THE ADAMS EXPRESS COMPANY

 

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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 1,3		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
Christine M. Sloan		Assistant Treasurer
Geraldine H. Paré		Assistant Secretary

 

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Stock Data

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Market Price (9/30/06)		$	13.52
Net Asset Value (9/30/06)		$	15.73
Discount:			14.1%

 

New York Stock Exchange ticker symbol: ADX

NASDAQ Mutual Fund Quotation Symbol: XADEX

Newspaper stock listings are generally under the abbreviation: AdaEx

 

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Distributions in 2006

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From Investment Income		$	0.13
From Net Realized Gains			0.02
Total		$	0.15

 

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2006 Dividend Payment Dates

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March 1, 2006

June 1, 2006

September 1, 2006

December 27, 2006*

 

*Anticipated

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LETTER TO STOCKHOLDERS

 

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We submit herewith the financial statements of the Company for the nine months ended September 30, 2006. Also provided are a schedule of investments and other summary financial information.

 

Net assets of the Company at September 30, 2006 were $15.73 per share on 85,117,815 shares outstanding, compared with $14.71 per share at December 31, 2005 on 86,099,607 shares outstanding. On March 1, 2006, a distribution of $0.05 per share was paid, consisting of $0.02 from 2005 investment income, $0.02 from 2005 short-term capital gain, and $0.01 from 2006 investment income, all taxable in 2006. A 2006 investment income dividend of $0.05 per share was paid on June 1, 2006 and September 1, 2006.

 

Net investment income for the nine months ended September 30, 2006 amounted to $13,673,160, compared with $12,904,578 for the same period in 2005. These earnings are equal to $0.16 and $0.15 per share.

 

Net capital gain realized on investments for the nine months ended September 30, 2006 amounted to $32,807,779, the equivalent of $0.39 per share.

 

The total return on the market value (with dividends and capital gains reinvested) of the Company’s shares was 9.0% for the nine months ended September 30, 2006. The total return on the net asset value of the Company’s shares in the period was 8.2%. These compare to an 8.5% total return for the Standard & Poor’s 500 Composite Stock Index and a 10.9% total return for the Dow Jones Industrial Average over the same time period.

 

For the twelve months ended September 30, 2006, the Company’s total return on market value was 10.1% and on net asset value was 9.7%, as the discount narrowed during the period. Comparable figures for the S&P 500 and the Dow Jones Industrials were 10.8% and 13.1%, respectively over the twelve month time period.

 

By now, you should have received the proxy statement concerning the upcoming Special Meeting of Stockholders on November 7, 2006. As is more fully described in the proxy statement, we are calling the Special Meeting to obtain your approval of a comprehensive rewriting and updating of our corporate charter. We believe that the charter amendments will provide your Board of Directors with additional tools needed to strengthen its ability to further the interests of the Company and our long-term shareholders. Your vote is very important and we urge you to vote in favor of each of the eight charter amendment proposals. If you have not yet voted, please call the Altman Group at 1-800-314-9816, extension 7309, and they can assist you in voting your proxy.

 

Current and potential shareholders can find information about the Company, including the daily net asset value (NAV) per share, the market price, and the discount/premium to the NAV, at our website (www.adamsexpress.com). Also available at the website are a history of the Company, historical financial information, and other useful content. Further information regarding shareholder services is located on page 15 of this report.

 

By order of the Board of Directors,

Douglas G. Ober,

Chairman and

Chief Executive Officer

Joseph M. Truta,

President

 

October 13, 2006

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STATEMENT OF ASSETS AND LIABILITIES

 

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September 30, 2006

(unaudited)

 

