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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 0-26996
INVESTORS FINANCIAL
SERVICES CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3279817
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
200 CLARENDON STREET
P.O. BOX 9130
BOSTON, MASSACHUSETTS 02116
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 330-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
---
The aggregate market value of Common Stock held by non-affiliates of
the registrant was $402,399,874 based on the last reported sale price of
$59.6875 on The Nasdaq National Market on February 16, 1999 as reported by
Nasdaq.
As of February 16, 1999, there were 6,741,778 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1998. Portions of such Proxy Statement are incorporated by reference in
Part III.
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ITEM 1. BUSINESS
GENERAL
Investors Financial Services Corp. (the `Company'), based in Boston,
Massachusetts, provides asset administration services for the financial
services industry through its wholly-owned subsidiaries, Investors Bank &
Trust Company -Registered Trademark- and Investors Capital Services, Inc.
Services provided by the Company include global custody, multicurrency
accounting, institutional transfer agency, performance measurement, cash
management, foreign exchange, securities lending, mutual fund administration,
institutional trust services and investment advisory services. These services
are provided to a variety of financial asset managers, including mutual fund
complexes, investment advisors, banks and insurance companies. At December
31, 1998, the Company provided financial asset administration services for
net assets totaling approximately $245 billion, including approximately $14
billion of foreign assets. The Company also engages in private banking
transactions, including secured lending and deposit accounts.
The Company operated as a subsidiary of Eaton Vance Corp. (`Eaton
Vance'), an investment management firm conducting business through subsidiaries,
from its formation in 1969 through November 1995. In 1995, the boards of
directors of the Company and Eaton Vance determined to separate the business
operations of the Company from those of Eaton Vance by means of a tax free, pro
rata distribution of Eaton Vance's ownership interest in the Company to the
stockholders of Eaton Vance (the `Spin-Off Transaction'). The Spin-Off
Transaction was completed on November 10, 1995, prior to the completion of an
initial public offering of 2,300,000 shares of the Company's Common Stock, $.01
par value, (the `Common Stock') on November 14, 1995 (the `Offering'). As used
herein, the defined term `Company' shall mean Investors Financial Services Corp.
from and after June 29, 1995, the date of organization of Investors Financial
Services Corp., and shall mean Investors Bank & Trust Company prior to that
date, unless the context otherwise indicates. Investors Bank & Trust Company is
sometimes referred to herein as the `Bank.'
On May 29, 1998, the Company acquired AMT Capital Services, Inc. and an
affiliated company, a New York-based firm recognized for providing fund
administration services to global and domestic institutional investment
management firms. Under the terms of the acquisition agreement, the Company
acquired all of the outstanding capital stock of AMT Capital Services, Inc. in
exchange for 194,006 shares of the Company's common stock. The acquisition was
accounted for under the pooling-of-interests method of accounting and was
structured as a tax-free reorganization under the Internal Revenue Code. Upon
completion of the acquisition, AMT Capital Services, Inc. became a wholly owned
subsidiary of the Company and was renamed Investors Capital Services, Inc.
On October 1, 1998, Investors Bank & Trust Company acquired the
domestic institutional trust and custody business of BankBoston, N.A. Under the
terms of the purchase agreement, the Company paid approximately $48 million to
BankBoston as of the closing and will pay up to an additional $6 million one
year after the closing depending upon certain business performance criteria. The
business provides a full range of master trust and custody services to
endowments pension funds, municipalities, mutual funds and other financial
institutions, primarily located in New England. The primary focus is small to
midsize custody accounts. In connection with the acquisition, the Company also
entered into an Outsourcing Agreement through which the Company will act as
custodian for three BankBoston asset management related businesses: domestic
private banking, institutional asset management and international private
banking. The Company will provide transaction processing and asset safekeeping
and servicing to the clients of those businesses. The acquisition was accounted
for under the purchase method of accounting. Since October 1, 1998, the business
has been included in the operations of Investors Bank & Trust Company.
On February 16, 1999, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable March 17,
1999 to stockholders of record on March 1, 1999. All share numbers shown in this
Report reflect shares outstanding prior to the two-for-one stock split.
OVERVIEW OF THE FINANCIAL SERVICES INDUSTRY
Utilizing a broad range of pooled products, including mutual funds,
unit investment trusts, separate accounts and variable annuities to achieve
their clients' investment goals, asset managers manage and invest financial
assets entrusted to them. Asset administration companies, such as the Company,
perform various services for the asset managers and the pooled products they
sponsor, including global custody, multicurrency accounting, transfer agency,
portfolio performance measurement, foreign exchange, securities lending,
administration and investment advisory services.
The Company believes the strong inflow of assets into pooled products
and other investment products and the related asset administration of those
products, provides an opportunity for revenue growth for asset administration
companies. As shown in the chart on the following page, total financial assets
managed by mutual fund companies, insurance companies, private pension funds and
banks have grown at an average annual rate of over 12% since 1990. Mutual funds,
such as those serviced by the Company, make up a large part of the financial
assets in pooled investment vehicles. The U.S. mutual fund market has grown at
an average annual rate of more than 19% since 1990, with over $4 trillion in
assets at September 30, 1998. According to the International Mutual Funds
Survey, worldwide fund assets were over $8 trillion in September 1998, an
increase of $6 trillion in approximately seven years.
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<TABLE>
<CAPTION>
TOTAL U.S. FINANCIAL ASSETS COMPOUND ANNUAL
(in billions) DECEMBER 31, 1990 SEPTEMBER 30, 1998 GROWTH RATE
<S> <C> <C> <C>
Mutual Funds 1,154.6 4,508.9 19.22%
Life Insurance Companies 1,367.4 2,644.4 8.88
Private Pension Funds 1,610.9 3,644.9 11.11
Bank Personal Trusts and Estates 522.1 1,084.1 9.89
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Total 4,655.0 11,882.3 12.85%
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SOURCE: FEDERAL RESERVE BANK
The asset administration environment differs by asset management
organization and operational philosophy. The majority of asset managers
outsource custody services, using multiple custodians to foster cost reduction
through competition. Large asset managers may have the critical mass necessary
to justify the cost of in-house facilities to handle accounting, administration
and transfer agency services, while smaller asset managers outsource these
services as well. The Company believes that asset administration companies such
as the Company operate most efficiently when bundling core services such as
custody and accounting with value-added services such as securities lending and
foreign exchange. The Fund Accounting and Custody Tracking System (`FACTS'), the
software system developed and owned by the Company, supports these services with
its integrated functionality, so that information input once is entered into
various administrative subsystems without manual intervention.
Providing asset administration services globally remains a focus in the
financial services industry. The Company has offices located in Toronto, Canada,
Dublin, Ireland, and the Cayman Islands for servicing offshore funds. The
Company's Toronto subsidiary was opened in 1993 to service the offshore mutual
fund market. The Company opened an office in Dublin, Ireland in 1994 to service
investment managers distributing to European and Asian clients. In 1996, the
Company opened an administration site in the Cayman Islands to service
Caribbean-based funds.
Information technology remains a driving force in the financial
services industry. Asset managers are able to create innovative investment
products using data from world markets as a result of more powerful and
affordable information processing power, coupled with the ability to send large
volumes of information instantly through widely dispersed communication
networks. Timely on-line access to electronic information on security positions,
prices and price shifts facilitates on-line currency trading, indexation of
assets, real time arbitrage, and hedging through the use of derivative
securities. Asset administration providers use technology as a competitive tool
to deliver precise and functional information to the asset managers, and to
increase value-added services such as performance measurement and analytical
tools. Examples of analytical tools include reports showing time-weighted
return, performance by sector, and time-weighted return by sector. The Company
believes that the integrated nature of FACTS, compared with the disparate
systems used for different tasks by many other financial service providers,
provides the Company with a competitive advantage and positions the Company to
respond to the continuously changing technological demands of the financial
services industry.
Competition in the asset administration industry has reduced pricing in
almost all business segments, particularly with respect to custody services and
trustee services. Partially offsetting this trend is the development of new
services that have higher margins. The Company's continuous investment in
technology has permitted it to offer value-added services to clients, such as
offshore custody and fund accounting, securities lending and foreign exchange at
competitive prices on a global basis. Technological evolution and service
innovation enable the Company to generate additional revenues to offset price
pressure in maturing service lines.
In an effort to capture efficiencies of larger pools of assets, asset
managers create different investment structures. One example of this innovation
is the master-feeder structure. In the master-feeder structure, one or more
investment vehicles (the `feeder funds') with identical investment objectives
pool their assets in a common portfolio held by a separate investment vehicle
(the `master fund'). This structure permits each of the feeder funds to be sold
to a separate target market and through a different distribution channel even if
the feeder fund, on a stand-alone basis, would not be large enough to support
its operating costs. The feeder funds benefit from economies of scale available
to the larger pool of funds invested in the master fund.
A growing number of mutual funds have been structured as multi-tiered
or multi-class funds in order to address the differing requirements and
preferences of potential investors. In this environment, investors have the
option of purchasing fund shares with the sales load structure that best meets
their short-term and long-term investment strategy. Multiple class arrangements
allow an investment company to sell interests in a single investment portfolio
to separate classes of stockholders.
The financial asset administration service industry continued to
experience consolidation among service providers in 1998. The Company believes
that its size and responsiveness to client needs provide the financial services
industry with an asset administration alternative to superregional and money
center banks and other administration providers. While consolidation within the
industry may adversely affect the Company's ability to retain clients that have
been acquired,
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consolidation also creates opportunity for the Company as prospective clients
review their relationships with existing service providers. In addition,
consolidation among large financial institutions may enable the company to
acquire, at a reasonable price, asset administration businesses that do not fit
within the core focus of these new, consolidated financial institutions.
COMPANY STRATEGY
The principal asset administration services provided by the Company to
its clients are custody and multicurrency accounting. Value-added services
utilized by clients based upon their individual needs include securities
lending, foreign exchange, cash management, transfer agency, and mutual fund
administration. The Company's objective is to provide a broad range of services
to all clients, maximize the use of its value-added services and increase the
size of its client base. The Company has adopted the following strategy to
achieve this objective:
- DELIVER SUPERIOR SERVICES AND EXPAND CLIENT RELATIONSHIPS.
Service quality in asset administration relationships is a key
to maintaining existing business and attracting new clients.
The Company takes an integrated approach to asset
administration rather than the functional approach of some of
its competitors. Instead of separate departments managing
components of the custody and accounting task (e.g., trade
settlement, income collection, corporate actions, general
ledger accounting, portfolio accounting and pricing), the
Company dedicates a single operations team to handle all work
for a particular account or fund. In addition, each client is
assigned a Client Manager, independent of the operations team,
to anticipate the client's needs, to coordinate service
delivery, and to provide consulting support. The Company
believes that its strong client relationships create
continuing opportunities to provide additional services to
existing customers. Once a mutual fund complex becomes a
client, the Company believes the possibility exists that the
client will select the Company to provide additional services,
service additional funds, or both. At December 31, 1998, 65
mutual fund complexes and insurance companies utilized the
Company's services, up from 53 a year ago.
- MAINTAIN TECHNOLOGICAL EXPERTISE. The asset administration
industry requires the technological capability to support a
wide range of global security types and complex portfolio
structures in both local and base currencies, as well as the
telecommunications flexibility to support the diversity of
global communications standards. From a technological
standpoint, FACTS is an integrated computerized information
system that provides custody, securities movement and control,
portfolio accounting, general ledger accounting, pricing, net
asset value calculation, and master-feeder processing into a
single information system. By consolidating these functions,
the Company has eliminated redundancy in data capture and
reduced the opportunity for clerical error. The FACTS
architecture enables the Company to modify the system quickly,
resulting in increased processing quality and efficiency for
its clients. The Company believes that this integrated
architecture helps to differentiate the Company from its
competitors.
Technological enhancements and upgrades are an ongoing part of
asset administration, both to remain competitive and to create
information delivery mechanisms that add value to the
information available as part of clearing and settling
transactions. During 1998, the Company's Euro conversion
system processing developed for EMU was completed and
transparently transitioned to its clients. Through
standardized data extracts and automated interfaces developed
over the past several years, the Company's clients can connect
electronically with the Company's host computer and access
data collected from clearance and settlement transactions in
multiple currencies on a real-time basis. Through these
information-sharing tools, the Company is better equipped to
expand its custody and accounting services with foreign
exchange services and asset and transaction reporting and
monitoring services. This electronic linkage also positions
the Company to respond quickly to client requests.
- EXPAND OFFSHORE PROCESSING CAPABILITIES. Net assets processed
by the Dublin subsidiary, opened in 1994 to service
European-based clients, increased from $27 million at December
31, 1996 to over $1.4 billion at December 31, 1998. The
technology requirements of the offshore fund accounting
operations are facilitated by the architecture of FACTS. FACTS
allows microcomputers located at offshore processing centers
to use the FACTS software system to perform the components of
processing on-site in compliance with local jurisdiction
requirements for offshore investment funds, while utilizing
the Company's existing U.S.-based mainframe processing,
storage and archive capabilities. In contrast, other fund
accounting providers typically utilize entirely separate
systems for domestic and offshore processing.
SERVICE OFFERINGS
The Company provides a broad range of asset administration services to
the financial services industry, including global custody, multicurrency
accounting, securities lending, foreign exchange, mutual fund administration,
institutional transfer agency, performance measurement, private banking and
investment advisory services. Global custody and multicurrency accounting are
the principal asset administration services provided to the Company's clients.
Fees charged for these services reflect the highly competitive nature and
price-sensitivity of the market for such services. Securities lending and
foreign exchange services provide a more favorable pricing environment for the
Company and increased
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activity by the Company in these areas would not involve a proportionate
increase in personnel or other resources. Mutual fund administration and
institutional transfer agency services provide additional revenue-generating
opportunities, but require a corresponding increase in personnel and processing
resources.
Fees charged vary from client to client based on the volume of assets
under custody, the number of securities held and portfolio transactions, income
collected, and whether other value-added services such as foreign exchange and
performance measurement are needed. Generally, fees are billed to the client
monthly in arrears and, upon their approval, charged directly to their account.
The following is a description of the various services offered by the
Company.
GLOBAL CUSTODY. Global custody entails overseeing the safekeeping of
domestic and cross border securities for clients and settlement of portfolio
transactions. The Company's domestic net assets under custody have grown from
$22 billion at October 31, 1990 to $231 billion at December 31, 1998. Examples
of the safekeeping of cross-border securities for clients include the
safekeeping of Hong Kong stocks for a Dutch mutual fund or German bonds held for
an U.S. bank-sponsored mutual fund. At December 31, 1998, the Company's foreign
net assets under custody totaled approximately $14 billion.
Custody functions are fully integrated with security movement and
control, portfolio accounting, general ledger accounting, and pricing and
evaluation through FACTS. Custody functions include:
- - Settlement of purchases and sales of securities.
- - Safekeeping of securities and cash.
- - Tracking and collection of income and receivables, such as dividends
and distributions.
- - Reconciliation of cash and security positions.
- - Disbursement of expenses.
- - Calculation and reporting of cash availability to asset managers.
- - Reporting and processing of corporate actions, such as stock splits and
bond calls.
- - Initiation of settlement inquiries, including reclaims for foreign tax
withholding.
- - Periodic reporting of holdings, transactions, income, corporate actions
and cash flow.
The Company entered the foreign custody marketplace in 1988, when the
nature of foreign custody began to change dramatically. In the 1970s, foreign
custody was a series of manual, labor-intensive exchanges; settlement was a slow
process where most securities were re-registered and vaulted in the U.S. and the
volume of assets was relatively small. Major developed countries throughout the
world have evolved to highly automated environments, and the transition in
developing countries is proceeding rapidly.
Given the evolution of information technology and the industry's
acceptance of computer technology as the preferred vehicle to support foreign
custody, the Company established a worldwide network of global subcustodians. In
countries with centralized clearinghouses such as Euroclear, the Company
establishes a subcustodian relationship with the clearinghouse and is able to
receive information from the subcustodian in electronic format directly onto
FACTS. In nations without automated environments, subcustodians hold physical
securities in their own vaults and provide reporting in hard copy format to the
Company for input onto FACTS. The Company currently has custody agreements in 81
countries, typically with regional providers of custody services. Since the
Company does not have its own branches in these countries, it is able to operate
in the foreign custody arena with minimal fixed costs, while the Company's
clients benefit from the ability to use only one custodian, the Company, for
their international investment needs.
MULTICURRENCY ACCOUNTING. Multicurrency accounting entails the daily
recordkeeping for each account or investment vehicle, including calculations of
net asset value per share, dividend rates per share, and the maintenance of all
books, records and financial reports required by the Securities and Exchange
Commission and other regulatory agencies. Due to the growth in international
investments by asset managers, traditional fund accounting tasks must be
reconciled across multiple currencies. The primary approach of the Company is to
bundle the sale of fund accounting and custody services in order to work within
the natural efficiencies and control mechanisms of its integrated custody/fund
accounting system and operational philosophy. Multicurrency accounting functions
include:
- - Maintenance of the books and records of a fund in accordance with the
Investment Company Act of 1940.
- - Tracking of investment transactions for use in the calculation of tax
gains and losses.
- - Calculation and accrual of expenses.
- - Booking of purchases, redemptions and transfers of fund shares as
directed by the transfer agent.
- - Calculation of gains and losses by security and currency.
- - Determination of net income.
- - Calculation of daily yields in accordance with Securities and Exchange
Commission formula requirements.
- - Preparation of statements of assets and liabilities and statements of
operations.
- - Computation of the market value of the account.
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- - Calculation of the daily Net Asset Value of the account and reporting
of this value to the National Association of Securities Dealers for
publication in newspapers.
In addition to providing the above services to domestic-based accounts
and investment vehicles, the Company also provides offshore fund accounting. The
Company views the offshore market as a significant business opportunity and will
continue to invest in expansion to support client demand. The Company's Toronto
operations, conducted by the Company's wholly-owned Canadian subsidiary,
currently provide offshore services to 31 portfolios comprised of over $7
billion in assets. The Company's Dublin operations provide offshore services to
54 portfolios comprised of $1.4 billion in net assets.
MUTUAL FUND ADMINISTRATION. The Company provides mutual fund
administration services, including management reporting, regulatory reporting,
tax and accounting, and partnership administration. Management reporting
consists of information and reporting which is of primary interest to the fund's
asset managers and its board of trustees and includes:
- - Preparation of detailed quarterly financial information for
presentation to fund management and its board of trustees.
- - Monitoring the reporting of net asset value, settlement of trades, and
processing of stockholder transactions.
- - Monitoring compliance with investment portfolio restrictions.
- - Calculation of fund dividends to be declared in accordance with
management guidelines.
- - Preparation and monitoring of a fund's expense budget.
Regulatory reporting is the reporting and accumulation of information
required of the fund by the Securities and Exchange Commission and state
securities regulators and includes:
- - Coordination of preparation and filing of Securities and Exchange
Commission reports.
- - Maintenance of effective `blue sky' registrations in jurisdictions
selected for fund sales.
- - Coordination of the preparation and printing of stockholder reports.
- - Preparation of prospectus update and proxy material.
- - Coordination of on-going `blue sky' compliance.
Tax and accounting is required either by the fund's auditors or by
Internal Revenue Service rules and regulations and includes:
- - Performing portfolio compliance testing to establish qualification as a
regulated investment company.
- - Preparation of income and excise tax returns.
- - Preparation of audit package for use by independent public accountants.
- - Coordination of review of income, capital gains, and distribution
information.
In addition to on-going services, the Company also provides mutual fund
start-up consulting services, which typically include assistance with product
definition, service provider selection, and fund structuring and registration.
The Company has worked with a number of investment advisors to assist them in
the development of new mutual funds and other pooled investment vehicles.
