sep2016.htm - Generated by SEC Publisher for SEC Filing

 



For the nine months ended September 30, 2016, For U.S. equity markets and the S&P specifically,
the net asset value per Common Share increased valuation, as reflected in the price to earnings ratio and
6.32% while the investment return to our stock- cash flow yields, is at the upper end of historic fair value,
holders increased by 2.59%. By comparison, our bench- supported by ultra-low interest rates, corporate stock
mark, the Standard & Poor’s 500 Stock Index (including buybacks, dividend yields in excess of the 10 year U.S.
income), increased 7.85%. For the twelve months ended Treasury Bond yield and no significant earning alterna-
September 30, 2016, the return on the net asset value tive for investors. Favorably, energy companies and
per Common Share increased by 11.05%, and the return their suppliers are stabilizing, potentially removing a
to our stockholders increased by 9.72%; these compare significant drag on aggregate corporate earnings growth
with an increase of 15.45% for the S&P 500. During and margins. And though it appears likely that the
both periods, the discount at which our shares traded Federal Reserve will be raising interest rates this year,
continued to fluctuate and on September 30, 2016, it changes are likely to be modest and the path to higher
was 18.3%. rates significantly elongated as world economic growth
  remains restrained.
As detailed in the accompanying financial statements
(unaudited), as of September 30, 2016, the net assets As further evidence of stability, low quality bond yields
applicable to the Company’s Common Stock were when compared to U.S. Treasury yields remain con-
$1,076,439,805 equal to $39.98 per Common Share. trolled and significantly lower than earlier in the year.
  Historically, bull markets have ended with a significant
The increase in net assets resulting from operations geopolitical/financial event, a hostile Federal Reserve,
for the nine months ended September 30, 2016 was or euphoric market behavior. Given recent economic
$54,867,516. During this period, the net realized gain data, particularly employment and consumption data, the
on investments sold was $85,564,434 and the decrease prospect of a recession appears distant without some sort
in net unrealized appreciation was $29,521,051. Net of shock. And though aggressive Quantitative Easing
investment income for the nine months was $7,308,112. (QE) has ended in the U.S., it is being employed around
Distributions to common shareholders totaled $2,826,870 the world in Europe and Japan to reflate their respec-
and distributions to Preferred Stockholders amounted to tive economies. Thus, assuming some QE stimulus is
$8,483,979. fungible, the U.S. economy should benefit, presuming
no significant currency exchange ratio destabilization.
During the nine months, the Company also repurchased Likewise with investors more skittish as evidenced by
1,371,884 of its shares at a cost of $43,629,046 an aver- recent survey data, it would seem unlikely that the bull
age discount to net asset value of 17.6%. Our investments market has reached its zenith, particularly if easier tradi-
 in the healthcare, materials, financials, and technology tional fiscal policy replaces the Federal Reserve’s slow
sectors contributed to our outperformance of our departure from its accommodative monetary stance.
benchmark in the quarter, while industrials detracted Thus, we remain optimistic for the long term perfor-
modestly from performance. As well, our lack of an mance of equities, while acknowledging some short term
allocation to real estate and the utility sectors also challenges.
contributed as those sectors experienced negative
performance in the quarter. Information about the Company, including our invest-
ment objectives, operating policies and procedures,
For the past year, we have highlighted the difficult investment results, record of dividend and distribution
economic environment facing equity markets. Slow payments, financial reports and press releases, is on our
GDP growth in the first half, due in part to inventory website and has been updated through September 30,
destocking throughout the economy, has given way to 2016. It can be accessed on the internet at www.genera-
a modestly improved environment currently. Though lamericaninvestors.com.
revenue and earnings for the S&P 500 collectively have
experienced declines for 5 of the last 6 consecutive
quarters and 5 consecutive quarters, respectively,
most of it is attributable to the decline in energy
prices and its impact on the companies that operate
in and around the sector. Employment data are
 favorable, corporate operating margins remain
historically high despite headwinds, inventories look By Order of the Board of Directors,
to be in a better position, recent purchasing manager General American Investors Company, Inc.
surveys have improved, China’s economy appears to
have started to rebound, and retail sales remain a bright
spot. Housing has been an improving addition and may  
be expected to contribute more as household formations Jeffrey W. Priest
improve. Constraints on growth remain the same; an President and Chief Executive Officer
aggressive regulatory environment, currency instabil-  
ity, political uncertainty - domestically and abroad (i.e.  
Brexit), dramatically rising U.S. healthcare costs and an October 19, 2016
elevated consumer debt burden which has led to a higher  
than normal savings rate.  

