UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-00248
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THE ADAMS EXPRESS COMPANY
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(Exact name of registrant as specified in charter)
7 Saint Paul Street, Suite 1140, Baltimore, Maryland 21202
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(Address of principal executive offices) (Zip code)
Lawrence L. Hooper, Jr.
The Adams Express Company
7 Saint Paul Street
Suite 1140
Baltimore, Maryland 21202
Registrant's telephone number, including area code: 410-752-5900
Date of fiscal year end: December 31, 2006
Date of reporting period: December 31, 2006
Item 1. Reports to Stockholders.
The Adams Express Company
Annual Report 2006
Generation after generation
[GRAPHIC APPEARS HERE]
we grow with you(TM)
. GROW | . PROTECT | . INVEST
[LOGO OF ADAMS EXPRESS COMPANY]
2006 AT A GLANCE
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The Company
.. a closed-end equity investment company
.. objectives: preservation of capital
reasonable income
opportunity for capital gain
.. internally-managed
.. low expense ratio
.. low turnover
Stock Data (12/31/06)
NYSE Symbol.............. ADX
Market Price.......... $13.87
52-Week Range $12.37 - $14.37
Discount............... 12.5%
Shares Outstanding.86,838,223
Summary Financial Information
Year Ended December 31
2006 2005
------------------------------------------------------------------------------
Net asset value per share $ 15.86 $ 14.71
Total net assets 1,377,418,310 1,266,728,652
Unrealized appreciation 418,756,256 316,477,367
Net investment income 19,691,488 18,288,551
Total realized gain 56,553,881 53,817,950
Total return (based on market value) 17.9% 2.2%
Total return (based on net asset value) 15.0% 4.5%
Expense ratio 0.50% 0.45%
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2006 Dividends and Distributions
Amount
Paid (per share) Type
-----------------------------------------------------
March 1, 2006 $0.02 Short-term capital gain
March 1, 2006 0.03 Investment income
June 1, 2006 0.05 Investment income
September 1, 2006 0.05 Investment income
December 27, 2006 0.63 Long-term capital gain
December 27, 2006 0.02 Short-term capital gain
December 27, 2006 0.10 Investment income
-----------------------------------------------------
$0.90
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2007 Annual Meeting of Stockholders
Location: The Maryland Club, Baltimore, Maryland
Date: March 27, 2007
Time: 9:30 a.m.
PORTFOLIO REVIEW
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Ten Largest Portfolio Holdings (12/31/06)
Market Value % of Net Assets
------------ ---------------
Petroleum & Resources Corporation* $ 73,169,458 5.3
General Electric Co. 55,357,317 4.0
American International Group, Inc. 35,830,000 2.6
Microsoft Corp. 35,234,800 2.6
Bank of America Corp. 32,567,900 2.4
Pfizer Inc. 29,008,000 2.1
Wachovia Corp. 26,766,500 1.9
PepsiCo, Inc. 25,020,000 1.8
ConocoPhillips 24,822,750 1.8
Schlumberger Ltd. 24,000,800 1.7
------------ ----
Total $361,777,525 26.2%
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*Non-controlled affiliate
Sector Weightings (12/31/06)
[CHART]
Health Information Telecom Cash &
Consumer Energy Financial Care Industrials Technology Materials Services Utilities Equivalent
-------- ------ --------- ------ ----------- ----------- --------- -------- --------- ----------
18.0% 11.7% 17.9% 12.8% 12.9% 11.4% 5.3% 2.7% 3.5% 3.6%
1
THE ADAMS EXPRESS COMPANY
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Calendar Market Cumulative Cumulative Total Total net
Years Value market value market value market asset
of of capital of income value value
original gains dividends
shares distributions taken in
taken in shares
shares
--------------------------------------------------------------
1992 $10,480 $ 629 $ 237 $11,346 $11,619
1993 9,367 1,232 437 11,036 12,211
1994 8,188 1,766 661 10,615 12,218
1995 9,691 2,881 1,151 13,723 15,849
1996 10,349 3,994 1,615 15,958 19,150
1997 12,674 6,145 2,417 21,236 25,036
1998 13,952 8,292 3,068 25,312 30,930
1999 17,587 12,533 4,293 34,413 41,295
2000 16,506 14,186 4,315 35,007 39,541
2001 11,177 11,902 3,285 26,364 29,757
2002 8,308 9,888 2,733 20,929 23,998
2003 9,754 12,876 3,555 26,185 30,300
2004 10,312 14,989 4,311 29,612 33,945
2005 9,864 15,786 4,595 30,245 35,451
2006 10,902 19,046 5,698 35,646 40,760
Illustration of an assumed
15 year investment of $10,000
(unaudited)
Investment income dividends and capital gains distributions are taken in
additional shares. This chart covers the years 1992-2006. Fees for the
reinvestment of interim dividends are assumed as 2% of the amount reinvested
(maximum of $2.50) and commissions of $0.05 per share. There is no charge for
reinvestment of year-end distributions. No adjustment has been made for any
income taxes payable by stockholders on income dividends or on capital gains
distributions, or the sale of any shares. These results should not be
considered representative of the dividend income or capital gain or loss which
may be realized in the future.
[GRAPHIC APPEARS HERE]
2
LETTER TO STOCKHOLDERS
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The Year in Review
We are pleased to report a strong 15.0% total return on net assets for the Fund
in 2006. This compares well with the S&P 500 Index's return of 15.8%, and is
well ahead of the Lipper Large Cap Core Mutual Fund Average return of 13.5%. We
entered 2006 expecting a year of modest returns based on decelerating earnings
growth, but these were surpassed in the latter part of the year. Profit margins
were maintained or increased by many corporations due to strong cost-cutting
measures and earnings per share were further boosted by large share-repurchase
programs. When all the numbers are in, operating earnings per share growth of
the companies in the S&P 500 will most likely have been over 10% for an
unprecedented fourth year in a row, contributing to the higher return.
[PHOTO OF DOUGLAS G. OBER]]
Douglas G. Ober,
Chairman and Chief
Executive Officer
The short-term interest rate increases begun by the Federal Reserve Board (the
Fed) in 2004 were continued through the first six months of 2006. These actions
cast a pall over equity markets, resulting in a low 2.7% return for the S&P 500
through June 30. The yield curve (the variation of interest rates with time) had
become inverted, with short-term rates running higher than long-term rates, in
2005 and remained so through 2006. Such an inversion has historically preceded
slower economic growth or an outright recession. When the Fed took no action to
raise short-term rates further in the latter half of the year, investors became
more optimistic, analysts ceased lowering corporate earnings estimates, and the
equity markets headed up.
In addition to the above, there was a general increase in private equity
transactions, in which hedge funds and private investors took large positions
in public companies or bought them outright. Examples from our portfolio
included Clear Channel Communications and HCA, Inc. Such transactions
frequently were done at higher valuations than had been priced into the equity
markets, resulting in upward revaluations of many public companies and
consequent surges in the markets that were more speculative in nature than
fundamentally-based. There was also a pick-up in industry consolidation in a
number of sectors, including materials, industrial, financial,
telecommunications, and technology, as companies utilized large cash hoards
and/or stock to expand their businesses through acquisition. Several companies
in our portfolio were involved in such transactions, including AT&T, North Fork
Bancorp, Lucent Technologies, and Caremark Rx.
While this kind of activity has a salutary effect on market valuations, it has
no near-term impact on overall economic growth. Indeed, after strong growth in
the first quarter, the economy grew at roughly 2% for the next two quarters and
probably at a similar rate in the final three months of the year. Europe, on
the other hand, experienced accelerating, though still modest, growth and most
of the rest of the world grew strongly, though at a slightly reduced rate. We
chose not to participate directly in the international growth, preferring to
hold positions in domestic companies with major overseas operations, though we
did add Teva Pharmaceuticals, an Israeli corporation, to the portfolio.
Our performance in 2006 was led by our holdings in the telecom services,
energy, and consumer sectors of the economy. Our technology holdings
outperformed the S&P Index sector by nearly 6 percentage points, with a 14.3%
return. The Fund's investments in the health care sector also outperformed the
Index sector, by a more modest amount. Underperforming sectors included
financials, materials, industrials, and utilities, though both financials and
industrials had double-digit returns. Within the financials, we have generally
avoided real estate companies and brokers (with Morgan Stanley the exception),
which performed best in the group. The materials sector benefited from a flurry
of acquisitions in the metals group, where we have no current exposure. The
return of our industrial sector holdings was negatively impacted by our large
GE holding, which finally began to improve toward the end of the year.
Utilities with merchant generating assets and those with nuclear power plants,
which we have generally avoided, were the outstanding performers within the
utilities sector. Overall, there was only a modest difference between the
Fund's performance and that of the S&P 500 and it can in some part be accounted
for by the merger and acquisition activity mentioned above. Our philosophy of
investing in companies with strong outlooks often means we do not benefit from
such activity in the short term as we are less likely to own shares of merger
or acquisition targets. We believe that our approach results in more consistent
returns over the long term.
Investment Results
At the end of 2006 our net assets were $1,377,418,310 or $15.86 per share on
86,838,223 shares outstanding. This compares with $1,266,728,652 or $14.71 per
share on 86,099,607 shares outstanding a year earlier.
3
Net investment income for 2006 was $19,691,488 compared to $18,288,551 for
2005. These earnings are equal to $0.23 and $0.22 per share, respectively, on
the average number of shares outstanding throughout each year. Our 0.50%
expense ratio (expenses to average net assets) in 2006 was once again very low
compared to the fund industry in general.
Net realized gains amounted to $56,553,881 during the year, while the
unrealized appreciation on investments increased from $316,477,367 at December
31, 2005 to $418,756,256 at year end.
Dividends and Distributions
The total dividends and distributions paid in 2006 were $0.90 per share
compared to $0.86 in 2005. The table on page 21 shows the history of our
dividends and distributions over the past fifteen years, including the annual
rate of distribution as a percentage of the average daily market price of the
Company's Common Stock. In 2006, the annual rate of distribution was 6.80%
compared to 6.65% in 2005. As announced on November 9, 2006, a year-end
distribution consisting of investment income of $0.10 and capital gains of
$0.65 was made on December 27, 2006, both realized and taxable in 2006. On
January 11, 2007, an additional distribution of $0.05 per share was declared to
shareholders of record February 16, 2007, payable March 1, 2007, representing
the balance of undistributed net investment income and capital gains earned
during 2006 and an initial distribution from 2007 net investment income, all
taxable to shareholders in 2007.
Outlook for 2007
For the past two years, we have anticipated a slowdown in the domestic economy,
to a significant degree due to higher energy prices and short-term interest
rates. Surprisingly, both the consumer and the industrial sectors of the
economy seem to have adapted to these expected drags on growth, although some
impact has been felt. Particular industries, notably housing and autos, have
been hit harder than others and will take some time to recover. In general,
though, conditions are good and there is little reason to expect the economy to
fall into recession. After a brief pause, manufacturing industries are growing;
consumers continue to spend the bulk of their paychecks; the Fed has stopped
raising interest rates for now; energy prices have begun to ease with a mild
early part of the winter; and the dollar has only weakened modestly. There is
general agreement among economists that a "soft landing" will occur, in which
the economy slows sufficiently that inflation is brought below 2% but does not
reach recession. Equity investors are content with this outlook, though they
have had to temper expectations that the Fed will cut rates in the first half
of the year.
