrust Banks, Inc. 614,864 Wachovia Corporation INSURANCE (18.2%) 275,000 The Allstate Corporation 360,000 American International Group, Inc. 275,000 Annuity and Life Re (Holdings), Ltd. (a) 350,000 Arch Capital Group Ltd. (a) 400,000 AXIS Capital Holdings Limited 300 Berkshire Hathaway Inc. Class A (a) 500,000 Everest Re Group, Ltd. 285,000 MetLife, Inc. 335,000 PartnerRe Ltd. 230,000 Transatlantic Holdings, Inc. (COST $17,349,060) OTHER (2.6%) 550,000 Annaly Capital Management, Inc. 10,000 Epoch Holding Corporation Series A Convertible Preferred 4.6% (d) 925,000 MFA Mortgage Investments, Inc. (COST $87,398,021) (COST $22,878,434) (COST $127,625,515) HEALTH CARE (10.7%) PHARMACEUTICALS (8.7%) 175,000 Alkermes, Inc. (a) 170,000 Biogen Idec Inc. (a) 150,000 Cephalon, Inc. (a) 604,900 Cytokinetics, Incorporated (a) 200,000 Genentech, Inc. (a) 380,000 MedImmune, Inc. (a) 180,000 Novo Nordisk B 1,347,900 Pfizer Inc MEDICAL INSTRUMENTS AND DEVICES (2.0%) 450,000 Medtronic, Inc. (COST $66,003,518) (COST $10,483,716) (COST $76,487,234) 14,415,300 37,869,600 14,356,500 35,016,505 101,657,905 17,905,250 25,797,600 110,000 23,663,500 13,348,000 32,997,000 49,055,000 16,817,850 23,795,050 14,283,000 217,772,250 7,650,500 16,566,667 7,113,250 31,330,417 350,760,572 2,339,750 8,362,300 10,561,500 4,524,652 16,226,000 12,300,600 14,992,200 34,910,610 104,217,612 24,079,500 128,297,112 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 6 - 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 MACHINERY & EQUIPMENT (1.7%) SHARES COMMON AND PREFERRED STOCKS (Continued) VALUE (NOTE 1a) 1,150,000 ABB Ltd. ADR (COST $12,430,211) $20,677,000 MINING (1.1%) 65,000 Rio Tinto plc ADR (COST $13,420,904) 13,811,850 MISCELLANEOUS (4.2%) Other (b) (COST $43,662,790) 50,016,500 OIL AND NATURAL GAS (INCLUDING SERVICES) (17.2%) 825,000 Apache Corporation 850,000 Halliburton Company 1,000,000 Patterson-UTI Energy, Inc. 3,000,000 Talisman Energy Inc. 1,220,000 Weatherford International Ltd. (a) RETAIL TRADE (18.9%) 700,000 Costco Wholesale Corporation 2,500,000 Dollar General Corporation 1,570,000 The Home Depot, Inc. (c) 2,100,000 The TJX Companies, Inc. 575,000 Wal-Mart Stores, Inc. 54,870,750 26,392,500 23,230,000 50,970,000 50,983,800 206,447,050 37,009,000 40,150,000 63,051,200 59,892,000 26,553,500 226,655,700 (COST $148,725,073) (COST $86,346,776) TECHNOLOGY (3.2%) 2,250,000 Xerox Corporation (a) (COST $31,682,709) 38,137,500 TOTAL COMMON AND PREFERRED STOCKS (113.4%) (COST $729,900,430) 1,359,753,863 CONSUMER PRODUCTS AND SERVICES (2.9%) PRINCIPAL AMOUNT CORPORATE NOTE $35,000,000 General Motors Nova Scotia Finance Company 6.85% Guaranteed Notes Due 10/15/08 (COST $33,745,957) 34,737,500 SHARES SHORT-TERM SECURITY AND OTHER ASSETS 17,255,705 SSgA Prime Money Market Fund (1.4%) (COST $17,255,705) 17,255,705 TOTAL INVESTMENTS (e) (117.7%) Liabilities in excess of receivables and other assets (-1.0%) (COST $780,902,092) PREFERRED STOCK (-16.7%) NET ASSETS APPLICABLE TO COMMON STOCK (100%) 1,411,747,068 (12,293,980) 1,399,453,088 (200,000,000) $1,199,453,088 (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 short positions, if any. (d) Restricted security of an affiliate acquired 11/7/06. (e) At December 31, 2006: (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 $632,899,306, (3) aggregate gross unrealized depreciation was $2,054,330, and (4) net unrealized appreciation was $630,844,976. (see notes to financial statements) 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. Investments in money market funds are valued at their net asset value. The restricted security is valued at par value (cost), divided by the conversion price of $6.00 multiplied by the last reported sales price of the publicly traded common stock of the corporation. 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 29,589,198 shares and 8,000,000 shares, respectively, were outstanding at December 31, 2006. 