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Your Company provided an outstanding return from its investments in 1999. 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 first quarter of 1999 was marked by moderate swings in the market, as corporate earnings reports for the end of 1998 were mixed and there were no strong signals of economic direction. The release of first quarter G.D.P. figures in April indicated that the domestic economy was not slowing down and the rest of the world was showing signs of improvement. This was especially true in Southeast Asia, which had been a drag from both an economic and a financial standpoint in 1998. By mid-year, the Company's portfolio had generated a return of 10.3%, while the Standard & Poor's 500 Stock Index had returned 12.4%. The market, very "narrow" at the start of the year, with only a few stocks contributing to its performance, widened in the second quarter to reflect a better outlook for most sectors of the economy. Economic growth estimates were raised and increased corporate earnings estimates followed. Despite growth in the economy of nearly 4%, there were no signs of acceleration in wage or price inflation, as increases in wages appeared to be completely offset by higher productivity. The Federal Reserve Board raised short-term interest rates in June to help slow the economy's pace and control the rate of inflation.
The July announcement of slower second quarter economic growth was ignored as attention was focussed on indications of a pick-up in general activity in the third quarter. Fears of interest rate increases, followed by further action by the Federal Reserve, forced investors to take a long, hard look at valuations in the market, resulting in three months of declines in the S&P 500. The economy, however, was not to be deterred and continued to grow apace, fueled by strong consumer spending and the final corporate push to eliminate any possibility of Year 2000 computer problems. The indicators of inflation were virtually unchanged, leading investors to believe the Fed had done its job and rates would not be pushed up further. The stocks of technology and communications companies led the markets in the fourth quarter to new all-time highs. Outperformance was restricted almost exclusively to large-capitalization growth stocks, as evidenced by the fact that 30% of all New York Stock Exchange stocks and 31% of NASDAQ stocks were down 20% or more for the year.
The Adams Express portfolio, comprised principally of large-capitalization companies with superior long term growth prospects, recorded exceptional performance in 1999. Our technology and communication services holdings did very well, especially companies such as Nortel Networks, Nextel, and QRS, which have been in the portfolio for a number of years, and Sapient, Global Crossing, and Oracle, which were new to the portfolio this year. The outperformance by these sectors, as well as basic materials, capital goods, and consumer cyclical holdings, was partially offset by our healthcare, financial, and consumer staple stocks. It should be noted, however, that there were individual names in each underperforming sector which did very well, including Chiron, American International Group, and MediaOne Group, all long term holdings.
For the year ending December 31, 1999, the return on net assets of the Company, including income and capital gains distributions, was 33.6%, compared to a return of 27.2% for the Dow Jones Industrials and 21.0% for the Standard & Poor's 500. Based on market prices, the Adams Express Company's return was 36.1% aided by the narrowing of the discount of the market price to the net asset value per share from 18.2% at the beginning of the year to 16.7% at year-end.
INVESTMENT RESULTS
At the end of 1999 our net assets were $2,170,801,875 or $40.28 per share on 53,894,827 shares outstanding as compared with $1,688,080,336 or $32.54 per share on 51,876,651 shares outstanding a year earlier. The year-end asset figure represented the first quarter-end at which the Company's net assets exceeded the $2 billion mark in its seventy years as a closed-end fund.
Net investment income for 1999 was $19,143,783 compared to $22,579,513 for 1998. These earnings are equal to $0.37 and $0.45 per share, respectively, on the average number of shares outstanding throughout the year. It has been increasingly difficult to generate income in the portfolio as both the percentage of stocks paying dividends and the percentage of dividend increases have declined markedly in the past several years. The dividend yield on the Standard & Poor's 500 has fallen from 3.76% in 1990 to 1.16% in 1999. We continue to seek ways to generate additional income without impacting performance through the use of convertible securities and other actions. In 1999, our 0.32% expense ratio (expenses to net assets) was once again at a very low level compared to the industry.
Net realized gains amounted to $106,820,166 during the year, while the unrealized appreciation on investments increased from $879,139,734 at December 31, 1998 to $1,298,662,686 at year end.
DIVIDENDS AND DISTRIBUTIONS
As announced on November 11, 1999, a year-end distribution consisting of investment income of $0.09 and capital gains of $2.00 was made on December 27, 1999, both realized and taxable in 1999. On January 13, 2000, an additional distribution of $0.12 per share was declared payable March 1, 2000, representing the balance of undistributed capital gains earned during 1999 and an initial distribution from 2000 net investment income, all taxable to shareholders in 2000.