It is our belief that inflation is more stubborn than many believe and that Fed
Chairman Bernanke will keep short-term interest rates at the current level for
most, if not all, of 2007, and may even raise them further if the economy
rebounds. Housing and energy prices have declined from their highest levels, as
have the prices of some industrial raw materials, but the impact of these price
increases over the past several years still are not reflected in consumer
prices. Agricultural commodities, especially corn, remain very expensive, with
little sign of easing, yet food price increases have not been remarkable. We
would expect Mr. Bernanke, as the new Fed chairman, to take action to firmly
establish his credentials as an inflation fighter. Thus, he is more likely to
err on the side of caution than take a chance that inflation will subside on
its own.
With the expectation that interest rates will remain high longer, we are not
looking for the economy to accelerate until the final quarter of 2007 and
perhaps not until 2008. Year-over-year, real GDP growth should amount to 2% to
2 1/2% in 2007 at best. The cost-cutting which occurred in 2006 cannot continue
indefinitely, nor can share-buybacks boost earnings by more than 2% or so. This
leaves anticipated growth in the earnings per share of the S&P 500 of 5% to 7%.
Such a modest level of earnings growth would normally generate rather subdued
returns in the equity markets. We do, however, believe that multiple expansion
could occur in 2007, with the market's price/earnings ratio rising to 17 from
16 on a trailing basis, and drive returns closer to the 10% level. The merger,
acquisition, and privatization activity which began in earnest in 2006 is
expected to continue this year and may even accelerate. As noted previously,
this has been reflected to some degree in equity markets already and should
continue to drive valuations upward until stocks become over-valued, which they
are not currently, or the current liquidity of the markets declines. We do not
expect that the new Congress, controlled by Democrats, will have much impact on
the economy in the short term. Energy legislation, the elimination of tax cuts,
increased social program spending, and the ongoing war in Iraq will, however,
serve as a drag on the economy over time.
Outside the U. S., the developing economies of Asia are expected to slow their
rapid rate of growth somewhat. The more developed countries of Europe, the
Americas, and Asia should also experience slower growth as central banks have
raised interest rates and the impacts of high energy and commodity prices are
being felt. Given the relative sizes of the various economies, we expect that
worldwide growth will be in the range of 3% to 3 1/2%. Further weakening of the
U. S. dollar is likely to stimulate exports and reduce imports domestically,
4
thus lowering our trade deficit. This will also provide a test of how tightly
the economies of other countries are linked to ours. Should the lower demand
for foreign goods in this country trigger a more dramatic slowing outside the
U. S., there could be a worldwide recession, in which event our holdings in
multi-national companies would not perform well. We do not expect a downward
spiral into recession, however, as most economies are in much better financial
condition than in the past. Any change in the situation in the Middle East,
either more antagonistic or calming, will be felt worldwide in the form of
significantly higher or lower energy prices. Any change in the portfolio to
reflect one or the other of these possibilities would be risky; we prefer to
take the position that energy prices will continue to exhibit high volatility
in 2007.
With the bulk of our holdings in the largest-capitalization segment of the
market, there is not likely to be much acquisition or privatization activity in
the portfolio. We should, however, benefit significantly from any multiple
expansion which occurs as well as from industry consolidation, which our
companies might well lead through merger. While our outlook for the rest of the
world is cautious, international growth still looks stronger than domestic
growth. Many of our investments are in multi-national companies, which should
perform particularly well in this anticipated environment. We believe that
these multi-national companies, as well as the ones we hold that are focused on
domestic activity, have excellent long-term prospects and, absent unforeseen
events, we do not anticipate making wholesale changes in the portfolio in 2007.
Special Shareholder Meeting
We were gratified with the strong support shown by our shareholders at the
special meeting held on November 7, 2006. All eight of the proposals of the
Board of Directors were overwhelmingly approved, with no proposal receiving
less than 83% of the votes cast. A full report of the meeting can be found on
page 23. The approval of these important changes to the corporate charter
provides the Company with additional tools to protect the interests of our
long-term shareholders. You have clearly expressed your interest in seeing the
Company continue as a closed-end fund, and your action has strengthened our
ability to do so.
Share Repurchase Program
On December 14, 2006, the Board of Directors authorized the repurchase by
management of an additional 5% of the outstanding shares of the Company over
the ensuing year. The repurchase program is subject to the same restriction as
in the past, namely that shares can be repurchased when the discount of the
market price of the shares from the net asset value is 10% or greater.
From the beginning of 2007 through January 25, 2007, a total of 158,900 shares
have been repurchased at a total cost of $2,197,875 and a weighted average
discount from net asset value of 13.1%.
Effective January 1, 2007, Mr. David D. Weaver was promoted to Vice
President--Research. Mr. Weaver has been a senior research analyst covering
consumer discretionary and industrials sectors for the Company.
The proxy statement for the Annual Meeting of Stockholders to be held in
Baltimore on March 27, 2007, is expected to be mailed on or about February 16,
2007.
By order of the Board of Directors,
[GRAPHIC APPEARS HERE] [GRAPHIC APPEARS HERE]
Douglas G. Ober, Joseph M. Truta,
Chairman and Chief President
Executive Officer
January 26, 2007
5
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
December 31, 2006
Assets
Investments* at value:
Common stocks and convertible securities
(cost $871,858,922) $1,252,479,033
Non-controlled affiliate, Petroleum & Resources Corporation
(cost $34,735,404) 73,169,458
Short-term investments (cost $49,432,213) 49,432,213
Securities lending collateral (cost $69,086,380) 69,086,380 $1,444,167,084
------------------------------------------------------------------------------------------------
Cash 501,080
Dividends receivable 1,507,341
Prepaid pension cost 3,362,803
Prepaid expenses and other assets 2,296,927
---------------------------------------------------------------------------------------------------------------
Total Assets 1,451,835,235
---------------------------------------------------------------------------------------------------------------
Liabilities
Open written option contracts at value (proceeds $717,931) 1,015,840
Obligations to return securities lending collateral 69,086,380
Accrued expenses and other liabilities 4,314,705
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Total Liabilities 74,416,925
---------------------------------------------------------------------------------------------------------------
Net Assets $1,377,418,310
===============================================================================================================
Net Assets
Common Stock at par value $0.001 per share, authorized 150,000,000 shares;
issued and outstanding 86,838,223 shares (includes 58,794 restricted
shares, 7,500 restricted stock units, and 4,199 deferred stock units) (Note 6) $ 86,838
Additional capital surplus 954,499,749
Accumulated other comprehensive income (Note 5) (1,824,105)
Undistributed net investment income 4,632,588
Undistributed net realized gain on investments 1,266,984
Unrealized appreciation on investments 418,756,256
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Net Assets Applicable to Common Stock $1,377,418,310
===============================================================================================================
Net Asset Value Per Share of Common Stock $15.86
===============================================================================================================
*See schedule of investments on pages 15 through 17.
The accompanying notes are an integral part of the financial statements.
6
STATEMENT OF OPERATIONS
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Year Ended December 31, 2006
Investment Income
Income:
Dividends:
From unaffiliated issuers $ 22,729,733
From non-controlled affiliate 1,606,317
Interest and other income 1,896,214
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Total income 26,232,264
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Expenses:
Investment research 2,783,475
Administration and operations 1,374,432
Directors' fees 352,820
Reports and stockholder communications 768,511
Transfer agent, registrar and custodian expenses 327,075
Auditing and accounting services 125,196
Legal services 131,766
Occupancy and other office expenses 351,952
Travel, telephone and postage 106,643
Other 218,906
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Total expenses 6,540,776
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Net Investment Income 19,691,488
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Realized Gain and Change in Unrealized Appreciation on Investments
Net realized gain on security transactions 50,615,753
Net realized gain distributed by regulated investment company
(non-controlled affiliate) 5,938,128
Change in unrealized appreciation on investments 102,278,889
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Net Gain on Investments 158,832,770
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Change in Net Assets Resulting from Operations $178,524,258
===============================================================================
The accompanying notes are an integral part of the financial statements.
7
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
For the Year Ended
------------------------------
Dec. 31, 2006 Dec. 31, 2005
--------------------------------------------------------------------------------------------------
From Operations:
Net investment income $ 19,691,488 $ 18,288,551
Net realized gain on investments 56,553,881 53,817,950
Change in unrealized appreciation on investments 102,278,889 (27,193,045)
Adjustment to apply FASB Statement No. 158 (note 5) (1,824,105) --
--------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 176,700,153 44,913,456
--------------------------------------------------------------------------------------------------
Distributions to Stockholders From:
Net investment income (19,554,259) (18,634,893)
Net realized gain from investment transactions (56,771,240) (53,672,531)
--------------------------------------------------------------------------------------------------
Decrease in net assets from distributions (76,325,499) (72,307,424)
--------------------------------------------------------------------------------------------------
From Capital Share Transactions:
Value of shares issued in payment of distributions 31,661,698 30,523,934
Cost of shares purchased (note 4) (21,770,315) (32,052,187)
Deferred compensation (notes 4, 6) 423,621 101,973
--------------------------------------------------------------------------------------------------
Change in net assets from capital share transactions 10,315,004 (1,426,280)
--------------------------------------------------------------------------------------------------
Total Change in Net Assets 110,689,658 (28,820,248)
Net Assets:
Beginning of year 1,266,728,652 1,295,548,900
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $4,632,588 and $4,672,704, respectively) $1,377,418,310 $1,266,728,652
==================================================================================================
The accompanying notes are an integral part of the financial statements.
8
NOTES TO FINANCIAL STATEMENTS
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1. Significant Accounting Policies
The Adams Express Company (the Company) is registered under the Investment
Company Act of 1940 as a diversified investment company. The Company is an
internally-managed fund whose investment objectives are preservation of
capital, the attainment of reasonable income from investments, and an
opportunity for capital appreciation.
Security Valuation -- Investments in securities traded on a national security
exchange are valued at the last reported sale price on the day of valuation.
Over-the-counter and listed securities for which a sale price is not available
are valued at the last quoted bid price. Short-term investments (excluding
purchased options) are valued at amortized cost. Purchased and written options
are valued at the last quoted asked price.
Affiliated Companies -- Investments in companies 5% or more of whose
outstanding voting securities are held by the Company are defined as
"Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940.
Security Transactions and Investment Income -- Investment transactions are
accounted for on the trade date. Gain or loss on sales of securities and
options is determined on the basis of identified cost. Dividend income and
distributions to shareholders are recognized on the ex-dividend date, and
interest income is recognized on the accrual basis.
2. Federal Income Taxes
The Company's policy is to distribute all of its taxable income to its
shareholders in compliance with the requirements of the Internal Revenue Code
applicable to regulated investment companies. Therefore, no federal income tax
provision is required. For federal income tax purposes, the identified cost of
securities at December 31, 2006 was $1,024,625,668, and net unrealized
appreciation aggregated $419,541,416, of which the related gross unrealized
appreciation and depreciation were $475,809,356 and $56,267,940, respectively.
As of December 31, 2006, the tax basis of distributable earnings was $3,477,022
of undistributed ordinary income and no undistributed long-term capital gain.
Distributions paid by the Company during the year ended December 31, 2006 were
classified as ordinary income of $22,964,152, and long-term capital gain of
$53,361,347. In comparison, distributions paid by the Company during the year
ended December 31, 2005 were classified as ordinary income of $26,198,384, and
long-term capital gain of $46,109,040. The distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Accordingly, periodic reclassifications are made within
the Company's capital accounts to reflect income and gains available for
distribution under income tax regulations.