INVESTMENT ADVISORY. The Bank acts as investment advisor to the
Merrimac master investment funds (the `Funds'). The Funds have three operating
master funds, the Merrimac Cash Portfolio, the Merrimac Treasury Portfolio, and
the Merrimac Treasury Plus Portfolio. The master funds are comprised of six
operating feeder funds. At December 31, 1998 net assets for the Merrimac series
totaled over $903 million. The Company has engaged Allmerica to act as
sub-advisor to manage the investments of the Merrimac Cash Portfolio and has
engaged Aeltus Investment Management, Inc. to act as sub-advisor to manage the
investments of the Merrimac Treasury Portfolio. Effective January 1999, the
Company has engaged M & I Investment Management Corp. to act as sub-advisor to
manage the investments of the Merrimac Treasury Portfolio and the Merrimac
Treasury Plus Portfolio. In addition to acting as advisor to the Funds, the Bank
has entered into agreements to provide custody, fund accounting, administration,
transfer agency and certain other related services to the Funds. The Merrimac
feeder funds offer shares mainly to institutional investors. The Funds may add
additional feeder funds and/or master funds in the future.
FOREIGN EXCHANGE. The Company offers foreign exchange services to
facilitate settlement of international securities transactions for U.S. dollar
denominated mutual funds and other accounts and to convert income payments
denominated in a non-U.S. currency to U.S. dollars. By using the Company rather
than a third party foreign exchange bank to perform these functions, clients
reduce the amount of time spent coordinating currency delivery and monitoring
delivery failures and claims. The current volume of trades processed by the
Company is approximately 35,000 trades per year, which vary in size. The Company
engages in limited foreign exchange trading transactions for its own account.
The conversion to the EURO has had no significant impact on the foreign exchange
revenue since transactions previously required in each individual currency are
now denominated in the EURO. Foreign exchange fee revenue totaled $2,106,000,
$4,427,000 and $5,020,000 for the years ended December 31, 1996, 1997, and 1998
respectively.
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SECURITIES LENDING. Securities lending involve the lending of clients'
securities to brokers and other institutions for a fee, which improves a
client's return on the underlying securities. The Company acts as agent for its
clients for both international and domestic securities lending services.
Currently, lending services are provided to seven clients, and the current loan
portfolio aggregates approximately $1.9 billion. The Company retains as
compensation a portion of the lending fee due to the client as owner of the
borrowed asset. Securities lending fee revenue totaled $1,947,000, $2,865,000
and $3,625,000 for the years ended December 31, 1996, 1997 and 1998
respectively.
Through a network of broker/dealers, the Company places the securities
out on loan pursuant to client instruction, delivers the subject securities and
performs the necessary loan accounting. Accounting entails monitoring each
security out on loan by broker, allocating the loans to each fund, tracking the
fixed or variable rebate due the broker, updating the daily investments,
applying the earnings to each security loan and preparing daily and monthly
earnings statements for each fund and all the brokers.
All loans are fully collateralized with cash, government securities or
a letter of credit. This collateral is reinvested according to each client's
instructions. The Company monitors all outstanding loans on a daily basis by
reviewing exposure by broker, performing asset reconciliations, and marking each
security to market to ensure that proper collateral levels are maintained.
INSTITUTIONAL TRANSFER AGENCY. Transfer agency encompasses mutual fund
shareholder recordkeeping and communications. Services include tracking capital
shares, fulfilling purchase, transfer, and redemption requests, and sending
account statements, tax reporting information and distributions to shareholders.
The Company provides mutual fund shareholder servicing and recordkeeping for
clients representing approximately 19,000 shareholder accounts. These services
are generally provided only to institutional clients with smaller numbers of
outstanding shareholders or omnibus positions of retail shareholders.
PERFORMANCE MEASUREMENT. Performance measurement services involve the
creation of systems and databases that enable asset managers to construct,
manage, and analyze their portfolios. Services include portfolio profile
analysis, portfolio return analysis, and customized benchmark construction.
Performance measurement uses data already captured by FACTS to calculate
statistics and report them to asset managers. The Company provided this service
for an aggregate of over $26 billion in net assets managed by 46 investment
advisors.
INSTITUTIONAL CUSTODY SERVICES. The Company offers institutional
custody services to individuals, family groups, trusts, endowments and
foundations, and retirement plans. The Company develops this client base by
forming relationships with investment advisors and working with the advisors to
service mutual clients. The Company provided institutional custody services to
approximately 12,000 accounts at December 31, 1998.
The acquisition of the domestic institutional trust and custody
business from BankBoston has expanded the Company's presence in the
institutional custody marketplace and added greater depth and diversity to the
Company's client base. While competitors tend to focus on the large
institutional opportunities, the Company targets the small to mid-size
institutional custody market. Custody services provided to these clients include
the safekeeping of securities and the settlement of securities transactions.
Custody service fees are determined based on assets under custody and number of
transactions in each account.
Acting as a fiduciary for certain of these accounts, the Company
provides trust administration and estate settlement services. These services
include on-going fiduciary review of the trust instrument, collection and
safekeeping of assets, distribution of income, appropriate reporting for court
and tax purposes, preparation of tax returns, and distribution of assets as
required. The Company does not provide investment advice, but works closely with
third-party investment advisors chosen by each client to carry out the
investment of assets.
BANKING SERVICES. The Company offers credit lines to its clients for
the purpose of leveraging portfolios and covering overnight cash shortfalls.
Additionally, the Company's clients, which consist mainly of managers of mutual
funds, unit investment trusts and other pooled asset products, typically
generate large cash balances from securities sales and other transactions which
they wish to invest on a short-term basis. The Company does not conduct
consumer-banking operations.
At December 31, 1998, the Company had gross loans outstanding to
individuals, non-profit institutions and mutual funds of approximately $54
million, which represented approximately 4% of the Company's total assets. The
interest rates charged on the Bank's loans are indexed to either the prime rate
or the rate paid on 90-day Treasury bills. The Company has never had a loan
loss, and has no delinquent loans. Other than a loan made to a non-profit
association for purposes of the Community Reinvestment Act, all loans are
secured by marketable securities and are due on demand.
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SALES, MARKETING AND CLIENT SUPPORT
The Company employs a direct sales staff of twelve employees that
target potential market areas, including investment management companies,
insurance companies, banks and investment advisors. Sales personnel are
primarily based at the Company's headquarters in Boston, and are given
geographic area sales responsibility. The Company also has one sales person
located in Dublin who is responsible for international markets. Included in the
twelve sales employees, are five individuals who are dedicated to marketing
services to institutional accounts. Senior managers from all functional areas
are directly involved in obtaining new clients, frequently working as a team
with a sales professional.
New client contacts are generated by a variety of methods, including
client referrals, personal sales calls, direct mailing to targeted clients,
attendance at trade shows and seminars, and advertising in trade publications.
In order to service existing clients, a client management staff of
approximately 13 professionals based in the Company's Boston office provides
client support. Each client is assigned a Client Manager responsible for the
overall satisfaction of the client. The Client Manager is usually a senior
professional with extensive industry experience and works with the client on
contracts, new products and specific systems requirements.
SIGNIFICANT CLIENTS
The Company presently provides services to approximately 63 mutual fund
complexes and insurance companies. The Company's largest current client, Eaton
Vance, accounted for 10%, 10% and 9% of the Company's net operating revenues for
the years ended December 31, 1996, 1997 and 1998 respectively. No other single
client of the Company represented more than 10% of net operating revenues. Eaton
Vance has been a client of the Company since 1975. The Company's agreements with
mutual funds managed by Eaton Vance, pursuant to which the Company provides
custody and fund accounting services, extend through August 2000 and continue
thereafter until terminated by either party upon sixty days prior notice. Total
assets processed under long-term contracts at December 31, 1998 were over $79
billion. All other client engagements are, and in the future may be, terminable
upon 60 days notice.
SOFTWARE SYSTEMS AND DATA CENTER
The Company's asset administration operations are supported by
sophisticated computer technology. The Company receives vast amounts of
information across a worldwide computer network. That information, which covers
a wide range of global security types and complex portfolio structures in
various currencies, must then be processed, resulting in system-wide updating
and reporting. The Company must have the capability to provide not only daily
and periodic reports of asset accounting and performance, but also to provide
measurement and analytical data to asset managers on-line on a real time basis.
This technology requirement call for powerful and sophisticated computer
hardware and software systems operated in a cost-effective manner.
The primary software system used by the Company is FACTS. The system
was developed over a four-year period by the Bank of New England, and was put
into operation in 1986. It was acquired by the Company in 1990 in connection
with the acquisition by the Company of the Financial Products Services Division
of the Bank of New England.
FACTS utilizes microcomputers networked to servers networked to a
mainframe computer system. The microcomputers can be located in any location
with the requisite telecommunications network for the automated interface to the
mainframe, enabling the Company to provide geographically dispersed processing
services effectively and efficiently. This configuration also provides redundant
processing capability; if the mainframe fails, FACTS is able to process
independently on the microcomputers.
FACTS emphasizes efficiency and accuracy because it integrates custody,
securities movement and control, portfolio accounting, general ledger
accounting, pricing, net asset value calculation, and master/feeder processing
into a single system without repeated manual input or intervention. The
traditional industry approach is to have separate applications for each of these
functions and to interconnect the component applications with manual
intervention at various points in the process.
The integrated nature of the FACTS architecture allows the Company to
affect modifications and enhancements quickly, resulting in increased processing
quality and efficiency for the Company's clients. This integrated architecture
helps differentiate the Company from its competitors. System enhancements and
upgrades are an ongoing part of asset administration, both to keep ahead of the
competition and to create information delivery mechanisms that add value to the
information available as part of clearing and settling transactions. Over the
past few years, the Company has developed standardized data extracts and
automated interfaces that allow its clients to connect electronically with the
Company's host computer and access data collected from clearance and settlement
transactions in multiple currencies on a real-time basis. This electronic
linkage also positions the Company to respond quickly to client requests.
A substantial portion of the Company's electronic transaction
processing services depends upon mainframe computer hardware, owned and operated
by Electronic Data Systems (`EDS'), contained in the EDS Information Processing
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Center (`IPC') in Plano, Texas. Processing and networking functions and
equipment are located at the IPC, and in the Boston, MA, Camp Hill and Auburn
Hills, Michigan and Charlotte, NC metropolitan areas. By outsourcing data
processing, the Company can focus its resources on its core line of business and
minimize its capital investment in computer equipment. EDS is able to offer the
Company up to date computer products and services to which it would not
otherwise have access, while removing the risk of product obsolescence. Due to
its diverse customer base, EDS can invest in the latest computer technology and
spread the costs over multiple users. In addition, the defined pricing provided
by EDS for products and services allows the Company to match its data processing
cost with the related revenue stream. The use of EDS as a hardware provider
allows the Company to dedicate its efforts to the ongoing enhancement of its
software systems while receiving the benefit of the continuing investment by EDS
in its computer hardware.
EDS also provides mainframe disaster recovery services. EDS maintains
additional processing equipment at the Plano IPC and at a designated alternate
IPC which may be used in the event of equipment failure. The Plano facility is
also supported by an uninterruptable power supply and diesel generators which
can supply power to continue operations for an extended period of time. Critical
software and data files are backed-up daily and stored off-site. Disaster
recovery plans are tested through simulations conducted by the Company annually.
Notwithstanding these precautions, there can be no assurance that a fire or
other natural disaster affecting the data center would not disable the host
computer system.
The current agreement between the Company and EDS obligates EDS to
provide the Company with comprehensive data processing services and obligates
the Company to utilize EDS's services for substantially all of its data
processing requirements. The Company is billed for these services monthly on an
as-used basis as determined by a pricing schedule for specific products and
services. EDS began providing services to the Company in December 1990 and the
current agreement is scheduled to expire on December 31, 2000.
COMPETITION
The Company operates in a highly competitive environment in all areas
of its business. The Company's most significant competitors are State Street
Bank & Trust Company, The Bank of New York, Chase Manhattan Corp., Brown
Brothers Harriman & Co., and PNC Bank. These competitors possess substantially
greater financial, sales and marketing resources than the Company and process a
greater amount of financial assets than the Company. In addition, the Company
also encounters competition in the sale of fund accounting services from large
in-house accounting departments of mutual fund complexes, insurance companies
and banks offering proprietary mutual funds. Competitive factors include
technological advancement and flexibility, breadth of services provided and
quality of service. The Company believes that it competes favorably in these
categories.
INTELLECTUAL PROPERTY
The Company's success is dependent upon its software development
methodology and other intellectual property rights developed and owned by the
Company, including FACTS. The Company relies on a combination of trade secret,
nondisclosure and other contractual arrangements and technical measures, and
copyright and trademark laws to protect its proprietary rights. The Company
generally enters into confidentiality agreements with its employees and
consultants, and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights. Furthermore, such
protections may not preclude competitors from developing products and services
with functionality or features similar to those of the Company. In addition,
effective copyright, trademark and other trade protection may not be available
in certain international markets serviced by the Company. Finally, there can be
no assurance that intellectual property protection will be available in certain
foreign countries. The registration of the service mark Investors Bank & Trust
Company will remain in force until 2006, at which time it may be renewed.
Although the Company believes that its services do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against the Company in the future.
EMPLOYEES AND TRAINING
As of December 31, 1998, the Company had 1,258 employees. None of the
Company's employees are represented by a union. The Company believes that its
relations with its employees are good.
The Company developed a five-week professional development program for
entry level staff. Successful completion of the program is required of most
newly hired employees. Topics covered during the program include an overview of
the financial services industry and regulatory environment, principles of
investment company accounting, instruction in operating and control procedures,
manual performance of fund accounting tasks and intensive training on FACTS.
This training program is supplemented by ongoing education on the industry and
client base.
The Company's business is labor-intensive, and its success depends to a
significant extent upon a number of key management employees and skilled
technical, managerial and marketing personnel, few of which are bound by
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employment agreements. From October 31, 1990 to December 31, 1998, the Company's
staff increased from 463 to 1,258 employees.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws
governing businesses and employers, the Company and the Bank are further
regulated by federal and state laws and regulations applicable to financial
institutions and their parent companies. Virtually all aspects of the Company's
and the Bank's operations are subject to specific requirements or restrictions
and general regulatory oversight. State and federal banking laws have as their
principal objective either the maintenance of the safety and soundness of
financial institutions and the federal deposit insurance system or the
protection of consumers or classes of consumers, rather than the specific
protection of stockholders of a bank or its parent company. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
THE COMPANY
GENERAL. The Company, as a bank holding company, is subject to
regulation and supervision by the Federal Reserve Board (the `FRB') and by the
Massachusetts Commissioner of Banks (the `Commissioner'). The Company is
required to file annually a report of its operations with, and is subject to
examination by, the FRB and the Commissioner. The FRB has the authority to issue
orders to bank holding companies to cease and desist from unsound banking
practices and violations of conditions imposed by, or violations of agreements
with, the FRB. The FRB is also empowered to assess civil monetary penalties
against companies or individuals who violate the Bank Holding Company Act of
1956, as amended, (the `BHCA') or orders or regulations thereunder, to order
termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a
non-banking subsidiary by a bank holding company.
BHCA - ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring substantially all the assets of a bank or
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any bank, or increasing such ownership or control of any bank, or
merging or consolidating with any bank holding company without prior approval of
the FRB. No approval under the BHCA is required, however, for a bank holding
company already owning or controlling 50% or more of the voting shares of a bank
to acquire additional shares of such bank. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the `Interstate Act') generally authorizes
bank holding companies to acquire banks located in any state. In addition, the
Interstate Act generally authorizes national and state chartered banks to merge
across state lines (and thereby create interstate branches) commencing June 1,
1997. Under the provisions of the Interstate Act, states are permitted to `opt
out' of this latter interstate branching authority by taking action prior to the
commencement date. States may also `opt in' early (i.e., prior to June 1, 1997)
to the interstate merger provisions.
The BHCA also prohibits a bank holding company from acquiring a direct
or indirect interest in or control of more than 5% of the voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks or furnishing services to its subsidiary banks, except that it may engage
in and may own shares of companies engaged in certain activities the FRB has
determined to be so closely related to banking or managing and controlling banks
as to be a proper incident thereto. In making such determinations, the FRB is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests or unsound banking practices.
The FRB has by regulation determined that certain activities are
closely related to banking within the meaning of the BHCA. Should the Company
desire to expand its activities beyond its current financial services
activities, it would generally be limited to the following activities: operating
a mortgage company, finance company, credit card company, factoring company, or
savings association; performing certain data processing operations; providing
limited securities brokerage services; acting as an investment or financial
advisor; acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a collection agency;
and providing certain courier services. The FRB also has determined that certain
other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper incident
thereto.
COMMITMENTS TO AFFILIATED INSTITUTIONS. Under FRB policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy and is expected to maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting the Bank.
The legality and precise scope of this policy is unclear, however, in light of
federal judicial precedent. Additionally, the Federal Deposit Insurance Act (the
`FDIA') requires the holding company parent of an undercapitalized bank to
guarantee, up to certain limits, the bank's compliance with a capital
restoration plan approved by the bank's primary federal supervisory agency. As
Investors Financial Services Corp. has no assets other than its ownership
interests in the Bank and Investors Capital Services, Inc., its ability to serve
as a source of strength to the Bank through the contribution of capital is,
presently, limited to contributing (i) dividends received, if any, from
Investors Capital Services, Inc. and (ii)
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proceeds from the sale of securities such as its Common Stock or the Capital
Securities discussed under `Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview.'
CAPITAL REQUIREMENTS. The FRB has adopted capital adequacy guidelines
pursuant to which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing applications to it under the
BHCA. These capital adequacy guidelines generally require bank holding companies
to maintain total capital equal to 8% of total risk-adjusted assets and
off-balance sheet items, with at least one-half of that amount consisting of
Tier I or core capital and the remaining amount consisting of Tier II or
supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock,
which is not eligible to be, included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
such assets as premises, plant and equipment and traditional consumer loans.
Claims on, or guaranteed by, U.S. government agencies, as well as the portion of
claims that are collateralized by securities issued or guaranteed by the U.S.
Treasury are assigned a 20% level in the risk-weighting system. Off-balance
sheet items also are adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the FRB requires
bank holding companies to maintain a minimum leverage capital ratio of Tier I
capital (defined by reference to the risk-based capital guidelines) to total
assets of 3.0%. Total assets for this purpose does not include goodwill and any
other intangible assets and investments that the FRB determines should be
deducted from Tier I capital. The FRB has announced that the 3.0% Leverage Ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those, which
are not experiencing or anticipating significant growth. Because the Bank, and
consequently, the Company, anticipates significant future growth, the Company
will be required to maintain Leverage Ratios of at least 4.0% to 5.0% or more.
The Company currently is in compliance with both the Risk Based Capital
Ratio and the Leverage Ratio requirements. Goodwill arising from the acquisition
of the domestic institutional custody business of BankBoston, N.A. had a
negative impact on the Company's leverage ratio. At December 31, 1998, the
Company had a Tier I Risk Based Capital Ratio and a Total Risk Based Capital
Ratio equal to 15.32% and 15.34%, respectively and a Leverage Ratio equal to
4.61%. The Company expects that its leverage ratio will exceed 5.0% in the
second quarter of 1999.
LIMITATIONS ON ACQUISITIONS OF COMMON STOCK. The Federal Change in Bank
Control Act prohibits a person or group of persons from acquiring `control' of a
bank holding company unless the FRB has been given 60 days prior written notice
of such proposed acquisition and within that time period the FRB has not issued
a notice disapproving the proposed acquisition or extending for up to another 30
days the period during which such a disapproval may be issued. An acquisition
may be made prior to expiration of the disapproval period if the FRB issues
written notice of its intent not to disapprove the action. Under a rebuttable
presumption established by the FRB, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended (the
`Exchange Act') would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, any company, as that term is defined in the statute, would
be required to obtain the approval of the FRB under the BHCA before acquiring
25% (5% in the case of an acquirer that is a bank holding company) or more, or
such lesser percentage as the FRB deems to constitute control over the Company,
of the outstanding Common Stock of the Company. Such approval would be
contingent upon, among other things, the acquirer registering as a bank holding
company, divesting all impermissible holdings and ceasing any activities not
permissible for a bank holding company.