Assets
Investments* at value:
Common stocks and convertible securities (cost $890,329,275)		$	1,221,240,553
Non-controlled affiliate, Petroleum & Resources Corporation (cost $27,963,162)			64,902,349
Short-term investments (cost $44,281,402)			44,281,402
Securities lending collateral (cost $66,863,737)			66,863,737		$	1,397,288,041
Cash						300,006
Receivables:
Investment securities sold						4,140,194
Dividends and interest						1,350,441
Prepaid pension cost						5,306,290
Prepaid expenses and other assets						1,926,287
Total Assets						1,410,311,259
Liabilities
Investment securities purchased						502,510
Open written option contracts at value (proceeds $911,744)						678,815
Obligations to return securities lending collateral						66,863,737
Accrued expenses						3,600,831
Total Liabilities						71,645,893
Net Assets					$	1,338,665,366
Net Assets
Common Stock at par value $1.00 per share, authorized 150,000,000 shares; issued and outstanding 85,117,815 shares (includes 58,794 restricted shares, 9,000 restricted stock units, and 3,007 deferred stock units) (Note 6)					$	85,117,815
Additional capital surplus						845,629,802
Undistributed net investment income						7,261,520
Undistributed net realized gain on investments						32,572,835
Unrealized appreciation on investments						368,083,394
Net Assets Applicable to Common Stock					$	1,338,665,366
Net Asset Value Per Share of Common Stock						$15.73

 

*See Schedule of Investments on pages 8 and 9.

 

The accompanying notes are an integral part of the financial statements.

 

2

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STATEMENT OF OPERATIONS

 

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Nine Months Ended September 30, 2006

(unaudited)

 

Investment Income
Income:
Dividends:
From unaffiliated issuers		$	16,836,866
From non-controlled affiliate			633,179
Interest and other income			816,674
Total income			18,286,719
Expenses:
Investment research			2,062,101
Administration and operations			1,060,586
Directors’ fees			268,325
Reports and stockholder communications			301,170
Transfer agent, registrar and custodian expenses			276,077
Auditing and accounting services			91,941
Legal services			82,887
Occupancy and other office expenses			273,019
Travel, telephone and postage			66,274
Other			131,179
Total expenses			4,613,559
Net Investment Income			13,673,160
Realized Gain and Change in Unrealized Appreciation on Investments
Net realized gain on security transactions			32,668,759
Net realized gain distributed by regulated investment company (non-controlled affiliate)			139,020
Change in unrealized appreciation on investments			51,606,027
Net Gain on Investments			84,413,806
Change in Net Assets Resulting from Operations		$	98,086,966

 

The accompanying notes are an integral part of the financial statements.

 

3

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STATEMENTS OF CHANGES IN NET ASSETS

 

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		Nine Months Ended September 30, 2006				Year Ended December 31, 2005
		(unaudited)
From Operations:
Net investment income		$	13,673,160			$	18,288,551
Net realized gain on investments			32,807,779				53,817,950
Change in unrealized appreciation on investments			51,606,027				(27,193,045	)
Change in net assets resulting from operations			98,086,966				44,913,456
Distributions to Stockholders from:
Net investment income			(11,084,344	)			(18,634,893	)
Net realized gain from investment transactions			(1,719,287	)			(53,672,531	)
Decrease in net assets from distributions			(12,803,631	)			(72,307,424	)
From Capital Share Transactions:
Value of shares issued in payment of distributions			5,264				30,523,934
Cost of shares purchased (Note 4)			(13,657,423	)			(32,052,187	)
Deferred compensation (Notes 4,6)			305,538				101,973
Change in net assets from capital share transactions			(13,346,621	)			(1,426,280	)
Total Change in Net Assets			71,936,714				(28,820,248	)
Net Assets:
Beginning of period			1,266,728,652				1,295,548,900
End of period (including undistributed net investment income of $7,261,520 and $4,672,704, respectively)		$	1,338,665,366			$	1,266,728,652

 

The accompanying notes are an integral part of the financial statements.

 

4

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

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1. Significant Accounting Policies

 

The Adams Express Company (the Company) is registered under the Investment 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 September 30, 2006 was $1,028,950,325 and net unrealized appreciation aggregated $368,337,716, of which the related gross unrealized appreciation and depreciation were $444,297,240 and $75,959,524, respectively.