3. Investment Transactions
The Company's investment decisions are made by a committee of management, and
recommendations to that committee are made by the research staff.
Purchases and sales of portfolio securities, other than options and short-term
investments, during the year ended December 31, 2006 were $139,671,450 and
$217,209,083, respectively. Options may be written (sold) or purchased by the
Company. The Company, as writer of an option, bears the risks of possible
illiquidity of the option markets and from movements in security values. The
risk associated with purchasing an option is limited to the premium originally
paid. A schedule of outstanding option contracts as of December 31, 2006 can be
found on page 18.
Transactions in written covered call and collateralized put options during the
year ended December 31, 2006 were as follows:
Covered Calls Collateralized Puts
-------------------- --------------------
Contracts Premiums Contracts Premiums
--------- ---------- --------- ----------
Options outstanding,
December 31, 2005 2,320 $ 244,294 2,465 $ 317,641
Options written 9,975 1,262,505 10,988 1,223,297
Options terminated in
closing purchase
transactions (1,650) (203,033) (3,645) (439,498)
Options expired (6,330) (741,110) (7,330) (845,453)
Options exercised (570) (65,038) (375) (35,674)
-----------------------------------------------------------------
Options outstanding,
December 31, 2006 3,745 $ 497,618 2,103 $ 220,313
=================================================================
4. Capital Stock
The Company has 10,000,000 authorized and unissued preferred shares, $0.001 par
value.
On December 27, 2005, the Company issued 2,400,624 shares of its Common Stock
at a price of $12.715 per share (the average market price on December 12, 2005)
to stockholders of record November 22, 2005 who elected to take stock in
payment of the distribution from 2005 capital gain and investment income.
9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
On December 27, 2006, the Company issued 2,301,959 shares of its Common Stock
at a price of $13.75 per share (the average market price on December 11, 2006)
to stockholders of record November 21, 2006 who elected to take stock in
payment of the distribution from 2006 capital gain and investment income. In
addition, 722 shares were issued at a weighted average price of $13.43 per
share as dividend equivalents to holders of deferred stock units and restricted
stock units under the 2005 Equity Incentive Compensation Plan.
The Company may purchase shares of its Common Stock from time to time at such
prices and amounts as the Board of Directors may deem advisable. Transactions
in Common Stock for 2006 and 2005 were as follows:
Shares Amount
---------------------- --------------------------
2006 2005 2006 2005
---------- ---------- ------------ ------------
Shares issued in
payment of
distributions 2,302,681 2,400,624 $ 31,661,698 $ 30,523,934
Shares purchased (at a
weighted average
discount from net
asset value of 13.9%
and 12.6%,
respectively) (1,623,542) (2,458,500) (21,770,315) (32,052,187)
Net activity under the
2005 Equity Incentive
Compensation Plan 59,477 22,191 423,621 101,973
--------------------------------------------------------------------------
Net change 738,616 (35,685) $ 10,315,004 $ (1,426,280)
==========================================================================
5. Retirement Plans
The Company initially applied the provisions of Financial Accounting Standards
Board ("FASB") Statement No. 158, Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, at December 31, 2006. This accounting
standard requires recognition of the overfunded or underfunded status of a
defined benefit plan in the Statement of Assets and
Liabilities, and recognition of changes in the funded status in the years in
which the changes occur through the capital accounts. The transition rules for
implementing the standard require applying the provisions as of the end of the
year of initial implementation with no retrospective application. The
incremental effects on the line items in the Statement of Assets and
Liabilities at December 31, 2006, are as follows:
Before After
Application of Application of
Statement 158 Adjustments Statement 158
-------------- ----------- --------------
Prepaid pension cost $ 5,255,972 $(1,893,169) $ 3,362,803
----------------------------------------------------------------------
Total Assets $1,453,728,404 $(1,893,169) $1,451,835,235
======================================================================
Accrued expenses and other
liabilities $ 4,383,769 $ (69,064) $ 4,314,705
----------------------------------------------------------------------
Total Liabilities $ 74,485,989 $ (69,064) $ 74,416,925
======================================================================
Accumulated other
comprehensive income $ -- $(1,824,105) $ (1,824,105)
----------------------------------------------------------------------
Net Assets Applicable to
Common Stock $1,379,242,415 $(1,824,105) $1,377,418,310
======================================================================
The Company provides retirement benefits for its employees under a
non-contributory qualified defined benefit pension plan and a non-contributory
nonqualified defined benefit pension plan. The benefits are based on years of
service and compensation during the last five years of employment.
The Company uses a December 31 measurement date for its plans.
2006 2005
----------- -----------
Change in benefit obligation
Benefit obligation at beginning of year $ 8,951,798 $ 8,349,320
Service cost 460,969 359,998
Interest cost 518,015 504,330
Actuarial loss 70,276 (42,715)
Benefits paid (150,967) (219,135)
------------------------------------------------------------------------
Benefit obligation at end of year $ 9,850,091 $ 8,951,798
========================================================================
Change in plan assets
Fair value of plan assets at beginning of year $10,063,296 $ 9,976,905
Actual return on plan assets 922,155 292,963
Employer contribution -- 12,563
Benefits paid (150,967) (219,135)
------------------------------------------------------------------------
Fair value of plan assets at end of year 10,834,484 $10,063,296
========================================================================
Funded status $ 984,393 $ 1,111,498
========================================================================
Unrecognized prior service cost $ -- $ 456,052
Unrecognized net loss -- 1,727,768
------------------------------------------------------------------------
Net amount recognized $ -- $ 3,295,318
========================================================================
Items not yet recognized as a component of net periodic pension cost:
2006 2005
---------- ------
Prior service cost $ 336,276 $ --
Net (gain)/loss 1,487,829 --
------------------------------------------------------------
Total recognized as a charge to net assets $1,824,105 $ --
============================================================
10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The accumulated benefit obligation for all defined benefit pension plans was
$8,137,314 and $6,947,921 at December 31, 2006 and 2005, respectively.
2006 2005
--------- ---------
Components of net periodic pension cost
Service cost $ 460,969 $ 359,998
Interest cost 518,015 504,330
Actual return on plan assets (922,155) (292,963)
Amortization of prior service cost 119,776 126,553
Amortization of net (gain)/loss 180,764 188,462
Deferred asset gain 128,119 (504,070)
-------------------------------------------------------------
Net periodic pension cost $ 485,488 $ 382,310
=============================================================
In 2007, the Company estimates that $154,000 of prior service cost and $95,000
of net losses, for a total of $249,000, will be amortized from accumulated
other comprehensive income into net periodic pension cost.
Assumptions used to determine benefit obligations and costs are:
2006 2005
----- -----
Discount rate 5.75% 5.75%
Expected long-term return on plan assets 8.00% 8.00%
Rate of compensation increase 7.00% 7.00%
The assumption for the expected long-term return on plan assets is based on the
actual long-term historical returns realized by the plan assets, weighted
according to the current asset mix.
The asset allocations at December 31, 2006 and 2005, by asset category, are as
follows:
2006 2005
---- ----
Asset Category
Equity Securities & Equity Mutual Funds 68% 70%
Fixed Income Mutual Funds 27% 28%
Cash 5% 2%
Equity securities include Common Stock of the Company in the amount of $718,924
(6% of total plan assets) and $616,864 (6% of total plan assets) at December
31, 2006 and 2005, respectively.
The primary objective of the Company's pension plan is to provide capital
appreciation, current income, and preservation of capital through a portfolio
of stocks and fixed income securities. The equity portion of the portfolio may
range from 50% to 75% of total portfolio assets. The fixed income portion of
the portfolio may range from 25% to 50% of total portfolio assets and cash may
range from 0% to 25% of total portfolio assets. Subject to these allocation
ranges, the portfolio may be invested in any of the following securities:
common stocks, preferred
stocks, American Depository Receipts, foreign securities, mutual funds,
convertible securities, municipal bonds, corporate bonds, U.S. government
securities, and U.S. government agency securities.
The Company's policy is to contribute annually to the plans those amounts that
can be deducted for federal income tax purposes, plus additional amounts as the
Company deems appropriate in order to provide assets sufficient to meet
benefits to be paid to plan participants. The Company anticipates making no
contribution to the plans in 2007.
The following benefit payments, which reflect expected future service, are
expected to be paid:
Pension Benefits
----------------
2007 $ 301,638
2008 572,494
2009 562,223
2010 629,233
2011 614,012
Years 2012-2016 3,294,160
The Company also sponsors a defined contribution plan that covers substantially
all employees. The Company expensed contributions to this plan of $182,985 and
$181,236 for the years ended December 31, 2006 and December 31, 2005,
respectively. The Company does not provide postretirement medical benefits.
6. Equity-Based Compensation
The Stock Option Plan adopted in 1985 ("1985 Plan") has been discontinued and
no further grants will be made under this plan, although unexercised awards
granted in 2004 and prior years remain outstanding. The 1985 Plan permitted the
issuance of stock options and stock appreciation rights for the purchase of up
to 2,610,146 shares of the Company's Common Stock at the fair market value on
the date of grant. The exercise price of the options and related stock
appreciation rights is reduced by the per share amount of capital gains paid by
the Company during subsequent years. Options are exercisable beginning not less
than one year after the date of grant and stock appreciation rights are
exercisable beginning not less than two years after the date of grant. The
stock appreciation rights allow the holders to surrender their rights to
exercise their options and receive cash or shares in an amount equal to the
difference between the option exercise price and the fair market value of the
Common Stock at the date of surrender. All options terminate 10 years from the
date of grant if not exercised.
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
A summary of option activity under the 1985 Plan as of December 31, 2006, and
changes during the period then ended, is presented below:
Weighted- Weighted-
Average Average
Exercise Remaining
Options Price Life (Years)
------- --------- ------------
Outstanding at December 31, 2005 254,766 $11.71 5.71
Exercised (44,543) 8.34
Forfeited (8,233) 10.87
----------------------------------------------------------------
Outstanding at December 31, 2006 201,990 $11.81 4.79
----------------------------------------------------------------
Exercisable at December 31, 2006 124,068 $12.03 4.75
================================================================
The options outstanding as of December 31, 2006 are set forth below:
Weighted Weighted
Average Average
Options Exercise Remaining
Exercise price Outstanding Price Life (Years)
-------------- ----------- -------- ------------
$8.25-$10.49 54,427 $ 9.23 3.57
$10.50-$12.74 96,415 10.89 6.12
$12.75-$14.99 -- -- --
$15.00-$17.25 51,148 16.29 3.59
------------------------------------------------------------------
Outstanding at December 31, 2006 201,990 $11.81 4.79
==================================================================
Compensation cost resulting from stock options and stock appreciation rights
granted under the 1985 Plan is based on the intrinsic value of the award,
recognized over the award's vesting period, and remeasured at each reporting
date through the date of settlement. The total compensation cost recognized for
the year ended December 31, 2006 was $293,582.