 

 


Value
  Shares   COMMON STOCKS  (note 1a)
Consumer   Automobiles and Components (1.4%)    
Discretionary   1,264,063 Ford Motor Company (Cost $16,174,723)     $15,257,240
(11.0%)

Consumer Services (0.8%)

    
  21,000 Chipotle Mexican Grill, Inc. (a) (Cost $9,376,256)     8,893,500
           
   Retailing (8.8%)        
  309,665 Liberty Interactive Corporation - Ventures A (a) 12,346,344
  375,026 Macy’s Inc. 13,894,713
  919,768 The TJX Companies, Inc. 68,780,251
    (Cost $28,028,933)     95,021,308
    (Cost $53,579,912)     119,172,048
           
Consumer   Food, Beverage and Tobacco (11.6%)    
Staples   201,174 Danone 14,931,213
(15.2%) 182,400 Diageo plc ADR 21,165,696
  450,000 Nestle S.A. 35,483,620
  195,000 PepsiCo, Inc. 21,210,150
  704,378 Unilever N.V. 32,511,257
    (Cost $66,826,160)     125,301,936
  Food and Staples Retailing (3.6%)    
  168,781 Costco Wholesale Corporation 25,740,790
  142,280 CVS Health Corporation 12,661,497
(Cost $18,835,682)     38,402,287
(Cost $85,661,842)     163,704,223
 
Energy   113,000 Anadarko Petroleum Corporation 7,159,680
(6.9%) 160,900 Apache Corporation 10,276,683
    1,472,819 Cameco Corporation 12,607,331
  650,000 Ensco plc - Class A 5,525,000
  3,830,440 Gulf Coast Ultra Deep Royalty Trust (a) 252,809
  535,000 Halliburton Company 24,010,800
  1,730,000 Helix Energy Solutions Group, Inc. (a) 14,064,900
    (Cost $59,688,571)     73,897,203
         
Financials   Banks (1.5%)        
(22.8%) 140,000 M&T Bank Corporation (Cost $3,966,544)     16,254,000
    Diversified Financials (5.1%)    
  245,000 American Express Company 15,689,800
  285,000 JPMorgan Chase & Co. 18,978,150
  500,000 Nelnet, Inc. 20,185,000
(Cost $23,578,547)     54,852,950
  Insurance (16.2%)    
  158,877 Aon plc 17,872,074
  610,000 Arch Capital Group Ltd. (a) 48,348,600
  187,500 Axis Capital Holdings Limited 10,186,875
  110 Berkshire Hathaway Inc. Class A (a) 23,784,200
  125,000 Everest Re Group, Ltd. 23,746,250
  400,000 MetLife, Inc. 17,772,000
  243,298 Willis Towers Watson plc 32,302,675
(Cost $51,091,270)     174,012,674
    (Cost $78,636,361)     245,119,624
 
Health Care   Pharmaceuticals, Biotechnology and Life Sciences    
(12.1%) 757,400 Ariad Pharmaceuticals, Inc. (a) 10,368,806
    190,000 Celgene Corporation (a) 19,860,700
  514,409 Cempra, Inc. (a) 12,448,698
  438,600 Gilead Sciences, Inc. 34,702,032
  229,942 Intra-Cellular Therapies, Inc. (a) 3,504,316
  397,191 Merck & Co., Inc. 24,788,690
  540,252 Paratek Pharmaceuticals, Inc. (a) 7,028,679
460,808 Pfizer Inc. 15,607,567
711,123 Repros Therapeutics Inc. (a) 1,486,247
(Cost $75,153,558)    129,795,735

 


 


Value
Shares   COMMON STOCKS (continued) (note 1a)
Industrials Capital Goods (5.4%)    
(9.5%) 189,131 Eaton Corporation plc $12,427,798
  900,000 General Electric Company 26,658,000
190,000 United Technologies Corporation 19,304,000
(Cost $48,994,510)     58,389,798
Commercial and Professional Services (3.7%)  
787,800 Republic Services, Inc. (Cost $11,167,520)     39,744,510
Transportation (0.4%)    
104,012 Hertz Global Holdings, Inc. (a) (Cost $6,171,377)     4,177,122
    (Cost $66,333,407)     102,311,430
 