 

Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Accordingly, annual 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 nine months ended September 30, 2006 were $110,096,297 and $151,537,518, 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 September 30, 2006 can be found on page 11.

 

Transactions in written covered call and collateralized put options during the nine months ended September 30, 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		7,730				1,017,093			9,538				1,070,338
Options terminated in closing purchase transactions		(700	)			(86,897	)		(3,445	)			(412,021	)
Options expired		(5,400	)			(625,129	)		(4,555	)			(538,413	)
Options exercised		(470	)			(52,838	)		(225	)			(22,324	)
Options outstanding, September 30, 2006		3,480			$	496,523			3,778			$	415,221

 

4. Capital Stock

 

The Company has 10,000,000 authorized and unissued preferred shares without 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 on November 22, 2005 who elected to take stock in payment of the year-end distribution from 2005 capital gain and investment income.

 

During 2006, the Company issued 395 shares of its Common Stock at a weighted average price of $13.26 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
		Nine months ended September 30, 2006			Year ended December 31, 2005			Nine months ended September 30, 2006				Year ended December 31, 2005
Shares issued in payment of dividends		395			2,400,624			$	5,264			$	30,523,934
Shares purchased (at a weighted average discount from net asset value of 14.1% and 12.6%, respectively)		(1,040,700	)		(2,458,500	)			(13,657,423	)			(32,052,187	)
Net share activity under the 2005 Equity Incentive Compensation Plan		58,513			22,191				305,538				101,973
Net change		(981,792	)		(35,685	)		$	(13,346,621	)		$	(1,426,280	)

 

5. Retirement Plans

 

The Company’s qualified defined benefit pension plan covers all employees with at least one year of service. In addition, the Company has

 

5

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NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 

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a nonqualified defined benefit plan which provides eligible employees with retirement benefits to supplement the qualified plan. Benefits are based on length of service and compensation during the last five years of employment. 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. During the nine months ended September 30, 2006, the Company did not contribute to the plans. The Company does not anticipate making any contributions to the plans in 2006.

 

The following table aggregates the components of the plans’ net periodic pension cost for the nine months ended September 30, 2006:

 

Service cost		$	345,727
Interest cost			388,511
Expected return on plan assets			(595,527	)
Amortization of prior service cost			89,832
Amortization of net loss			135,573
Net periodic pension cost		$	364,116

 

The Company also sponsors a defined contribution plan that covers substantially all employees. For the nine months ended September 30, 2006, the Company expensed contributions of $137,238. The Company does not provide postretirement medical benefits.

 

6. Equity-Based Compensation

 

The Stock Option Plan adopted in 1985 (“1985 Plan”), which has been discontinued for new grants, 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. With the adoption of the 2005 Equity Incentive Compensation Plan at the 2005 Annual Meeting, no further grants will be made under the 1985 Plan, although unexercised awards granted in 2004 and prior years remain outstanding.

 

A summary of option activity under the 1985 Plan as of September 30, 2006, and changes during the period then ended, is presented below:

 

		Options			Weighted- Average Exercise Price			Weighted- Average Remaining Life (Years)
Outstanding at December 31, 2005		254,766			$	11.71		5.71
Exercised		(39,973	)			8.09
Cancelled		(8,233	)			10.87
Outstanding at September 30, 2006		206,560			$	12.42		4.98
Exercisable at September 30, 2006		128,638			$	12.61		4.91

 

The options outstanding as of September 30, 2006 are set forth below:

 

Exercise Price		Options Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Life (Years)
$8.50-$10.74		51,628		$	9.76		3.48
$10.75-$12.99		103,784			11.51		6.29
$13.00-$15.24		—			—		—
$15.25-$17.50		51,148			16.94		3.84
Outstanding at September 30, 2006		206,560		$	12.42		4.98

 

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 nine months ended September 30, 2006 was $153,578.