MASSACHUSETTS LAW. Massachusetts law generally defines a bank holding
company as a company which owns or controls two or more financial institutions.
Although the Company owns or controls only one financial institution, it is
deemed a bank holding company for purposes of Massachusetts's law due to the
manner in which it acquired the Bank. Accordingly, the Company has registered
with the Commissioner and is obligated to make reports to the Commissioner.
Further, as a Massachusetts bank holding company, the Company may not acquire
all or substantially all of the assets of a banking institution or merge or
consolidate with another bank holding company without the prior consent of the
Board of Bank Incorporation (the `BBI'). As a condition of such consent, the BBI
must receive notice from the Massachusetts Housing Partnership Fund (the `Fund')
that arrangements satisfactory to the Fund have been made by the Company to make
0.9% of its assets available for financing, down payment assistance, share
loans, closing costs and other costs related to programs promoted by the Fund,
including those related to creating affordable rental housing, limited equity
cooperatives, and tenant management programs.
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THE BANK
GENERAL. The Bank is subject to extensive regulation and examination by
the Commissioner and by the FDIC, which insures its deposits to the maximum
extent permitted by law, and to certain requirements established by the FRB. The
federal and state laws and regulations which are applicable to banks regulate
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans.
FDIC INSURANCE PREMIUMS. The Bank pays deposit insurance premiums to
the FDIC based on an assessment rate established by the FDIC for Bank Insurance
Fund-member institutions. The FDIC has established a risk-based assessment
system under which institutions are assigned to one of three capital groups -
`well capitalized,' `adequately capitalized' and `undercapitalized' - which are
defined in substantially the same manner as under the regulations establishing
the prompt corrective action system pursuant to Section 38 of the FDIA, as
discussed below. These three capital groups are then each divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with corresponding assessment rates ranging from .04% for well
capitalized, healthy institutions to .31% for undercapitalized institutions with
substantial supervisory concerns. There is a statutory minimum assessment of
$1,000 per semi-annual period. The Bank is currently subject to the statutory
minimum assessment.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks,
which, like the Bank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the FRB regarding
bank holding companies, as described above.
The FDIC's capital regulation establishes a minimum 3.0% Leverage Ratio
requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Leverage Ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's
regulation, highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Rating
System. A bank having less than the minimum Leverage Ratio shall, within 45 days
of the date as of which it fails to comply with such requirement, submit to its
FDIC regional director for review and approval a reasonable plan describing the
means and timing by which the bank shall achieve its minimum leverage capital
requirement. A bank, which fails, to file such plan with the FDIC is deemed to
be operating in an unsafe and unsound manner, and could be subject to a
cease-and-desist order from the FDIC. The FDIC's amended regulation also
provides that any insured depository institution with a Leverage Ratio less than
2.0% is deemed to be operating in an unsafe or unsound manner pursuant to
Section 8(a) of the FDIA and is subject to potential termination of deposit
insurance. Such an institution, however, will not be subject to an enforcement
proceeding thereunder, solely on account of its capital ratios if it has entered
into and is in compliance with a written agreement with the FDIC to increase its
Leverage Ratio to such level as the FDIC deems appropriate and to take such
other action as may be necessary for the institution to be operated in a safe
and sound manner. The FDIC capital regulation also provides, among other things,
for the issuance by the FDIC or its designee(s) of a capital directive, which is
a final order issued to a bank that fails to maintain minimum capital to restore
its capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
The FDIC has augmented the capital leverage ratios described above with
a risk-based capital framework which is more explicitly and systematically
sensitive to the risk profiles of individual banks. Under the risk-based capital
framework, the assets of the Bank are weighted pursuant to the risk category in
which each asset falls. These risk categories are substantially the same as
those described in the discussion of FRB capital requirements above. Banks
generally will be expected to maintain a minimum Tier I Risk Based Capital Ratio
of 4.0% and a Total Risk Based Capital Ratio of 8.0%. Any bank that does not
meet the minimum requirements, or whose capital is otherwise considered
inadequate, generally will be expected to develop and implement a capital plan
for achieving an adequate level of capital, consistent with the provisions of
the risk-based capital framework.
At December 31, 1998, the Bank was in compliance with all minimum
Federal regulatory capital requirements which are generally applicable to FDIC
insured banks. As of such date, the Bank had a Tier I Risk Based Capital Ratio
and a Total Risk Based Capital Ratio equal to 14.79% and 14.81%, respectively,
and a Leverage Ratio equal to 4.43%. As discussed above, the Bank expects its
leverage ratio to exceed 5.0% during the second quarter of 1999.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions, which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be (i) `well capitalized' if it has Total Risk Based Capital
Ratio of 10.0% or more, has a Tier I Risk Based Capital Ratio of 6.0% or more,
has a Leverage Ratio of 5.0% or more and is not subject to any written capital
order or directive; (ii) `adequately capitalized' if it has a total Risk Based
Capital Ratio of 8.0% or more, a
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Tier I Risk Based Capital Ratio of 4.0% or more, and a Leverage Ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
`well capitalized,' (iii) `undercapitalized' if it has a Total Risk Based
Capital Ratio that is less than 8.0%, a Tier I Risk Based Capital Ratio that is
4.0% or greater or a Leverage Ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) `significantly undercapitalized' if it has a Total Risk
Based Capital Ratio that is less than 6.0%, a Tier I Risk Based Capital Ratio
that is less than 3.0% or a Leverage Ratio that is less than 3.0%, and (v)
`critically undercapitalized' if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. Section 38 of the FDIA and the
regulations also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category,
except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval with 60 days after
receiving a capital restoration plan, subject to extensions by the agency.
An institution, which is required to submit a capital restoration plan,
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measure of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guarantee shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guarantee, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A critically undercapitalized institution is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership.
Immediately upon becoming undercapitalized, an institution becomes
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any of a number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
At December 31, 1998, the Bank was deemed to be an adequately
capitalized institution for the above purposes. Bank regulators may raise
capital requirements applicable to banking organizations beyond current levels.
Because the Company is unable to predict whether higher capital requirements
will be imposed and, if so, at what levels and on what schedules, it therefore
cannot predict what effect such higher requirements may have on the Company and
the Bank.
BROKERED DEPOSITS. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a well capitalized institution may solicit and accept, renew or roll over any
brokered deposit without restriction, (ii) an adequately capitalized institution
may not (x) accept, renew or roll over any brokered deposit unless it has
applied for and been granted a waiver of this prohibition by the FDIC or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited and (iii) an undercapitalized institution may
not (x) accept, renew or roll over any brokered deposits or (y) solicit deposits
by offering an effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable maturity in such
institution's normal market area or in the market area in which such deposits
are being solicited. The term `undercapitalized insured depository institution'
is defined to mean any insured depository institution that fails to meet the
minimum regulatory capital requirement prescribed by its appropriate federal
banking agency. The FDIC may, on a case-by-case basis and upon application by an
adequately capitalized insured depository institution, waive the restriction on
brokered deposits upon a finding that the acceptance of brokered deposits does
not constitute an unsafe or
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unsound practice with respect to such institution. Currently, the Bank is deemed
to be an adequately capitalized insured depository institution for purposes of
the restriction on the use of brokered deposits by such institutions. The bank
historically has not relied upon brokered deposits as a source of funding and,
at December 31, 1998, the Bank did not have any brokered deposits.
TRANSACTIONS WITH AFFILIATES. The FDIA restricts the range of
permissible transactions between a member bank and an affiliated company. The
Bank is subject to certain restrictions on loans to the Company, on investment
in the stock or securities thereof, on the taking of such stock or securities as
collateral for loans to any borrower, and on the issuance of a guarantee or
letter of credit on behalf of the Company. The Bank also is subject to certain
restrictions on most types of transactions with the Company, requiring that the
terms of such transactions be substantially equivalent to terms to similar
transactions with non-affiliates.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24
of the FDIA generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under the FDIC's regulations dealing with equity investments, an insured
state bank generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank. An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as a
limited partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the Bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees', and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
COMMUNITY REINVESTMENT ACT. The Federal Community Reinvestment Act
(`CRA') requires the FDIC and the Commissioner to evaluate the Bank's
performance in helping to meet the credit needs of the community. The Bank has
been designated as a `wholesale institution' for CRA purposes by the
Commissioner and the FDIC. This designation reflects the nature of the Company's
business as other than a retail financial institution and proscribes CRA review
criteria applicable to the Bank's particular type of business. As a part of the
CRA program, the Bank is subject to periodic examinations by the FDIC and the
Commissioner, and maintains comprehensive records of its CRA activities for this
purpose. Management believes the Bank is currently in compliance with all CRA
requirements. The Bank has pending an application with the FDIC to become
designated a `special purpose' institution, which designation would exempt the
Bank from CRA review by the FDIC. The Bank would still be subject to review by
the Commissioner.
MASSACHUSETTS LAW - DIVIDENDS. Under Massachusetts law trust companies
such as the Bank may pay dividends only out of `net profits' and only to the
extent that such payments will not impair the Bank's capital stock and surplus
account. If, prior to declaration of a dividend, the Bank's capital stock and
surplus accounts do not equal at least 10.0% of its deposit liabilities, then
prior to the payment of the dividend the Bank must transfer from net profits to
its surplus account the amount required to make its surplus account equal to
either (i) together with capital stock, 10.0% of deposit liabilities or, (ii)
subject to certain adjustments, 100% of capital stock. These restrictions on the
ability of the Bank to pay dividends to the Company may restrict the ability of
the Company to pay dividends to its stockholders.
REGULATORY ENFORCEMENT AUTHORITY. The enforcement powers available to
federal banking regulators include, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. Federal law requires, except under certain
circumstances, public disclosure of final enforcement actions by the federal
banking agencies.
TRANSFER AGENCY. In order to serve as transfer agent to its clients
that execute transactions in publicly traded securities, the Company must
register as a transfer agent under the Exchange Act. As a registered transfer
agent, the Company is subject to certain reporting and recordkeeping
requirements. Currently, management believes the Company is in compliance with
these registration, reporting and recordkeeping requirements.
REGULATION OF INVESTMENT COMPANIES. Certain of the Company's mutual
fund and unit investment trust clients are regulated as `investment companies'
as that term is defined under the Investment Company Act of 1940, as amended
(the `ICA'), and are subject to examination and reporting requirements
applicable to the services provided by the Company.
The provisions of the ICA and the regulations promulgated thereunder
prescribe the type of institution which may act as a custodian of investment
company assets, as well as the manner in which a custodian administers the
assets in its custody. Because the Company serves as custodian for a number of
its investment company clients, these regulations require, among other things,
that the Company maintain certain minimum aggregate capital, surplus, and
undivided profits. Additionally, arrangements between the Company and clearing
agencies or other securities depositories must meet ICA requirements for
segregation of assets, identification of assets and client approval. Future
legislative and regulatory
14
<PAGE>
changes in the existing laws and regulations governing custody of investment
company assets, particularly with respect to custodian qualifications, may have
a material and adverse impact on the Company. Currently, management believes the
Company is in compliance with all minimum capital and securities depository
requirements. Further, the Company is not aware of any proposed or pending
regulatory developments, which, if approved, would adversely affect the ability
of the Company to act as custodian to an investment company.
Investment companies are also subject to extensive recordkeeping and
reporting requirements. These requirements dictate the type, volume and duration
of the record keeping undertaken by the Company, either in its role as custodian
for an investment company or as a provider of administrative services to an
investment company. Further, the Company must follow specific ICA guidelines
when calculating the net asset value of a client mutual fund. Consequently,
changes in the statutes or regulations governing recordkeeping and reporting or
valuation calculations will affect the manner in which the Company conducts its
operations.
New legislation or regulatory requirements could have a significant
impact on the information reporting requirements applicable to the Company's
clients and may in the short term adversely affect the Company's ability to
service those clients at a reasonable cost. Any failure by the Company to
provide such support could cause the loss of customers and have a material
adverse effect on the Company's financial results. Additionally, legislation or
regulations may be proposed or enacted to regulate the Company in a manner,
which may adversely affect the Company's financial results.
ITEM 2. PROPERTIES.
As of December 31, 1998, the Company leased three offices located in
Boston, MA, one in New York, NY, as well as foreign offices in Toronto, Canada
and Dublin, Ireland for its offshore funds processing business.
The following table provides certain summary information with respect
to the principal properties that the Company leases:
<TABLE>
<CAPTION>
LOCATION FUNCTION SQ. FT. EXPIRATION DATE
- -------- -------- ------- ---------------
<S> <C> <C> <C>
200 Clarendon St., Boston, MA Principal Executive Offices and 233,992 2007
Operations Center
1 Exeter Plaza, Boston, MA Training Center 11,375 2001
24 Federal Street, Boston, MA Operations Center 3,658 Tenant at will
600 Fifth Avenue, New York, NY Operations Center 7,751 2005
1 First Canadian Place, Toronto Offshore Processing Center 17,790 2001
Earlsfort Terrace, Dublin Offshore Processing Center 7,135 1/31/01
</TABLE>
The Company entered into an agreement to lease an additional 25,186
square feet at the 200 Clarendon Street location to commence in 1999 in order to
expand its Boston operations. In addition, the Company also entered into an
agreement to lease an additional 3,500 square feet at its Earlsfort Terrace,
Dublin location. The Company intends to close its 24 Federal Street office,
subject to approval of the Commissioner of Banks and the FDIC, during the first
quarter of 1999. See Note 13 of the Notes to the Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time subject to claims arising in the
ordinary course of business. While the outcome of any claim cannot be predicted
with certainty, management does not expect these matters, individually or in the
aggregate, to have a material adverse effect on the results of operations and
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1998.
15
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently included in The Nasdaq National Market
under the symbol IFIN. The following table sets forth the range of quarterly
high and low bid quotations for the Company's Common Stock as reported by
NASDAQ. The quotations represent interdealer quotations without adjustment for
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
1997
HIGH BID LOW BID
-------- -------
<S> <C> <C>
First Quarter $35.125 $27.500
Second Quarter $50.000 $30.750
Third Quarter $48.250 $41.250
Fourth Quarter $51.250 $41.250
1998
HIGH BID LOW BID
-------- -------
First Quarter $56.000 $41.000
Second Quarter $59.563 $49.500
Third Quarter $68.375 $40.375
Fourth Quarter $65.000 $31.500
</TABLE>
As of February 16, 1999, there were approximately 972 stockholders of record.
DIVIDENDS
The Company currently intends to retain the majority of future earnings
to fund the development and growth of its business. The Company's ability to pay
dividends on the Common Stock may depend on the receipt of dividends from
Investors Bank & Trust Company. In addition, the Company may not pay dividends
on its Common Stock if it is in default under certain agreements, which the
Company entered into in connection with the sale of the 9.77% Capital Securities
by Investors Capital Trust I. See `Management Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources.' Any dividend
payments by Investors Bank & Trust Company are subject to certain restrictions
imposed by the Massachusetts Commissioner of Banks. See `Business Regulation and
Supervision.' Subject to regulatory requirements the Company expects to pay an
annual dividend to its stockholders, currently estimated to be in an amount
equal to $.16 per share of outstanding Common Stock (approximately $1,075,528
based upon 6,722,050 shares outstanding as of December 31, 1998). The Company
expects to declare and pay such dividend ratably on a quarterly basis.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Except as discussed below, the selected financial data presented below
have been derived from the Company's audited financial statements. This data
should be read in conjunction with `Management's Discussion and Analysis of
Financial Condition and Results of Operations,' the Company's Consolidated
Financial Statements and Notes thereto, and other financial information
appearing elsewhere in this Report. Information reported in the Company's 1997
Form 10-K was restated for the acquisition of AMT Capital Services, Inc., which
was accounted for as a pooling of interests. This restated information was filed
with the SEC on August 18, 1998.
<TABLE>
<CAPTION>
For the Two
For the Year Months Ended For the Year
Ended October 31, December 31, Ended December 31,
--------------------------- -------------- ----------------------------------------------
1994 1995(1) 1995 1996 1997 1998
------------- ------------- -------------- ------------ --------------- --------------
(Dollars in thousands, except per share and employee data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net interest income $ 4,778 $ 5,870 $ 1,966 $ 17,944 $ 26,173 $ 26,694
Non-interest income 43,049 53,607 8,407 59,189 82,524 98,024
Gain/(loss) on sale of investment
securities - - - (2) 114 832
------------- ------------- ------------- ------------ --------------- --------------
Net operating revenues 47,827 59,477 10,373 77,131 108,811 125,550
Operating expenses 42,503 52,569 8,877 64,613 87,362 99,584
------------- ------------- ------------- ------------ --------------- --------------
Income before income taxes 5,324 6,908 1,496 12,518 21,449 25,966
Income taxes 1,863 2,782 664 4,852 7,382 9,348
Minority interest expense - - - - 1,437 1,563
------------- ------------- ------------- ------------ --------------- --------------
Net income $ 3,461 $ 4,126 $ 832 $ 7,666 $ 12,630 $ 15,055
------------- ------------- ------------- ------------ --------------- --------------
------------- ------------- ------------- ------------ --------------- --------------
PER SHARE DATA:
Basic earnings per share $ 0.13 $ 1.15 $ 1.90 $ 2.25
------------- ------------ --------------- --------------
------------- ------------ --------------- --------------
Diluted earnings per share $ 0.12 $ 1.14 $ 1.85 $ 2.18
------------- ------------ --------------- --------------
------------- ------------ --------------- --------------
AVERAGE BALANCE SHEET DATA:
Interest earning assets $ 94,351 $ 106,130 $ 219,775 $ 575,662 $ 1,167,361 $ 1,443,487
Total assets 116,810 128,174 249,064 628,893 1,236,519 1,542,766
Total deposits 102,664 106,446 197,013 377,219 594,768 845,094
Common stockholders' equity 11,779 16,119 34,000 56,137 68,370 81,456
SELECTED FINANCIAL RATIOS:
Return on equity (2) 29.38% 25.60% 14.68% 13.65% 18.47% 18.48%
Return on assets (2) 2.96% 3.22% 2.00% 1.22% 1.02% 0.98%
Common equity as % of total assets 10.08% 12.58% 16.61% 6.39% 5.18% 5.28%
Dividend payout ratio (3) 1.73% 1.36% 0.00% 2.49% 4.45% 5.25%
Tier 1 capital ratio (4) 42.53% 37.62% 44.47% 24.57% 29.17% 14.28%
Non-interest income as % of net
operating income 90.01% 90.13% 81.05% 76.74% 75.84% 78.08%
Non-performing assets as % of total
assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Allowance for loan losses as % of
total loans 0.26% 0.26% 0.15% 0.15% 0.18% 0.18%
OTHER STATISTICAL DATA:
Assets processed at end of period (5) $72,418,449 $91,099,976 $94,208,228 $122,563,40 $139,418,241 $244,935,314
Employees at end of period 678 679 682 827 1,028 1,258
</TABLE>
- --------------------------------------
(1) Non-interest income for the year ended October 31, 1995 includes the
recognition of net proceeds of $2,572,000 from the assignment to a third
party of asset administration rights associated with $5 billion of unit
investment trust assets.
(2) Ratios for the two months ended December 31, 1995 have been annualized. The
ratios for the year ended October 31, 1995 include the effect of the unit
investment trust transaction described in (1) above. Without the earnings
associated with this transaction, return on equity and return on assets for
the year ended October 31, 1995 would have been 15.84% and 1.99%,
respectively.