Information Semiconductors and Semiconductor Equipment (3.4%)  
Technology 200,850 ASML Holding N.V. 22,009,143
(16.2%) 390,500 Intel Corporation 14,741,375
(Cost $12,991,164)     36,750,518
Software and Services (5.1%)    
680,686 Microsoft Corporation 39,207,514
378,034 Synchronoss Technologies, Inc. (a) 15,567,440
(Cost $29,257,286)     54,774,954
Technology Hardware and Equipment (7.7%)    
124,000 Apple Inc. 14,018,200
790,000 Cisco Systems, Inc. 25,058,800
127,900 Keysight Technologies, Inc. (a) 4,053,151
391,200 QUALCOMM Incorporated 26,797,200
238,209 Universal Display Corporation 13,222,981
(Cost $46,141,789)     83,150,332
    (Cost $88,390,239)     174,675,804
 
Materials (1.5%) 1,026,422 Huntsman Corporation (Cost $19,551,633)     16,699,886
   
 
Miscellaneous (4.1%)   Other (b) (Cost $40,651,299)     44,410,454
 
Telecommunication 683,852     Vodafone Group plc ADR (Cost $23,341,423)     19,934,286
Services (1.9%)          
 
  TOTAL COMMON STOCKS (101.2%) (Cost $590,988,245)     1,089,720,693
 
Warrant   WARRANT    
Technology 281,409 Applied DNA Sciences, Inc. (a) (Cost $2,814)     316,698
Hardware &          
Equipment (0.0%)          
 
 
Contracts   CALL OPTIONS    
(100 Shares Each)   Company/Expiration Date/ Exercise Price    
Energy (0.2%) 15,000 Cameco Corporation/March 17, 2017/$10.00 (a) 375,000
  10,000 Ensco plc/January 20, 2017/$8.00 (a) 1,350,000
      TOTAL CALL OPTIONS (Cost $1,076,018)     1,725,000

 


   187,191,386 State Street Institutional Treasury Plus Money Market Fund (17.4%) (Cost $187,191,386)     187,191,386
TOTAL INVESTMENTS (c) (118.8%) (Cost $779,258,463)     1,278,953,777
Liabilities in excess of receivables and other assets (-1.1%)   (12,396,797)
  1,266,556,980
PREFERRED STOCK (-17.7%)   (190,117,175)
NET ASSETS APPLICABLE TO COMMON STOCK (100%)   $1,076,439,805

 

ADR - American Depository Receipt (a) Non-income producing security.

(b) Securities which have been held for less than one year, not previously disclosed, and not restricted.

(c) At September 30, 2016 the cost of investments for Federal income tax purposes was $779,258,463; aggregate gross unrealized appreciation
 was $535,289,523; aggregate gross unrealized depreciation was $35,594,209; and net unrealized appreciation was $499,695,314.

(see notes to unaudited financial statements)


 


 
  Contracts   Value
Put Options   (100 shares each)    Company/Expiration Date/ Exercise Price (note 1a)
Energy   15,000 Cameco Corporation/March 17, 2017/$7.00 $450,000
(0.1%) 10,000 Ensco plc/January 20, 2017/$6.00 300,000
      TOTAL OPTIONS WRITTEN  (Premiums Received $773,965)     $750,000

 


 Net Shares   Shares  
Increases   Transacted    Held  
New Positions        
Chipotle Mexican Grill, Inc. —   21,000 (b)
CVS Health Corporation 142,280 142,280  
Universal Display Corporation 238,209 238,209
 
Additions        
General Electric Company 60,000 900,000  
Huntsman Corporation 45,000 1,026,422  
Intel Corporation 60,000 390,500  
Intra-Cellular Therapies, Inc. 32,500 229,942  
Keysight Technologies, Inc. 61,600 127,900  
Liberty Interactive Corporation - Ventures A 10,365 309,665  
MetLife, Inc. 35,000 400,000  
Paratek Pharmaceuticals, Inc. 63,176 540,252  
Repros Therapeutics Inc. 315,000 711,123  
 
Decreases        
Eliminations        
EMC Corporation 410,000 — (c)
 
Reductions        
Anadarko Petroleum Corporation 105,000 113,000  
Apache Corporation 40,000 160,900  
Apple Inc. 60,000 124,000  
Arch Capital Group Ltd. 65,600 610,000  
Ariad Pharmaceuticals, Inc. 442,600 757,400  
Cameco Corporation 100,000 1,472,819  
Cisco Systems, Inc. 249,500 790,000  
Diageo plc ADR 20,000 182,400  
Eaton Corporation plc 30,000 189,131  
Ensco plc - Class A 10,000 650,000  
Hertz Global Holdings, Inc. 841,052 104,012  
Merck & Co., Inc. 30,000 397,191  
QUALCOMM Incorporated 70,000 391,200  
Republic Services, Inc. 185,000 787,800  
The TJX Companies, Inc. 40,000 919,768  
United Technologies Corporation 110,000 190,000  

 

(a)      Common shares unless otherwise noted; excludes transactions in Common Stocks - Miscellaneous - Other.
(b)      Shares purchased in prior period and previously carried under Common Stocks - Miscellaneous - Other.
(c)      Shares sold as part of a merger with Dell Technologies.