 

The 2005 Equity Incentive Compensation Plan (“2005 Plan”) 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 awards earned contingent on achievement of certain performance targets. If performance targets are not achieved, all or a portion of the performance-based awards 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 were 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 September 30, 2006 is 3,331,645 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 September 30, 2006, and changes during the period then ended is presented below:

 

Awards		Shares/Units			Weighted Average Grant-Date Fair 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		3,007				13.02
Vested & issued		(9,165	)			12.56
Forfeited		(1,482	)			12.56
Balance at September 30, 2006 (includes 49,500 performance-based awards and 21,301 nonperformance-based awards)		70,801			$	12.91

 

6

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NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 

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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 period ending September 30, 2006 were $195,538. The total compensation costs for restricted stock units granted to non-employee directors for the period ended September 30, 2006 were $90,742. As of September 30, 2006, there were total unrecognized compensation costs of $632,312, 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 1.92 years.

 

7. Expenses

 

The aggregate remuneration paid during the nine months ended September 30, 2006 to officers and directors amounted to $2,149,556, of which $262,230 was paid as fees and compensation 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 deposits, 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. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Company. At September 30, 2006, the Company had securities on loan of $65,171,190 and held collateral of $66,863,737, 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.

FINANCIAL HIGHLIGHTS

 

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		Nine Months Ended
		(unaudited)
		September 30, 2006			September 30, 2005			Year Ended December 31
								2005			2004		2003		2002		2001
Per Share Operating Performance
Net asset value, beginning of period		$14.71			$15.04			$15.04			$14.36		$12.12		$16.05		$23.72
Net investment income		0.16			0.15			0.22			0.23*		0.19		0.20		0.26
Net realized gains and increase (decrease) in unrealized appreciation		0.98			0.24			0.32			1.39		2.85		(3.38)		(6.21)
Total from investment operations		1.14			0.39			0.54			1.62		3.04		(3.18)		(5.95)
Less distributions
Dividends from net investment income		(0.13)			(0.14)			(0.22)			(0.24)		(0.17)		(0.19)		(0.26)
Distributions from net realized gains		(0.02)			(0.01)			(0.64)			(0.66)		(0.61)		(0.57)		(1.39)
Total distributions		(0.15)			(0.15)			(0.86)			(0.90)		(0.78)		(0.76)		(1.65)
Capital share repurchases		0.03			0.04			0.05			0.02		0.04		0.05		0.04
Reinvestment of distributions		—			—			(0.06)			(0.06)		(0.06)		(0.04)		(0.11)
Total capital share transactions		0.03			0.04			(0.01)			(0.04)		(0.02)		0.01		(0.07)
Net asset value, end of period		$15.73			$15.32			$14.71			$15.04		$14.36		$12.12		$16.05
Per share market price, end of period		$13.52			$13.12			$12.55			$13.12		$12.41		$10.57		$14.22
Total Investment Return
Based on market price		9.0%			1.1%			2.2%			13.2%		25.2%		(20.6)%		(24.7)%
Based on net asset value		8.2%			3.0%			4.5%			12.1%		26.3%		(19.4)%		(24.7)%
Ratios/Supplemental Data
Net assets, end of period (in 000’s)		$1,338,665			$1,288,243			$1,266,729			$1,295,549		$1,218,862		$1,024,810		$1,368,366
Ratio of expenses to average net assets		0.47%	†		0.44%	†		0.45%			0.43%		0.47%		0.34%		0.19%
Ratio of net investment income to average net assets		1.40%	†		1.35%	†		1.44%			1.54%		1.45%		1.42%		1.33%
Portfolio turnover		11.51%	†		12.52%	†		12.96%			13.43%		12.74%		17.93%		19.15%
Number of shares outstanding at end of period (in 000’s)		85,118			84,090			86,100			86,135		84,886		84,536		85,233

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*	In 2004 the Company received $2,400,000, or $0.03 per share, in an extraordinary dividend from Microsoft Corp.

†	Ratios presented on an annualized basis.