(3) The Company intends to retain the majority of future earnings to fund
development and growth of its business. The Company currently expects to
pay cash dividends at an annualized rate of $.16 per share subject to
regulatory requirements. See "Dividends."
(4) Tier I capital consists of the sum of common stockholders' equity and
non-cumulative perpetual preferred stock minus all intangible assets (other
than certain qualifying goodwill) and excess deferred tax assets.
(5) Assets processed is the total dollar value of financial assets on the
reported date for which the Company provides one or more of the following
services: custody, multicurrency accounting, institutional transfer agency,
performance measurement, foreign exchange, securities lending and mutual
fund administration and investment advisory services.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Consolidated Financial Statements and related notes, which are
included elsewhere in this Report. The Company, through its wholly owned
subsidiaries, Investors Bank & Trust Company and Investors Capital Services,
Inc., provides global custody, multicurrency accounting, institutional transfer
agency, performance measurement, foreign exchange, securities lending, mutual
fund administration and investment advisory services to a variety of financial
asset managers, including 65 mutual fund complexes, investment advisors, banks
and insurance companies. The Company provides financial asset administration
services for net assets that totaled approximately $245 billion at December 31,
1998, including approximately $14 billion of foreign net assets. The Company
also engages in private banking transactions, including secured lending and
deposit accounts.
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The Capital Securities were issued by
Investors Capital Trust l, a Delaware statutory business trust sponsored by the
Company. The capital raised in the offering, along with existing capital and
earnings generated in the future, will be used to support the Company's balance
sheet growth. The Capital Securities qualify as Tier I capital under the capital
guidelines of the Federal Reserve. Under current Federal Reserve guidelines, no
more than 25% of the Company's Tier 1 capital may comprise Capital Securities
and other capital securities and cumulative preferred stock of the Company. In
September 1997 the Company completed an exchange offer pursuant to which all
outstanding capital securities were exchanged for substantially identical
capital securities registered under the Securities Act of 1933.
On May 29, 1998, the Company acquired AMT Capital Services, Inc. and an
affiliated company ("AMT Capital"), a New York-based firm recognized for
providing fund administration services to global and domestic institutional
investment management firms. Under the terms of the acquisition agreement, the
Company acquired all of the outstanding capital stock of AMT Capital in exchange
for 194,006 shares of the Company's common stock. The acquisition was accounted
for under the pooling-of-interests method of accounting. Upon completion of the
acquisition, AMT Capital became a wholly owned subsidiary of the Company and was
re-named Investors Capital Services, Inc.
On October 1, 1998, the Company completed the acquisition of the
domestic institutional trust and custody business of BankBoston, N.A. Under the
terms of the purchase agreement, the Company paid approximately $48 million to
BankBoston as of the closing and will pay up to an additional $6 million one
year after the closing depending upon certain business performance criteria. The
business provides master trust and custody services to endowments, pension
funds, municipalities, mutual funds and other financial institutions, primarily
in New England. The primary focus is small to midsize custody accounts ranging
in size from $5 million to $500 million in assets. The acquisition was accounted
for under the purchase method of accounting.
In connection with the acquisition, Investors Bank and BankBoston also
entered into an outsourcing agreement. Pursuant to the outsourcing agreement,
the Company will act as custodian for three BankBoston asset management related
businesses: domestic private banking, institutional asset management and
international private banking. The Company will provide transaction processing
and asset safekeeping and servicing to the clients of those businesses.
On February 16, 1999, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable March 17,
1999 to stockholders of record on March 1, 1999. All share numbers shown in this
Report reflect shares outstanding prior to the two-for-one stock split.
The Company's current largest client, Eaton Vance, accounted for 10%,
10% and 9% of the Company's net operating revenues for the years ended December
31, 1996, 1997 and 1998 respectively. The Company believes its relationship with
Eaton Vance is good and expects it to continue. The Company's agreements with
mutual funds managed by Eaton Vance, pursuant to which the Company provides
custody and fund accounting services, extend through August 2000 and continue
thereafter until terminated by either party upon sixty days prior notice.
The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
non-interest income are reported separately for financial statement presentation
purposes, the Company's clients view the pricing of the Company's asset
administration and banking service offerings on a bundled basis. In establishing
a fee structure for a specific client, management analyzes all expected revenue
and related expenses, as opposed to separately analyzing fee income and interest
income and related expenses for each from such relationship. Accordingly,
management believes net operating revenue (net interest income plus non-interest
income) and net income are the most meaningful measures of financial results.
Revenue generated from asset administration and other fees and interest income
increased 15% from $108,811,000 for the year ended December 31, 1997 to
$125,550,000 for the year ended December 31, 1998.
18
<PAGE>
Non-interest income consists primarily of fees for financial asset
administration and is principally derived from custody, multicurrency
accounting, transfer agency and administration services for financial asset
managers and the assets they control. The Company's clients pay fees based on
the volume of assets under custody, the number of securities held and portfolio
transactions, income collected and whether other value-added services such as
foreign exchange, securities lending and performance measurement are needed.
Asset-based fees are usually charged on a sliding scale. As such, when the
assets in a portfolio under custody grow as a result of changes in market values
or cash inflows, the Company's fees may be a smaller percentage of those assets.
Fees for individually managed accounts, such as custodial, trust and portfolio
accounting services for individuals, investment advisors, private trustees,
financial planners, other banks and fiduciaries, and other institutions are also
included in non-interest income.
Net interest income represents the difference between income generated
from interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by the Company's clients who, in the
course of their financial asset management, generate cash balances, which they
deposit on a short-term basis with the Company. The Company invests these cash
balances and remits a portion of the earnings on these investments to its
clients. The Company's share of earnings from these investments is viewed as
part of the total package of compensation paid to the Company from its clients
for performing asset administration services.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements, which are
not historical facts, so-called `forward-looking statements,' which involve
risks and uncertainties. Forward looking statements in this 10-K include certain
statements regarding capital ratios, liquidity and the Company's Year 2000
Project. The Company's actual future results may differ significantly from those
stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with the Securities and Exchange Commission.
The Company's future results may be subject to substantial risks and
uncertainties. The Company's planned increase in capital ratios is dependent
upon growth in retained earnings, which earnings are subject to the risks set
forth herein. In addition, the Company's liquidity is dependent, in part, upon
the continued availability of current borrowing facilities, the loss of which
may impair the Company's access to liquid funds. Because certain fees charged by
the Company for its services are based on the market values of assets processed,
such fees and the Company's quarterly and annual operating results are sensitive
to changes in interest rates, declines in stock market values, and investors
seeking alternatives to the investment offerings of the Company's clients. Also,
the Company's interest-related services, along with the market value of the
Company's investments, may be adversely affected by rapid changes in interest
rates or changes in the relationship between certain index rates. In addition,
many of the Company's client engagements are, and in the future are likely to
continue to be, terminable upon 60 days notice.
The Company relies on certain intellectual property protections to
preserve its intellectual property rights. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse effect on the Company. In addition the Year 2000
Issue discussed below may affect the Company's operations. The Company's
successful completion of its Year 2000 Project is subject to the risks set forth
under "Year 2000 Issue; Year 2000 Readiness Disclosure" below. The segment of
the financial services industry in which the Company is engaged is extremely
competitive. Certain current and potential competitors of the Company are more
established and benefit from greater market recognition and have substantially
greater financial, development and marketing resources than the Company.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially adversely affect revenues and
profitability, including: the timing of the commencement or termination of
client engagements, the rate of net inflows and outflows of investor funds in
the debt and equity-based investment vehicles offered by the Company's clients,
the introduction and market acceptance of new services by the Company and
changes or anticipated changes in economic conditions. Because the Company's
operating expenses are relatively fixed, any unanticipated shortfall in revenues
in a specified period may have an adverse impact on the Company's results of
operations for that period. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely affect its
business, financial condition, operating results and stock price.
YEAR 2000 ISSUE: YEAR 2000 READINESS DISCLOSURE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
19
<PAGE>
The Company relies heavily on its internal computer systems to process
transactions and conduct services for clients. In addition, the Company relies
on automated data communications with vendors, clients and other third parties,
as well as certain third party hardware and software providers such as
Electronic Data Systems. The Company also relies on other third party
relationships in the conduct of its business. For example, third party vendors
handle the payroll function for the Company, and the Company also relies on the
services of the landlords of its facilities, telecommunication companies,
utilities and commercial airlines, among others.
Any failure of the Company's internal computer systems, third party
data communications, third party hardware and software providers or other third
party vendors due to the Year 2000 issue could have material adverse impact on
the Company's ability to provide timely and accurate services to its clients. As
a result, any such failure could have a material adverse impact on the Company's
financial condition and results of operations.
In late 1997 the Company, with the assistance of an outside consultant,
completed a detailed assessment of the Company's Year 2000 compliance status. As
part of the assessment process, the Company also developed project plans for
application renovation and testing. Based on this assessment, the Company
determined that it would be required to modify or upgrade portions of its
software so that its computer systems would properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications to, or
upgrades of, existing software, the Year 2000 Issue can be mitigated. However,
if such modifications and upgrades are not made, or are not completed in a
timely manner, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and clients to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted. Any failure to convert by
another company, or a conversion that is incompatible with the company's
systems, could have a material adverse effect on the Company.
The Company has utilized both internal and external resources to modify
or upgrade existing software and to test such software for Year 2000 compliance.
The Company plans to complete the Year 2000 project, including all internal
testing, by the second quarter of 1999. The Company has completed compliance
testing of its flagship applications, significantly completed compliance testing
on all other applications and started integration testing of internal
applications. The Company began testing with clients in the fourth quarter of
1998 and will be substantially completed by the third quarter of 1999. The
Company believes that testing with business partners and third party vendors,
including such entities as the Depository Trust Company, will be substantially
completed by the third quarter of 1999.
The Company expects to complete its Remediation Contingency Plan in the
first quarter of 1999 to address any failure by the Company or any third party
with which the Company interacts to properly and/or completely renovate software
code and/or computer systems for the Year 2000 issue. The Company's plans will
address contingencies for (i) failure to complete successfully renovation,
validation or implementation of systems and (ii) failure of systems at critical
dates before or after January 1, 2000.
The Company has budgeted up to an additional $2,225,000 for Year 2000
costs that may arise during 1999, which consist primarily of internal staffing
costs, along with some outside consultants. These 1999 costs may include, but
are not limited to, completing testing with third parties that are not Year 2000
compliant and software renovation necessitated by internal and/or third party
testing. These amounts are not expected to have a material effect on the
Company's results of operations. Through December 31, 1998, the Company had
incurred and expensed approximately $1,765,000 related to the assessment of, and
remediation efforts in connection with, its Year 2000 project and the
development of a remediation plan. All amounts expensed and to be expensed in
connection with the Year 2000 issue will be funded through operating cash flows.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications, testing and contingency plans are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer code, availability of and cooperation by clients, vendors and other
third parties, the compatibility of third-party interfaces, and similar
uncertainties.
20
<PAGE>
STATEMENT OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Non-interest Income
Non-interest income increased $16,216,000 to $98,855,000 for the year
ended December 31, 1998 from $82,639,000 for the year ended December 31, 1997.
Non-interest income consists of the following items:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------- ---------------
1997 1998 Change
------------------- ----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $78,325 $96,757 24%
Computer service fees 644 518 (20%)
Other operating income 3,556 748 (79%)
Net gain/(loss) on sale of securities 114 832 -
------------------- -----------------
Total Non-interest Income $82,639 $98,855 20%
------------------- -----------------
------------------- -----------------
</TABLE>
Asset administration fees increased $18,432,000 due principally to
higher levels of assets processed. The Company earns such fees on assets
processed by the Company on behalf of a variety of financial asset managers.
Assets processed is the total dollar value of financial assets on the reported
date for which the Company provides one or more of the following services:
global custody, multicurrency accounting, institutional transfer agency,
performance measurement, foreign exchange, securities lending, mutual fund
administration and investment advisory services. Total net assets processed
increased to $245 billion at December 31, 1998 from $139 billion at December 31,
1997. Approximately $76 billion of this increase relates to the Company's
acquisition of BankBoston's domestic institutional custody business on October
1, 1998. The largest component of asset administration fees is asset-based fees,
which increased between periods due to the increase in assets processed. Another
significant portion of the increase in asset administration fees resulted from
the Company's success in marketing ancillary services such as securities
lending, foreign exchange and advisory services.
Computer service fees consist of amounts charged by the Company for
data processing services related to client accounts. The decrease in computer
service fees is related to renegotiations of contracts performed by Investors
Capital Services, Inc. in 1998. Other operating income consists of dividends
received relating to the Federal Home Loan Bank of Boston (`FHLBB') stock
investment and miscellaneous transaction-oriented private banking fees. The
decrease in other operating income resulted from services previously provided by
Investors Capital Advisors, Inc., a wholly owned subsidiary of the Company which
could no longer be provided due to regulatory restrictions imposed on the
Company. Investors Capital Advisors, Inc. was merged into Investors Capital
Services, Inc. on December 31, 1998. Gain on sale of securities increased in
1998 due to the Company's sale of certain available for sale mortgage-backed
securities in anticipation of prepayment risk.
21
<PAGE>
Operating Expenses
Total operating expenses increased by $12,222,000 to $99,584,000 for
the year ended December 31, 1998 compared to $87,362,000 for the year ended
December 31, 1997. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------- --------------
1997 1998 Change
------------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $ 53,457 $ 61,901 16%
Technology and telecommunications 10,656 12,055 12
Transaction processing services 8,000 7,610 (5)
Occupancy 4,620 6,990 51
Depreciation and amortization 2,070 2,657 27
Amortization of goodwill - 442 100
Travel and sales promotion 1,647 1,920 17
Professional fees 2,011 1,641 (18)
Insurance 768 783 2
Other operating expenses 4,133 3,585 (13)
------------------ ---------------
Total Operating Expenses $ 87,362 $ 99,584 14%
------------------ ---------------
------------------ ---------------
</TABLE>
Compensation and benefits expense increased by $8,440,000 or 16% from
period to period due to several factors. The average number of employees
increased 19% to 1,139 at December 31, 1998 from 958 at December 31, 1997. This
increase relates to the increase in client relationships, the expansion of
existing client relationships during the period and the addition of additional
employees related to the BankBoston acquisition in October 1998. In addition,
compensation expense related to the Company's management incentive plans
increased $602,000 between periods because of the increase in earnings subject
to incentive payments in 1998 compared to 1997. Benefits, including payroll
taxes, group insurance plans, retirement plan contributions and tuition
reimbursement, increased by $1,186,000 for the year ended December 31, 1998 from
the same period in 1997. Effective January 1, 1998 the Company adopted the
accounting method promulgated by Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," ("SOP
98-1"). Accordingly the Company capitalized $831,000 of compensation and
compensation-related expenses for employees who were directly associated with
internal use computer software projects during the year ended December 31, 1998.
Technology and telecommunications expense consists of operating lease
payments for microcomputers, fees charged by Electronic Data Systems for
mainframe data processing, telephone expense, software maintenance fees and
licenses, optical imaging and contract programming fees. Fees charged by EDS
increased $377,000 due to increased volume of mainframe data processing along
with Year 2000 testing. Increased hardware, software and telecommunications
expenses needed to support the growth in assets processed accounted for $815,000
of the increase between periods. License fees on software accounted for $371,000
of the increase. The Company capitalized $251,000 of contract programming
related expenses for contractors who were directly associated with internal use
computer software projects during the year ended December 31, 1998 in accordance
with SOP 98-1.
Occupancy expense increased $2,370,000 to $6,990,000 for the year ended
December 31, 1998 from $4,620,000 for the year ended December 31, 1997. This
increase resulted from expansion of office space in the Company's Boston,
Toronto, and Dublin offices.
Depreciation and amortization expense increased $587,000 to $2,657,000
for the year ended December 31, 1998 from $2,070,000 for the year ended December
31, 1997. This increase resulted from the purchase of furniture, equipment, and
capitalized software throughout 1997 and 1998.
The acquisition of BankBoston's institutional trust and custody
business was accounted for under the purchase method of accounting and as a
result, the purchase price was allocated first to all identifiable tangible and
intangible assets acquired and liabilities assumed. The remainder of the
purchase price (excess of purchase price over the fair value of intangible net
assets) was then allocated to goodwill. Goodwill expense relates to the
amortization of the resulting goodwill from the acquisition, which is being
amortized over its estimated useful life.
Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
making sales calls on potential clients, traveling to existing client sites and
the Company's foreign subsidiaries, and attending industry conferences. This
expense increased $273,000 to $1,920,000 for the year ended December 31, 1998
from $1,647,000 for the year ended December 31, 1997 due primarily to increased
travel of the sales and client management staff, as well as increased travel to
foreign subsidiaries.
22
<PAGE>
Professional fees decreased $370,000 to $1,641,000 for the year ended
December 31, 1998 from $2,011,000 for the year ended December 31, 1997. The
decrease in professional fees relates to non-recurring consulting and legal fees
incurred during 1997.
Other operating expenses decreased $524,000 to $3,585,000 for the year
ended December 31, 1998 from $4,133,000 for the year ended December 31, 1997.
Other operating expenses include fees for office supplies, recruiting costs,
temporary help and various fees assessed by the Massachusetts Banking
Commission. The cost of temporary help decreased due to a change in strategy of
using interns instead of hiring outside manpower. Fees assessed by the
Massachusetts Banking Commission decreased by $108,000 due to a change in the
assessment base.
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities and changes in
interest rates for the year ended December 31, 1998 compared to the year ended
December 31, 1997.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
------------ ------------ --------------
(Dollars in thousands)
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Fed funds sold and
interest-earning deposits $ (1,262) $ (37) $ (1,299)
Investment securities 17,584 (4,026) 13,558
Loans (21) 458 437
------------ ------------ --------------
Total interest-earning assets $ 16,301 $ (3,605) $ 12,696
------------ ------------ --------------
INTEREST-BEARING LIABILITIES
Deposits $ 11,461 $ (781) $ 10,680
Borrowings 2,030 (535) 1,495
------------ ------------ --------------
Total interest-bearing liabilities $ 13,491 $ (1,316) $ 12,175
------------ ------------ --------------
Change in net interest income $ 2,810 $ (2,289) $ 521
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
Net interest income increased $521,000 or 2% to $26,694,000 for the
year ended December 31, 1998 from $26,173,000 for the 1997 period. This net
increase resulted from an increase in interest income of $12,696,000 offset by
an increase in interest expense of $12,175,000. The net impact of the above
changes was a 39 basis point decrease in net interest margin.
The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the year ended
December 31, 1998 increased $306,246,000 or 25% compared to the year ended
December 31, 1997. This growth primarily resulted from an increase in average
interest earning assets of $276,126,000.
Interest expense increased $12,175,000 due primarily to the higher
level of deposits and short-term borrowings. The increase was offset by a
decrease in the average interest rates paid by the Company from 5.03% to 4.80%
between periods.
Income Taxes
The Company's earnings were taxed on the federal level at 35% for the
1997 and 1998 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly owned subsidiary, were
assessed at the tax rate for Massachusetts's securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts's banks of 10.91%. The provision for income taxes
for the year ended December 31, 1998 increased by $1,966,000 over the 1997
provision. The overall effective tax rate increased to 36% for the year ended
December 31, 1998, from 34% for the year ended December 31, 1997. The increase
in the overall effective tax rate is due to the change in tax status from an S
Corporation to a C Corporation of Investors Capital Services, Inc.
23
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Noninterest Income
Noninterest income increased $23,453,000 to $82,639,000 for the year
ended December 31, 1997 from $59,186,000 for the year ended December 31, 1996.
Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------- ---------------
1996 1997 Change
------------------- ----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $57,462 $78,325 36%
Computer service fees 482 644 34
Other operating income 1,244 3,556 186
Net gain/(loss) on sale of securities (2) 114 -
------------------- -----------------
Total Noninterest Income $59,186 $82,639 40%
------------------- -----------------
------------------- -----------------
</TABLE>
Asset administration fees increased due principally to higher levels of
assets processed. Total net assets processed increased to $139 billion at
December 31, 1997 from $122 billion at December 31, 1996. Of the $17 billion net
increase in assets processed from December 31, 1996 to December 31, 1997,
approximately 24% of the increase reflects assets processed for new clients, and
the remainder of the increase reflects growth of assets processed for existing
clients, offset in part by the assets of clients no longer serviced by the
Company. Also contributing to the growth in asset administration fees was the
expansion of relationships with existing clients. The largest component of asset
administration fees is asset-based fees, which increased between periods due to
the previously mentioned increase in assets processed. Another significant
portion of the increase in asset administration fees resulted from the Company's
success in marketing ancillary services such as securities lending, foreign
exchange and advisory services.
The increase in other operating income was due to the Company's
increased investment in FHLBB stock as well as an increase in services provided
by Investors Capital Advisers, Inc. a wholly owned subsidiary of Investors
Capital Services, Inc.
24
<PAGE>
Operating Expenses
Total operating expenses increased by $22,749,000 to $87,362,000 for
the year ended December 31, 1997 compared to $64,613,000 for the year ended
December 31, 1996. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------- --------------
1996 1997 Change
------------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $39,096 $53,457 37%
Technology and telecommunications 7,894 10,656 35
Transaction processing services 5,685 8,000 41
Occupancy 4,527 4,620 2
Depreciation and amortization 1,616 2,070 28
Travel and sales promotion 1,264 1,647 30
Professional fees 1,290 2,011 56
Insurance 876 768 (12)
Other operating expenses 2,365 4,133 75
------------------ ---------------
Total operating expenses $64,613 $87,362 35%
------------------ ---------------
------------------ ---------------
</TABLE>
Compensation and benefits expense increased by $14,361,000 or 37% from
period to period due to several factors. The average number of employees
increased 29% to 958 at December 31, 1997 from 744 at December 31, 1996. This
increase relates primarily to the increase in client relationships and to the
expansion of existing client relationships during the period. In addition,
compensation expense related to the Company's management incentive plans
increased $799,000 between periods because of the increase in earnings subject
to incentive payments in 1997 compared to 1996. Benefits, including payroll
taxes, group insurance plans, retirement plan contributions and tuition
reimbursement, increased by $984,000 for the year ended December 31, 1997 from
the same period in 1996. The increase was due principally to increased payroll
taxes attributable to the increase in compensation expense.
Increased hardware, software and telecommunications expenses needed to
support the growth in assets processed accounted for $1,710,000 of the increased
expense between periods. Also contributing was the Company's increased use of
contract programmers to perform information systems development projects, which
accounted for $644,000 of the increase. License fees on software used to
generate automated financial statements for Company clients as a part of its
expanded mutual fund administration services accounted for $408,000 of the
increase.
Transaction processing services expense consists of volume-related
expenses including subcustodian fees and external contract services. The
increase in this expense relates primarily to an increase in subcustodian fees
and pricing services, driven by the growth in assets processed. The Company's
decision to outsource its mailroom and photocopy facility in February of 1996
contributed to $325,000 of the increase from year to year.
Depreciation and amortization expense increased $454,000 to $2,070,000
for the year ended December 31, 1997 from $1,616,000 for the year ended December
31, 1996. This increase resulted from the purchase of furniture and equipment
related to the Company's move to new office space in late 1996 and 1997.
Travel and sales promotion increased $383,000 to $1,647,000 for the
year ended December 31, 1997 from $1,264,000 for the year ended December 31,
1996 due primarily to increased travel to the foreign subsidiaries.
Professional fees increased $721,000 to $2,011,000 for the year ended
December 31, 1997 from $1,290,000 for the year ended December 31, 1996. This
increase resulted primarily from an increase in consulting fees relating to
performing technical development work along with additional audit fees related
to compliance with the Federal Deposit Insurance Corporation Improvement Act of
1991.
Insurance expense decreased by $108,000 between the periods due to the
renegotiation of the Company's premiums and coverages for errors and omissions
liability, directors and officers liability and blanket bond during 1996.
Other operating expenses increased $1,768,000 to $4,133,000 for the
year ended December 31, 1997 from $2,365,000 for the year ended December 31,
1996. Recruiting costs and temporary help accounted for $770,000 of the
increase; this increase relates to the tight labor market caused by low
unemployment in Massachusetts in 1997. Fees assessed by the Massachusetts
Banking Commission increased by $278,000 due to the growth in the total assets
of the Bank and a change in the assessment base. The remainder of the increase
relates to growth in assets processed.
25
<PAGE>
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities and changes in
interest rates for the year ended December 31, 1997 compared to the year ended
December 31, 1996.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
------------ ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Fed funds sold and
interest-earning deposits $ 1,096 $ 20 $ 1,116
Investment securities 35,563 (564) 34,999
Loans 514 (270) 244
------------ ------------ --------------
Total interest-earning assets 37,173 (814) 36,359
------------ ------------ --------------
INTEREST-BEARING LIABILITIES
Deposits 8,768 671 9,439
Borrowings 18,351 405 18,756
------------ ------------ --------------
Total interest-bearing liabilities 27,119 1,076 28,195
------------ ------------ --------------
Change in net interest income $ 10,054 $ (1,890) $ 8,164
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
Net interest income increased $8,164,000 or 45% to $26,173,000 for the
year ended December 31, 1997 from $18,009,000 for the 1996 period. This net
increase resulted from an increase in interest income of $36,359,000 offset by
an increase in interest expense of $28,195,000. The net impact of the above
changes was an 89 basis point decrease in net interest margin.
The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the year ended
December 31, 1997 increased $607,626,000 or 97% compared to the year ended
December 31, 1996. This growth primarily resulted from an increase in average
interest earning assets of $591,699,000.
Interest expense increased $28,195,000 due primarily to the higher
level of deposits and borrowings and to a lesser extent to an increase in the
interest rate paid by the Company. The average rate paid on deposits and
short-term borrowings increased from 4.83% to 5.03% between periods.
Income Taxes
The Company's earnings were taxed on the federal level at 35% for the
1997 and 1996 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 11.32%. The provision for income taxes
for the year ended December 31, 1997 increased by $2,530,000 over the 1996
provision. The overall effective tax rate decreased to 34% for the year ended
December 31, 1997, from 39% for the year ended December 31, 1996. The decrease
in the effective tax rate is due to the Company's investment in municipal
securities in the first quarter of 1997.
26
<PAGE>
FINANCIAL CONDITION
INVESTMENT PORTFOLIO
The following table summarizes the Company's investment portfolio for the dates
indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1997 1998
---------------- ---------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY:
State and political subdivisions $ - $ 35,225 $ 35,821
Mortgage-backed securities 414,665 590,365 733,109
Federal agency securities 37,517 168,687 166,181
Foreign government securities 7,828 7,769 7,706
---------------- ---------------- ----------------
Total securities held to maturity $ 460,010 $ 802,046 $ 942,817
---------------- ---------------- ----------------
---------------- ---------------- ----------------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 40,259 $ 30,092 $ -
State and political subdivisions - 8,382 37,577
Corporate debt - - 48,070
Mortgage-backed securities 230,862 424,376 259,422
---------------- ---------------- ----------------
Total securities available for sale $ 271,121 $ 462,850 $ 345,069
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The investment portfolio is used to invest depositors' funds and
provide a secondary source of earnings for the Company. In addition, the Company
uses the investment portfolio to secure open positions at securities clearing
institutions in connection with its custody services. The portfolio is comprised
of securities of state and political subdivisions, mortgage-backed securities
issued by the Federal National Mortgage Association (`FNMA' or `Fannie Mae') and
the Federal Home Loan Mortgage Corporation (`FHLMC' or `Freddie Mac'), and
Federal Agency callable bonds issued by FHLMC and the Federal Home Loan Bank of
Boston (`FHLBB'), municipal securities, corporate debt securities, and foreign
government bonds issued by the Canadian provinces of Ontario and Manitoba.
The Company invests in mortgage-backed securities, Federal Agency
callable bonds and corporate debt to increase the total return of the investment
portfolio. Mortgage-backed securities generally have a higher yield than U.S.
Treasury securities due to credit and prepayment risk. Credit risk results from
the possibility that a loss may occur if a counterparty is unable to meet the
terms of the contract. Prepayment risk results from the possibility that changes
in interest rates may cause mortgage securities to be paid off prior to their
maturity dates. Federal Agency callable bonds generally have a higher yield than
U.S. Treasury securities due to credit and call risk. Credit risk results from
the possibility that the Federal Agency issuing the bonds may be unable to meet
the terms of the bond. Call risk results from the possibility that fluctuating
interest rates and other factors may result in the exercise of the call option
by the Federal Agency. Credit risk related to mortgage-backed securities and
Federal Agency callable bonds is substantially reduced by payment guarantees and
credit enhancements.
The Company invests in municipal securities to generate stable, tax
advantaged income. Municipal securities generally have lower stated yields than
Federal Agency and U.S. Treasury Securities, but the after-tax yields are
comparable. Municipal Securities are subject to credit risk.
The Company invests in foreign government bonds in order to generate
foreign source income to maximize the use of the foreign tax credit. The foreign
government bonds are denominated in U.S. dollars to avoid foreign currency risk.
These bonds are subject to credit risk.
27
<PAGE>
The book value and weighted average yield of the Company's securities
held to maturity at December 31, 1998, by effective maturity, are reflected in
the following table.
<TABLE>
<CAPTION>
Weighted
Average
Book Value Yield
----------------- -------------
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 17 7.47%
Due from one to five years 258,875 6.43%
Due after five years up to ten years 184,268 6.16%
Due after ten years 499,657 6.19%
-----------------
Total securities held to maturity $ 942,817
-----------------
-----------------
</TABLE>
The book value and weighted average yield of the Company's securities
available for sale at December 31, 1998, by effective maturity, are reflected in
the following table.
<TABLE>
<CAPTION>
Weighted
Average
Book Value Yield
----------------- -------------
(Dollars in thousands)
<S> <C> <C>
Due from one to five years $ 249,510 6.12%
Due after five years up to ten years 40,668 5.47%
Due after ten years 54,891 5.72%
-----------------
Total securities available for sale $ 345,069
-----------------
-----------------
</TABLE>
LOAN PORTFOLIO
The following table summarizes the Company's loan portfolio for the dates
indicated:
<TABLE>
<CAPTION>
October 31 December 31,
------------------------------- --------------------------------
1994 1995 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals $ 12,085 $ 13,446 $ 16,610 $ 23,449 $ 26,858 $ 25,583
Loans to not-for-profit
organizations 1,520 289 289 13 13 13
Loans to mutual funds -- -- 10,000 42,875 29,174 28,796
-------- -------- -------- -------- -------- --------
$ 13,605 $ 13,735 22,899 66,337 56,045 54,392
Less: allowance for loan losses (35) (35) (35) (100) (100) (100)
-------- -------- -------- -------- -------- --------
Net loans $ 13,570 $ 13,700 $ 22,864 $ 66,237 $ 55,945 $ 54,292
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Floating Rate $ 13,580 $ 13,675 $ 22,839 $ 66,224 $ 55,932 $ 54,279
Fixed Rate 25 25 25 13 13 13
-------- -------- -------- -------- -------- --------
$ 13,605 $ 13,700 22,864 $ 66,237 $ 55,945 $ 54,292
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the prime rate
and are fully secured by liquid collateral, primarily freely tradable securities
held in custody by the Company for the borrower. The unsecured lines of credit
may, in the event of a default, be collateralized at the Company's option by
securities held in custody by the Company for those mutual funds. Loans to
mutual funds also include advances by the Company to certain mutual fund clients
pursuant to the terms of the custody agreements between the Company and those
clients.
At December 31, 1998, the Company's only lending concentrations which
exceeded 10% of total loans were the revolving lines of credit to mutual fund
clients discussed above. These loans were made in the ordinary course of
business on the same terms and conditions prevailing at the time for comparable
transactions.
The Company's credit loss experience has been excellent. There have
been no loan chargeoffs or adverse credit actions in the history of the Company.
It is the Company's policy to place a loan on non-accrual status when either
principal or interest becomes 60 days past due and the loan's collateral is not
sufficient to cover both principal and accrued interest. As of December 31,
1998, there were no past due loans, troubled debt restructurings, or any loans
on non-accrual status.
28
<PAGE>
Although virtually all of the Company's loans are fully collateralized with
freely tradable securities, management recognizes some credit risk inherent in
the loan portfolio, and has recorded an allowance for loan losses of $100,000 at
December 31, 1998. This amount is not allocated to any particular loan, but is
intended to absorb any risk of loss inherent in the loan portfolio. Management
actively monitors the loan portfolio and the underlying collateral and regularly
assesses the adequacy of the allowance for loan losses.
INTEREST RATE SENSITIVITY
The Company, like all financial intermediaries, is subject to interest
rate risk. Rapid changes in interest rates could adversely affect the
profitability of the Company by causing changes in the market value of the
Company's assets and its net interest income. Interest rate risk arises when an
earning asset matures or when its rate of interest changes in a time frame
different from that of the supporting interest-bearing liability. By seeking to
minimize the difference between the amount of earning assets and the amount of
interest-bearing liabilities that could change interest rates in the same time
frame, the Company attempts to reduce the risk of significant adverse effects on
net interest income caused by interest rate changes. The Company does not
attempt to match each earning asset with a specific interest-bearing liability.
Instead, as shown in the table below, it aggregates all of its earning assets
and interest-bearing liabilities to determine the difference between these in
specific time frames. This difference is known as the rate-sensitivity gap. A
positive gap indicates that more earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the opposite.
Maintaining a balanced position will reduce risk associated with interest rate
changes, but it will not guarantee a stable interest rate spread because the
various rates within a time frame may change by differing amounts and change in
different directions.
The Company seeks to manage interest rate risk by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows in
relation to liability cash flows. Portfolio actions used to manage interest rate
risk include managing the effective duration of the portfolio securities and
utilizing interest rate floors and interest rate swaps. Interest rate contracts
are used to hedge against large rate swings and changes in the shape of the
yield curve.
Interest rate contracts involve elements of credit and market risk
which are not reflected in the Company's consolidated financial statements. Such
instruments are entered into for hedging (as opposed to investment or
speculative) purposes. See Note 14 to the Consolidated Financial Statements. The
Company periodically monitors the financial stability of its counterparties
according to prudent investment guidelines and established procedures. There can
be no assurance that such portfolio actions will adequately limit interest rate
risk.
29
<PAGE>
The following table presents the repricing schedule for the Company's
interest earning assets and interest bearing liabilities at December 31, 1998:
<TABLE>
<CAPTION>
Within Three Six One
Three to Six to Twelve Year to Over Five
Months Months Months Five Years Years Total
------------- ------------ ------------- ------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Investment securities (2) $579,269 $152,433 $153,837 $272,212 $137,761 $1,295,512
Loans - fixed rate - - - 13 - 13
Loans - variable rate 54,279 - - - - 54,279
------------- ------------ ------------- ------------- ------------- --------------
Total interest-earning
assets 633,548 152,433 153,837 272,225 137,761 1,349,804
Interest-bearing liabilities:
Demand deposit accounts 71,162 - - - - 71,162
Savings accounts 667,098 - - - - 667,098
Interest rate contracts (360,000) 50,000 90,000 220,000 - -
Short term borrowings 434,168 - - - - 434,168
------------- ------------ ------------- ------------- ------------- --------------
Total interest-bearing
liabilities 812,428 50,000 90,000 220,000 - 1,172,428
------------- ------------ ------------- ------------- ------------- --------------
Net interest sensitivity gap
during the period ($178,880) $102,433 $63,837 $52,225 $137,761 $177,376
------------- ------------ ------------- ------------- ------------- --------------
------------- ------------ ------------- ------------- ------------- --------------
Cumulative gap ($178,880) ($76,447) ($12,610) $39,615 $177,376
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 77.98% 91.14% 98.66% 103.38% 115.13%
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
Interest sensitive assets as a
percent of total assets
(cumulative) 43.23% 53.63% 64.13% 82.70% 92.10%
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
Net interest sensitivity gap as a
percent of total assets (12.21%) 6.99% 4.36% 3.56% 9.40%
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
Cumulative gap as a percent
of total assets (12.21%) (5.22%) (0.86%) 2.70% 12.10%
------------- ------------ ------------- ------------- -------------
------------- ------------ ------------- ------------- -------------
</TABLE>
(1) Adjustable rate assets are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which
they are due. Fixed rate loans are included in the period in which they
are scheduled to be repaid.
(2) Mortgage-backed securities are included in the pricing category that
corresponds with their effective maturity.
MARKET RISK
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of appropriate risk given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with Board approved guidelines. The
Company's Board of Directors reviews, on a quarterly basis, the Company's
asset/liability position, including simulations of the effect on the Company's
capital of various interest rate scenarios. The extent of the movement of
interest rates, higher or lower, is an uncertainty that could have a negative
impact on the earnings of the Company.
In the normal course of business, the financial position of the Company
is routinely subjected to a variety of risks,
30
<PAGE>
including market risks associated with interest rate movements. The Company
regularly assesses these risks and has established policies and business
practices to protect against the adverse effects of these and other potential
exposures. The Company recognizes that effective management of interest rate
risk includes an understanding of when adverse changes in interest rates will
flow through the statement of income and comprehensive income. Accordingly, the
Company will manage its position so that it monitors its exposure to net
interest income over both a one year planning horizon and a longer term
strategic horizon. In order to manage this interest rate risk, the Company has
established that it will follow a policy limit stating that projected net
interest income over the next 12 months will not be reduced by more than 10%
given a change in interest rates of up to 200 basis points (+ or -) over 12
months.
The Bank's primary tool in managing interest rate risk in this manner
is an income simulation model wherein the Company projects the future net
interest income derived from the most current projected balance sheet using a
variety of interest rates scenarios. The model seeks to adjust for cashflow
changes arising from the changing interest rates for mortgage prepayments,
callable securities and adjustable rate securities. The Company also utilizes
interest rate swap agreements to manage interest risk. Interest rate contracts
involve an agreement with a counterparty to exchange cash flows based on an
underlying interest rate index. The effect of these agreements was to lengthen
short-term variable rate liabilities into longer-term fixed rate liabilities.
The results of the sensitivity analysis as of December 31, 1998 and
December 31, 1997, indicated that given an upward shift of interest rates by 200
basis points would result in a reduction in projected net interest income of
3.0% and 9.0% respectively, versus the policy limit of 10%. Conversely, a
downward shift of 200 basis points would result in an increase in projected net
interest income of 3.71% and 9.2% respectively.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes requires the making of certain
assumptions that may tend to oversimplify the manner in which actual yield and
costs respond to changes in market interest rates. Assumptions are the
underlying factors that drive the interest rate risk measurement system which
include interest rate forecasts, client liability funding, mortgage prepayment
assumptions and portfolio yields. The model assumes that the composition of the
Company's interest sensitive assets and liabilities existing at the beginning of
a period will change periodically over the period being measured. The model also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the model provides an indication
of the Company's interest rate risk exposure at a particular point in time, such
measurement is not intended to and does not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results. The results of this modeling are monitored
by management and presented to the Board of Directors, quarterly.
LIQUIDITY
Liquidity represents the ability of an institution to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management. For
a financial institution such as the Company, these obligations arise from the
withdrawals of deposits and the payment of operating expenses.
