EXHIBIT 13.3
LETTER TO STOCKHOLDERS
TO OUR STOCKHOLDERS We are pleased to report that 1994 was another successful
year for State Street. We capitalized on global opportunities and positioned
ourselves for future growth. As we aim for superior long-term financial
performance, our primary financial measure is sustainable real growth in
earnings per share. Against this measure, we achieved an earnings per share
increase of 15% in 1994, which is consistent with the 15% compound annual rate
for the past 10 years. Return on stockholders' equity was 17.5%, which we
achieved despite continued investment spending of 10% of revenue, compared with
our long-term, historical rate of 8%. Revenue grew 17%, further positioning us
to achieve our revenue goal for the decade of the '90s: 12.5% real growth per
year. As our financial results demonstrate, we have achieved consistent results
through economic and interest rate cycles, as well as through the ups and downs
of the securities markets. These results are reflected in our dividend per
share, which was increased 15% in 1994 and has grown at a compound annual rate
of 17% over the past 10 years.
State Street's primary focus is servicing financial assets -- as a
custodian and as an investment manager -- for mutual funds and other
institutional investors worldwide. In 1994, approximately 88% of net income came
from these services; the balance came from our commercial lending business and
corporate items.
As a result of State Street's focus, our company has developed some
fundamental characteristics. We have a strong customer base. Our customers, who
operate in the dynamic global financial markets, are growing. As they grow, they
require more of the services State Street offers. Indicative of State Street's
powerful customer franchise is the fact that revenue from the 10 largest
customers in 1994 who were also with us in 1990 has grown at a compound annual
rate of 13%. Our revenue is distributed across a broad customer base: in 1994,
our 10 largest customers generated only 12% of revenue.
We are expanding globally, broadening our customer base and taking
advantage of worldwide trends that provide opportunities. For the rest of the
1990s, we expect to achieve substantial growth from international markets
As a worldwide leader in servicing and managing financial assets, State
Street has the economies of scale necessary to deliver the highest quality
service cost-effectively. Our financial strength enables us to make strategic
acquisitions and invest in new technology to create products that benefit
existing customers and attract new customers.
These fundamental characteristics of State Street continue to keep us
optimistic about the long-term growth prospects of our company.
In 1994, we continued to add new customers and strengthen relationships
with existing customers. We also added new products and expanded existing
services that will provide additional opportunities for revenue generation. For
example, we introduced a trust vehicle that allows investment managers to pool
taxable and tax-exempt funds. We expanded our securities lending program to
penetrate global markets, adding lending capabilities in six markets, lending to
non-U.S. borrowers and accepting new types of collateral. For the one million
defined contribution plan participants we service in the United States, we
introduced a leading-edge customer-service system.
During the year, we continued to expand our global capabilities. We
received a German banking license, which enables us to offer our entire range of
capabilities to the German marketplace. We added a team of investment managers
in London to strengthen our ability to deliver more effectively the innovative
quantitative investment strategies that State Street pioneered and that European
investors are increasingly seeking.
We increased capacity and improved operating efficiency. To meet customers'
growing need for high-quality, almost instantaneous information, we made
substantial enhancements to State Street Interchange(R), a message-based network
architecture that allows us to move information to and from our customers
globally in close to real-time. We significantly upgraded our core multicurrency
accounting system. As a result of our reengineering efforts, we reduced
subcustody unit costs by 14%. To support business growth, we increased total
processing power at our data centers by 15%. To obtain greater operating
efficiency, we consolidated a significant portion of our worldwide securities
operations. We installed robotic tape libraries in our data centers and upgraded
to newer, array-disk technology, improving performance and efficiency while
reducing cost
In 1993, we made a strategic decision to increase investment spending to
approximately 10% of revenue for 1993 and 1994. We invested in information
technology, product development and geographic expansion to position State
Street for future growth. We began to benefit from this investment spending
program in 1994. In 1995 and the years ahead, we will realize increased benefits
from these investments. Over the course of 1995, we plan to reduce investment
spending to a more normal level of 8% by year end.
In 1995, we expect to generate increased revenue by introducing new
products and expanding the services we provide for current customers. We will
benefit from attracting new customers in the United States and around the world
as we increase our penetration of global markets. The integration of Investors
Fiduciary Trust Company, which we acquired in the first quarter of 1995, will
enable us to leverage our full range of products by marketing our services to
these new mutual fund customers. We also expect to receive additional
productivity savings from our ongoing reengineering initiatives. These
strategies, combined with the global trends that are discussed in the following
section of this report, position us for long-term growth.
To enhance our position as a global growth company, we listed our stock on
the New York Stock Exchange in February 1995.
As we look to 1995 and beyond, State Street will continue to focus on
servicing and managing the financial assets of institutional investors
worldwide. With this focus, we expect to achieve superior financial performance.
Given our current assessment of the company and the markets we serve, our
expectation is for continued double-digit earnings per share growth for the next
few years.
The excellent financial performance that we achieved during 1994 is the
result of the efforts of State Street's highly professional workforce. Our high
business-retention rate reflects the dedication of our 11,000 employees around
the world. We would like to thank all of our employees for their contributions
during the past year. We look forward to the success we will achieve together in
1995 and in the years ahead.
/s/Marshall N. Carter
Chairman and Chief Executive Officer
/d/ David A. Spina
Vice Chairman, Treasurer and Chief Financial Officer