The 2005 Equity Incentive Compensation Plan ("2005 Plan"), adopted at the 2005
Annual Meeting, permits the grant of stock options, restricted stock awards and
other stock incentives to key employees and all non-employee directors. The
2005 Plan provides for the issuance of up to 3,413,131 shares of the Company's
Common Stock, including both performance and nonperformance-based restricted
stock. Performance-based restricted stock awards vest at the end of a specified
three year period, with the ultimate number of shares earned contingent on
achieving certain performance targets. If performance targets are not achieved,
all or a portion of the performance-based restricted shares are forfeited and
become available for future grants. Nonperformance-based restricted stock
awards vest ratably over a three year period and nonperformance-based
restricted stock units (granted to non-employee directors) vest over a one year
period. It is the current intention that employee grants will be
performance-based. The 2005 Plan provides for accelerated vesting in the event
of death or retirement. Non- employee directors also may elect to defer a
portion of their cash compensation, with such deferred amount to be paid by
delivery of deferred stock units. Outstanding awards are granted at fair market
value on grant date. The number of shares of Common Stock which remains
available for future grants under the 2005 Plan at December 31, 2006 is
3,329,260 shares.
The Company pays dividends and dividend equivalents on outstanding awards,
which are charged to net assets when paid. Dividends and dividend equivalents
paid on restricted awards that are later forfeited are reclassified to
compensation expense.
A summary of the status of the Company's awards granted under the 2005 Plan as
of December 31, 2006, and changes during the period then ended, is presented
below:
Weighted Average
Grant-Date Fair
Awards Shares/Units Value
------ ------------ ----------------
Balance at December 31, 2005 21,441 $12.57
Granted:
Restricted stock 49,500 12.93
Restricted stock units 7,500 13.24
Deferred stock units 4,199 13.17
Vested (12,147) 12.58
------------------------------------------------------------
Balance at December 31, 2006
(includes 49,500 performance-
based awards and 20,993
nonperformance-based awards) 70,493 $ 12.92
============================================================
Compensation costs resulting from awards granted under the 2005 Plan are based
on the fair value of the award on grant date (determined by the average of the
high and low price on grant date) and recognized on a straight-line basis over
the requisite service period. For those awards with performance conditions,
compensation costs are based on the most probable outcome and, if such goals
are not met, compensation cost is not recognized and any previously recognized
compensation cost is reversed. The total compensation costs for restricted
stock granted to employees for the year ended December 31, 2006 were $271,629.
The total compensation costs for restricted stock units granted to non-employee
directors for the year ended December 31, 2006 were $119,737. As of December
31, 2006, there were total unrecognized compensation costs of $527,227, a
component of additional capital surplus, related to nonvested equity-based
compensation arrangements granted under the 2005 Plan. Those costs are expected
to be recognized over a weighted average period of 1.82 years. The total fair
value of shares vested during the years ended December 31, 2006 and 2005 was
$168,230 and $9,889, respectively.
12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
7. Expenses
The aggregate remuneration paid during the year ended December 31, 2006 to
officers and directors amounted to $2,592,307, of which $339,415 was paid to
directors who were not officers. These amounts represent the taxable income to
the Company's officers and directors and therefore differ from the amounts
reported in the accompanying Statement of Operations that are recorded and
expensed in accordance with generally accepted accounting principles.
8. Portfolio Securities Loaned
The Company makes loans of securities to brokers, secured by cash, U.S.
Government securities, or bank letters of credit. The Company accounts for
securities lending transactions as secured financing and receives compensation
in the form of fees or retains a portion of interest on the investment of any
cash received as collateral. The Company also continues to receive interest or
dividends on the securities loaned. The loans are secured at all times by
collateral of at least 102% of the fair value of the securities loaned plus
accrued interest. At December 31, 2006, the Company had securities on loan of
$67,475,119, and held collateral of $69,086,380, consisting of an investment
trust fund which may invest in money market instruments, commercial paper,
repurchase agreements, U.S. Treasury Bills, and U.S. agency obligations.
9. New Accounting Pronouncements
In July 2006, the FASB released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). 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 Fund's tax returns
to determine whether the tax positions are "more-likely-than-not" of being
sustained by the applicable 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 to be implemented no later
than the Company's June 29, 2007 net asset value. The application of FIN 48 is
not expected to materially impact the Company's financial statements.
In September 2006, the FASB released Statement of Financial Accounting Standard
No. 157, Fair Value Measurement ("FAS 157"), which provides enhanced guidance
for using fair value to measure assets and liabilities. The standard requires
companies to provide expanded information about the assets and liabilities
measured at fair value and the potential effect of these fair valuations on an
entity's financial performance. The standard does not expand the use of fair
value in any circumstances, but provides clarification on acceptable fair
valuation methods and applications. Adoption of FAS 157 is required for fiscal
years beginning after November 15, 2007. Application of the standard is not
expected to materially impact the Company's financial statements.
13
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Year Ended December 31
------------------------------------------------------
2006 2005 2004 2003 2002
-------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of year $14.71 $15.04 $14.36 $12.12 $16.05
-------------------------------------------------------------------------------------------------------
Net investment income 0.23 0.22 0.23* 0.19 0.20
Net realized gains and increase (decrease)
in unrealized appreciation 1.86 0.32 1.39 2.85 (3.38)
Adjustment to apply FASB
Statement No. 158 (note 5) (0.02) -- -- -- --
-------------------------------------------------------------------------------------------------------
Total from investment operations 2.07 0.54 1.62 3.04 (3.18)
-------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (0.23) (0.22) (0.24) (0.17) (0.19)
Distributions from net realized gains (0.67) (0.64) (0.66) (0.61) (0.57)
-------------------------------------------------------------------------------------------------------
Total distributions (0.90) (0.86) (0.90) (0.78) (0.76)
-------------------------------------------------------------------------------------------------------
Capital share repurchases 0.04 0.05 0.02 0.04 0.05
Reinvestment of distributions (0.06) (0.06) (0.06) (0.06) (0.04)
-------------------------------------------------------------------------------------------------------
Total capital share transactions (0.02) (0.01) (0.04) (0.02) 0.01
-------------------------------------------------------------------------------------------------------
Net asset value, end of year $15.86 $14.71 $15.04 $14.36 $12.12
=======================================================================================================
Per share market price, end of year $13.87 $12.55 $13.12 $12.41 $10.57
-------------------------------------------------------------------------------------------------------
Total Investment Return
Based on market price 17.9% 2.2% 13.2% 25.2% (20.6)%
Based on net asset value 15.0% 4.5% 12.1% 26.3% (19.4)%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $1,377,418 $1,266,729 $1,295,549 $1,218,862 $1,024,810
Ratio of expenses to average net assets 0.50% 0.45% 0.43% 0.47% 0.34%
Ratio of net investment income to
average net assets 1.50% 1.44% 1.54% 1.45% 1.42%
Portfolio turnover 10.87% 12.96% 13.43% 12.74% 17.93%
Number of shares outstanding at
end of year (in 000's) 86,838 86,100 86,135 84,886 84,536
-------------------------------------------------------------------------------------------------------
*In 2004 the Fund received $2,400,000, or $0.03 per share, in an extraordinary
dividend from Microsoft Corp.
14
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
December 31, 2006
Shares Value (A)
-------------------------------------------------------------------
Stocks and Convertible Securities -- 96.2%
Consumer -- 18.0%
Consumer Discretionary -- 7.7%
BJ's Wholesale Club, Inc. (B)........... 500,000 $ 15,555,000
Clear Channel Communications, Inc....... 350,000 12,439,000
Comcast Corp. (B)....................... 365,000 15,450,450
Gannett Co., Inc........................ 112,500 6,801,750
Harley-Davidson, Inc.................... 165,000 11,627,550
Newell Rubbermaid Inc................... 400,000 11,580,000
OSI Restaurant Partners, Inc............ 315,000 12,348,000
Ryland Group Inc........................ 50,000 2,731,000
Target Corp............................. 300,000 17,115,000
------------
105,647,750
------------
Consumer Staples -- 10.3%
Avon Products, Inc...................... 430,000 14,207,200
Bunge Ltd. (C).......................... 200,000 14,502,000
Coca-Cola Co............................ 200,000 9,650,000
Dean Foods Co. (B)...................... 340,000 14,375,200
Del Monte Foods Co...................... 1,115,000 12,298,450
PepsiCo, Inc............................ 400,000 25,020,000
Procter & Gamble Co..................... 340,000 21,851,800
Safeway Inc............................. 423,000 14,618,880
Unilever plc ADR........................ 550,000 15,301,000
------------
141,824,530
------------
Energy -- 11.7%
ConocoPhillips.......................... 345,000 24,822,750
ENSCO International, Inc................ 209,150 10,470,049
Exxon Mobil Corp........................ 215,000 16,475,450
Marathon Oil Co......................... 120,000 11,100,000
Murphy Oil Corp......................... 38,500 1,957,725
Petroleum & Resources Corporation (D)... 2,186,774 73,169,458
Schlumberger Ltd........................ 380,000 24,000,800
------------
161,996,232
------------
Financial -- 17.9%
Banking -- 14.0%
BankAtlantic Bancorp.................... 880,000 12,152,800
Bank of America Corp.................... 610,000 32,567,900
Bank of New York Co., Inc. (The)........ 375,000 14,763,750
Compass Bancshares Inc. (C)............. 300,000 17,895,000
Fifth Third Bancorp..................... 280,000 11,460,400
Investors Financial Services Corp. (C).. 382,500 16,321,275
Morgan Stanley.......................... 200,000 16,286,000
Prosperity Bancshares Inc............... 200,000 6,902,000
Wachovia Corp........................... 470,000 26,766,500
Wells Fargo & Co........................ 650,000 23,114,000
Wilmington Trust Corp................... 363,000 15,307,710
------------
193,537,335
------------
Insurance -- 3.9%
AMBAC Financial Group, Inc.............. 200,000 17,814,000
American International Group, Inc....... 500,000 35,830,000
------------
53,644,000
------------
15
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2006
Shares Value (A)
-------------------------------------------------------------------
Health Care -- 12.8%
Abbott Laboratories..................... 320,000 $ 15,587,200
Advanced Medical Optics, Inc. (B) (C)... 325,000 11,440,000
Bristol-Myers Squibb Co................. 345,000 9,080,400
Caremark Rx Inc......................... 245,000 13,991,950
Genentech, Inc. (B)..................... 220,000 17,848,600
Johnson & Johnson....................... 255,000 16,835,100
MedImmune, Inc. (B)..................... 225,000 7,283,250
Medtronic, Inc.......................... 310,000 16,588,100
Pfizer Inc.............................. 1,120,000 29,008,000
Teva Pharmaceutical Industries Ltd ADR.. 385,000 11,965,800
Wyeth Co................................ 325,000 16,549,000
Zimmer Holdings, Inc. (B)............... 125,000 9,797,500
------------
175,974,900
------------
Industrials -- 12.9%
Cintas Corp............................. 300,000 11,913,000
Curtiss-Wright Corp..................... 460,000 17,056,800
Donnelley (R.R.) & Sons Co. (C)......... 100,000 3,554,000
Emerson Electric Co..................... 400,000 17,628,000
Essex Corp. (B)......................... 174,800 4,179,468
General Electric Co..................... 1,487,700 55,357,317
Illinois Tool Works Inc................. 250,000 11,547,500
Masco Corp. (C)......................... 450,000 13,441,500
3M Co................................... 160,000 12,468,800
United Parcel Service, Inc.............. 155,000 11,621,900
United Technologies Corp................ 300,000 18,756,000
------------
177,524,285
------------
Information Technology -- 11.4%
Communication Equipment -- 1.3%
Avaya Inc. (B).......................... 600,000 8,388,000
Corning Inc. (B)........................ 500,000 9,355,000
------------
17,743,000
------------
Computer Related -- 8.5%
Automatic Data Processing Inc........... 300,000 14,775,000
BEA Systems, Inc. (B)................... 800,000 10,064,000
Cisco Systems, Inc. (B)................. 850,000 23,230,500
Dell Inc. (B)........................... 585,000 14,677,650
Microsoft Corp.......................... 1,180,000 35,234,800
Oracle Corp. (B)........................ 1,100,000 18,854,000
------------
116,835,950
------------
Electronics -- 1.6%
Cree, Inc. (B) (C)...................... 375,000 6,495,000
Intel Corp.............................. 800,000 16,200,000
------------
22,695,000
------------
16
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
December 31, 2006
Prin. Amt.