(see notes to unaudited financial statements)


 


The diversification of the Company’s net assets applicable to its Common Stock by industry group as of
September 30, 2016 is shown in the table.

  Cost   Value    Percent Common  
Industry Category (000)   (000)   Net Assets*   
Financials            
Banks $3,966 $16,254 1.5 %
Diversified Financials 23,579   54,853 5.1  
Insurance 51,091   174,013 16.2  
78,636   245,120 22.8  
Information Technology            
Semiconductors & Semiconductor Equipment 12,991   36,751 3.4  
Software & Services 29,257   54,775 5.1  
Technology Hardware & Equipment 46,145   83,467 7.7  
88,393   174,993 16.2  
Consumer Staples            
Food, Beverage & Tobacco 66,826   125,302 11.6  
Food & Staples Retailing 18,836   38,402 3.6  
85,662   163,704 15.2  
Health Care            
Pharmaceuticals, Biotechnology & Life Sciences 75,154   129,796 12.1  
 
Consumer Discretionary            
Automobiles & Components 16,175   15,257 1.4  
Consumer Services 9,376   8,894 0.8  
Retailing 28,029   95,021 8.8  
53,580   119,172 11.0  
Industrials            
Capital Goods 48,995   58,390 5.4  
Commercial & Professional Services 11,167   39,744 3.7  
Transportation 6,171   4,177 0.4  
66,333   102,311 9.5  
 
Energy 60,765   75,622 7.1  
Miscellaneous** 40,651   44,410 4.1  
Telecommunication Services 23,341   19,934 1.9  
Materials 19,552   16,700 1.5  
592,067   1,091,762 101.4  
Short-Term Securities 187,191   187,191 17.4  
Total Investments $779,258   1,278,953 118.8  
Other Assets and Liabilities - Net     (12,396 ) (1.1 )
Preferred Stock     (190,117 ) (17.7 )
Net Assets Applicable to Common Stock   $1,076,440 100.0 %

 

*      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.

(see notes to unaudited financial statements)


 


Assets        
INVESTMENTS, AT VALUE (NOTE 1a)        
Common stocks (cost $590,988,245)   $1,089,720,693
Purchased options (cost $1,076,018)   1,725,000
Warrant (cost $2,814)   316,698
Money market fund (cost $187,191,386)   187,191,386
Total investments (cost $779,258,463)   1,278,953,777
 
RECEIVABLES AND OTHER ASSETS        
Cash $13,003    
Dividends, interest and other receivables   2,066,567    
Qualified pension plan asset, net excess funded (note 7)   1,968,195    
Prepaid expenses, fixed assets and other assets   669,083 4,716,848
 
TOTAL ASSETS   1,283,670,625
 
Liabilities        
Payable for securities purchased   4,131,496    
Outstanding options written, at value (premiums received $773,965) (note 4)     750,000    
Accrued preferred stock dividend not yet declared   219,955    
Accrued compensation payable to officers and employees   3,000,000    
Accrued supplemental pension plan liability (note 7)   5,716,664    
Accrued supplemental thrift plan liability (note 7)   2,939,531    
Accrued expenses and other liabilities   355,999    
 
TOTAL LIABILITIES   17,113,645
 
5.95% CUMULATIVE PREFERRED STOCK, SERIES B -        
7,604,687 shares at a liquidation value of $25 per share (note 5)   190,117,175
NET ASSETS APPLICABLE TO COMMON STOCK - 26,924,813 shares (note 5)   $1,076,439,805
 
NET ASSET VALUE PER COMMON SHARE   $39.98
 
Net Assets Applicable To Common Stock        
Common Stock, 26,924,813 shares at par value (note 5) $26,924,813    
Additional paid-in capital (note 5)   468,779,278    
Undistributed net investment income (note 5)   5,759,467    
Undistributed realized gain on securities sold   89,208,772    
Accumulated other comprehensive loss (note 7)   (5,247,870 )  
Unallocated distributions on Preferred Stock   (8,703,934 )  
Unrealized appreciation on investments, options written and other   499,719,279    
 
NET ASSETS APPLICABLE TO COMMON STOCK   $1,076,439,805

 

(see notes to unaudited financial statements)


 


