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We are pleased to submit the financial statements of the Company for the year ended December 31, 1996. In addition, there is a schedule of investments, a list of principal changes in portfolio securities during the fourth quarter and the report of the independent accountants. Certain historical financial statistics are also listed, including a record of the Company's income dividends and capital gain distributions for the last fifteen years.
The Year in Review
The U. S. economy grew at a moderate pace in 1996 for the second year in a row with the strength experienced in sectors such as technology and energy largely offset by weakness in other areas, notably paper and steel. After a relatively slow start, the economy picked up steam in the second quarter as some inventory buildup occurred. The third quarter was characterized by a slowdown in consumer spending, which immediately kicked off efforts to cut inventories through reduced production.
Consumer spending remained anemic during the summer and into the fall. Retailer hopes for a strong holiday selling season appeared borne out in the first week following Thanksgiving, but the final sales figures have shown only a modest increase from the dismal holiday season of 1995. Despite solid income growth, there has been a propensity to save rather than spend. With the consumer responsible for approximately two thirds of economic activity, much growth is unlikely if spending does not improve .
On the industrial side of the economy, a great many corporations have restructured or reorganized to such an extent that their gross and operating profit margins are substantially higher than they were earlier in this business cycle. Therefore, profit levels have remained strong or grown despite modest growth in revenues. Overall profit growth slowed measurably in the third quarter of 1996, however, and probably did so again in the final quarter though we have not seen many reports yet. This is one of our major concerns going into 1997. There has also been an increasing amount of merger, acquisition and spinoff activity around the world. As global competition heats up, more and more companies are seeking partners in order to compete effectively or are divesting non-core assets in order to devote their capital to their principal operations.
Financial markets in the United States, after a spurt in February, were rather volatile but directionless until July. Strategists and economists spent much of the time debating whether or not the Federal Reserve Board would act to raise or cut interest rates as a consequence of statistical reports on the condition of the economy. After the report of strong growth in the second quarter there was real concern that the Federal Reserve would raise interest rates to put a damper on growth and the first major setback in financial markets in some time occurred, as stocks fell by nearly 10% in early July. The mini-correction was short-lived, however, with investors hunting for bargains within weeks and the upward trend resuming. In December, the stock market again fell briefly as a result of remarks made by Mr. Greenspan of the Federal Reserve about equity valuations and of concerns about a pullback by foreign buyers of U.S. Treasury securities. Investor demand recovered and the market set a new record high before a final-day setback.
The performance of the portfolio of The Adams Express Company kept pace with the market through the first nine months of the year, as investors showed increasing interest in companies with strong balance sheets, histories of consistent growth, and reasonable expectations for the future. By the end of the third quarter, many of these stocks were fully valued and investors began searching elsewhere for undervalued companies with less certain prospects. Rather than investing in lesser-quality stocks, we chose to add to our positions in stocks already in the portfolio which were not yet fully valued. By the end of the calendar year, the return on net assets of The Adams Express Company was 20.1% compared to a return of 22.8% for the Standard & Poor's 500. On the basis of market prices, the fund's return was less, at 16.4%, due to the widening of the discount of the market price of Adams Express stock from 13.4% at the beginning of the year to 16.7% at year-end. Our year-end holdings of cash and short-term investments stood at 4.7% of net assets compared to 10.9% of assets a year ago.
Investment Results
At the end of 1996 our net assets were $1,138,760,396 or $23.71 per share on 48,036,528 shares outstanding as compared with $986,230,914 or $21.36 per share on $46,165,517 shares outstanding a year earlier.
Net investment income for the year 1996 was $24,237,044 compared to $22,394,045 for the year 1995. These earnings are equal to $0.52 and $0.50 per share, respectively, on the average number of shares outstanding throughout each year.
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