or Shares Value (A)
--------------------------------------------------------------------------------------------
Materials -- 5.3%
Air Products and Chemicals, Inc............................. 250,000 $ 17,570,000
duPont (E.I.) de Nemours and Co............................. 360,000 17,535,600
Florida Rock Industries Inc. (C)............................ 200,000 8,610,000
Martin Marietta Materials, Inc.............................. 83,000 8,624,530
Rohm & Haas Co.............................................. 400,000 20,448,000
--------------
72,788,130
--------------
Telecom Services -- 2.7%
Alltel Corp................................................. 300,000 18,144,000
AT&T Corp................................................... 400,000 14,300,000
Windstream Corp............................................. 310,178 4,410,731
--------------
36,854,731
--------------
Utilities -- 3.5%
Aqua America, Inc. (C)...................................... 608,000 13,850,240
Duke Energy Corp............................................ 611,560 20,309,908
MDU Resources Group, Inc.................................... 562,500 14,422,500
--------------
48,582,648
--------------
Total Stocks and Convertible Securities
(Cost $906,594,326) (E)....................................... 1,325,648,491
--------------
Short-Term Investments -- 3.6%
U.S. Government Obligations -- 1.2%
U.S. Treasury Bills, 4.93%, due 2/15/07..................... $16,500,000 16,398,319
--------------
Time Deposit -- 0.0%
Bank of America Corp., 4.55%, due 1/2/07.................... 286,455
--------------
Commercial Paper -- 2.4%
Chevron Funding Co., 5.20-5.23%, due 1/2/07-1/11/07......... $12,700,000 12,692,139
Coca-Cola Enterprises 5.26%, due 1/23/07.................... $ 7,700,000 7,675,249
General Electric Capital Corp., 5.24%, due 1/16/07.......... $ 3,900,000 3,891,485
Toyota Motor Credit Corp., 5.25%, due 1/9/07-1/11/07........ $ 8,500,000 8,488,566
--------------
Total Commercial Paper.................................... 32,747,439
--------------
Total Short-Term Investments
(Cost $49,432,213)............................................ 49,432,213
--------------
Total Securities Lending Collateral -- 5.0%
(Cost $69,086,380)
Brown Brothers Investment Trust, 5.26%, due 1/2/07.......... 69,086,380
--------------
Total Investments -- 104.8%
(Cost $1,025,112,919)......................................... 1,444,167,084
Cash, receivables, prepaid expenses and other assets, less
liabilities -- (4.8)%..................................... (66,748,774)
--------------
Net Assets -- 100.0%............................................ $1,377,418,310
================================================================================
Notes:
(A) See note 1 to financial statements. Securities are listed on the New York
Stock Exchange, the American Stock Exchange, or the NASDAQ, except
restricted securities.
(B) Presently non-dividend paying.
(C) All or a portion of these securities are on loan. See Note 8 to Financial
Statements.
(D) Non-controlled affiliate, a closed-end sector fund, registered as an
investment company under the Investment Company Act of 1940.
(E) The aggregate market value of stocks held in escrow at December 31, 2006
covering open call option contracts written was $25,200,685. In addition,
the required aggregate market value of securities segregated by the
custodian to collateralize open put option contracts written was $7,971,500.
17
SCHEDULE OF OUTSTANDING OPTION CONTRACTS
--------------------------------------------------------------------------------
December 31, 2006
Contracts Contract
(100 shares Strike Expiration Appreciation/
each) Security Price Date (Depreciation)
----------------------------------------------------------------------------------------
COVERED CALLS
100 AMBAC Financial Group, Inc............. $ 90 Jan 07 $ 12,199
100 AMBAC Financial Group, Inc............. 90 Feb 07 6,699
200 American International Group, Inc...... 70 Feb 07 (35,601)
200 Bunge Ltd.............................. 65 Jan 07 (137,601)
100 Bunge Ltd.............................. 70 Apr 07 (53,125)
150 Bunge Ltd.............................. 75 Apr 07 (31,201)
100 Bunge Ltd.............................. 80 Apr 07 (2,300)
150 Comcast Corp........................... 40 Jan 07 (24,450)
200 Emerson Electric Co.................... 47.50 Mar 07 700
100 Harley-Davidson, Inc................... 65 Jan 07 (43,801)
100 Harley-Davidson, Inc................... 70 Jan 07 (17,800)
250 Harley-Davidson, Inc................... 65 Feb 07 (137,626)
100 Harley-Davidson, Inc................... 80 May 07 (5,000)
100 Investors Financial Services Corp...... 50 Jan 07 19,199
200 Investors Financial Services Corp...... 55 Jan 07 22,399
200 Marathon Oil Co........................ 100 Jan 07 28,171
100 Marathon Oil Co........................ 105 Apr 07 (1,276)
100 Martin Marietta Materials, Inc......... 100 Jan 07 (38,301)
150 Martin Marietta Materials, Inc......... 115 Jan 07 12,299
100 Morgan Stanley......................... 75 Jan 07 (51,800)
200 Rohm & Haas Co......................... 55 Jan 07 15,399
200 Ryland Group Inc....................... 60 Jan 07 13,399
100 Target Corp............................ 55 Jan 07 (5,801)
45 3M Co.................................. 85 Apr 07 1,890
100 United Technologies Corp............... 70 Jan 07 10,200
100 United Technologies Corp............... 75 May 07 10,700
100 Wyeth Co............................... 55 Jan 07 9,705
100 Zimmer Holdings, Inc................... 80 Jan 07 2,267
----- ---------
3,745 (420,457)
----- ---------
COLLATERALIZED PUTS
150 Advanced Medical Optics, Inc........... 35 Apr 07 (10,951)
150 Avon Products, Inc..................... 25 Jan 07 14,550
250 Essex Corp............................. 17.50 Feb 07 15,999
200 Florida Rock Industries Inc............ 30 Jan 07 20,399
100 Marathon Oil Co........................ 67.50 Jan 07 10,700
200 Martin Marietta Materials, Inc......... 75 Jan 07 20,963
200 Masco Corp............................. 25 Jan 07 16,399
53 Ryland Group Inc....................... 30 Jan 07 5,141
100 Ryland Group Inc....................... 40 Apr 07 3,750
100 Ryland Group Inc....................... 42.50 Apr 07 3,700
100 Teva Pharmaceutical Industries Ltd. ADR 32.50 Jan 07 (6,300)
200 Teva Pharmaceutical Industries Ltd. ADR 30 Mar 07 2,399
200 Wachovia Corp.......................... 47.50 Jan 07 17,399
100 Wachovia Corp.......................... 50 Apr 07 8,400
----- ---------
2,103 122,548
----- ---------
$(297,909)
=========
18
CHANGES IN PORTFOLIO SECURITIES
--------------------------------------------------------------------------------
During the Three Months Ended December 31, 2006
(unaudited)
Shares
------------------------------------------
Held
Additions Reductions Dec. 31, 2006
--------- ---------- -------------
Advanced Medical Optics, Inc.......... 15,000 325,000
Alcatel-Lucent ADR.................... 204,960/(1)/ 204,960 --
Dell Inc.............................. 20,000 585,000
Emerson Electric Co................... 200,000/(2)/ 400,000
ENSCO International, Inc.............. 75,000 209,150
Essex Corp............................ 58,300 174,800
Intel Corp............................ 250,000 800,000
KBW, Inc.............................. 5,000 5,000 --
Petroleum & Resources Corporation..... 200,778/(3)/ 2,186,774
Prosperity Bancshares Inc............. 200,000 200,000
Teva Pharmaceutical Industries Ltd ADR 365,000 385,000
AMBAC Financial Group, Inc............ 40,000 200,000
AT&T Corp............................. 195,000 400,000
BP plc ADR............................ 95,000 --
Bunge Ltd............................. 35,000 200,000
Cisco Systems, Inc.................... 260,000 850,000
Dean Foods Co......................... 10,000 340,000
Donnelley (R.R.) & Sons Co............ 125,000 100,000
Harley-Davidson, Inc.................. 35,000 165,000
Laboratory Corp. of America Holdings.. 140,000 --
Lucent Technologies Inc............... 2,900,000/(1)/ --
Oracle Corp........................... 256,001 1,100,000
Solectron Corp........................ 1,850,000 --
Target Corp........................... 50,000 300,000
Wilmington Trust Corp................. 57,000 363,000
--------
(1) Received 204,960 shares of Alcatel-Lucent ADR for 1,050,000 shares of
Lucent Technologies Inc. surrendered. Sold 1,850,000 shares of Lucent
Technologies Inc. prior to the merger.
(2) By stock split.
(3) By dividend reinvestment.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of The Adams Express Company:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Adams Express Company
(hereafter referred to as the "Company") at December 31, 2006, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 2006 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 19, 2007
-------------------------
20
HISTORICAL FINANCIAL STATISTICS
--------------------------------------------------------------------------------
(unaudited)
Dividends Distributions Total
From From Net Dividends
Net Asset Market Investment Realized and Annual
Value Of Shares Value Value Income Gains Distributions Rate of
Dec. 31 Net Assets Outstanding* Per Share* Per Share* Per Share* Per Share* Per Share* Distribution**
---------------------------------------------------------------------------------------------------------------
1992 $ 696,924,779 51,039,938 $13.65 $13.33 $.31 $ .77 $1.08 8.47%
1993 840,610,252 63,746,495 13.19 11.92 .30 .79 1.09 8.17
1994 798,297,600 66,584,985 11.99 10.42 .33 .73 1.06 9.27
1995 986,230,914 69,248,276 14.24 12.33 .35 .76 1.11 9.53
1996 1,138,760,396 72,054,792 15.80 13.17 .35 .80 1.15 8.95
1997 1,424,170,425 74,923,859 19.01 16.13 .29 1.01 1.30 8.65
1998 1,688,080,336 77,814,977 21.69 17.75 .30 1.10 1.40 8.17
1999 2,170,801,875 80,842,241 26.85 22.38 .26 1.37 1.63 8.53
2000 1,951,562,978 82,292,262 23.72 21.00 .22 1.63 1.85 7.76
2001 1,368,366,316 85,233,262 16.05 14.22 .26 1.39 1.65 9.44
2002 1,024,810,092 84,536,250 12.12 10.57 .19 .57 .76 6.14
2003 1,218,862,456 84,886,412 14.36 12.41 .17 .61 .78 6.80
2004 1,295,548,900 86,135,292 15.04 13.12 .24 .66 .90 7.05
2005 1,266,728,652 86,099,607 14.71 12.55 .22 .64 .86 6.65
2006 1,377,418,310 86,838,223 15.86 13.87 .23 .67 .90 6.80
--------
* Adjusted to reflect the 3-for-2 stock split effected in October 2000.