Income          
Dividends (net of foreign withholding taxes of $584,658)   $17,123,481
Interest     140,948
    17,264,429
Expenses          
Investment research $5,089,654      
Administration and operations 2,783,604      
Office space and general 1,294,894      
Auditing and legal fees 227,094      
Directors’ fees and expenses 176,595      
Transfer agent, custodian and registrar fees and expenses 172,685      
State and local taxes 130,841      
Stockholders’ meeting and reports 80,950   9,956,317
NET INVESTMENT INCOME     7,308,112
 
Net Realized Gain and Change in Unrealized Appreciation on Investments (notes 1, 3 and 4)      
Net realized gain on investments:        
Securities transactions 84,938,020
Written options transactions (notes 1b and 4) 626,414      
85,564,434      
Net decrease in unrealized appreciation (29,521,051)    
NET GAIN ON INVESTMENTS       56,043,383
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS     (8,483,979)
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS   $54,867,516

 


Nine Months Ended      
September 30, 2016     Year Ended
Operations (Unaudited)     December 31, 2015
Net investment income $7,308,112 $13,728,242
Net realized gain on investments 85,564,434   34,130,660
Net decrease in unrealized appreciation (29,521,051)     (76,268,833)
63,351,495   (28,409,931)
Distributions to Preferred Stockholders:        
From net investment income —     (3,344,407)
From net capital gains —     (7,967,565)
Unallocated distributions (8,483,979)     —
Decrease in net assets from Preferred distributions (8,483,979)     (11,311,972)
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 54,867,516   (39,721,903)
OTHER COMPREHENSIVE INCOME        
Funded status of defined benefit plans (note 7) —     538,384
 
Distributions to Common Stockholders        
From net investment income (1,455,838)     (9,622,112)
From net capital gains (1,371,032)     (22,923,266)
DECREASE IN NET ASSETS FROM COMMON DISTRIBUTIONS (2,826,870)     (32,545,378)
 
Capital Share Transactions (Note 5)        
Value of Common Shares issued in payment of dividends and distributions —     13,532,276
Cost of Common Shares purchased (43,629,046)     (101,674,879)
DECREASE IN NET ASSETS - CAPITAL TRANSACTIONS (43,629,046)     (88,142,603)
NET INCREASE (DECREASE) IN NET ASSETS 8,411,600   (159,871,500)
 
Net Assets Applicable to Common Stock        
BEGINNING OF PERIOD 1,068,028,205   1,227,899,705
END OF PERIOD (including under/over distributed net investment income of        
$5,759,467 and ($92,807), respectively) $1,076,439,805 $1,068,028,205

 

(see notes to unaudited financial statements)


 


The following table shows per share operating performance data, total investment return, ratios and supplemental data for the nine months
ended September 30, 2016 and for each year in the five-year period ended December 31, 2015. This information has been derived from
information contained in the financial statements and market price data for the Company’s shares.

Nine Months                              
Ended                              
September 30, 2016           Year Ended December 31,      
(Unaudited)     2015   2014   2013   2012   2011
 
PER SHARE OPERATING PERFORMANCE                                
asset value, beginning of period $37.74      $39.77      $41.07   $32.68     $29.78 $31.26
Net investment income .27   .48   .32   .17   .24   .18
Net gain (loss) on securities,                                
realized and unrealized, and other 2.38   (.99)     2.39   10.51   5.05   (.68)
Other comprehensive income (loss) —      .02     (.13)      .20      —     (.10)
2.65     (.49)      2.58   10.88     5.29   (.60)
Distributions on Preferred Stock:                                
Dividends from net investment income —     (.12)     (.04)     (.04)     (.04)     (.11)
Distributions from net capital gains —     (.27)     (.34)     (.35)     (.35)     (.27)
Unallocated  (.31)     —      —    —      —     —
(.31)      (.39)      (.38)      (.39)      (.39)     (.38)
from investment operations  2.34     (.88)      2.20   10.49     4.90   (.98)
Distributions on Common Stock:                                
Dividends from net investment income (.05)     (.34)     (.32)     (.18)     (.21)     (.15)
Distributions from net capital gains (.05)     (.81)     (3.18)     (1.92)   (1.79)   (.35)
     (.10)     (1.15)     (3.50)     (2.10)     (2.00)     (.50)
asset value, end of period $39.98      $37.74      $39.77      $41.07      $32.68 $29.78
share market value, end of period  $32.65      $31.94      $35.00      $35.20      $27.82 $24.91
TOTAL INVESTMENT RETURN - Stockholder                                
return, based on market price per share 2.59%*     (5.34%)     9.32%     34.24%     19.77%     (5.29%)
 
