|
Your Company again provided strong returns from its investments in 1998. In this annual report, you will find our financial statements for the year, the report of independent accountants, our year-end portfolio holdings, and summary financial information for the Company.
THE YEAR IN REVIEW
The strength of the economy in 1998 once again confounded most observers, as expectations of a marked slowdown went unfulfilled. While 1997 had been a year of relatively smooth growth, 1998 turned out to be one of wide variation. The year got off to a very strong start, driven by heavy spending on equipment by business and a jump in consumer spending. One of the factors affecting equipment spending during the year was the effort by many companies to resolve their potential computer problems with the turn of the century (the so-called Y2K problem). A great many old computers and other equipment using computer controls were replaced during the year. The Company's own Y2K program is discussed later in this letter. Consumer spending was broadly based on both durable goods, such as automobiles and entertainment equipment, and on non-durables, particularly services. The growth in consumer spending was fueled by a modest increase in wage income and, more importantly, the creation of many new jobs.
In the second quarter, the reverberations from the economic problems in Asia were felt strongly, as cheap imports from abroad displaced some domestic sales and severely limited pricing power in other areas. Domestic companies responded to this competition by cutting capacity, laying off workers, and generally bringing costs down. Economic growth slowed dramatically, consumer confidence declined, and earnings reports for the quarter were disappointing. The stock market peaked in July and dropped precipitously, correcting by over 19% in short order. High quality, large-capitalization stocks held up better than most, but those with any exposure to Southeast Asia were penalized. By the end of August, investors determined that the situation was not as bad as they had thought and sought bargains in the markets. The economy did not decelerate, but indeed showed unexpected strength as consumer spending continued to grow, though not quite as rapidly as earlier in the year.
The Federal Reserve Board, concerned about the economy, financial market liquidity, and the situation overseas, cut short-term interest rates three times in the latter part of the year. The lack of any evidence of incipient inflation was, of course, critical in the Fed's decisions to reduce rates. Investors interpreted the action as an indication of the willingness of the government to do its best to keep the economy growing and stock prices began to recover. Despite the effect of a protracted labor dispute at General Motors, there was an acceleration in growth in the third quarter with good follow-through into the final quarter of the year. Stock prices surpassed their old highs in November and have continued to set new records in early 1999. The focus continued on the largest-capitalization companies, which exhibited strong, predictable growth. Negative earnings surprises were announced by companies in virtually every industry during the year, so predictability became more and more important.
With many stable, large-capitalization stocks in its portfolio, Adams Express realized an excellent return in 1998. While we did not participate in the Internet mania directly, since the bulk of the companies in the industry have speculative valuations, several of the companies we do own are involved in Internet activities and did exceptionally well. Our holdings in telephone utility (now called communications services by Standard & Poor), technology, and health care companies were the greatest contributors to our returns, while basic materials, energy and consumer distribution holdings lagged the overall return of the portfolio.
For the year ended December 31, 1998, the return on net assets of Adams Express, including income and capital gains distributions, was 23.7%, compared to a return of 18.1% for the Dow Jones Industrials and 28.7% for the Standard & Poor's 500. Based on market prices, the Company's return was 19.3%, as the discount of the Company's market price to its net asset value widened from 15.2% at the beginning of the year to 18.2% at year-end. Our holdings of cash and short-term investments amounted to 1.7% of net assets at year-end compared to 1.9% a year ago.
INVESTMENT RESULTS
At the end of 1998 our net assets were $1,688,080,336 or $32.54 per share on 51,876,651 shares outstanding as compared with $1,424,170,425 or $28.51 per share on 49,949,239 shares outstanding a year earlier.
Net investment income for the year 1998 was $22,579,513 compared to $20,784,601 for the year 1997. These earnings are equal to $0.45 and $0.43 per share, respectively, on the average number of shares outstanding throughout each year.
Net realized gains amounted to $82,933,498 during the year, while the unrealized appreciation on investments increased from $665,179,036 at December 31, 1997 to $879,139,734 at year end.
DIVIDENDS AND DISTRIBUTIONS
As announced on November 12, 1998, a year-end distribution consisting of investment income of $0.14 and capital gains of $1.60 was made on December 28, 1998, both realized and taxable in 1998. On January 14, 1999, an additional distribution of $0.12 per share was declared payable March 1, 1999, representing the balance of undistributed net investment income and capital gains earned during 1998 and an initial distribution from 1999 net investment income, all taxable to shareholders in 1999.