** The annual rate of distribution is the total dividends and capital gain
distributions during the year divided by the average daily market price of
the Company's Common Stock.
-------------------------
Common Stock
Listed on the New York Stock Exchange
The Adams Express Company
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(410) 752-5900 or (800) 638-2479
Website: www.adamsexpress.com
E-mail: contact@adamsexpress.com
Counsel: Chadbourne & Parke L.L.P.
Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP
Transfer Agent & Registrar: American Stock Transfer & Trust Co.
Custodian of Securities: Brown Brothers Harriman & Co.
21
OTHER INFORMATION
--------------------------------------------------------------------------------
Statement on Quarterly Filing of Complete Portfolio Schedule
In addition to publishing its complete schedule of portfolio holdings in the
First and Third Quarter Reports to shareholders, the Company also files its
complete schedule of portfolio holdings with the Securities and Exchange
Commission for the first and third quarters of each fiscal year on Form N-Q.
The Company's Forms N-Q are available on the Commission's website at
www.sec.gov. The Company's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room, and information on the operation of the
Public Reference Room may be obtained by calling 1-800-SEC-0330. The Company
also posts its Forms N-Q on its website at: www.adamsexpress.com. under the
heading "Financial Reports".
Annual Certification
The Company's CEO has submitted to the New York Stock Exchange the annual CEO
certification as required by Section 303A.12(a) of the NYSE Listed Company
Manual.
Proxy Voting Policies and Record
A description of the policies and procedures that the Company uses to determine
how to vote proxies relating to portfolio securities owned by the Company and
information as to how the Company voted proxies relating to portfolio
securities during the 12 month period ended June 30, 2006 are available (i)
without charge, upon request, by calling the Company's toll free number at
(800) 638-2479; (ii) on the Company's website by clicking on "Corporate
Information" heading on the website; and (iii) on the Securities and Exchange
Commission's website at www.sec.gov.
Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. By their
nature, all forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those contemplated by the
forward-looking statements. Several factors that could materially affect the
Company's actual results are the performance of the portfolio of stocks held by
the Company, the conditions in the U.S. and international financial markets,
the price at which shares of the Company will trade in the public markets, and
other factors discussed in the Company's periodic filings with the Securities
and Exchange Commission.
Privacy Policy
In order to conduct its business, the Company, through its transfer agent,
currently American Stock Transfer & Trust Company, collects and maintains
certain nonpublic personal information about our stockholders of record with
respect to their transactions in shares of our securities. This information
includes the stockholder's address, tax identification or Social Security
number, share balances, and dividend elections. We do not collect or maintain
personal information about stockholders whose shares of our securities are held
in "street name" by a financial institution such as a bank or broker.
We do not disclose any nonpublic personal information about you, our other
stockholders or our former stockholders to third parties unless necessary to
process a transaction, service an account or as otherwise permitted by law.
To protect your personal information internally, we restrict access to
nonpublic personal information about our stockholders to those employees who
need to know that information to provide services to our stockholders. We also
maintain certain other safeguards to protect your nonpublic personal
information.
22
SPECIAL STOCKHOLDER MEETING
--------------------------------------------------------------------------------
A special meeting of stockholders was held on Tuesday, November 7, 2006. The
purpose of the meeting was to approve a comprehensive rewriting and updating of
the Company's corporate charter. All of the proposed charter amendments were
approved by the stockholders. The results of the voting on the eight proposals
were as follows:
For Against Abstain
---------- --------- ---------
Proposal 1 -- Purpose of the Company..................... 49,540,644 5,129,444 1,379,302
Proposal 2 -- Classification, designation, etc., of stock 48,157,962 6,401,838 1,489,588
Proposal 3 -- Stockholder voting......................... 47,815,151 6,703,051 1,531,184
Proposal 4 -- Stockholder election of directors.......... 48,104,483 6,290,312 1,654,590
Proposal 5 -- Power to amend bylaws...................... 46,942,610 7,448,398 1,668,694
Proposal 6 -- Quorum for stockholder meetings............ 48,301,556 6,280,923 1,466,905
Proposal 7 -- Determinations by the Board................ 48,218,222 6,230,818 1,600,344
Proposal 8 -- Miscellaneous conforming amendments........ 47,773,356 6,212,332 2,063,694
--------------------------------------------------------------------------------
This report, including the financial statements herein, is transmitted to the
stockholders of The Adams Express Company for their information. It is not a
prospectus, circular or representation intended for use in the purchase or
sale of shares of the Company or of any securities mentioned in the report.
The rates of return will vary and the principal value of an investment will
fluctuate. Shares, if sold, may be worth more or less than their original
cost. Past performance is not indicative of future investment results.
--------------------------------------------------------------------------------
23
SHAREHOLDER INFORMATION AND SERVICES
--------------------------------------------------------------------------------
WE ARE OFTEN ASKED --
How do I invest in Adams Express?
Adams Express Common Stock is listed on the New York Stock Exchange. The
stock's ticker symbol is "ADX" and may be bought and sold through registered
investment security dealers. Your broker will be able to assist you in this
regard. In addition, stock may be purchased through our transfer agent,
American Stock Transfer & Trust Company's INVESTORS CHOICE Plan (see page 25).
Where do I get information on the stock's price, trading and/or net asset value?
The daily net asset value (NAV) per share and closing market price may be
obtained from our website at www.adamsexpress.com. The daily NAV is also
available on the NASDAQ Mutual Fund Quotation System under the symbol XADEX.
The week-ending NAV is published on Saturdays in various newspapers.
Adams Express daily trading is shown in the stock tables of many daily
newspapers, often with the abbreviated form "AdaEx." Local newspapers
determine, usually by volume of traded shares, which securities to list. If
your paper does not carry our listing, please telephone the Company at (800)
638-2479 or visit our website.
How do I replace a lost certificate(s) or how do I correct a spelling error on
my certificate?
Your Adams Express stock certificates are valuable documents and should be kept
in a safe place. For tax purposes, keep a record of each certificate, including
the cost or market value of the shares it covers at the time acquired. If a
certificate is lost, destroyed or stolen, notify the transfer agent immediately
so a "stop transfer" order can be placed on the records to prevent an
unauthorized transfer of your certificate. The necessary forms and requirements
to permit the issuance of a replacement certificate will then be sent to you. A
certificate can be replaced only after the receipt of an affidavit regarding
the loss accompanied by an open surety bond, for which a small premium is paid
by the stockholder.
In the event a certificate is issued with the holder's name incorrectly
spelled, a correction can only be made if the certificate is returned to the
transfer agent with instructions for correcting the error. Transferring shares
to another name also requires that the certificate be forwarded to the transfer
agent with the appropriate assignment forms completed and the signature of the
registered owner Medallion guaranteed by a bank or member firm of The New York
Stock Exchange, Inc.
Is direct deposit of my dividend checks available?
Yes, our transfer agent offers direct deposit of your interim dividend and
year-end distribution checks. You can request direct deposit with American
Stock Transfer either on-line or by calling them at the phone number provided
on page 25.
Who do I notify of a change of address?
The transfer agent.
We go to Florida (Arizona) every winter. How do we get our mail from Adams
Express?
The transfer agent can program a seasonal address into its system; simply send
the temporary address and the dates you plan to be there to the transfer agent.
I want to give shares to my children, grandchildren, etc. as a gift. How do I
go about it?
Giving shares of Adams Express is simple and is handled through our transfer
agent. The stock transfer rules are clear and precise for most forms of
transfer. They will vary slightly depending on each transfer, so write to the
transfer agent stating the exact intent of your gift plans and the transfer
agent will send you the instructions and forms necessary to effect your
transfer.
How do I transfer shares held at American Stock Transfer (AST)?
There are many circumstances that require the transfer of shares to new
registrations, e.g., marriage, death, a child reaching the age of maturity, or
giving shares as a gift. Each situation requires different forms of
documentation to support the transfer. You may obtain transfer instructions and
download the necessary forms from our transfer agent's website:
www.amstock.com. Click on Shareholder Services, then General Shareholder
Information and Transfer Instructions.
24
SHAREHOLDER INFORMATION AND SERVICES (CONTINUED)
--------------------------------------------------------------------------------
DIVIDEND PAYMENT SCHEDULE
The Company presently pays dividends four times a year, as follows: (a) three
interim distributions on or about March 1, June 1, and September 1, and (b) a
"year-end" distribution, payable in late December, consisting of the estimated
balance of the net investment income for the year and the net realized capital
gain earned through October 31. Stockholders may elect to receive the year-end
distribution in stock or cash. In connection with this distribution, all
stockholders of record are sent a dividend announcement notice and an election
card in mid-November.
Stockholders holding shares in "street" or brokerage accounts may make their
election by notifying their brokerage house representative.
INVESTORS CHOICE
INVESTORS CHOICE is a direct stock purchase and sale plan, as well as a
dividend reinvestment plan, sponsored and administered by our transfer agent,
American Stock Transfer & Trust Company (AST). The Plan provides registered
stockholders and interested first time investors an affordable alternative for
buying, selling, and reinvesting in Adams Express shares.
The costs to participants in administrative service fees and brokerage
commissions for each type of transaction are listed below.
Initial Enrollment and
Optional Cash Investments
Service Fee $2.50 per investment
Brokerage Commission $0.05 per share
Reinvestment of Dividends*
Service Fee 2% of amount invested
(maximum of $2.50 per investment)
Brokerage Commission $0.05 per share
Sale of Shares
Service Fee $10.00
Brokerage Commission $0.05 per share
Deposit of Certificates for safekeeping
(waived if sold) $7.50
Book to Book Transfers Included
To transfer shares to another participant or to a new
participant
Fees are subject to change at any time.
Minimum and Maximum Cash Investments
Initial minimum investment (non-holders) $500.00
Minimum optional investment
(existing holders) $50.00
Electronic Funds Transfer
(monthly minimum) $50.00
Maximum per transaction $25,000.00
Maximum per year NONE
A brochure which further details the benefits and features of INVESTORS CHOICE
as well as an enrollment form may be obtained by contacting AST.
For Non-registered Shareholders
For shareholders whose stock is held by a broker in "street" name, the AST
INVESTORS CHOICE Direct Stock Purchase and Sale Plan remains available through
many registered investment security dealers. If your shares are currently held
in a "street" name or brokerage account, please contact your broker for details
about how you can participate in AST's Plan or contact AST.
----------
The Company
The Adams Express Company
Lawrence L. Hooper, Jr.
Vice President, General Counsel and Secretary
Seven St. Paul Street, Suite 1140, Baltimore, MD 21202
(800) 638-2479
Website: www.adamsexpress.com
E-mail: contact@adamsexpress.com
The Transfer Agent
American Stock Transfer & Trust Company
Address Shareholder Inquiries to:
Shareholder Relations Department
59 Maiden Lane
New York, NY 10038
(877) 260-8188
Website: www.amstock.com
E-mail: info@amstock.com
Investors Choice Mailing Address:
Attention: Dividend Reinvestment
P.O. Box 922
Wall Street Station
New York, NY 10269-0560
Website: www.amstock.com
E-mail: info@amstock.com
*The year-end dividend and capital gain distribution will usually be made in
newly issued shares of common stock. There are no fees or commissions in
connection with this dividend and capital gain distribution when made in newly
issued shares.