 

7

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SCHEDULE OF INVESTMENTS

 

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September 30, 2006

(unaudited)

 

 

		Shares		Value (A)
Stocks and Convertible Securities — 96.1%
Consumer — 17.6%
Consumer Discretionary — 7.6%
BJ’s Wholesale Club, Inc. (B)		500,000		$	14,590,000
Clear Channel Communications, Inc.		350,000			10,097,500
Comcast Corp. (B)		365,000			13,450,250
Gannett Co., Inc.		112,500			6,393,375
Harley-Davidson, Inc.		200,000			12,550,000
Newell Rubbermaid Inc.		400,000			11,328,000
OSI Restaurant Partners, Inc.		315,000			9,988,650
Ryland Group Inc. (C)		50,000			2,160,500
Target Corp.		350,000			19,337,500
					99,895,775
Consumer Staples — 10.1%
Avon Products, Inc.		430,000			13,183,800
Bunge Ltd. (C)		235,000			13,618,250
Coca-Cola Co.		200,000			8,936,000
Dean Foods Co. (B)		350,000			14,707,000
Del Monte Foods Co.		1,115,000			11,651,750
PepsiCo, Inc.		400,000			26,104,000
Procter & Gamble Co.		340,000			21,073,200
Safeway Inc.		423,000			12,838,050
Unilever plc ADR		550,000			13,645,500
					135,757,550
Energy — 11.0%
BP plc ADR		95,000			6,230,100
ConocoPhillips		345,000			20,537,850
ENSCO International, Inc.		134,150			5,879,795
Exxon Mobil Corp.		215,000			14,426,500
Marathon Oil Co.		120,000			9,228,000
Murphy Oil Corp.		38,500			1,830,675
Petroleum & Resources Corporation (D)		1,985,996			64,902,349
Schlumberger Ltd.		380,000			23,571,400
					146,606,669
Financials — 17.8%
Banking — 13.9%
BankAtlantic Bancorp, Inc.		880,000			12,513,600
Bank of America Corp.		610,000			32,677,700
Bank of New York Co., Inc. (The)		375,000			13,222,500
Compass Bancshares Inc.		300,000			17,094,000
Fifth Third Bancorp (C)		280,000			10,662,400
Investors Financial Services Corp. (C)		382,500			16,478,100
Morgan Stanley		200,000			14,582,000
Wachovia Corp.		470,000			26,226,000
Wells Fargo & Co.		650,000			23,517,000
Wilmington Trust Corp.		420,000			18,711,000
					185,684,300
Insurance — 3.9%
AMBAC Financial Group, Inc.		240,000			19,860,000
American International Group, Inc.		500,000			33,130,000
					52,990,000

		Shares		Value (A)
Health Care — 12.9%
Abbott Laboratories		320,000		$	15,539,200
Advanced Medical Optics, Inc. (B)(C)		310,000			12,260,500
Bristol-Myers Squibb Co.		345,000			8,597,400
Caremark Rx Inc.		245,000			13,884,150
Genentech, Inc. (B)		220,000			18,194,000
Johnson & Johnson		255,000			16,559,700
Laboratory Corp. of America Holdings (B)		140,000			9,179,800
MedImmune, Inc. (B)		225,000			6,572,250
Medtronic, Inc.		310,000			14,396,400
Pfizer Inc.		1,120,000			31,763,200
Teva Pharmaceutical Industries Ltd. ADR		20,000			681,800
Wyeth Co.		325,000			16,523,000
Zimmer Holdings, Inc. (B)		125,000			8,437,500
					172,588,900
Industrials — 12.7%
Cintas Corp.		300,000			12,249,000
Curtiss-Wright Corp.		460,000			13,961,000
Donnelley (R.R.) & Sons Co. (C)		225,000			7,416,000
Emerson Electric Co.		200,000			16,772,000
Essex Corp. (B)		116,500			2,027,100
General Electric Co.		1,487,700			52,515,810
Illinois Tool Works Inc.		250,000			11,225,000
Masco Corp. (C)		450,000			12,339,000
3M Co.		160,000			11,907,200
United Parcel Service, Inc.		155,000			11,150,700
United Technologies Corp.		300,000			19,005,000
					170,567,810
Information Technology — 12.9%
Communication Equipment — 1.9%
Avaya Inc. (B)		600,000			6,864,000
Corning Inc. (B)		500,000			12,205,000
Lucent Technologies Inc. (B)		2,900,000			6,786,000
					25,855,000
Computer Related — 9.1%
Automatic Data Processing Inc.		300,000			14,202,000
BEA Systems, Inc. (B)		800,000			12,160,000
Cisco Systems, Inc. (B)		1,110,000			25,530,000
Dell Inc. (B)		565,000			12,904,600
Microsoft Corp.		1,180,000			32,249,400
Oracle Corp. (B)		1,356,001			24,055,458
					121,101,458
Electronics — 1.9%
Cree, Inc. (B)(C)		375,000			7,541,250
Intel Corp.		550,000			11,313,500
Solectron Corp. (B)		1,850,000			6,031,000
					24,885,750