The Company's primary sources of liquidity include cash and cash
equivalents, federal funds sold, new deposits, short-term borrowings, interest
payments on securities held to maturity and available for sale, fees collected
from asset administration clients, and the capital raised from the sale of the
Capital Securities. Asset liquidity is also provided by managing the duration of
the investment portfolio. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funds, management
believes that the Company maintains overall liquidity sufficient to meet its
depositors' needs, to satisfy its operating requirements and to fund the payment
of an anticipated annual cash dividend of approximately $.16 per share.
The Company's ability to pay dividends on the Common Stock may depend
on the receipt of dividends from Investors Bank & Trust Company. In addition,
the Company may not pay dividends on its Common Stock if it is in default under
certain agreements entered into in connection with the sale of the Capital
Securities. Any dividend payments by Investors Bank & Trust Company are subject
to certain restrictions imposed by the Massachusetts Commissioner of Banks.
Subject to regulatory requirements, the Company expects to pay to an annual
dividend to its stockholders, currently estimated to be in an amount equal to
$.16 per share of outstanding Common Stock (approximately $1,075,528 based upon
6,722,050 shares outstanding as of December 31, 1998).
At December 31, 1997 and 1998, cash and cash equivalents were 1% of
total assets. At December 31, 1998, approximately $25 million or 1% of total
assets mature within a one year period.
The Company has informal borrowing arrangements with various
counterparties whereby each counterparty has agreed to make funds available to
the Company at the Federal funds overnight rate. The aggregate amount of these
borrowing arrangements as of December 31, 1998 was $216 million. Each bank may
terminate its arrangement at any time
31
<PAGE>
and is under no contractual obligation to provide requested funding to the
Company. The Company's borrowings under these arrangements are typically on an
overnight basis. The Company believes that if these banks were unable to provide
funding as described above, a satisfactory alternative source of funding would
be available to the Company. There can be no assurance, however, that such
funding will be available. Lack of availability of liquid funds could have a
material adverse impact on the operations of the Company.
The Company also has Master Repurchase Agreements in place with various
counterparties whereby each broker has agreed to make funds available to the
Company at various rates in exchange for collateral consisting of marketable
securities. The aggregate amount of these borrowing arrangements at December 31,
1998 was $1.3 billion.
The Company also has a borrowing arrangement with the Federal Home Loan
Bank of Boston (the `FHLBB') whereby the Company may borrow amounts determined
by prescribed collateral levels and the amount of FHLBB stock held by the
Company. The minimum amount of FHLBB stock held by the Company is required to
(i) 1% of its outstanding residential mortgage loan principal (including
mortgage pool securities), (ii) 0.3% of total assets, (iii) total advances from
the FHLBB, divided by a leverage factor of 20. If the Company borrows under this
arrangement, the Company is required to hold FHLBB stock equal to 5% of such
outstanding advances. The aggregate amount of borrowing available to the Company
under this arrangement at December 31, 1998 was $607 million.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and
financing activities. Net cash provided by operating activities was $21,908,365
for the year ended December 31, 1998. Net cash used for investing activities,
consisting primarily of purchases of investment securities, proceeds from
maturities of investment securities, and purchases of acquisitions was
$13,493,625 for the year ended December 31, 1998. Net cash used for financing
activities, consisting primarily of net activity in deposits, was $6,938,000 for
the year ended December 31, 1998.
CAPITAL RESOURCES
Historically, the Company has financed its operations principally
through internally generated cash flows. The Company incurs capital expenditures
for furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. As a result, the Company's capital
expenditures were $3,971,000, $4,919,000 and $4,863,000 for the years ended
December 31, 1996, 1997 and 1998 respectively.
Stockholders' equity at December 31, 1998 was $88,283,000, an increase
of $12,570,000 or 17%, from $75,713,000 at December 31, 1997. The ratio of
stockholders' equity to assets increased to 6.03% at December 31, 1998 from
5.18% at December 31, 1997.
The Federal Reserve Board has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a `risk-weighted'
asset base. Certain off-balance sheet items, which previously were not expressly
considered in capital adequacy computations, are added to the risk-weighted
asset base by converting them to a balance sheet equivalent and assigning them
the appropriate risk weight.
Federal Reserve Board and FDIC guidelines require that banking
organizations have a minimum ratio of total capital to risk-adjusted assets and
off balance sheet items of 8.0%. Total capital is defined as the sum of `Tier I'
and `Tier II' capital elements, with at least half of the total capital required
to be Tier I. Tier I capital includes, with certain restrictions, the sum of
common stockholders' equity, non-cumulative perpetual preferred stock, a limited
amount of cumulative perpetual preferred stock, and minority interests in
consolidated subsidiaries, less certain intangible assets. Tier II capital
includes, with certain limitations, subordinated debt meeting certain
requirements, intermediate-term preferred stock, certain hybrid capital
instruments, certain forms of perpetual preferred stock, as well as maturing
capital instruments and general allowances for loan losses.
32
<PAGE>
The following table summarizes the Company's Tier I and total capital
ratios at December 31, 1998:
<TABLE>
<CAPTION>
Amount Ratio
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 70,480 15.32%
Tier I capital minimum requirement 18,399 4.00%
-------- ---------
Excess Tier I capital $ 52,081 11.32%
-------- ---------
-------- ---------
Total capital $ 70,580 15.34%
Total capital minimum requirement 36,799 8.00%
-------- ---------
Excess total capital $ 33,781 7.34%
-------- ---------
-------- ---------
Risk adjusted assets, net of intangible assets $459,985
--------
--------
</TABLE>
The following table summarizes the Bank's Tier I and total capital
ratios at December 31, 1998:
<TABLE>
<CAPTION>
Amount Ratio
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 67,767 14.79%
Tier I capital minimum requirement 18,326 4.00%
-------- ---------
Excess Tier I capital $ 49,441 10.81%
-------- ---------
-------- ---------
Total capital $ 67,867 14.81%
Total capital minimum requirement 36,653 8.00%
-------- ---------
Excess total capital $ 31,214 6.79%
-------- ---------
-------- ---------
Risk adjusted assets, net of intangible assets $458,157
--------
--------
</TABLE>
In addition to the risk-based capital guidelines, the Federal Reserve
Board and the FDIC use a `Leverage Ratio' as an additional tool to evaluate
capital adequacy. The Leverage Ratio is defined to be a Company's Tier I capital
divided by its adjusted total assets. The Leverage Ratio adopted by the federal
banking agencies requires a ratio of 3.0% Tier I capital to adjusted average
total assets for top-rated banking institutions. All other banking institutions
are expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of
the risk-based capital ratios and the Leverage Ratio requires the capital of the
Company to be reduced by most intangible assets. The Company's Leverage Ratio at
December 31, 1998 was 4.61%, which is in excess of regulatory minimums. The
Bank's Leverage Ratio at December 31, 1998 was 4.43%, which is also in excess of
regulatory minimums. See `Business - Regulation and Supervision.'
33
<PAGE>
The following tables present average balances, interest income and
expense, and yields earned or paid on the major categories of assets and
liabilities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1996 1997 1998
---------------------------- --------------------------- ---------------------------------
Average Average Average Average Average Average
Balance Interest Yield/ Balance Interest Yield/ Balance Interest Yield/
Cost Cost Cost
--------- --------- ------- --------- -------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Fed funds sold $ 33,989 $ 1,859 5.47% $ 53,758 $ 2,981 5.55% $ 30,721 $ 1,682 5.48%
Interest-earning deposits 126 6 4.76% -- -- -- -- -- --
Investment securities (3) 497,965 32,490 6.52% 1,053,009 67,489 6.41% 1,352,682 81,047 5.99%
Demand Loans (4) 43,582 2,322 5.33% 60,594 2,566 4.23% 60,093 3,003 5.00%
--------- -------- ----- ---------- ------- ------ ---------- -------- ------
Total interest-earning assets 575,662 36,677 6.37% 1,167,361 73,036 6.26% 1,443,487 $ 85,732 5.94%
-------- ----- ------- ------ -------- ------
Allowance for loan losses (74) (100) (100)
Noninterest-earning assets 53,305 69,258 99,378
--------- ---------- ----------
Total assets $628,893 $1,236,519 $1,542,765
--------- ---------- ----------
--------- ---------- ----------
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 142,059 $ 6,944 4.89% $ 140,274 $ 7,179 5.12% $ 194,648 $ 9,334 4.80%
Savings 56,775 2,302 4.05% 252,408 11,468 4.54% 455,687 20,042 4.40%
Time 721 38 5.27% 1,472 76 5.16% 502 27 5.38%
Short Term Borrowings 186,952 9,384 5.02% 538,315 28,140 5.23% 578,216 29,635 5.13%
--------- -------- ----- ---------- ------- ------ ---------- -------- ------
Total interest-bearing liabilities 386,507 18,668 4.83% 932,469 46,863 5.03% 1,229,053 59,038 4.80%
-------- ----- ------- ------ -------- ------
Noninterest-bearing liabilities:
Demand deposits 132,063 142,436 129,256
Noninterest bearing time 45,601 58,178 65,000
deposits
Other liabilities 8,585 12,814 13,826
--------- --------- ---------
Total liabilities 572,756 1,145,897 1,437,135
Trust Preferred Securities - 22,252 24,174
Equity 56,137 68,370 81,456
--------- --------- ---------
Total liabilities and equity $ 628,893 $1,236,519 $1,542,765
--------- --------- ---------
--------- --------- ---------
Net interest income $18,009 $ 26,173 $ 26,694
------- -------- ---------
------- -------- ---------
Net interest margin (1) 3.13% 2.24% 1.85%
Average interest rate spread (2) 1.54% 1.23% 1.14%
Ratio of interest-earning assets to
interest-bearing liabilities 148.9% 125.2% 117.45%
</TABLE>
- ---------
(1) Net interest income divided by total interest-earning assets.
(2) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.
(3) Average yield/cost on available securities is based on amortized cost.
(4) Average yield/cost on demand loans includes accrual and nonaccrual
interest balances
34
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISLCOSURES ABOUT MARKET RISK
The information required by this item is contained in the "Market Risk"
section in the "Management's Discussion and Analysis," as part of this Report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the financial
statements and schedules set forth in Item 14(a) under the captions
`Consolidated Financial Statements' and `Financial Statement Schedules' as a
part of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required under this item is incorporated herein by
reference to the information in the sections entitled `Occupations of Directors
and Executive Officers,' `Election of Directors' and `Compensation and other
Information Concerning Directors and Officers' contained in the Company's
definitive proxy statement pursuant to Regulation 14A, which proxy statement
will be filed with the Securities and Exchange Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by
reference to the information in the section entitled `Compensation and other
Information Concerning Directors and Officers' contained in the Company's
definitive proxy statement pursuant to Regulation 14A, which proxy statement
will be filed with the Securities and Exchange Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference to the information in the section entitled `Management and Principal
Holders of Voting Securities' contained in the Company's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the Company's fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by
reference to the information in the section entitled `Certain Relationships and
Related Transactions' contained in the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the Company's fiscal year ended December 31, 1998.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS.
For the following consolidated financial information included
herein, see Index on Page F-1:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1998.
Consolidated Statements of Income and Comprehensive Income for
the Years Ended December 31, 1996, 1997 and 1998.
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES.
None.
3. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
2.1(1) Plan of Exchange of Common and Class A Stock of the Company for all
outstanding stock of the Bank
3.1(1) Certificate of Incorporation of the Company
3.2(1) By-laws of the Company
4.1(1) Specimen certificate representing the Common Stock
4.2(1) Stockholder Rights Plan
10.1* Amended and Restated 1995 Stock Plan
10.2(1) Custodian Agreement among and between the Company, Eaton Vance Corp.
and each investment company advised by Eaton Vance Corp. which adopted
the Agreement dated December 17, 1990
10.3(1) Transfer and Assumption
Agreement between the Company and Bank of New York dated January 27,
1995 regarding the assignment of Merrill Lynch Unit Investment Trust
administration service
10.4(1) Information Technology Services Contract between the Company and
Electronic Data Systems, Inc. dated September 24, 1990
10.5(1) Third Party Hub and Spoke Processing License Agreement between the
Company and Signature Financial Group, Inc. dated May 21, 1993
10.6(1) Hub and Spoke Facilities Management Agreement between the Company and
Signature Financial Group, Inc. dated May 21, 1993
10.7(1) Loan Agreements with Landon Clay dated May 10, 1993 and October 6,
1994
10.8(1)* Description of the executive bonus arrangement
10.9(1)* Employment contract between the Company and Kevin Sheehan
10.10(1)* Employment contract between the Company and Michael Rogers
10.11(1)* Employment contract between the Company and Edmund Maroney
10.12(1)* Employment contract between the Company and Robert Mancuso
10.13(1) Sublease Agreement, as amended, between the Company and the Bank of
New England, N.A. dated May 25, 1990, for premises located at 89 South
Street, Boston, Massachusetts
10.14* Amended and Restated 1995 Non-Employee Director Stock Option Plan
10.15(2) Information Technology Services Contract between the Company and
Electronic Data Systems, Inc. dated September 20,1995,
10.16(2) Lease Agreement between the Company and John Hancock Mutual Life
Insurance Company, dated November 13, 1995, for the premises located
at 200 Clarendon Street, Boston, Massachusetts.
10.17(3)* Employment contract between the Company and Karen C. Keenan
10.18(3)* 1995 Employee Stock Purchase Plan
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
10.19(3) Amended and Restated Declaration of Trust among the Company and the
Trustees named therein, dated January 31, 1997
10.20(3) Purchase Agreement among the Company, Investors Capital Trust I and
Keefe, Bruyette & Woods, Inc., dated January 30, 1997 (Included in
Exhibit 10.19)
10.21(3) Indenture between the Company and The Bank of New York, dated January
31, 1997
10.22(3) Registration Rights Agreement, among the Company, Investors Capital
Trust I and Keefe, Bruyette & Woods, Inc., dated January 31, 1997
10.23(3) Common Securities Guarantee Agreement by the Company as Guarantor,
dated January 31, 1997
10.24(3) Capital Securities Guarantee Agreement between the Company as
Guarantor and The Bank of New York as Capital Securities Guarantee
Trustee, dated January 31, 1997
10.25 Agreement and Plan of Merger dated as of May 12, 1998 by and among the
Company, AMT Capital Services, Inc., Alan M. Trager, Carla E. Dearing
and the other parties named therein (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-3, File No. 333-58031)
10.26 Purchase and Sale Agreement dated as of July 17, 1998 by and between
Investors Bank & Trust Company and BankBoston, N.A. (filed as Exhibit
2.1 to the Company's Current Report on Form 8-K filed with the
Commission on August 19, 1998)
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (See Page 38 of this Report)
27 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-95980).
(2) Previously filed as an exhibit to Form 10-K for the fiscal year ended
October 31, 1996.
(3) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1997.
* Indicates a management contract or a compensatory plan, contract or
arrangement.
(b) REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K on October 16, 1998
regarding the acquisition by Investors Bank & Trust Company of the domestic
institutional trust and custody business of BankBoston, N.A. The Company filed
amendments to that form 8-K on Form 8-K/A on December 15, 1998 and February 5,
1999.
(c) EXHIBITS.
The Company hereby files as part of this Form 10-K the exhibits listed
in Item 14(a)(3) above. Exhibits which are incorporated herein by reference can
be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C., and at the Securities and Exchange Commission's regional
offices at CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511 and Seven World Trade Center, Suite 1300, New York, NY 10048. Copies
of such material can also be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
29549, at prescribed rates.
(d) FINANCIAL STATEMENT SCHEDULES
None.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts on the 26th day of February, 1999.
INVESTORS FINANCIAL SERVICES CORP.
By: /s/ Kevin J. Sheehan
---------------------------------------------
Kevin J. Sheehan
President, Chief Executive Officer
and Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Investors Financial
Services Corp., hereby severally constitute and appoint Kevin J. Sheehan and
Michael F. Rogers, and each of them singly, our true and lawful attorneys, with
full power to them and each of them singly, to sign for us in our names in the
capacities indicated below, all amendments to this report, and generally to do
all things in our names and on our behalf in such capacities to enable Investors
Financial Services Corp. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the 26th day of February, 1999.
Signature Title(s)
--------- --------
/s/ Kevin J. Sheehan President, Chief Executive Officer and
- ------------------------------ Chairman of the Board (Principal Executive
Kevin J. Sheehan Officer); Director
/s/ Michael F. Rogers Executive Vice President
- ------------------------
Michael F. Rogers
/s/ Karen C. Keenan Senior Vice President and Chief Financial
- ------------------------------ Officer (Principal Financial Officer and
Karen C. Keenan Principal Accounting Officer)
/S/ Robert B. Fraser Director
- ------------------------------
Robert B. Fraser
/s/ Donald G. Friedl Director
- ------------------------------
Donald G. Friedl
/s/ James M. Oates Director
- ------------------------------
James M. Oates
/s/ Phyllis S. Swersky Director
- ------------------------------
Phyllis S. Swersky
/s/ Thomas P. McDermott Director
- ------------------------------
Thomas P. McDermott
/s/ Frank B. Condon, Jr. Director
- ------------------------------
Frank B. Condon, Jr.
38
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management to Stockholders .................................................................. F-2
FDICIA Independent Auditors' Report ................................................................... F-3
Independent Auditors' Report .......................................................................... F-4
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998 ............................ F-5
Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 1996, 1997 and 1998 .......................................................... F-6
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 ............ F-8
Notes to Consolidated Financial Statements ............................................................ F-10
</TABLE>
<PAGE>
February 16, 1999
To the Stockholders:
FINANCIAL STATEMENTS
The Management of Investors Bank & Trust Company ("Bank") is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by Management.
INTERNAL CONTROL
Management is responsible for establishing an effective internal control over
financial reporting, including safeguarding of assets, presented in conformity
with both generally accepted accounting principles and the Federal Financial
Institutions Examination Council instructions for Schedules RC, RI, and RI-A of
the Consolidated Reports of Condition and Income (Call Report instructions). The
structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even an effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of an internal control may
vary over time.
Management assessed the institution's internal control over financial reporting,
including safeguarding of assets, presented in conformity with both generally
accepted accounting principles and Call Report instructions for Schedules RC,
RI, and RI-A as of December 31, 1998. This assessment was based on criteria for
effective internal control over financial reporting, including safeguarding of
assets, described in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, Management believes that the Bank maintained an effective internal
control over financial reporting, including safeguarding of assets, presented in
conformity with both generally accepted accounting principles and Call Report
instructions for Schedules RC, RI, and RI-A as of December 31, 1998.
The Audit Committee of the Board of Directors is comprised entirely of outside
directors who are independent of the Bank's Management. The Audit Committee is
responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with Management, the independent
auditors, and the internal auditors to ensure that they are carrying out their
responsibilities. The Committee is also responsible for performing an oversight
role by reviewing and monitoring the financial, accounting and auditing
procedures of the Bank, in addition to reviewing the Bank's financial reports.
The independent auditors and the internal auditors have full and free access to
the Audit Committee, with or without the presence of Management, to discuss the
adequacy of the internal control for financial reporting and any other matters
which they believe should be brought to the attention of the Committee.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and soundness laws
and regulations and has maintained records of its determinations and assessments
as required by the FDIC. Based on this assessment, Management believes that the
Bank has complied, in all material respects, with the designated safety and
soundness laws and regulations for the year ended December 31, 1998.
/s/ Kevin J. Sheehan
- ------------------------------
Kevin J. Sheehan
Chief Executive Officer
/s/ Karen C. Keenan
- ------------------------------
Karen C. Keenan
Chief Financial Officer
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Audit Committee
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
We have examined management's assertion that, as of December 31, 1998, Investors
Bank & Trust Company (the "Bank") maintained effective internal control over
financial reporting, including safeguarding of assets, presented in conformity
with both generally accepted accounting principles and the Federal Financial
Institutions Examination Council Instructions for Consolidated Reports of
Condition and Income for Schedules RC, RI, and RI-A, which assertion is included
in the Bank's accompanying management report.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of internal control structure over financial
reporting, testing and evaluating the design and operating effectiveness of
internal control over financial reporting, including safeguarding of assets, and
such other procedures as we considered necessary in the circumstances. We
believe that our examination provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any
evaluation of internal control over financial reporting to future periods are
subject to the risk that internal control may become inadequate because of
changes in conditions, or that the degree of compliance with the policies may
deteriorate.