25
BOARD OF DIRECTORS
--------------------------------------------------------------------------------
Number of
portfolios
in fund
Position Term Length complex
Personal held with of of time Principal Occupations overseen Other
Information the fund office served during the last 5 years by director directorships
---------------------------------------------------------------------------------------------------------------------------
Independent Directors
Enrique R. Arzac, Ph.D. Director One Since Professor of Finance and Two Director of Petroleum &
7 St. Paul Street, Year 1983 Economics, formerly, Vice Dean Resources Corporation and
Suite 1140 of Academic Affairs of the Credit Suisse Asset
Baltimore, MD 21202 Graduate School of Business, Management Funds
Age 65 Columbia University. (28 funds) (investment
companies).
---------------------------------------------------------------------------------------------------------------------------
Phyllis O. Bonanno Director One Since President & CEO of International Two Director of Petroleum &
7 St. Paul Street, Year 2003 Trade Solutions, Inc. Resources Corporation
Suite 1140 (consultants). Formerly, (investment company), Borg-
Baltimore, MD 21202 President of Columbia College, Warner Inc. (industrial),
Age 63 Columbia, South Carolina, and Mohawk Industries, Inc.
Vice President of Warnaco Inc. (carpets and flooring).
(apparel).
---------------------------------------------------------------------------------------------------------------------------
Daniel E. Emerson Director One Since Retired Executive Vice Two Director of Petroleum &
7 St. Paul Street, Year 1982 President of NYNEX Corp. Resources Corporation
Suite 1140 (communications), retired (investment company).
Baltimore, MD 21202 Chairman of the Board of both
Age 82 NYNEX Information Resources
Co. and NYNEX Mobile
Communications Co. Previously
Executive Vice President and
Director of New York Telephone
Company.
---------------------------------------------------------------------------------------------------------------------------
Frederic A. Escherich Director One Since Private Investor. Formerly, Two Director of Petroleum &
7 St. Paul Street, Year 2006 Managing Director and head of Resources Corporation
Suite 1140 Mergers and Acquisitions (investment company).
Baltimore, MD 21202 Research and the Financial
Age 54 Advisory Department with
J.P. Morgan.
---------------------------------------------------------------------------------------------------------------------------
Roger W. Gale, Ph.D. Director One Since President & CEO of GF Energy, Two Director of Petroleum &
7 St. Paul Street, Year 2005 LLC (consultants to electric Resources Corporation
Suite 1140 power companies). Formerly, (investment company), Ormat
Baltimore, MD 21202 member of management group, (geothermal and renewable
Age 60 PA Consulting Group (energy energy), and U.S. Energy
consultants). Association.
---------------------------------------------------------------------------------------------------------------------------
Thomas H. Lenagh Director One Since Financial Advisor. Formerly, Two Director of Petroleum &
7 St. Paul Street, Year 1968 Chairman of the Board and CEO Resources Corporation,
Suite 1140 of Greiner Engineering Inc. Cornerstone Funds, Inc. (2
Baltimore, MD 21202 (formerly Systems Planning funds) (investment
Age 88 Corp.) (consultants). Formerly, companies), and Photonics
Treasurer and Chief Investment Product Group (crystals).
Officer of the Ford Foundation
(charitable foundation).
---------------------------------------------------------------------------------------------------------------------------
Kathleen T. McGahran, Director One Since Principal & Director of Pelham Two Director of Petroleum &
Ph.D., J.D., C.P.A. Year 2003 Associates, Inc. (executive Resources Corporation
7 St. Paul Street, education). Adjunct Associate (investment company).
Suite 1140 Professor, Columbia Executive
Baltimore, MD 21202 Education, Graduate School of
Age 56 Business, Columbia University.
Formerly, Associate Dean and
Director of Executive Education,
and Associate Professor,
Columbia University.
---------------------------------------------------------------------------------------------------------------------------
26
BOARD OF DIRECTORS (CONTINUED)
--------------------------------------------------------------------------------
Number of
portfolios
in fund
Position Term Length complex
Personal held with of of time Principal Occupations overseen Other
Information the fund office served during the last 5 years by director directorships
--------------------------------------------------------------------------------------------------------------------------
Independent Directors (continued)
John J. Roberts Director One Since Retired Senior Advisor, Two Director of Petroleum &
7 St. Paul Street, Year 1976 formerly, Vice-Chairman Resources Corporation
Suite 1140 External Affairs, American (investment company) and
Baltimore, MD 21202 International Group, Inc. Honorary Director of
Age 84 (insurance). Formerly, Chairman American International
and CEO of American Group, Inc.
International Underwriters
Corporation. Previously,
President of American
International Underwriters
Corporation-U.S./ Overseas
Operations.
--------------------------------------------------------------------------------------------------------------------------
Craig R. Smith, M.D. Director One Since President, Williston Consulting Two Director of Petroleum &
7 St. Paul Street, Year 2005 LLC (consultants to Resources Corporation
Suite 1140 pharmaceutical and (investment company),
Baltimore, MD 21202 biotechnology industries). LaJolla Pharmaceutical
Age 60 Formerly, Chairman, President & Company, and Depomed, Inc.
CEO of Guilford (specialty pharmaceuticals).
Pharmaceuticals
(pharmaceuticals &
biotechnology).
--------------------------------------------------------------------------------------------------------------------------
Interested Director
Douglas G. Ober Director, One Director Chairman & CEO of the Two Director of Petroleum &
7 St. Paul Street, Chairman Year Since Company and Petroleum & Resources Corporation
Suite 1140 and 1989; Resources Corporation. (investment company).
Baltimore, MD 21202 CEO Chairman
Age 60 of the
Board
Since
1991
--------------------------------------------------------------------------------------------------------------------------
27
THE ADAMS EXPRESS COMPANY
--------------------------------------------------------------------------------
Board Of Directors
Enrique R. Arzac/(1)(3)/ Thomas H. Lenagh/(1)(4)/
Phyllis O. Bonanno/(1)(4)/ Kathleen T. McGahran/(2)(4)/
Daniel E. Emerson/(2)(3)/ Douglas G. Ober/(1)/
Frederic A. Escherich/(2)(3)/ John J. Roberts/(1)(3)/
Roger W. Gale/(3)/ Craig R. Smith/(2)(4)/
--------
/(1)/ Member of Executive Committee
/(2)/ Member of Audit Committee
/(3)/ Member of Compensation Committee
/(4)/ Member of Retirement Benefits Committee
Officers
Douglas G. Ober Chairman and Chief
Executive Officer
Joseph M. Truta President
Lawrence L. Hooper, Jr. Vice President, General
Counsel and Secretary
Maureen A. Jones Vice President, Chief
Financial Officer and
Treasurer
Stephen E. Kohler Vice President -- Research
David R. Schiminger Vice President -- Research
D. Cotton Swindell Vice President -- Research
David D. Weaver Vice President -- Research
Christine M. Sloan Assistant Treasurer
Geraldine H. Pare Assistant Secretary
28
[LOGO OF ADAMS EXPRESS COMPANY] The Adams Express Company
Seven St. Paul Street, Suite 1140
Baltimore, MD 21202
(410) 752-5900 or (800) 638-2479
www.adamsexpress.com
[GRAPHIC APPEARS HERE]
Item 2. Code of Ethics.
On June 12, 2003, the Board of Directors adopted a code of
ethics that applies to registrant's principal executive
officer and principal financial officer. The code of ethics
is available on registrant's website at:
www.adamsexpress.com. Since the code of ethics was adopted
there have been no amendments to it nor have any waivers
from any of its provisions been granted.
Item 3. Audit Committee Financial Expert.
The board of directors has determined that at least one of
the members of registrant's audit committee meets the
definition of audit committee financial expert as that term
is defined by the Securities and Exchange Commission. The
director on the registrant's audit committee whom the board
of directors has determined meets such definition is
Kathleen T. McGahran, who is independent pursuant to
paragraph (a)(2) of this Item.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate fees for professional
services rendered by its independent auditors,
PricewaterhouseCoopers LLP, for the audits of the Companys
annual and semi-annual financial statements for 2006 and
2005 were $77,405 and $64,750 respectively.
(b) Audit Related Fees. There were no audit-related
fees in 2006 and 2005.
(c) Tax Fees. The aggregate fees to registrant for
professional services rendered by PricewaterhouseCoopers LLP
for the review of registrant's excise tax calculations and
preparations of federal, state and excise tax returns for
2006 and 2005 were $11,278 and $10,540, respectively.
(d) All Other Fees. The aggregate fees to registrant
by PricewaterhouseCoopers LLP other than for the services
referenced above for 2006 and 2005 were $10,044 and $800,
respectively. The $10,044 for services in 2006 related to
the review of the Company's procedures for calculating the
amounts to be paid or granted to the Company's officers in
accordance with the Company's cash incentive plan and the
2005 Equity Incentive Compensation Plan, review of the
Company's calculations related to those plans, and
preparation of a report to the Company's Compensation
Committee.
(e) (1) Audit Committee Pre-Approval Policy. As of
2006, all services to be performed for registrant by
PricewaterhouseCoopers LLP must be pre-approved by the audit
committee. All services performed in 2006 were pre-approved
by the committee.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate fees by PricewaterhouseCoopers LLP
for non-audit professional services rendered to registrant
for 2006 and 2005 were $21,322 and $11,340, respectively.
(h) The registrant's audit committee has considered
the provision by PricewaterhouseCoopers LLP of the non-audit
services described above and found that they are compatible
with maintaining PricewaterhouseCoopers LLPs independence.
Item 5. Audit Committee of Listed registrants.
(a) The registrant has a standing audit committee
established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934. The members of the audit
committee are: Kathleen T. McGahran, chair, Daniel E.
Emerson, Frederic A. Escherich, and Craig R. Smith.
(B) Not applicable.
Item 6. Schedule of Investments - This schedule is included
as part of the report to shareholders filed under Item 1 of
this form.
Item 7. Disclosure of Proxy Voting Policies and Procedures
for Closed-End Management Investment Companies.
PROXY VOTING GUIDELINES
The Adams Express Company (Adams) follows long-standing
general guidelines for the voting of portfolio company
proxies and takes very seriously its responsibility to vote
all such proxies. The portfolio company proxies are
evaluated by our research staff and voted by our portfolio
management team, and we annually provide the Board of
Directors with a report on how proxies were voted during the
previous year. We do not use an outside service to assist us
in voting our proxies.
As an internally-managed investment company, Adams uses its
own staff of research analysts and portfolio managers. In
making the decision to invest in a company for the
portfolio, among the factors the research team analyses is
the integrity and competency of the company's management. We
must be satisfied that the companies we invest in are run by
managers with integrity. Therefore, having evaluated this
aspect of our portfolio companies' managements, we give
significant weight to the recommendations of the company's
management in voting on proxy issues.
We vote proxies on a case-by-case basis according to what we
deem to be the best long-term interests of our shareholders.
The key over-riding principle in any proxy vote is that
stockholders be treated fairly and equitably by the
portfolio company's management. In general, on the election
of directors and on routine issues that we do not believe
present the possibility of an adverse impact upon our
investment, after reviewing whether applicable corporate
governance requirements as to board and committee
composition have been met, we will vote in accordance with
the recommendations of the company's management. When we
believe that the management's recommendation is not in the
best interests of our stockholders, we will vote against
that recommendation.
