Exhibit 13.3
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Marshall N. Carter
Chairman and Chief Executive Officer
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David A. Spina
President and Chief Operating Officer
To Our Stockholders
1997 was a year of outstanding financial performance against our strategic plan.
We achieved our twentieth consecutive year of double-digit earnings per share
growth, a record in which we take great pride. We continued to invest in the
people, technology and new products that will allow us to anticipate and serve
the evolving needs of our customers around the world. We recorded a record level
of new business during the year. State Street remains focused on serving
institutional investors worldwide.
FINANCIAL RESULTS
Our 1997 financial results were outstanding, exceeding both our financial goals
and our historical trends. Earnings per share of $2.32 were up 30% from 1996.
This compares to a compound annual growth rate of 17% over the last 15 years.
That historical rate is consistent with our primary financial goal of achieving
sustainable real growth in earnings per share. At $2.3 billion, revenue
increased 24% from the previous year. This is above our 17% compound annual
growth rate achieved in the decade to date and the 15% rate needed to meet our
goal of repeating our revenue record of the 1980's in the 1990's. Return on
stockholders' equity was 20.6%, well above our goal of 18%.
Our record-setting performance was primarily attributable to strong, fundamental
growth throughout State Street. Additionally, our business strategies have
positioned State Street to benefit from several external factors that favored us
in 1997, including strong securities markets, robust mutual funds inflows,
active currency markets, and steady growth in cross-border investing. Since
external factors may not be as favorable in the future, we expect State Street's
future earnings per share growth rates to be more in keeping with our long-term,
historical performance.
We remain confident that execution of our strategic business plan will continue
to create value for our stockholders over the long term. In 1997, our 20 years
of consistent performance, our strong performance during the year, and the
prospects for State Street's future growth were recognized by the market. The
stock price increased 80%, contributing to an annual total return to
stockholders of 23% over the past five years.
ADDING VALUE THROUGH A
BROAD RANGE OF SERVICES
Our commitment is clear. State Street has earned its reputation for working with
customers to meet their changing needs by developing the products and services
they require. WE CONTINUE TO BUILD OUR BUSINESS FOR FUTURE GROWTH BY DEVELOPING
A BROADER PRODUCT ARRAY FOR OUR CUSTOMERS.
Global Link(SM), the integrated, electronic market information, trade execution,
and reporting platform we introduced in August 1996, now provides eight services
via the Bridge Information Systems network. The Global Link service suite
includes unique currency markets research, currency management tools,
multi-market equity execution, and real-time foreign exchange trading.
Our mutual funds administration services saw strong growth in 1997, as more
mutual fund companies sought to outsource these complex regulatory compliance
functions. In 1997, mutual funds under administration increased 42%, and we are
prepared to serve customers' growing demand for these services.
Our compliance monitoring services are providing customers with valuable
solutions for another important challenge. Our Investment Policy MonitorSM
product, significantly enhanced in 1997, allows managers and sponsors to review
their investment strategies to ensure they comply with plan or portfolio
guidelines.
With established mutual fund servicing capabilities in the Cayman Islands,
Dublin, Luxembourg, Sydney, and Toronto, we are successfully converting our U.S.
market leadership to global leadership. As U.S.-style mutual funds continue to
win acceptance in the global marketplace, we are prepared to serve customers'
growing demand for offshore and in-country mutual funds services.
In investment management, we are focused on continuing the expansion of both our
global reach and diversified product lines. In 1997, we began offering
investment management capabilities in Hong Kong and Munich, and opened an office
in Santiago, Chile. We added a number of new investment strategies, including
aggressive growth strategies. In addition, we broadened the range of investment
management strategies we offer for high-net-worth individuals, introducing
innovative services like those focusing on the specific investment needs of
entrepreneurs. In the defined contribution plan market, we continued to add new
customers to our distinguished roster.
We add value as well through the delivery methods we develop for our new
products and services. We released new versions of many of our on-line delivery
products, including Ino Sight(SM), which uses leading-edge technology to deliver
increasing amounts of information. We design our services to be Internet-enabled
where feasible, anticipating that our customers will request greater Internet
access as security standards improve.
THE FUTURE
EXPANDING RELATIONSHIPS ARE A KEY ELEMENT OF STATE STREET'S BUSINESS GROWTH. In
1997, our existing customers accounted for about 80% of the increase in our
revenue through their internal growth, the assignment of additional assets to
State Street for management or custody, and their use of additional products and
services. And, of course, each new customer we added in 1997 is an opportunity
to grow a relationship in the future.
Investing for Growth
Our outstanding performance of 1997, both in financial results and in the
quality, breadth and reliability of our services, is attributable to our ongoing
investments in support of our strategic plan. ANTICIPATING INDUSTRY CHANGES AND
INVESTING TO DEVELOP THE RESOURCES TO HANDLE THEM BEFORE THEY OCCUR IS AN
IMPORTANT ELEMENT OF STATE STREET'S INDUSTRY LEADERSHIP. Investments in
technology, global expansion, and product development early in this decade drove
our strong growth in 1996 and 1997. We continue to invest for our future. For
example, our comprehensive approach to the Year 2000 challenge is attracting new
customers looking to State Street as part of their Year 2000 solution. We are
implementing solutions for the rapid integration of Europe's new single
currency, the euro, that will enable institutional investors to focus on
business as usual. We are expanding our capacity and providing further back-up
for our 24-hour, 365-day operating capabilities with another global data center,
located in Kansas City, that will open in 1999.
A Growing Market
THE MARKET FOR SERVICES TO INSTITUTIONAL INVESTORS IS LARGE AND GROWING.
Analysts estimate the $6 trillion global mutual fund industry will grow 15%
annually over the next five years, the $8 trillion pension fund industry 10%,
the $9 trillion insurance industry 9% and the $15 trillion asset management
industry 10%. LONG-TERM, GLOBAL TRENDS BODE WELL FOR THE BUSINESS IN WHICH STATE
STREET IS INVESTING. The aging of the world's population, pressures on
pay-as-you-go pension systems, increasing cross-border investing, and the
growing complexity of investment strategies will continue to drive demand for
our services for decades to come. (We discuss these important trends further in
the following section.)
GROWING IN A GROWING BUSINESS
State Street is well positioned to meet the needs of institutional investors
around the world. We are introducing a steady stream of new products and
services to the global marketplace.
We will continue to develop and refine our strong revenue flows, focus on
increasing profit margins, develop and manage our migration to the technology
platforms of the 21st century, and carefully manage the pace at which we
introduce new products and capabilities. We know our team of 14,000 State Street
employees around the world is committed to these objectives and to our company's
success.
/s/ Marshall N. Carter /s/ David A. Spina
Marshall N. Carter David A. Spina
Chairman and President and
Chief Executive Officer Chief Operating Officer