OUTLOOK FOR 2000
We have expressed the opinion for some time that economic growth would slow in the U.S. to the 2% range. While not succumbing to the "new economy" arguments espoused by many, our belief now is that demand both here and abroad will be strong enough to drive the economy at about a 3.5% growth rate this year. There appears to be sufficient productive capacity in place around the world to meet demand without causing notable price increases. In fact, overall corporate profits have grown only modestly in the past several years since the availability of capacity worldwide has resulted in very little pricing power for corporations except large technology companies whose profits have fueled the growth of the S&P 500's earnings. This situation is expected to continue in 2000, with further divergence between the growth rates of profitability of the companies in the S&P Index and corporations in general.
The rate increases implemented by the Federal Reserve in 1999 and those expected in the early part of this year should begin to be felt by the economy in the next several quarters. We anticipate that, with a modest slowing in growth, inflation will remain at a very low level throughout the year. The only serious concern we have is the tightness of the labor supply. General demographic trends are keeping the labor force from growing to meet the needs of the economy; the unemployment rate is the lowest it has been in decades. Continued tightness will necessarily exert upward pressure on wages as there are more jobs than people to fill them. The trend in productivity has precluded this from happening to date, but it is unlikely to continue to do so indefinitely. By raising interest rates to slow the growth rate of the economy, the Federal Reserve intends to keep wages under control.
With these factors in mind, we must consider the appropriateness of the valuations currently in the stock market. Since the beginning of 2000, investors have rapidly shifted money out of the favorite technology stocks of 1999 and into more prosaic industries such as consumer goods and energy. The highest flying stocks, many related to the Internet, have corrected by 10% or more, but still carry incredible prices relative to the normal measures of valuation. Meanwhile, the rest of the market has begun to perform a bit better as defensive investments have been sought. We expect that these trends will continue as slower growth will have the most impact on those companies which have been perceived as super-growth stories. Our technology holdings are feeling the effects of the current sector rotation, but they only represent about a third of the portfolio and the bulk of the companies continue to report excellent growth and profits. We have benefited, and will continue to do so, from the rotation into more defensive stocks which comprise the majority of our portfolio. We believe that all of the companies we hold have excellent long term fundamentals and should therefore do well in a period of more moderate economic growth.
SHARE REPURCHASE PROGRAM
On November 11, 1999, the Board of Directors authorized the management to repurchase up to 5% of the outstanding shares of the Company (approximately 2,600,000 shares) over the ensuing twelve months, as long as the discount of the market price of the shares from the net asset value is greater than 10%. It was felt that, by so doing, the growth in the number of shares outstanding would slow, the net asset value per share would increase, and the dilution caused by the issuance of shares in lieu of cash for the year-end capital gain distribution would diminish. In addition, the liquidity of the Company's shares in the marketplace should increase and the discount to net asset value could decrease. This program is expected to benefit all the shareholders of the Company.
As of January 13, 2000, a total of 236,200 shares have been repurchased at a total cost of $7,835,559 and a weighted average discount from net asset value of 14.5%. The Company was restricted from buying shares until late in December, 1999.
YEAR 2000 READINESS DISCLOSURE
The countdown is over for Year 2000, and we have entered into the new century unscathed. We are pleased to report there were no system failures, either in- house or reported by any of our critical vendors or portfolio companies. The Company incurred no significant costs relating to the Year 2000 issue.
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The Company included in its Third Quarter Report to Shareholders a postcard inviting shareholders to send us the names of investors who might be interested in learning more about the Company. We have received a good response to this initiative, with over 320 cards returned and information packages mailed out to prospective holders. It is our intention to repeat the insertion in our First Quarter Report and periodic future mailings. Please feel free to provide us with names and addresses at any time, either by mail, telephone, or through our soon to be updated website at www.adamsexpress.com.
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Mr. Allan Comrie resigned from the Board of Directors as of December 31, 1999. Mr. Comrie, a director since 1987, shared his extensive investment knowledge with the Board as former President and Chief Executive Officer of U.S. & Foreign Securities Corp. We have been enriched by his participation on the Board and wish him all the best in the future.
The proxy statement for the Annual Meeting of Stockholders to be held in Palm Beach, Florida on March 28, 2000, will be mailed on or about February 17, 2000 to holders of record on February 14, 2000.
By order of the Board of Directors,
Douglas G. Ober,
Chairman and Chief Executive Officer
Joseph M. Truta,
President
January 21, 2000
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