In our opinion, management's assertion that, as of December 31, 1998, the Bank
maintained effective internal control over financial reporting, including
safeguarding of assets, presented in conformity with both generally accepted
accounting principles and the Federal Financial Institutions Examination Council
Instructions for Consolidated Reports of Condition and Income for Schedules RC,
RI, and RI-A is fairly stated, in all material respects, based on the criteria
established in "INTERNAL CONTROL--INTEGRATED FRAMEWORK" issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP
February 16, 1999
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
Investors Financial Services Corp.:
We have audited the accompanying consolidated balance sheets of Investors
Financial Services Corp., and its subsidiaries, (collectively, the `Company') as
of December 31, 1998 and 1997 and the related consolidated statements of income
and comprehensive income, stockholders' equity, and cash flows for each of the
years ended December 31, 1998, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
years ended December 31, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 16, 1999
F-4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,298,566 $ 18,775,240
Federal funds sold and securities purchased under resale agreements 75,000,000 --
Securities held to maturity (approximate fair value of $809,708,389 and $948,645,106
at December 31, 1997 and December 31, 1998 respectively) 802,046,077 942,816,546
Securities available for sale 462,850,089 345,069,507
Non-marketable equity securities 5,476,600 7,626,500
Loans, less allowance for loan losses of $100,000 at December 31, 1997 and
December 31, 1998 55,944,957 54,291,985
Accrued interest and fees receivable 22,874,836 28,666,818
Equipment and leasehold improvements, net 8,556,231 10,832,688
Goodwill, net -- 43,767,163
Other assets 10,399,420 13,661,094
--------------- ---------------
TOTAL ASSETS $ 1,460,446,776 $ 1,465,507,541
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 354,616,945 $ 173,207,097
Savings 427,122,987 667,097,468
Time 65,000,000 65,000,000
--------------- ---------------
Total deposits 846,739,932 905,304,565
Securities sold under repurchase agreements 499,188,363 434,168,072
Short-term borrowings 744,265 --
Other liabilities 13,899,936 13,562,592
--------------- ---------------
Total liabilities 1,360,572,496 1,353,035,229
--------------- ---------------
Commitments and contingencies (Note 4 and 13)
Company-obligated, manditorily redeemable, preferred securities of subsidiary trust holding
solely junior subordinated deferrable interest debentures of the Company 24,161,104 24,189,409
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and
outstanding: 0 in 1997 and in 1998) -- --
Common stock, par value $0.01 (shares authorized: 20,000,000; issued and
outstanding: 6,664,319 in 1997 and 6,722,050 in 1998) 66,643 67,261
Surplus 55,903,286 57,705,468
Deferred compensation (1,248,775) (1,198,604)
Retained earnings 19,525,129 33,483,703
Accumulated other comprehensive income/(loss), net 1,466,893 (1,774,885)
Treasury stock, par value, $0.01 (shares authorized and issued: 0 in 1997 and
4,000 in 1998) -- (40)
--------------- ---------------
Total stockholders' equity 75,713,176 88,282,903
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,460,446,776 $ 1,465,507,541
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 1,864,989 $ 2,980,617 $ 1,682,260
Investment securities held to maturity and
available for sale 32,490,280 67,488,991 81,046,822
Loans 2,322,158 2,566,321 3,002,800
----------------- ----------------- ------------------
Total interest income 36,677,427 73,035,929 85,731,882
----------------- ----------------- ------------------
Interest expense:
Deposits 9,271,675 18,722,500 29,403,308
Short-term borrowings 9,396,359 28,140,731 29,634,817
----------------- ----------------- ------------------
Total interest expense 18,668,034 46,863,231 59,038,125
----------------- ----------------- ------------------
Net interest income 18,009,393 26,172,698 26,693,757
Provision for loan losses 65,000 - -
----------------- ----------------- ------------------
Net interest income after provision for loan losses 17,944,393 26,172,698 26,693,757
Non-interest income:
Asset administration fees 57,462,455 78,324,689 96,757,252
Computer service fees 482,275 643,668 518,121
Other operating income 1,244,453 3,555,986 748,185
Gain/(loss) on securities available for sale (2,488) 113,958 832,491
----------------- ----------------- ------------------
Net operating revenue 77,131,088 108,810,999 125,549,806
----------------- ----------------- ------------------
OPERATING EXPENSES
Compensation and benefits 39,095,879 53,456,470 61,901,434
Technology and telecommunications 7,894,033 10,655,583 12,054,997
Transaction processing services 5,684,553 8,000,104 7,610,105
Occupancy 4,527,043 4,620,412 6,990,475
Depreciation and amortization 1,615,881 2,070,170 2,657,277
Amortization of goodwill - - 442,093
Travel and sales promotion 1,264,155 1,647,241 1,919,812
Professional fees 1,289,976 2,011,291 1,641,292
Insurance 876,131 768,055 782,606
Other operating expenses 2,365,772 4,133,065 3,584,023
----------------- ----------------- ------------------
Total operating expenses 64,613,423 87,362,391 99,584,114
----------------- ----------------- ------------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 12,517,665 21,448,608 25,965,692
Provision for income taxes 4,851,504 7,381,452 9,347,649
Minority interest expense, net of income taxes - 1,437,276 1,563,200
----------------- ----------------- ------------------
NET INCOME 7,666,161 12,629,880 15,054,843
----------------- ----------------- ------------------
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities:
Unrealized holding gains/(losses) arising during
the period 388,881 744,661 (3,774,572)
Less: reclassification adjustment for
gains/(losses) included in net income (1,592) 72,933 532,794
----------------- ----------------- ------------------
Other comprehensive income/(loss) 387,289 817,594 (3,241,778)
----------------- ----------------- ------------------
COMPREHENSIVE INCOME $ 8,053,450 $ 13,447,474 $ 11,813,065
----------------- ----------------- ------------------
----------------- ----------------- ------------------
BASIC EARNINGS PER SHARE $ 1.15 $ 1.90 $ 2.25
----------------- ----------------- ------------------
----------------- ----------------- ------------------
DILUTED EARNINGS PER SHARE $ 1.14 $ 1.85 $ 2.18
----------------- ----------------- ------------------
----------------- ----------------- ------------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A OTHER
COMMON COMMON DEFERRED RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS COMPENSATION EARNINGS INCOME (LOSS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 5,935 $ 60,445 $ 54,782,770 $(2,117,787) $ 702,950 $ 262,010
Adjustment to costs of stock issuance -- -- 35,193 -- -- --
Conversion of Class A to common stock (2,340) 2,340 -- -- -- --
Amortization of deferred compensation -- -- -- 430,112 -- --
Exercise of stock options -- 3 5,145 -- -- --
Net income -- -- -- -- 7,666,161 --
Cash dividend to IFSC, $0.03 per share -- -- -- -- (193,325) --
Cash dividend to S Corp -- -- -- -- (360,000) --
Change in accumulated other comprehensive
income/(loss), net -- -- -- -- -- 387,289
-------- -------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996 $ 3,595 $ 62,788 $ 54,823,108 $(1,687,675) $ 7,815,786 $ 649,299
Conversion of Class A to common stock (3,595) 3,595 -- -- -- --
Amortization of deferred compensation -- -- -- 438,900 -- --
Exercise of stock options -- 260 720,178 -- -- --
Net income -- -- -- -- 12,629,880 --
Cash dividend IFSC, $0.08 per share -- -- -- -- (515,622) --
Cash dividend to S Corp -- -- -- -- (404,915) --
Contribution of capital to S Corp -- -- 360,000 -- -- --
Change in accumulated other comprehensive
income/(loss), net -- -- -- -- -- 817,594
-------- -------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997 $ -- $ 66,643 $ 55,903,286 $(1,248,775) $ 19,525,129 $ 1,466,893
Additions to deferred compensation -- 100 499,900 (500,000) -- --
Amortization of deferred compensation -- -- -- 550,171 -- --
Exercise of stock options -- 518 1,379,242 -- -- --
Purchase of treasury stock -- -- (76,960) -- -- --
Net income -- -- -- -- 15,054,843 --
Cash dividend to IFSC, $0.12 per share -- -- -- -- (790,903) --
Cash dividend to S Corp -- -- -- -- (250,000) --
Non-cash dividend to S Corp -- -- -- -- (55,366) --
Change in accumulated other comprehensive
income/(loss), net -- -- -- -- -- (3,241,778)
-------- -------- ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 $ -- $ 67,261 $ 57,705,468 $(1,198,604) $ 33,483,703 $ (1,774,885)
-------- -------- ------------ ----------- ------------ ------------
-------- -------- ------------ ----------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
<S> <C> <C>
BALANCE, DECEMBER 31, 1995 $ -- $ 53,696,323
Adjustment to costs of stock issuance -- 35,193
Conversion of Class A to common stock -- --
Amortization of deferred compensation -- 430,112
Exercise of stock options -- 5,148
Net income -- 7,666,161
Cash dividend to IFSC, $0.03 per share -- (193,325)
Cash dividend to S Corp -- (360,000)
Change in accumulated other comprehensive
income/(loss), net -- 387,289
--------- ------------
BALANCE, DECEMBER 31, 1996 $ -- $ 61,666,901
Conversion of Class A to common stock -- --
Amortization of deferred compensation -- 438,900
Exercise of stock options -- 720,438
Net income -- 12,629,880
Cash dividend IFSC, $0.08 per share -- (515,622)
Cash dividend to S Corp -- (404,915)
Contribution of capital to S Corp -- 360,000
Change in accumulated other comprehensive
income/(loss), net -- 817,594
--------- ------------
BALANCE, DECEMBER 31, 1997 $ -- $ 75,713,176
Additions to deferred compensation -- --
Amortization of deferred compensation -- 550,171
Exercise of stock options -- 1,379,760
Purchase of treasury stock (40) (77,000)
Net income -- 15,054,843
Cash dividend to IFSC, $0.12 per share -- (790,903)
Cash dividend to S Corp -- (250,000)
Non-cash dividend to S Corp -- (55,366)
Change in accumulated other comprehensive
income/(loss), net -- (3,241,778)
--------- ------------
BALANCE, DECEMBER 31, 1998 $ (40) $ 88,282,903
--------- ------------
--------- ------------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,666,161 $ 12,629,880 $ 15,054,843
---------------- ----------------- -----------------
Adjustments to reconcile net income to net cash
provided by/(used for) operating activities:
Depreciation and amortization 1,615,881 2,070,170 3,099,370
Amortization of deferred compensation 430,112 438,900 550,171
Provision for loan losses 65,000 - -
Amortization of premiums on securities, net of
accretion of discounts 2,521,119 4,455,050 8,229,723
(Gain)/loss on sale of securities available for sale 2,488 (113,958) (832,491)
(Gain)/loss on disposal of fixed assets 15,211 (4,727) -
Deferred income taxes 898,513 336,851 (426,661)
Changes in assets and liabilities (net of acquisition):
Accrued interest and fees receivable (5,967,922) (6,466,156) (2,315,982)
Other assets (3,246,298) (4,735,830) (2,113,383)
Other liabilities 4,513,829 2,781,624 662,775
---------------- ----------------- -----------------
Total adjustments 847,933 (1,238,076) 6,853,522
---------------- ----------------- -----------------
Net cash provided by/(used for) operating activities 8,514,094 11,391,804 21,908,365
---------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 48,406,151 105,833,935 178,807,669
Proceeds from maturities of securities held to maturity 39,691,309 107,992,568 299,838,733
Proceeds from sales of securities available for sale 26,904,258 24,833,488 159,400,416
Purchases of securities available for sale (243,550,740) (323,691,447) (229,340,372)
Purchases of securities held to maturity (359,516,797) (451,865,060) (444,158,843)
Purchase of non-marketable equity securities (967,400) (4,509,200) (2,149,900)
Net (increase) decrease in time deposits due from banks 1,000,000 - -
Net (increase) decrease in federal funds sold and
securities purchased under resale agreements (105,000,000) 45,000,000 75,000,000
Net (increase) decrease in loans (43,437,672) 10,291,932 1,652,972
Proceeds from sales of equipment and leasehold
Improvements - 189,121 -
Purchase of the Business - - (47,681,451)
Purchases of equipment and leasehold improvements (3,790,514) (4,918,994) (4,862,849)
---------------- ----------------- -----------------
Net cash (used for)/provided by investing activities (640,261,405) (490,843,657) (13,493,625)
---------------- ----------------- -----------------
</TABLE>
F-8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits 142,007,125 89,702,331 (181,409,848)
Net increase in time and savings deposits 265,516,792 160,520,692 239,974,481
Net increase (decrease) in short-term borrowings 222,019,746 203,111,876 (65,764,556)
Proceeds from exercise of stock options 5,148 720,438 1,379,760
Proceeds from issuance of trust preferred stock - 25,000,000 -
Purchase of treasury stock - - (77,000)
Costs of stock issuance 35,193 (838,896) -
Contribution of capital to S Corp - 360,000 -
Dividends paid to IFSC (193,325) (515,622) (790,903)
Dividends paid to S Corp (360,000) (404,915) (250,000)
----------------- ------------------ -----------------
Net cash provided by/(used for) financing activities 629,030,679 477,655,904 (6,938,066)
----------------- ------------------ -----------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (2,716,632) (1,795,949) 1,476,674
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 21,811,147 19,094,515 17,298,566
----------------- ------------------ -----------------
CASH AND DUE FROM BANKS, END OF YEAR $ 19,094,515 $ 17,298,566 $ 18,775,240
----------------- ------------------ -----------------
----------------- ------------------ -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 17,253,000 $ 45,968,000 $ 58,961,000
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Cash paid for income taxes $ 4,220,000 $ 7,049,000 $ 7,616,000
----------------- ------------------ -----------------
----------------- ------------------ -----------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
The Company purchased all of the outstanding capital stock of AMT Capital
Services, Inc., in exchange for 194,006 shares of the Company's common stock.
During 1998, AMT Capital Services, Inc., distributed a noncash dividend of
$55,366. The acquisition was accounted for under the pooling-of-interests method
of accounting.
The Company also purchased the institutional trust and custody business of
BankBoston for a total approximate purchase price of $53,676,553. The
acquisition was accounted for under the purchase method of accounting. The fair
value of assets acquired at the date of acquisition is presented as follows:
<TABLE>
<S> <C>
Accounts receivable $ 3,476,000
Fixed assets 97,946
Goodwill 44,209,256
Accrued expenses (101,751)
------------------
Net assets acquired $ 47,681,451
------------------
------------------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. DESCRIPTION OF BUSINESS
Investors Financial Services Corp. (`IFSC') provides asset administration
services for the financial services industry through its wholly owned
subsidiaries, Investors Bank & Trust Company (the `Bank') and Investors
Capital Services, Inc. The Bank provides global custody, multicurrency
accounting, institutional transfer agency, performance measurement,
foreign exchange, securities lending, mutual fund administration and
investment advisory services to a variety of financial asset managers,
including mutual fund complexes, investment advisors, banks and insurance
companies. IFSC and the Bank are subject to regulation by the Federal
Reserve Board of Governors, the Office of the Commissioner of Banks of the
Commonwealth of Massachusetts and the Federal Deposit Insurance
Corporation.
As used herein, the defined term `the Company' shall mean IFSC together
with the Bank and its domestic and foreign subsidiaries from the date of
the share exchange discussed below and shall mean the Bank prior to that
date.
On September 19, 1997, pursuant to the terms of the Certificate of
Incorporation of the Company, all shares of the Company's Class A Common
Stock automatically converted into shares of the Company's Common Stock.
The terms of the Class A Common Stock were identical to the terms of the
Common Stock, except that the Common Stock receives only one vote per
share rather than the ten votes per share previously received by Class A
Common Stock.
On May 29, 1998, the Company acquired AMT Capital Services, Inc. and an
affiliated company ("AMT Capital Services"), a New York-based firm
recognized for providing fund administration services to global and
domestic institutional investment management firms. Under the terms of the
acquisition agreement, the Company acquired all of the outstanding capital
stock of AMT Capital Services in exchange for 194,006 shares of the
Company's Common Stock. The acquisition was accounted for under the
pooling-of-interests method of accounting. Upon completion of the
acquisition, AMT Capital Services became a wholly-owned subsidiary of the
Company and was re-named Investors Capital Services, Inc.
On October 1, 1998, the Bank acquired the domestic institutional custody
business (the "Business") of BankBoston, N.A. ("BankBoston"). Under the
terms of the purchase agreement, the Company has paid approximately $48
million to BankBoston as of the closing and will pay up to an additional
$6 million one year after the closing depending upon business performance.
The acquisition was accounted for under the purchase method of accounting.
Upon completion of the acquisition, the Business became integrated into
the consolidated institutional trust and custody business of the Bank.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and its domestic and foreign subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
CUSTODY AND TRUST ASSETS - Asset administration fees, including securities
lending and foreign exchange services and computer services fees, are
composed primarily of fee and fee-related income and are recorded on the
accrual basis.
ACCOUNTING ESTIMATES - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. On January 1,1998, the
Company adopted Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," ("SOP 98-1").
As a result of this change in accounting method, the Company had
capitalized approximately $1,478,000 of costs associated with the
development of internal use software during the year ended December 31,
1998.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES - The Company classifies all equity securities that have readily
determinable fair values and all investments in debt securities into one of
three categories, as follows:
- - Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and reported at
amortized cost.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
- - All other debt and equity securities are classified as available for
sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
- - The specific identification method is used to determine gains and
losses on sales of securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards (`SFAS') No. 107 requires the disclosure of the estimated fair value
of financial instruments, whether or not recognized in the Company's
consolidated balance sheets, estimated using available market information or
other appropriate valuation methodologies.
The carrying amounts of cash and due from banks are a reasonable estimate of
their fair value. The fair value of securities owned is estimated based on
quoted market prices. Both loans (including commitments to lend) and deposits
(including time deposits) bear interest at variable rates and are subject to
periodic repricing. As such, the carrying amount of loans and deposits is a
reasonable estimate of fair value. The fair value of the Company's interest rate
contracts is estimated based on quoted market prices. The Company does not have
any other significant financial instruments.
LOANS - Interest income on loans is recorded on the accrual basis. Losses on
loans are provided for under the allowance method of accounting. The allowance
is increased by provisions charged to operating expenses based on amounts
management considers necessary to meet probable and reasonably estimated losses
on loans.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization. Depreciation and
amortization are provided on the straight-line method over the estimated useful
lives of the assets which range from three to seven years, and for leasehold
improvements over the lesser of the useful life or the life of the lease.
LONG-LIVED ASSETS - SFAS No. 121, `Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of,' establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. In
accordance with this Statement and Accounting Principles Board Opinion, ("APB")
No. 17, `Intangible Assets,' the Company continues to evaluate the amortization
period that it assigns and the recoverability of the carrying amount of the
assets to determine whether later events and circumstances warrant revised
estimates of their assignments.
INCOME TAXES - Income tax expense is based on estimated taxes payable or
refundable on a tax return basis for the current year and the changes in
deferred tax assets and liabilities during the year in accordance with SFAS No.
109, `Accounting for Income Taxes.' Deferred tax assets and liabilities are
established for temporary differences between the accounting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are realized
or settled.
TRANSLATION OF FOREIGN CURRENCIES - The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses realized
from the settlement of foreign currency transactions, which were not significant
in the years ended December 31, 1996, 1997 and 1998, are included in other
operating expenses in the consolidated statements of income.