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 2006 and 2005 were as follows: Treasury shares issued in payment of dividends and distributions Increase in paid-in capital Total increase Shares purchased (at an average discount from net asset value of 9.0% and 12.4%, respectively) Decrease in paid-in capital Total decrease Net increase (decrease) SHARES AMOUNT 2006 2005 2006 2005 1,326,499 1,067,491 $1,326,499 47,422,339 48,748,838 $1,067,491 35,517,225 36,584,716 787,700 1,222,404 (787,700) (28,298,392) (29,086,092) $19,662,746 (1,222,404) (38,589,768) (39,812,172) ($3,227,456) At December 31, 2006, the Company held in its treasury 1,642,365 shares of Common Stock with an aggregate cost in the amount of $49,650,348. Distributions for tax and book purposes are substantially the same. As of December 31, 2006, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income Accumulated capital losses Unrealized appreciation $889,490 (1,715,049) 630,844,976 $630,019,417 In accordance with U.S. Treasury Regulations, the Company has elected to defer $1,715,049 of net realized capital losses arising after October 31, 2006. Such losses are treated for tax purposes as arising on January 1, 2007. To reflect reclassification arising from permanent “book/tax” differences for non-deductible expenses during the year ended December 31, 2006, undistributed net investment income was increased by $2,764, and additional paid- in capital was decreased by $2,764. Net assets were not affected by this reclassification. 3. OFFICERS’ COMPENSATION The aggregate compensation paid by the Company during 2006 and 2005 to its officers (identified on page 19) amounted to $7,255,500 and $5,881,000, respectively. 4. PURCHASES AND SALES OF SECURITIES Purchases and sales of securities and securities sold short (other than short-term securities and options) during 2006 amounted to $250,301,775 and $321,482,449, on long transactions, respectively, and $4,061,806 and $3,432,125, on short sale transactions, respectively. 5. BENEFIT PLANS The Company has funded and unfunded defined contribution thrift plans that are available to its employees. The aggregate cost of such plans for 2006 and 2005 was $805,729 and $815,088, respectively. The Company also has both a funded (Qualified) and an unfunded (Supplemental) noncontributory defined bene- fit pension plans that cover 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. Effective December 31, 2006, the Company adopted the recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS158”) which was released on September 2006. FAS 158 improves financial reporting by requiring employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in the statement of assets and liabilities and to recognize changes in funded status in the year in which the changes occur through other comprehensive income. 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: DECEMBER 31, 2006 (MEASUREMENT DATE) SUPPLEMENTAL PLAN QUALIFIED PLAN TOTAL DECEMBER 31, 2005 (MEASUREMENT DATE) SUPPLEMENTAL PLAN QUALIFIED PLAN TOTAL CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year Service cost Interest cost Benefits paid Actuarial (gains)/losses Plan amendments Projected 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 AT END OF YEAR Unrecognized actuarial (gains)/losses Unrecognized prior service cost Net amount recognized at end of year $8,902,156 201,809 501,644 (542,274) (848) — 9,062,487 15,906,987 — 2,354,533 — (542,274) 17,719,246 8,656,759 — — $8,656,759 $3,139,034 115,586 182,511 (165,252) 48,848 — 3,320,727 — — — 165,252 (165,252) — (3,320,727) — — ($3,320,727) $12,041,190 317,395 684,155 (707,526) 48,000 — 12,383,214 15,906,987 — 2,354,533 165,252 (707,526) 17,719,246 5,336,032 — — $5,336,032 $7,487,615 194,771 481,413 (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 $7,714,456 $2,690,636 112,956 166,597 (146,513) 298,925 16,433 3,139,034 — — — 146,513 (146,513) — (3,139,034) (53,984) 91,890 ($3,101,128) $10,178,251 307,727 648,010 (660,804) 1,370,678 197,328 12,041,190 14,625,572 64,946 1,730,760 146,513 (660,804) 15,906,987 3,865,797 353,319 394,212 $4,613,328 Accumulated benefit obligation at end of year $8,400,586 $2,971,614 $11,372,200 $8,322,164 $2,725,423 $11,047,587 INCREMENTAL EFFECT OF ADOPTING FAS 158 BEFORE