 

8

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SCHEDULE OF INVESTMENTS (CONTINUED)

 

---

 

September 30, 2006

(unaudited)

 

		Shares		Value (A)
Materials — 4.9%
Air Products and Chemicals, Inc.		250,000		$	16,592,500
du Pont (E.I.) de Nemours and Co.		360,000			15,422,400
Florida Rock Industries Inc.		200,000			7,742,000
Martin Marietta Materials, Inc.		83,000			7,023,460
Rohm & Haas Co.		400,000			18,940,000
					65,720,360
Telecom Services — 3.0%
Alltel Corp.		300,000			16,650,000
AT&T Corp.		595,000			19,373,200
Windstream Corp.		310,178			4,091,248
					40,114,448
Utilities — 3.3%
Aqua America, Inc. (C)		608,000			13,339,520
Duke Energy Corp.		611,560			18,469,112
MDU Resources Group, Inc.		562,500			12,566,250
					44,374,882
Total Stocks and Convertible Securities (Cost $918,292,437) (E)				$	1,286,142,902

		Prin. Amt.			Value (A)
Short-Term Investments — 3.3%
U.S. Government Obligations —1.2%
U.S. Treasury Bills, 4.98%, due 11/16/06		$	16,500,000		$	16,395,005
Time Deposit — 0.0%
J.P. Morgan, 4.63%, due 10/2/06						224,843
Commercial Paper — 2.1%
American General Finance, Inc., 5.24%, due 10/3/06 - 10/31/06			8,000,000			7,978,766
Chevron Funding Co., 5.19- 5.20%, due 10/3/06 - 10/26/06			5,600,000			5,583,867
General Electric Capital Corp., 5.23%, due 10/10/06 - 10/17/06			7,750,000			7,735,726
Toyota Motor Credit Corp., 5.20- 5.23%, due 10/5/06 - 10/19/06			6,375,000			6,363,195
						27,661,554
Total Short-Term Investments (Cost $44,281,402)						44,281,402
Securities Lending Collateral — 5.0%
Brown Brothers Investment Trust, 5.25%, due 10/2/06						66,863,737
Total Securities Lending Collateral (Cost $66,863,737)						66,863,737
Total Investments — 104.4% (Cost $1,029,437,576)						1,397,288,041
Cash, receivables, prepaid expenses and other assets, less liabilities — (4.4)%						(58,622,675	)
Net Assets — 100%					$	1,338,665,366

---

Notes:

(A)	See note 1 to financial statements. Securities are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ.

(B)	Presently non-dividend paying.

(C)	Some of the shares of this company 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 September 30, 2006 covering open call option contracts written was $21,037,760. In addition, the aggregate market value of securities segregated by the Company’s custodian required to collateralize open put option contracts written was $14,884,000.