RATIOS AND SUPPLEMENTAL DATA                                
Net assets applicable to Common Stock,                                
end of period (000’s omitted) $1,076,440     $1,068,028      $1,227,900      $1,229,470      $955,418      $886,537
Ratio of expenses to average net assets                                
applicable to Common Stock 1.26%**     1.17%     1.10%   1.27%     1.67%     1.39%
Ratio of net income to average net assets                                
applicable to Common Stock 0.93%**   1.17%     0.78%   0.47%     0.74%     0.56%
Portfolio turnover rate 12.20%*     14.41%     14.98%     17.12%     9.56%     11.17%
 
PREFERRED STOCK                                
Liquidation value, end of period (000’s omitted) $190,117     $190,117    $190,117 $190,117     $190,117    $190,117
Asset coverage 666%     662%     746%     747%     603%     566%
Liquidation preference per share $25.00 $25.00 $25.00 $25.00 $25.00 $25.00
Market value per share $26.65 $26.75 $26.01 $25.30 $25.54 $25.47

 

*Not annualized
**Annualized

(see notes to unaudited financial statements)


 


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 accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) pursuant to the requirements for reporting; Accounting Standards Codification 946, Financial Services - Investment
Companies (“ASC946”), and Regulation S-X.
 
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income, expenses
and gains and losses during the reported period. Changes in the economic environment, financial markets, and any other parameters
used in determining these estimates could cause actual results to differ, and these differences could be material.
 
a. Security Valuation Equity securities traded on a national securities exchange are valued at the last reported sales price on the
last business day of the period. Equity securities reported on the NASDAQ national market are valued at the official closing price on
that day. Listed and NASDAQ equity 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 options written) on the valuation date. Equity securities traded
primarily in foreign markets are valued at the closing price of such securities on their respective exchanges or markets. Corporate
debt securities, domestic and foreign, are generally traded in the over-the-counter market rather than on a securities exchange. The
Company utilizes the latest bid prices provided by independent dealers and information with respect to transactions in such securities
to determine current market value. If, after the close of foreign markets, 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. 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 specific procedures appropriate to each security as established
by and under the general supervision of the Board of Directors. The determination of fair value involves subjective judgments. As a
result, using fair value to price a security may result in a price materially different from the price used by other investors or the price
that may be realized upon the actual sale of the security.
 
b. Options The Company may purchase and write (sell) put and call options. The Company typically purchases put options or writes
call options to hedge the value of portfolio investments while it typically purchases call options and writes put options to obtain equity
market exposure under specified circumstances. 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 are reported as a liability on the Statement of Assets and Liabilities.
Those that expire unexercised are treated by the Company on the expiration date as realized gains on written option transactions
in the Statement of Operations. 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 on written option transactions in the Statement of Operations. If a written 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 on investments in the Statement of Operations. If a written put option is exercised, the premium reduces the
cost basis for the securities purchased by the Company and is parenthetically disclosed under cost of investments on the Statement of
Assets and Liabilities. 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. See Note 4 for written option activity.
 
c. Security Transactions and Investment Income Security 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 pre-
mium on investments, is earned from settlement date and is recognized on the accrual basis. Cost of short-term investments represent
amortized cost.
 
d. Foreign Currency Translation and Transactions Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such currencies versus U.S. dollars on the date of valuation.
Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at
the exchange rate in effect on the transaction date. Events may impact the availability or reliability of foreign exchange rates used
to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Company’s Board of Directors. The Company does not separately report the effect of
changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and
unrealized gain or loss from investments on the Statement of Operations.
 
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign
withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
 
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S.
companies as a result of, among other factors, the possibility of political or economic instability or the level of governmental supervi-
sion and regulation of foreign securities markets.
 
e. Dividends and Distributions The Company expects to pay dividends of net investment income and distributions of net realized
capital and currency gains, if any, annually to common shareholders and quarterly to preferred shareholders. Dividends and distribu-
tions to common and preferred shareholders, which are determined in accordance with Federal income tax regulations are recorded
on the ex-dividend date. Permanent book/tax differences relating to income and gains are reclassified to paid-in capital as they arise.
 
f. 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. In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, man-
agement has analyzed the Company’s tax positions taken or expected to be taken on Federal and state income tax returns for all open
tax years (the current and the prior three tax years) and has concluded that no provision for income tax is required in the Company’s
financial statements.
 
g. Contingent Liabilities Amounts related to contingent liabilities are accrued if it is probable that a liability has been incurred
and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated
with the ultimate resolution of a matter that are reasonably estimable and, if so, they are included in the accrual.
 
h. 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.

