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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's investment objectives as well as the nature and risk of its investment transactions are set forth in the Company's registration statement.
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 are valued at amortized cost. Options are valued at the last sale price or 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 including options, at December 31, 1996 was $714,509,542, and net unrealized appreciation aggregated $422,926,694, of which the related gross unrealized appreciation and depreciation were $436,915,409 and $13,988,715, respectively.
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
Purchases and sales of portfolio securities, other than options and short-term investments, during the year ended December 31, 1996 were $229,828,959 and $186,029,588, respectively. Option transactions comprised an insignificant portion of operations during the year ended December 31, 1996. All investment decisions are made by a committee, and no one person is primarily responsible for making recommendations to that committee.
4. Capital Stock
On December 27, 1996, the Company issued 1,871,011 shares of its stock at a price of $19.50 per share (market value) to stockholders of record November 25, 1996 who elected to take stock in payment of the distribution from 1996 capital gain and investment income.
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. No purchases were made during the year ended December 31, 1996.
The Company has 10,000,000 unissued preferred shares without par value.
The Company has an employee incentive stock option and stock appreciation rights plan which provides for the issuance of options and stock appreciation rights for the purchase of up to 2,050,000 shares of the Company's common stock at 100% of the fair market value at date of grant. Options are exercisable beginning not less than one year after the date of grant and extend and vest over ten years from the date of grant. Stock appreciation rights are exercisable beginning not less than two years after the date of grant and extend over the period during which the option is exercisable. The stock appreciation rights allow the optionees to surrender their rights to exercise their options and receive cash or shares in an amount equal to the difference between the option price and the fair market value of the common stock at the date of surrender. Under the plan, the exercise price of the options and related stock appreciation rights is reduced by the per share amount of capital gain paid by the Company during subsequent years. At the beginning of 1996, 517,250 options were outstanding with exercise prices of $8.770 - $18.438 per share. During 1996, the Company granted options, including stock appreciation rights, for 29,551 shares of common stock with an exercise price of $19.625 per share. During the year stock appreciation rights relating to 73,903 stock option shares were exercised at market prices between $18.500 - $20.375 per share and the stock options relating to these rights which had exercise prices between $9.175 - $16.455 per share were cancelled. In addition, stock options and stock appreciation rights relating to 76,723 shares which had exercise prices of $15.255 - $17.238, were cancelled during the year ended December 31, 1996. At December 31, 1996, there were outstanding exercisable options to purchase 130,109 common shares at $7.5700 - $17.2375 per share and unexercisable options to purchase 266,066 common shares at $15.255 - $19.625 per share. Total compensation expense recognized in 1996 related to the stock options and stock appreciation rights plan was $439,113. At December 31, 1996, there were 913,825 shares available for future option grants.
During the year ended December 31, 1996, the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," became effective. The provisions of this Statement had no significant impact on the financial statements of the Company.
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