ADJUSTMENTS AFTER Noncurrent benefit asset LIABILITIES Current benefit liability Noncurrent benefit liability $7,939,307 $717,452 $8,656,759 213,549 3,042,285 — 64,893 213,549 3,107,178 Accumulated other comprehensive income — (652,559) (652,559) AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME CONSIST OF: Net actuarial loss/(gain) Prior service cost/(credit) ($1,006,540) 289,088 ($717,452) ($5,136) 70,029 $64,893 ($1,011,676) 359,117 ($652,559) 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 Net periodic benefit cost 5.75% 8.75% 4.25% $201,809 501,645 (1,127,040) 13,235 185,502 ($224,849) 5.75% N/A 4.25% $115,586 182,511 — 21,861 — $319,958 $317,395 684,156 (1,127,040) $194,771 481,413 (1,077,936) 35,096 185,502 $95,109 13,235 152,996 ($235,521) 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 5.50% 8.75% 4.25% 5.50% N/A 4.25% 5.75% 8.75% 4.25% N/A N/A N/A 5.50% 8.75% 4.25% N/A N/A N/A $307,727 648,010 (1,077,936) 37,674 152,996 $68,471 N/A N/A N/A 5.50% N/A 4.25% $112,956 166,597 — 24,439 — $303,992 5.75% N/A 4.25% PLAN ASSETS The Company’s qualified pension plan asset allocations by asset EXPECTED CASH FLOWS Qualified Plan Supplemental Plan Total category at December 31, 2006 and 2005, are as follows: Expected Company contributions for 2007 — $213,549 $213,549 ASSET CATEGORY Equity securities Debt securities Total December 31 2006 88.2% 11.8 2005 97.3% 2.7 100.0% 100.0% Generally, not less than 80% of plan assets are invested in Expected benefit payments: 2007 2008 2009 2010 2011 investment companies that invest in equity securities. 2012-2016 $527,506 $213,549 $741,055 536,049 542,757 561,535 583,903 257,363 289,572 320,654 353,543 793,412 832,329 882,189 937,446 3,190,667 2,217,100 5,407,767 6. PUT OPTION A transaction in a written collateralized put option during the year ended December 31, 2006 was as follows: Option written Option terminated in closing purchase transaction Option outstanding, December 31, 2006 Collateralized Put Contract 100 (100) — Premium $16,199 (16,199) $0 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 $308,900 for 2006. Minimum rental commitments under the operating lease are approximately $505,000 in 2007. 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 7. OPERATING LEASE COMMITMENT- (Continued from previous page.) 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 in 2007. The Company will also receive its proportionate share of operating expenses and real property taxes under the sublease. 8. RECENT ACCOUNTING PRONOUNCEMENTS On July 13, 2006, the FASB released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN48”). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applic- able tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after June 29, 2007 and is to be applied to all open tax years as of the effective date. Management does not believe that the application of this standard will have a material impact on the financial statements of the Company. On September 20, 2006, the FASB released Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management does not believe that the application of this standard will have a material impact on the financial statements of the Company. 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, 2006. This information has been derived from information contained in the financial statements and market price data for the Company’s shares. 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 and unrealized Other comprehensive income Distributions on Preferred Stock: 4.72 .03 Dividends from net investment income (.04) Distributions from net short-term capital gains Distributions from net long-term capital gains (.01) (.36) (.41) 2006 2005 2004 2003 2002 $39.00 .34 $35.49 .19 $33.11 .32 $26.48 .03 $35.14 .19 5.85 — (.03) (.08) (.30) (.41) 3.48 — 7.72 (7.88) — — (.09) (.01) (.12) — (.32) (.41) — — (.23) (.35) (.36) (.35) 7.39 (8.04) Total from investment operations 4.68 5.63 3.39 Distributions on Common Stock: Dividends from investment income Distributions from net short-term capital gains Distributions from net long-term capital gains (.29) (.04) (2.81) (3.14) (.15) (.44) (1.53) (2.12) (.23) (.02) — (.78) (1.01) — (.52) (.54) (.02) (.19) (.41) (.62) 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 — $40.54 $37.12 — $39.00 $34.54 — $35.49 $31.32 (.22) $33.11 $29.73 — $26.48 $23.85 Return, based on market price per share 16.78% 17.40% 8.79% 27.01% (27.21)% RATIOS AND SUPPLEMENTAL DATA Net assets applicable to Common Stock, end of year (000’s omitted) $1,199,453 $1,132,942 $1,036,393 $986,335 $809,192 Ratio of expenses to average net assets applicable to Common Stock 1.06% 1.25% 1.15% 1.23% 0.92% Ratio of net income to average net assets applicable to Common Stock Portfolio turnover rate 0.86% 19.10% 0.51% 20.41% 0.94% 16.71% 0.13% 18.62% 0.61% 22.67% PREFERRED STOCK Liquidation value, end of year (000’s omitted) Asset coverage Liquidation preference per share Market value per share $200,000 700% $25.00 $24.44 $200,000 666% $200,000 618% $200,000 593% $150,000 639% $25.00 $24.07 $25.00 $24.97 $25.00 $25.04 $25.00 $25.85 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 statement of investments, of General American Investors Company, Inc. as of December 31, 2006, 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 manage- ment. Our responsibility is to express an opinion on these financial statements and financial high- lights 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, 2006, 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, 2006, 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 17, 2007 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 (64) 1994 President and Chief Executive Officer of the Company since 1995 Sally A. Lynch, Ph.D. (47) Vice-President of the 1997 Company since 2006 securities analyst (biotechnology industry) Andrew V. Vindigni (47) Senior Vice-President of the Peter P. Donnelly (58) Vice-President of the 1988 Company since 2006 Vice-President 1995-2006; securities analyst (financial services industry) 1974 Company since 1991 securities trader Eugene S. Stark (48) 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 (40) Vice-President of the 2003 Company since 2006 securities analyst (general industries); securities analyst & portfolio manager of Scudder, Stevens and Clark (1996-2003) Diane G. Radosti (54) Treasurer of the 1980 Company since 1990 Principal Accounting Officer since 2003 Carole Anne Clementi (60) Secretary of the 1982 Company since 1994 shareholder relations and office management Craig A. Grassi (38) 1991 Assistant Vice-President of the Company since 2005 information technology Maureen E. LoBello (56) 1992 Assistant Secretary of the Company since 2005 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 2, 2006, 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 (75) 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. (42) 1995 Managing Member Diaz & Altschul Capital Management, LLC (private investment company) Lewis B. Cullman (88) 1961 Philanthropist Gerald M. Edelman (77) 1976 John D. Gordan, III (61) 1986 Sidney R. Knafel (76) 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) OOTTHHEERR DDIIRREECCTTOORRSSHHIIPPSS AANNDD AAFFFFIILLIIAATTIIOONNSS Delta Opportunity Fund, Ltd., Director Diversified Natural Products, Inc., Director Medicis Pharmaceutical Corporation, Director Medrium, Inc., Chairman, Board of Directors National Public Radio Foundation, Trustee Neurosciences Research Foundation, Trustee The Overbrook Foundation, Director 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 D. Ellen Shuman (51) 2004 Vice President and Chief Investment Officer Bowdoin College, Trustee Edna McConnell Clark Foundation, Carnegie Corporation of New York Investment Advisor The Investment Fund for Foundations, Director Joseph T. Stewart, Jr. (77) 1987 Corporate director and trustee 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 Sun-Times Media Group, Inc., Director Triarc Companies, Inc., Director Raymond S. Troubh (80) 1989 Financial Consultant INSIDE (“INTERESTED”) DIRECTOR Spencer Davidson (64) 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 

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