OUTLOOK FOR 1999
Our expectations for the U.S. economy in 1999 are modest, as they were a year ago for 1998. Capital spending is not expected to grow at the double digit rates of the past two years, as a number of industries are suffering from excess capacity. In addition, we expect Y2K-associated computer spending to decline dramatically this year. In the second half of 1998, the consumer was the principal driver of growth; with little wage growth expected and fewer jobs created, it is doubtful that the consumer will continue to spend as heavily in 1999. One of the possible stimulants to the economy this year is a gradual improvement in the Asian situation. Outside of Japan, there are signs that the worst of the crisis is over and the economies of the developing countries are no longer deteriorating rapidly. Also, the dollar has weakened against some key currencies, making the prices of U.S. goods more competitive in the rest of the world. Europe has entered a new era with a single trading currency, which may have some interesting ramifications for trade with this country. With trade simplified within the zone, opportunities for American producers may decline in Europe. Alternatively, easier trade may enable the region to grow more rapidly, improving the demand for goods from all sources.
Our general conclusion as to the economic outlook is very much the same as a year ago, namely that we expect a slowdown in growth to the 2% range. Whereas last year we were more pessimistic than most, now we seem to be closer to the consensus. There still does not seem to be evidence of inflationary forces impacting prices, so the Federal Reserve has room to cut interest rates in order to stimulate activity if necessary. Our greatest concern at this juncture is the valuation of stocks, whether relative to book value, earnings, cash flow, or any other traditional measure. Company fundamentals seem to have little bearing on what people think stocks are worth. Current Wall Street estimates of 17% growth in the earnings of the Standard & Poor's 500 stocks seem outlandish compared to the 2% growth projected for the economy as a whole. Our position continues to be to invest in companies whose long term outlooks and current balance sheets are strong and risks of disappointment are small. We are thus confident that the portfolio will perform well regardless of disruptions in the domestic or the global economy.
YEAR 2000 READINESS DISCLOSURE
As the millennium approaches, the Company, along with other investment companies and financial institutions, could be adversely affected if computer systems and embedded technology do not properly process and calculate date-related information relating to Year 2000 ("Y2K"). The date problem relates to computer programs which only use two digits to identify the date. For example, 00 could be interpreted as 1900. Therefore, all computer programs must process data using appropriate date coding. The Company has established a Year 2000 project team, which reports directly to the Chairman of the Board. The project team has been testing its in-house hardware and software systems for the Y2K issue and has been monitoring the Year 2000 compliance status of the Company's principal outside vendors. The Company's custodian bank and transfer agent, The Bank of New York, has confirmed it will meet all interim and final regulatory deadlines and will be fully compliant in 1999. Since the Company has investments in companies that may be materially adversely affected by the Y2K issue, the Company could also be adversely affected. For this reason, all of the companies whose securities are held in the Company's portfolio have been sent surveys to determine their Y2K readiness. The Securities Industry Association (SIA) is scheduled to perform industry tests in March and April 1999 and the Company, along with its industry vendors, is planning to participate. The Company has incurred no significant costs and does not reasonably expect any additional significant costs relating to the Year 2000 issue. A contingency plan is being formulated to deal with utility power outages and other Y2K problems, which may have a direct effect on the Company. Despite these efforts, there is no assurance that any adverse impact on the Company will be avoided.
--------------------------------------------------------------------------------
Mr. Augustine R. Marusi resigned from the Board of Directors as of October 8, 1998. Mr. Marusi joined the Board in 1971 while he was Chairman of the Board and President of Borden Inc. His keen insight, warm personality, and extensive business knowledge have been of great value to the Company. We would like to take this opportunity to express our sincere appreciation for his 27 years of service and wish him well in the future.
Effective January 4, 1999, Ms. Christine M. Griffith was elected by the Board of Directors as Assistant Treasurer. Ms. Griffith was formerly a Manager at PricewaterhouseCoopers LLP.
The proxy statement for the Annual Meeting of Stockholders to be held in New York City on March 30, 1999, will be mailed on or about February 16, 1999 to holders of record on February 12, 1999.
By order of the Board of Directors,
Douglas G. Ober,
Chairman and Chief Executive Officer
Joseph M. Truta,
President
January 22, 1999
|