Our general guidelines for when we will vote contrary to the
recommendation of the portfolio company management's
recommendation are:
Stock Options
Our general guideline is to vote against stock option plans
that we believe are unduly dilutive of our stock holdings in
the company. We use a general guideline that we will vote
against any stock option plan that results in dilution in
shares outstanding exceeding 4%. Most stock option plans are
established to motivate and retain key employees and to
reward them for their achievement. An analysis of a stock
option plan can not be made in a vacuum but must be made in
the context of the company's overall compensation scheme. In
voting on stock option plans, we give consideration to
whether the stock option plan is broad-based in the number
of employees who are eligible to receive grants under the
plan. We generally vote against plans that permit re-pricing
of grants or the issuance of options with exercise prices
below the grant date value of the company's stock.
Corporate Control/Governance Issues
Unless we conclude that the proposal is favorable to our
interests as a long-term shareholder in the company, we have
a long-standing policy of voting against proposals to create
a staggered board of directors. In conformance with that
policy, we will generally vote in favor of shareholder
proposals to eliminate the staggered election of directors.
Unless we conclude that the proposal is favorable to our
interests as a long-term shareholder in the company, our
general policy is to vote against amendments to a company's
charter that can be characterized as blatant anti-takeover
provisions.
With respect to so-called golden parachutes and other
severance packages, it is our general policy to vote against
proposals relating to future employment contracts that
provide that compensation will be paid to any director,
officer or employee that is contingent upon a merger or
acquisition of the company.
We generally vote for proposals to require that the majority
of a board of directors consist of independent directors and
vote against proposals to establish a retirement plan for
non-employee directors.
We have found that most stockholder proposals relating to
social issues focus on very narrow issues that either fall
within the authority of the company's management, under the
oversight of its board of directors, to manage the day-to-
day operations of the company or concern matters that are
more appropriate for global solutions rather than company-
specific ones. We consider these proposals on a case-by-case
basis but usually are persuaded management's position is
reasonable and vote in accordance with management's
recommendation on these types of proposals.
Item 8. Portfolio Managers of Closed-End Management
Investment Companies.
(a) (1) Douglas G. Ober, Chairman and Chief Executive
Officer, and Joseph M. Truta, President, comprise the 2
person portfolio management team for the registrant. Mr.
Ober and Mr. Truta have served as portfolio managers
for the registrant since 1991. This information is as
of February 15, 2007. Mr. Ober is the lead member of
the portfolio management team. Mr. Ober and Mr. Truta
receive investment recommendations from a team of
research analysts and make decisions jointly about any
equity transactions in the portfolio. Concurrence of
both portfolio managers is required for an investment
recommendation to be approved.
(2) Mr. Ober and Mr. Truta also comprise the
portfolio management team for registrant's non-
controlled affiliate, Petroleum & Resources
Corporation (Petroleum), a registered investment
company with total net assets of $812,047,239 as of
December 31, 2006. Mr. Ober is Chairman, Chief
Executive Officer and President of Petroleum and Mr.
Truta is Executive Vice President. This information is
as of February 15, 2007. The Petroleum fund is a non-
diversified fund focusing on the energy and natural
resources sectors and Adams is a diversified fund with
a different focus, and there are few material
conflicts of interest that may arise in connection
with the portfolio managers' management of both funds.
The funds do not buy or sell securities or other
portfolio holdings to or from the other, and
procedures and policies are in place covering the
sharing of expenses and the allocation of investment
opportunities, including bunched orders and
investments in initial public offerings, between the
funds.
(3) The portfolio managers are compensated through a
three-component plan, consisting of salary, annual cash
incentive compensation, and equity incentive
compensation. The value of each component in any year
is determined by the Compensation Committee, comprised
solely of independent director members of the Board of
Directors. Salaries are determined by using
appropriate industry surveys and information about the
local market as well as general inflation statistics.
Cash incentive compensation is based on a combination
of absolute and relative fund performance over one and
three year periods as well as individual success at
meeting goals and objectives set by the Board of
Directors at the beginning of each year. Target
incentives are set based on 80% of salary for the Chief
Executive Officer and 60% of salary for the President.
Two-thirds of each individual's annual cash incentive
is based on fund performance and one third on
individual success. The portion based on performance
is determined using a scale in which the target can be
earned by absolute fund pre- tax performance of 10%.
The scale ranges from zero to 125% of target. The
result is then modified by an average of the one and
three year performance relative to the S&P 500, whereby
each one percent outperformance or underperformance by
the fund adds or deducts 5% from the percentage of
target earned based on the scale. The maximum
percentage of target which may be earned is 200% and
the minimum is zero. Equity incentive compensation,
based on a plan approved by shareholders in 2005, can
take several forms. Following approval of the plan,
grants of restricted stock were made to the portfolio
managers in April 2005, with vesting in equal
proportions over a three year period. The size of the
grants was determined by the Compensation Committee
with the assistance of an outside compensation
consultant. Grants of restricted stock were also made
on January 12, 2006, that will vest at the end of three
years, but only upon the achievement of specified
performance criteria; certain percentages of the target
number of shares will be deemed to have been earned
based on achieving performance goals over specified
intervening time periods. The benchmark used to
measure performance is a hypothetical portfolio
comprised of a 50/50 blend of the S&P 500 Index and the
Lipper Large Cap Core Mutual Fund Index ("Hypothetical
Portfolio"). The first one-sixth of the target number
of restricted shares were earned on January 1, 2007
because the Company's one year total NAV return
exceeded the one year total NAV return of the
Hypothetical Portfolio. Lesser percentages or no
shares would have been earned if the Company's NAV
return trailed that of the Hypothetical Portfolio,
depending on the level of underperformance on that
date. For the next one-third of the target number of
shares, those shares will be deemed to have been earned
if, on January 1, 2008, the Company's two year total
NAV return meets or exceeds that of the Hypothetical
Portfolio, with a lesser percentage or no shares being
earned if the Company's total NAV return trails that of
the Hypothetical Portfolio, depending on the level of
underperformance on that date. The remaining 50% of
the target shares will be deemed to have been earned
if, on January 1, 2009, the Company's three year total
NAV return meets or exceeds that of the Hypothetical
Portfolio, with a lesser percentage or no shares being
earned if the Company's total NAV return trails that of
the Hypothetical Portfolio, depending on the level of
underperformance on that date. In addition, if, on
January 1, 2009, the Company's three year total NAV
return exceeds that of the Hypothetical Portfolio, an
additional number of shares up to 50% of the target
number of shares will be earned and vest depending on
the level of outperformance. Dividends and capital
gains paid on the Company's shares of Common Stock
("dividends") will be paid on all of the target number
of shares of restricted stock, when such dividends are
paid on the Common Stock, except that no dividends or
capital gains will be paid on any shares that are
forfeited due to the failure to achieve the performance
criteria described above. The basis for the portfolio
managers' cash incentive and equity incentive
compensation determinations for Petroleum is the same
as for Adams, except that the portion of the cash
incentive based upon fund performance uses the Dow
Jones Oil and Gas Index and the S&P 500 Index as the
benchmarks in a 70%/30% ratio, over a one and three
year period, and the benchmarks used to measure fund
performance for equity incentive compensation is a
hypothetical portfolio comprised of a 80/20 blend of
the Dow Jones Oil and Gas Index and the S&P 500 Index.
All of the above information is as of December 31,
2006, except as noted.
(4) Using a valuation date of December 31, 2006, Mr.
Ober beneficially owns equity securities in registrant
of over $1,000,000. Mr. Truta beneficially owns equity
securities in registrant of over $1,000,000.
Item 9. Purchases of Equity Securities by Closed-End
Management Investment Company and Affiliated Purchasers.
Maximum
Total Number (or
Number of Approximate
Shares (or Dollar Value)
Total Units) of Shares (or
Number Purchased Units) that
of Average as Part of May Yet Be
Shares Price Publicly Purchased
(or Paid per Announced Under the
Units) Share (or Plans or Plans or
Period(2) Purchased Unit) Programs Programs
-------- --------- --------- --------- ---------
Jan. 2006 243,200 $ 12.94 243,200 3,792,429
Feb. 2006 250,400 $ 12.97 250,400 3,542,029
Mar. 2006 345,600 $ 13.21 345,600 3,196,429
Apr. 2006 165,700 $ 13.36 165,700 3,030,729
May 2006 35,800 $ 13.45 35,800 2,994,929
June 2006 0 $ 0.00 0 2,994,929
Jul. 2006 0 $ 0.00 0 2,994,929
Aug. 2006 0 $ 0.00 0 2,994,929
Sep. 2006 0 $ 0.00 0 2,994,929
Oct. 2006 255,300 $ 13.84 255,300 2,739,629
Nov 2006 150,800 $ 13.95 150,800 2,589,629
Dec 2006 176,742 $ 13.87 176,742 2,412,087
-------- --------- --------- --------- ---------
Total 1,623,542(1) $ 13.41 1,623,542(2) 2,412,087(2)
(1) There were no shares purchased other than through a
publicly announced plan or program.
(2.a) The Plan was extended on December 8, 2005 and was
reapproved on December 14, 2006.
(2.b) The share amount approved in 2005 was 5% of
outstanding shares, or approximately 4,192,729 shares, and
in 2006 was 5% of outstanding shares, or approximately
4,235,634 shares.
(2.c) Unless reapproved, the Plan will expire on or about
December 13, 2007.
(2.d) None.
(2.e) None.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which
shareholders may recommend nominees to the registrant's
board of directors made or implemented after the registrant
last provided disclosure in response to the requirements of
Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or
this Item.
Item 11. Controls and Procedures.
Conclusions of principal officers concerning controls and
procedures.
(a) As of February 15, 2007, an evaluation was performed
under the supervision and with the participation of the
officers of registrant, including the principal executive
officer (PEO) and principal financial officer (PFO), of the
effectiveness of registrant's disclosure controls and
procedures. Based on that evaluation, the registrant's
officers, including the PEO and PFO, concluded that, as of
February 15, 2007, the registrant's disclosure controls and
procedures were reasonably designed so as to ensure that
material information relating to the registrant is made
known to the PEO and PFO.
(b) There have been no significant changes in the
registrant's internal control over financial reporting (as
defined in Rule 30a-3(d) under the Investment Company Act of
1940 (17 CFR 270.30a-3(d)) that occurred during the
registrant's last fiscal half-year that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits attached hereto. (Attach certifications as
exhibits)
(1) Not applicable. See registrant's response to Item 2,
above.
(2) Separate certifications by the registrant's principal
executive officer and principal financial officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 and
required by Rule 30a-2 under the Investment Company Act of
1940, are attached.
Signatures:
Pursuant to the requirements of the Securities Exchange Act
of 1934 and the Investment Company Act of 1940, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE ADAMS EXPRESS COMPANY
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer
(Principal Executive Officer)
Date: February 15, 2007
Pursuant to the requirements of the Securities Exchange Act
of 1934 and the Investment Company Act of 1940, this report
has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
BY: /s/ Douglas G. Ober
-----------------------
Douglas G. Ober
Chief Executive Officer
(Principal Executive Officer)
Date: February 15, 2007
BY: /s/ Maureen A. Jones
-----------------------
Maureen A. Jones
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 15, 2007