 

9

---

PORTFOLIO SUMMARY

 

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September 30, 2006

(unaudited)

 

 

Ten Largest Portfolio Holdings

 

		Market Value			% of Net Assets
Petroleum & Resources Corporation*		$	64,902,349		4.8
General Electric Co.			52,515,810		3.9
American International Group, Inc.			33,130,000		2.5
Bank of America Corp.			32,677,700		2.4
Microsoft Corp.			32,249,400		2.4
Pfizer Inc.			31,763,200		2.4
Wachovia Corp.			26,226,000		2.0
PepsiCo, Inc.			26,104,000		2.0
Cisco Systems, Inc.			25,530,000		1.9
Oracle Corp			24,055,458		1.8
Total		$	349,153,917		26.1	%

*Non-controlled affiliate

 

 

Sector Weightings

 

10

---

SCHEDULE OF OUTSTANDING OPTION CONTRACTS

 

---

 

September 30, 2006

(unaudited)

 

 

Contracts (100 shares each)		Security		Strike Price		Contract Expiration Date				Appreciation/ (Depreciation)
COVERED CALLS
100		Air Products and Chemicals, Inc.		$    75		Dec		06		$	8,700
100		AMBAC Financial Group, Inc.		85		Nov		06			9,439
100		AMBAC Financial Group, Inc.		90		Jan		07			8,699
100		AMBAC Financial Group, Inc.		90		Feb		07			12,199
200		American International Group, Inc.		70		Feb		07			(7,601	)
100		Avon Products, Inc.		35		Oct		06			9,200
200		Bunge Ltd.		65		Jan		07			(1,601	)
100		Caremark Rx Inc.		60		Oct		06			6,200
100		Caremark Rx Inc.		60		Dec		06			(1,800	)
100		Caremark Rx Inc.		65		Jan		07			2,700
100		Dean Foods Co.		40		Dec		06			(20,800	)
100		Harley-Davidson, Inc.		65		Jan		07			(8,301	)
250		Harley-Davidson, Inc.		65		Feb		07			(47,626	)
100		Investors Financial Services Corp.		50		Oct		06			11,450
100		Investors Financial Services Corp.		55		Oct		06			14,324
100		Investors Financial Services Corp.		50		Jan		07			12,199
200		Investors Financial Services Corp.		55		Jan		07			19,399
100		Laboratory Corp. of America Holdings		70		Nov		06			4,200
150		Laboratory Corp. of America Holdings		72.50		Nov		06			15,299
200		Marathon Oil Co.		100		Jan		07			24,171
80		Martin Marietta Materials, Inc.		140		Oct		06			13,759
100		Martin Marietta Materials, Inc.		100		Jan		07			(3,801	)
100		Morgan Stanley		75		Jan		07			(12,800	)
100		Murphy Oil Corp.		55		Oct		06			12,700
200		Ryland Group Inc.		60		Jan		07			10,399
100		Target Corp.		55		Jan		07			(58,301	)
100		United Technologies Corp.		70		Jan		07			3,200
100		Zimmer Holdings, Inc.		80		Jan		07			5,267
3,480											40,873
COLLATERALIZED PUTS
150		Avon Products, Inc.		25		Jan		07			12,300
150		Cintas Corp.		35		Nov		06			15,299
100		ENSCO International, Inc.		40		Oct		06			6,700
200		ENSCO International, Inc.		45		Oct		06			(17,523	)
250		ENSCO International, Inc.		40		Dec		06			(10,751	)
150		Exxon Mobil Corp.		52.50		Oct		06			14,550
100		Florida Rock Industries Inc.		35		Dec		06			6,949
200		Florida Rock Industries Inc.		30		Jan		07			10,399
250		Intel Corp.		17.50		Oct		06			22,999
100		Marathon Oil Co.		75		Oct		06			(5,300	)
100		Marathon Oil Co.		67.50		Jan		07			(8,800	)
200		Masco Corp.		25		Jan		07			2,399
250		MedImmune, Inc.		25		Dec		06			20,499
200		Medtronic, Inc.		42.50		Nov		06			9,399
100		Procter & Gamble Co.		55		Oct		06			8,700
250		Ryland Group Inc.		30		Oct		06			22,999
150		Ryland Group Inc.		35		Oct		06			12,299
100		Ryland Group Inc.		37.50		Oct		06			7,200
53		Ryland Group Inc.		30		Jan		07			2,491
100		Target Corp.		42.50		Oct		06			11,200
100		Target Corp.		45		Oct		06			9,700
150		United Parcel Service, Inc.		65		Oct		06			8,549
100		Wachovia Corp.		50		Oct		06			12,200
200		Wachovia Corp.		47.50		Jan		07			11,399
75		Zimmer Holdings, Inc.		60		Dec		06			6,200
3,778											192,056
											$232,929