 


 


2. Fair Value Measurements - Various data inputs are used in determining the value of the Company’s investments. These inputs are
summarized in a hierarchy consisting of the three broad levels listed below:
Level 1 - quoted prices in active markets for identical securities (including money market funds which are valued using amortized cost
and which transact at net asset value, typically $1.00 per share),
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.), and
Level 3 - significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities. The following is a summary of the inputs used to value the Company’s net assets as of September 30, 2016:

 

Assets   Level 1   Level 2 Level 3   Total
Common stocks $1,089,720,693 — — $1,089,720,693
Purchased options   1,725,000 — —   1,725,000
Warrant   316,698 — —   316,698
Money market fund   187,191,386 — —   187,191,386
Total $1,278,953,777 — — $1,278,953,777
               
Liabilities              
Options written ($750,000)   — — ($750,000)

 

Transfers of Level 3 securities, if any, are reported as of the actual date of reclassification. No such transfers occurred during the nine
months ended September 30, 2016.
 
3. Purchases and Sales of Securities - Purchases and sales of securities (other than short-term securities and options) for the nine
months ended September 30, 2016 amounted to $132,953,062 and $259,521,693, on long transactions, respectively.
 
4. Written Options - The level of activity in written options varies from year to year based upon market conditions. Transactions in
written covered call options and collateralized put options for the nine months ended September 30, 2016 were as follows:

 

Covered Calls     Collateralized Puts
Contracts     Premiums Contracts Premiums
Options outstanding, December 31, 2015 2,250 $1,473,462 2,500 $404,556
Options written 6,000   1,566,530 25,000 773,965
Options terminated in closing purchase transaction (4,500)     (1,672,355) (1,500) (247,869)
Options expired (500)     (129,998 0 0
Options assigned (3,250)     (1,237,639) (1,000) (156,687)
Options outstanding, September 30, 2016 0 $0 25,000 $773,965

 

5. 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. With respect to the Common Stock,
26,924,813 shares were issued and outstanding; 8,000,000 Preferred Shares were originally issued and 7,604,687 were outstanding on
September 30, 2016.
 
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 were noncallable for the 5 year period ended September 24, 2008 and have a liquidation
preference of $25.00 per share plus accumulated and unpaid dividends to the date of redemption. On December 10, 2008, the Board
of Directors authorized the repurchase of up to 1 million Preferred Shares in the open market at prices below $25.00 per share. This
authorization has been reviewed annually thereafter. To date, 395,313 shares have been repurchased.
 
The Company allocates distributions from net capital gains and other types of income proportionately 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 net capital gains,
they will be paid from investment company taxable income or will represent a return of capital.
 
Under the Investment Company Act of 1940, the Company is required to maintain an asset coverage of at least 200% of the Preferred
Stock. In addition, pursuant to Moody’s Investor Service, Inc. Rating Agency Guidelines, the Company is required to maintain a
certain discounted asset coverage for its portfolio that equals or exceeds a Basic Maintenance Amount. 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. In addition, failure to meet the
foregoing asset coverage requirements could restrict the Company’s 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, gener-
ally, vote together with the holders of Common Stock as a single class.
Holders of Preferred Stock will elect two members to 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 subclassification
as a closed-end investment company or changes in its fundamental investment policies.
 
The Company presents its Preferred Stock, for which its redemption is outside of the Company’s control, outside of the net assets
applicable to Common Stock in the Statement of Assets and Liabilities.

 


 


5. Capital Stock and Dividend Distributions - (Continued from bottom of previous page.)
Transactions in Common Stock during the nine months ended September 30, 2016 and the year ended December 31, 2015 were as
follows:

 

Shares   Amount
2016 2015 2016   2015
Par value of shares issued in payment of dividends      
and distributions (includes 439,217 shares issued from treasury) —   439,217 —   $439,217
         —     13,093,059
  —     13,532,276
Par value of shares purchased (at an average discount from                
net asset value of 17.6% and 15.5%, respectively) (1,371,884)   (3,014,364)   ($1,371,884)     (3,014,364)
Decrease in paid-in capital         (42,257,162)     (98,660,515)
Total decrease         (43,629,046)     (101,674,879)
Net decrease (1,371,884)   (2,575,147)   ($43,629,046)   ($88,142,603)

 

At September 30, 2016, the Company held in its treasury 5,056,059 shares of Common Stock with an aggregate cost in the amount of
$168,679,999.
 
