Gramercy Sends Letter to Adams Express Board and Management

Mar 07, 2011, 12:18 ET from Gramercy

GREENWICH, Conn., March 7, 2011 /PRNewswire/ -- Gramercy sent the following letter to the Adams Express (NYSE: ADX) Board of Directors on February 25, 2011.

February 25, 2011


The Adams Express Company

Seven St. Paul Street, Suite 1140

Baltimore, Maryland 21202

Attention: Lawrence L. Hooper, Jr., Vice President, General Counsel and Secretary

Re: Board of Directors' Statement of Opposition to Gramercy Global Optimization Fund's Proposal Submitted for the Company's 2011 Annual Meeting

Dear Mr. Hooper:

We have received your letter dated February 7, 2011 which includes our modified proposal submitted on behalf of Gramercy Global Optimization Fund along with the Board of Directors Statement of Opposition (each of which will appear in the proxy statement related to the 2011 Annual Meeting of The Adam Express Company (the "Company" or "ADX").

In your statement of opposition you state that our calculation of the Company's net asset value ("NAV") return is flawed. In your words:

"Presenting the Company's total return by calculating it based upon the reinvestment of dividends and capital gains at the NAV (the net asset value of the portfolio of securities held by the Company) as the Proponent does, is flawed.  No stockholder who reinvests his or her distributions from the Company when the Company's stock is trading at a discount does so at the NAV; the reinvestment is done based on the market price. Reinvesting distributions at market price more than accurately reflects returns earned by stockholders and is the method for calculating the Company's total return on NAV as specified by the Securities and Exchange Commission."

Although the methodology you reference above may be legally acceptable for calculating the Company's performance, it is, nonetheless, misleading. The alternative performance return calculations we presented to you in our proposal more accurately reflect the historical performance of the Company's portfolio.

More specifically, upon the distribution by the Company of a dividend the NAV of the portfolio decreases by an amount equal to such dividend.  But when calculating the return on the Company's portfolio your methodology assumes that dividends paid by the Company are re-invested by the Company at a price equal to the market price of the Company's shares (which is significantly less than the NAV of the Company's shares). The effect of this assumption is to provide an immediate uplift in the Company's performance return even though, economically, the value of the Company's portfolio is static. On a cumulative basis, this grossly exaggerates the reported return of the Company's performance.  

For example, assume the Company has a single share outstanding and is contemplating a dividend payment to its shareholder of $1. Prior to the dividend payment the Company's NAV and market price are $10 and $8.50, respectively.  Further assume that, upon payment of that dividend, both the NAV and market price drop to $9 and $7.50, respectively. Set forth below is a summary of our respective approaches to calculating performance.

Gramercy's Method (Reinvestment of Dividends at the Ex-Dividend NAV)

  • Number of new shares that could be purchased with dividends:
    • =  Dividend Proceeds / Ex-Dividend NAV
    • =  $1 / $9
  • Imputed NAV of the Company:
    • =  Total Number of Shares Post-Purchase * Ex-Dividend NAV
    • = (0.111 + 1) * $9 = $10
  • Performance Return of the Company:
    • =  (Imputed NAV – Cum-Dividend NAV) / Cum-Dividend NAV
    • =  ($10$10) / $10
    • =  0%

ADX's Method (Reinvestment of Dividends at the Ex-Dividend Market Price)

  • Number of new shares that could be purchased with dividends:
    • = Dividend Proceeds / Ex-Dividend Market Price
    • =  $1 / $7.50
  • Imputed NAV of the Company:
    • =  Total Number of Shares Post-Purchase * Ex-Dividend NAV
    • = (0.133 + 1) * $9 = $10.20
  • Performance Return of the Company:
    • =  (Imputed NAV – Cum-Dividend NAV) / Cum-Dividend NAV
    • =  ($10.20$10) / $10
    • =  2%

As you can see, your performance methodology has "created" a 2% return; however the portfolio still maintains only $10 of assets.

In addition to your opposition to our return methodology, we are also concerned with your opposition to our efforts to narrow the discount between the NAV and the market value of the Company's shares. We believe that you have an implicit duty to the Company's shareholders to narrow the discount to NAV at which the Company's shares trade in the market. However, by utilizing the return methodology outlined in your response to our proposal, the Company's management benefits from a wider discount to NAV due to a more favorable performance return of the Company's portfolio. Thus, there is a severe conflict of interest between management and shareholders as shareholders would clearly benefit with narrower discounts to NAV and management could possibly benefit from a wider discount.

We hope that the Board revisits this issue as it prepares for the Company's annual meeting next month and reconsiders the methodology it uses to calculate the Company's performance.  At a minimum, we think it would be appropriate for you to provide the Company's shareholders with a detailed numerical example (similar to the example enclosed herein) which illustrates the differences between our two performance methodologies.  

Very truly yours,

Tony Tessitore

cc: John Ganley, Senior Counsel, U.S. Securities and Exchange Commission

SOURCE Gramercy