 

11

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CHANGES IN PORTFOLIO SECURITIES

 

---

 

During the Three Months Ended September 30, 2006

(unaudited)

 

		Shares
		Additions			Reductions		Held September 30, 2006
Advanced Medical Optics, Inc.		10,000					310,000
Avon Products, Inc.		10,000					430,000
Dell Inc.		20,000					565,000
ENSCO International, Inc.		134,150					134,150
Essex Corp.		116,500					116,500
Exxon Mobil Corp.		85,000					215,000
Florida Rock Industries Inc.		50,000					200,000
Intel Corp.		240,000					550,000
MDU Resources Group, Inc.		187,500	(1)				562,500
Ryland Group Inc.		50,000					50,000
Teva Pharmaceutical Industries Ltd. ADR		20,000					20,000
Wells Fargo & Co.		325,000	(1)				650,000
Windstream Corp.		310,178	(2)				310,178
Abbott Laboratories					30,000		320,000
AMBAC Financial Group, Inc.					55,000		240,000
Aqua America, Inc.					42,000		608,000
BP plc ADR					175,000		95,000
Caremark Rx Inc.					10,000		245,000
Cisco Systems, Inc.					90,000		1,110,000
Dean Foods Co.					100,000		350,000
Donnelley (R.R.) & Sons Co.					35,000		225,000
Harley-Davidson, Inc.					35,000		200,000
HCA Inc.					250,000		—
Laboratory Corp. of America Holdings					60,000		140,000
Newell Rubbermaid Inc.					115,000		400,000
Target Corp.					60,000		350,000
Unilever plc ADR					71,000		550,000

---

(1)	By stock split.

(2)	Received 1.033926 shares for each share of Alltel Corp. held.

 

---

 

 

12

---

HISTORICAL FINANCIAL STATISTICS

 

---

 

 

December 31		Value of Net Assets			Shares Outstanding*		Net Asset Value per Share*			Dividends from Net Investment Income per Share*			Distributions from Net Realized Gains per Share*
1996		$	1,138,760,396		72,054,792		$	15.80		$	.35		$	.80
1997			1,424,170,425		74,923,859			19.01			.29			1.01
1998			1,688,080,336		77,814,977			21.69			.30			1.10
1999			2,170,801,875		80,842,241			26.85			.26			1.37
2000			1,951,562,978		82,292,262			23.72			.22			1.63
2001			1,368,366,316		85,233,262			16.05			.26			1.39
2002			1,024,810,092		84,536,250			12.12			.19			.57
2003			1,218,862,456		84,886,412			14.36			.17			.61
2004			1,295,548,900		86,135,292			15.04			.24			.66
2005			1,266,728,652		86,099,607			14.71			.22			.64
September 30, 2006 (unaudited)			1,338,665,366		85,117,815			15.73			.13			.02

---

*	Adjusted to reflect the 3-for-2 stock split effected in October 2000.

 

---

 

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.

 

13

---

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 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”.

 

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 http//www.sec.gov.

 

Privacy Policy

 

In order to conduct its business, The Adams Express 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.

 

14

---

SHAREHOLDER INFORMATION AND SERVICES

 

---

 

 

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 $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.

 

15