The tax basis distributions during the year ended December 31, 2015 were as follows: ordinary distributions of $12,966,519 and net
capital gains distributions of $30,890,831. As of December 31, 2015, distributable earnings on a tax basis included $1,442,060 from
ordinary distributions, $5,268,234 from undistributed net capital gains and $529,240,330 from net unrealized appreciation on invest-
ments if realized in future years. Reclassifications arising from permanent “book/tax” differences reflect non-tax deductible expenses
and redesignation of dividends during the year ended December 31, 2015. As a result, additional paid-in capital was decreased
by $3,081 and net investment income increased by $3,081. As of December 31, 2015 the Company had straddle loss deferrals of
$252,864. Net assets were not affected by this reclassification .
 
6. Officers’ Compensation - The aggregate compensation accrued and paid by the Company during the nine months ended September
30, 2016 to its officers (identified on back cover) amounted to $5,238,375.
 
7. Benefit Plans - The Company has funded (qualified) and unfunded (supplemental) noncontributory defined benefit pension plans
that are available to its employees. The pension 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 components of the net periodic benefit cost (income) of the plans
for the nine months ended September 30, 2016 were:
     
Service cost $418,201    
Interest cost  703,676      
Expected return on plan assets  (1,019,762)      
Amortization of prior service cost  13,353      
  Amortization of recognized net actuarial loss  263,258      
Net periodic benefit cost $378,726      
 
The Company recognizes the overfunded status of its defined benefit postretirement plan as an asset in the Statement of Assets and
Liabilities and recognizes changes in funded status in the year in which the changes occur through other comprehensive income.
 
The Company also has funded (qualified) and unfunded (supplemental) defined contribution thrift plans that are available to its employ-
ees. The aggregate cost of such plans for the nine months ended September 30, 2016 was $376,794. The qualified thrift plan acquired
19,000 shares and distributed 35,643 shares of the Company’s Common Stock during the nine months ended September 30, 2016 and
held 560,294 shares of the Company’s Common Stock at September 30, 2016.
 
8. Operating Lease Commitment - In September 2007, the Company entered into an operating lease agreement for office space which
expires in February 2018 and provided for aggregate rental payments of approximately $10,755,000, net of construction credits. The
lease agreement contains clauses whereby the Company receives free rent for a specified number of months and credit towards construc-
tion of office improvements, and incurs escalations annually relating to operating costs and real property taxes and to annual rent charges
beginning in February 2013. The Company has the option to renew the lease after February 2018 for five years at market rates. Rental
expense approximated $886,700 for the nine months ended September 30, 2016. Minimum rental commitments under the operating
lease are approximately $1,183,000 in 2016 and 2017, and $99,000 in 2018.

 


Previous purchases of the Company’s Common and Preferred Stock are set forth in Note 5 on pages 10 and 11. Prospective purchases of
Common and Preferred 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.
The policies and procedures used by the Company to determine how to vote proxies relating to portfolio securities and the Company’s
proxy voting record for the twelve-month period ended September 30, 2016 are available: (1) without charge, upon request, by calling
us at our toll-free telephone 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.
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.
Copies of Forms N-Q may also be obtained and reviewed at the SEC’s Public Reference Room in Washington, DC or through the
Company by calling us at 1-800-436-8401. Information on the operation of the SEC’s Public Reference Room may be obtained by
calling 1-800-SEC-0330.
On April 15, 2016, 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 listing 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.

 


 

DIRECTORS*
Spencer Davidson, Chairman
Sidney R. Knafel, Lead Independent Director
Arthur G. Altschul, Jr. Daniel M. Neidich
Rodney B. Berens Jeffrey W. Priest
Lewis B. Cullman Henry R. Schirmer
John D. Gordan, III Raymond S. Troubh
Betsy F. Gotbaum  
(*The Company is a stand-alone fund.)
 
OFFICERS
Jeffrey W. Priest, President and Chief Executive Officer
Andrew V. Vindigni, Senior Vice-President
Craig A. Grassi, Vice-President
Sally A. Lynch, Vice-President
Anang K. Majmudar, Vice-President
Michael W. Robinson, Vice-President
Eugene S. Stark, Vice-President, Administration, Principal
Financial Officer & Chief Compliance Officer
Diane G. Radosti, Treasurer
Linda J. Genid, Corporate Secretary
   
 
SERVICE COMPANIES
Counsel Transfer Agent and Registrar
Sullivan & Cromwell LLP American Stock Transfer & Trust
Independent Auditors Company, LLC
Ernst & Young LLP 6201 15th Avenue
    Brooklyn, NY 11219
Custodian 1-800-413-5499
State Street Bank and www.amstock.com
Trust Company