F-11
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS - The Company does not purchase derivative
financial instruments for trading purposes. Interest rate swap agreements are
matched with specific financial instruments reported on the consolidated balance
sheet and periodic cash payments are accrued on a settlement basis.
The Company also enters into interest rate swap agreements as discussed in Note
12 and foreign exchange contracts as discussed in Note 15. The Company
implemented SFAS No. 119, `Disclosure About Derivative Financial Investments and
Fair Value of Financial Instruments,' in fiscal 1996. This standard requires
expanded disclosure about amounts, nature and terms associated with the
derivative financial instruments held.
The Company enters into foreign exchange contracts with clients and
simultaneously enters into a matched position with another bank. These contracts
are subject to market value fluctuations in foreign currencies. Gains and losses
from such fluctuations are netted and recorded as an adjustment of asset
administration fees.
The Company's policy requires settlement accounting principles for interest rate
swaps in which net interest rate differentials to be paid or received are
recorded currently as adjustments to interest expense.
LIABILITIES - SFAS No. 125, `Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,' establishes consistent accounting
standards for transfers and servicing of F financial assets and extinguishments
of liabilities. SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers of financial assets
that are secured borrowings based upon the existence of control. SFAS No. 125
was effective and adopted during fiscal 1997. SFAS No. 125 had no material
effect upon the Company's consolidated financial statements.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
using the intrinsic value-based method of APB No. 25, as allowed under SFAS No.
123, `Accounting for Stock-Based Compensation.'
EARNINGS PER SHARE - In 1997, the Company adopted SFAS No. 128, `Earnings per
Share,' and SFAS No. 129, `Disclosure of Information about Capital Structure'.
SFAS No. 128 requires that entities with publicly held common stock or potential
common stock compute, present, and disclose earnings per share based upon the
Basic and/or Diluted earnings per share (`EPS'). Basic EPS were computed by
dividing net income by the weighted average number of common shares outstanding
during the year. Diluted EPS were computed by increasing the weighted average of
common shares outstanding used in Basic EPS by the number of additional common
shares that would have been outstanding if the dilutive common stock had been
issued. Based upon the Company's capital structure, the Statement requires
presentation of both Basic and Diluted EPS.
COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130, `Reporting
Comprehensive Income.' SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
financial statements for periods beginning after December 15, 1997.
F-12
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING - In 1998, the Company adopted SFAS No. 131, `Disclosures
about Segments of an Enterprise and Related Information.' SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997, and is discussed in
Note 18.
EMPLOYEE BENEFIT PLANS - In 1998, the Company adopted SFAS No. 132, `Employers'
Disclosures about Pensions and Other Postretirement Benefits.' SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans, but
requires additional information on changes in the benefit obligations and fair
values of plan assets. SFAS No. 132 is addressed in Note 11.
NEW ACCOUNTING PRINCIPLES - SFAS No. 133, `Accounting for Derivative Instruments
and Hedging Activities,' is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivatives instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value
depends on the intended use of the derivative and the resulting designation.
RECLASSIFICATIONS - Certain amounts in the prior periods' financial statements
have been reclassified to conform to the current year's presentation.
ACQUISITIONS - On May 29, 1998, the Company acquired all of the outstanding
share capital of AMT Capital Services, Inc. and AMT Capital Advisers, Inc.
(collectively, "AMT Capital"), in exchange for 194,006 shares of the Company's
Common Stock. Of the 194,006 shares of Common Stock issued to the Former AMT
Capital Stockholders, 18,938 shares are being held in escrow by First Chicago
Trust Company of New York as escrow agent pursuant to an Escrow Agreement dated
as of May 29, 1998 among the Company, the Former AMT Capital Stockholders and
the escrow agent (the "Escrow Agreement") until the earlier of (i) February 28,
1999 and (ii) the Company's first public announcement of earnings following
completion by the Company's independent auditors of the first full-year audit of
the Company's consolidated financial statements following May 29, 1998 to cover
any reimbursable claims relating to the AMT Acquisition. The remaining 175,068
shares acquired by the Former AMT Capital Stockholders pursuant to the AMT
Acquisition were registered on a Registration Statement on Form S-3 (File No.
333-58031), declared effective on July 9, 1998, and may be sold to the public by
the Former AMT Capital Stockholders.
The AMT Acquisition has been accounted for under the "pooling-of-interests"
method and therefore the consolidated financial statements for all periods prior
to the acquisition have been restated to include the accounts and operations of
AMT Capital Services with those of the Company. The AMT Acquisition was
structured as a tax-free reorganization under the Internal Revenue Code.
Prior to the business combination, AMT Capital was an S Corporation for the
fiscal year ended December 31, 1997, and consequently, was not subject to
federal income taxes. The pro-forma income tax provision for AMT Capital that
would have been reported by the Company as an additional provision to its
historical tax expense, had AMT Capital not been an S Corporation prior to the
combination, was $535,000 for the year ended December 31, 1997.
As a result of the AMT Capital Services, Inc. acquisition, all of the prior
period consolidated financial statements were restated and filed with the
Securities and Exchange Commission on Form 8-K on August 19, 1998. On December
31, 1998, Investors Capital Services, Inc. and Investors Capital Advisers, Inc.
were merged into one company, Investors Capital Services, Inc., via a tax free
reorganization.
F-13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No adjustments to conform accounting policies of the Company and AMT Capital
were required.
Revenue and net income (loss) for the previously separate companies for
the years ended December 31, 1996, 1997 and 1998 were:
<TABLE>
<C> <C> <C>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
NET OPERATING REVENUE:
IFSC $ 74,576,110 $ 102,988,898 $ 120,850,168
AMT Capital 2,554,978 5,822,101 4,699,638
------------------ ------------------- ------------------
Total $ 77,131,088 $ 108,810,999 $ 125,549,806
------------------ ------------------- ------------------
------------------ ------------------- ------------------
NET INCOME:
IFSC $ 7,773,962 $ 11,580,261 $ 14,995,459
AMT Capital (107,801) 1,049,619 59,384
------------------ ------------------- ------------------
Total $ 7,666,161 $ 12,629,880 $ 15,054,843
------------------ ------------------- ------------------
------------------ ------------------- ------------------
BASIC EARNINGS PER
SHARE
IFSC $ 1.21 $ 1.80 $ 2.24
AMT Capital (0.06) 0.10 0.01
------------------ ------------------- ------------------
Total $ 1.15 $ 1.90 $ 2.25
------------------ ------------------- ------------------
------------------ ------------------- ------------------
DILUTED EARNINGS PER
SHARE
IFSC $ 1.20 $ 1.75 $ 2.17
AMT Capital (0.06) 0.10 0.01
------------------ ------------------- ------------------
Total $ 1.14 $ 1.85 $ 2.18
------------------ ------------------- ------------------
------------------ ------------------- ------------------
</TABLE>
On October 1, 1998, the Bank acquired the domestic institutional trust and
custody business of BankBoston, N.A. (the "Business"), which has been accounted
for as a purchase combination in which the goodwill has been amortized over an
estimated useful life of 25 years. Under the terms of the purchase agreement,
the Company has paid approximately $48 million to BankBoston as of the closing
and will pay up to an additional $6 million one year after the closing depending
upon business performance.
The approximate purchase price, including acquisition costs, is estimated to be
$53,676,553 and has been allocated as follows:
<TABLE>
<S> <C>
Tangible assets purchased:
Accounts receivable $ 3,476,000
Fixed assets 97,946
Accrued expenses (101,751)
Approximate purchase price in excess of net tangible assets (goodwill) $ 44,209,256
</TABLE>
The remaining contingency consideration of $6 million will be added to the value
of goodwill upon resolution and amortized over the remaining useful life of the
goodwill.
Prior to the acquisition, the Business provided a full range of master trust and
custody services to small and mid-size clients located primarily in the New
England area. The Business provided custody and safekeeping of assets for mutual
funds, financial institutions, trusts and other institutions. The Business also
provided custody and safekeeping of assets, income collection, trade settlement,
corporate action administration and trade date accounting services for
endowments, pension funds, and municipalities.
F-14
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The information below presents on a pro forma basis, certain historical
information for the Company, adjusted for the Business acquisition as if such
acquisition had been consummated on January 1, 1998 and 1997. Since October 1,
1998, the Business has been included in the operations of the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
PRO FORMA RESULTS (UNAUDITED):
- -------------------------------------
Net interest income $ 24,971,697 $ 23,406,508
Net operating revenue 136,117,746 122,485,809
Basic earnings per share $ 2.23 $ 1.80
Diluted earnings per share $ 2.16 $ 1.76
COMPANY AS REPORTED:
- -------------------------------------
Net interest income $ 26,693,757 $ 26,172,698
Net operating revenue 125,549,806 108,810,999
Basic earnings per share $ 2.25 $ 1.90
Diluted earnings per share $ 2.18 $ 1.85
</TABLE>
F-15
<PAGE>
3. SECURITIES
Amortized cost amounts and approximate fair values of securities are summarized
as follows as of December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
HELD TO MATURITY COST GAINS (LOSSES) FAIR VALUE
<S> <C> <C> <C> <C>
State and political subdivisions $ 35,224,790 $ 2,296,252 $ - $ 37,521,042
Mortgage-backed securities 590,364,940 5,649,718 (514,023) 595,500,635
Federal agency securities 168,687,478 545,863 (491,229) 168,742,112
Foreign government securities 7,768,869 175,731 - 7,944,600
----------------- ----------------- -------------- -----------------
Total $ 802,046,077 $ 8,667,564 $ (1,005,252) $809,708,389
----------------- ----------------- -------------- -----------------
----------------- ----------------- -------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
AVAILABLE FOR SALE COST GAINS (LOSSES) FAIR VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 30,002,114 $ 90,136 - $ 30,092,250
Municipal bonds 8,348,265 33,588 - 8,381,853
Mortgage-backed securities 422,207,689 2,624,065 (455,768) 424,375,986
----------------- ----------------- -------------- -----------------
Total $ 460,558,068 $ 2,747,789 $ (455,768) $462,850,089
----------------- ----------------- -------------- --------------------
----------------- ----------------- -------------- --------------------
</TABLE>
Amortized cost amounts and approximate fair values of securities are summarized
as follows as of December 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
HELD TO MATURITY COST GAINS (LOSSES) FAIR VALUE
<S> <C> <C> <C> <C>
State and political subdivisions $ 35,820,768 $ 2,966,961 $ - $ 38,787,729
Mortgage-backed securities 733,108,941 4,422,851 (1,299,976) 736,231,816
Federal agency securities 166,181,042 1,019,633 (1,619,839) 165,580,836
Foreign government securities 7,705,795 338,930 - 8,044,725
------------------ ---------------- -------------- -----------------
Total $ 942,816,546 $ 8,748,375 $ (2,919,815) $ 948,645,106
----------------- ----------------- -------------- --------------------
----------------- ----------------- -------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
AVAILABLE FOR SALE COST GAINS (LOSSES) FAIR VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - $ - $ - $ -
Municipal bonds 36,985,302 592,138 - 37,577,440
Mortgage-backed securities 261,528,982 239,507 (2,346,422) 259,422,067
Corporate debt 49,328,482 - (1,258,482) 48,070,000
----------------- ----------------- -------------- -----------------
Total $ 347,842,766 $ 831,645 $(3,604,904) $ 345,069,507
----------------- ----------------- -------------- --------------------
----------------- ----------------- -------------- --------------------
</TABLE>
F-16
<PAGE>
3. SECURITIES (CONTINUED)
Non-marketable equity securities at December 31, 1997 and 1998 consisted of
stock of the Federal Home Loan Bank of Boston (the `FHLBB'). As a member of the
FHLBB, the Company is required to invest in $100 par value stock of the FHLBB in
an amount equal to the greater of (i) 1% of its outstanding residential mortgage
loan principal (including mortgage pool securities), (ii) 0.3% of total assets,
and (iii) total advances from the FHLBB, divided by a leverage factor of 20. If
and when such stock is redeemed, the Company will receive an amount equal to the
par value of the stock.
The amortized cost amounts and approximate fair values of securities by
effective maturity are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
HELD TO MATURITY COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 16,716 $ 16,785
Due from one to five years 357,580,590 360,361,877 258,875,047 259,673,124
Due five years up to ten years 183,840,479 184,373,997 184,268,112 184,094,491
Due after ten years 260,625,008 264,972,515 499,656,671 504,860,706
---------------- ----------------- ----------------- -----------------
Total $ 802,046,077 $ 809,708,389 $ 942,816,546 $ 948,645,106
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
AVAILABLE FOR SALE COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
Due within one year $ 20,020,094 $ 20,039,100 $ - $ -
Due from one to five years 307,636,460 309,517,768 251,338,758 249,510,115
Due five years up to ten years 132,367,416 132,756,384 40,388,656 40,667,899
Due after ten years 534,098 536,837 56,115,352 54,891,493
----------------- ------------------ ------------------ -----------------
Total $460,558,068 $462,850,089 $ 347,842,766 $ 345,069,507
---------------- ------------------ ------------------ -----------------
---------------- ------------------ ------------------ -----------------
</TABLE>
The maturity distributions of mortgage-backed securities have been allocated
over maturity groupings based upon actual pre-payments to date and anticipated
pre-payments based upon historical experience.
Five securities available for sale were sold during the years ended December 31,
1996 and 1997 and twenty six available for sale securities were sold during the
year ended December 31,1998. The following table summarizes the gains and losses
incurred from the sales:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
AVAILABLE FOR SALE 1996 1997 1998
<S> <C> <C> <C>
Gains $ 17,577 $ 113,958 $ 855,331
(Losses) (20,065) - (22,840)
----------------- ------------------ --------------------
Net gain/(loss) $ (2,488) $ 113,958 $ 832,491
----------------- ------------------ --------------------
----------------- ------------------ --------------------
</TABLE>
The amortized cost of securities pledged amounted to approximately $590,000,000
and $602,000,000 at December 31, 1997 and December 31, 1998, respectively.
Securities are pledged primarily to secure public funds and clearings with other
depository institutions.
F-17
<PAGE>
4. LOANS
Loans consist of demand loans with individuals and not-for-profit institutions
located in the greater Boston, Massachusetts metropolitan area and loans to
mutual fund clients. The loans to mutual funds include lines of credit and
advances pursuant to the terms of the custody agreements between the Company and
those mutual fund clients to facilitate securities transactions and redemptions.
Generally, the loans are, or may be, in the event of default, collateralized
with marketable securities held by the Company as custodian. There were no
impaired or non-performing loans at December 31, 1997 and December 31, 1998. In
addition, there have been no loan charge-offs or recoveries during the years
ended December 31, 1996, 1997 and 1998. Loans consisted of the following at
December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Loans to individuals $ 26,857,933 $ 25,582,978
Loans to not-for-profit institutions 12,500 12,500
Loans to mutual funds 29,174,524 28,796,507
------------------- -----------------
56,044,957 54,391,985
Less allowance for loan losses 100,000 100,000
------------------- -----------------
Total $ 55,944,957 $ 54,291,985
------------------- -----------------
------------------- -----------------
</TABLE>
The Company had commitments to lend approximately $62,845,000 and $141,399,000
at December 31, 1997 and December 31, 1998, respectively. The terms of these
commitments are similar to the terms of outstanding loans.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major components of equipment and leasehold improvements are as follows at
December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Furniture, fixtures and equipment $ 11,660,572 $ 16,065,494
Leasehold improvements 977,336 490,177
------------------- ------------------
Total 12,637,908 16,555,671
Less accumulated depreciation and amortization 4,081,677 5,722,983
------------------- ------------------
Equipment and leasehold improvements, net $ 8,556,231 $ 10,832,688
------------------- ------------------
------------------- ------------------
</TABLE>
The software costs capitalized under SOP 98-1 are included within the furniture,
fixtures and equipment component.
6. DEPOSITS
Time deposits at December 31, 1997 and December 31, 1998 include non-interest
bearing amounts for both years of approximately $65,000,000.
All time deposits had a minimum balance of $100,000 and a maturity of less
than three months at December 31, 1997 and December 31, 1998.
F-18
<PAGE>
7. SHORT-TERM BORROWINGS
The major components of short-term borrowings are as follows at December 31,
1997 and December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Repurchase agreements $499,188,363 $ 434,168,072
Treasury, tax and loan account 744,265 -
------------------- ------------------
Total $499,932,628 $ 434,168,072
------------------- ------------------
------------------- ------------------
</TABLE>
The Company enters into repurchase agreements whereby securities are sold by the
Company under agreements to repurchase. The interest rate on the outstanding
agreements at December 31, 1997 ranged from 4.95% to 5.90% and all agreements
matured by March 3,1998. The interest rate on the outstanding agreements at
December 31, 1998 was 4.25% and all agreements mature by January 4, 1999.
The Company receives federal tax deposits from clients as an agent for the
Federal Reserve Bank and accumulates these deposits in the Treasury, Tax and
Loan account. The Federal Reserve Bank charges the Company interest at the
Federal Funds rate on such deposits. The interest rate on the outstanding
balance at December 31, 1997 was 5.26%.
The following securities were pledged under the repurchase agreements at
December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 20,392,469 $ 20,392,469 $ - $ -
Federal agency securities - - 39,460,575 39,617,163
Mortgage-backed securities 501,141,751 503,300,183 469,058,938 470,969,611
------------------ ----------------- ------------------ ------------------
Total $521,534,220 $523,692,652 $ 508,519,513 $ 510,586,774
------------------ ----------------- ------------------ ------------------
------------------ ----------------- ------------------ ------------------
</TABLE>
The amount outstanding at March 31, 1998 was the highest amount outstanding at
any month end during the year ended December 31, 1998. The average balance
during the year ended December 31, 1998 was $501,142,000. There were no balances
with clients for which the amount at risk exceeded 10% of stockholders' equity.
F-19
<PAGE>
8. INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal $ 3,576,931 $ 5,453,161 $ 7,133,054
State 182,809 773,510 1,668,286
Foreign 193,251 9,462 93,670
-------------------- -------------------- --------------------
3,952,991 6,236,133 8,895,010
-------------------- -------------------- --------------------
Deferred:
Federal 619,357 246,014 (313,844)
State 240,861 90,838 (112,817)
Foreign 38,295 - -
-------------------- -------------------- --------------------
898,513 336,852 (426,661)
-------------------- -------------------- --------------------
Total income taxes $ 4,851,504 $ 6,572,985 $ 8,468,349
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
Differences between the effective income tax rate and the federal statutory
rates are as follows for the years ended December 31, 1996, 1997 and 1998 were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
Federal statutory rate 35.00% 35.00% 35.00%
State income tax rate, net of federal benefit 2.20 2.61 4.30
Foreign income taxes with different rates 1.20 0.03 -
Tax-exempt income, net of disallowance - (2.35) (4.17)
Other 0.36 (0.88) 0.87
----------------- ---------------- ----------------
Effective tax rate 38.76% 34.41% 36.00%
</TABLE>
F-20
<PAGE>
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities consist of the following at December 31,
1997 and December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Deferred tax assets:
Employee benefit plans $ 829,330 $ 598,463
Securities available for sale - 998,373
Other 84,716 180,993
---------------- ----------------
914,046 1,777,829
Deferred tax liabilities:
Prepaid insurance (636,948) -
Securities available for sale (825,128) -
Unearned compensation (139,431) -
Depreciation and amortization (414,409) (629,538)
---------------- ----------------
Net deferred tax asset (liability) $(1,101,870) $ 1,148,291
---------------- ----------------
---------------- ----------------
</TABLE>
Net deferred tax liabilities and assets are reported as components of other
liabilities and other assets, respectively, in the 1997 and 1998 consolidated
balance sheets.
9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE COMPANY
On January 31, 1997, a trust sponsored and wholly owned by the Company issued
$25,000,000 in 9.77% Trust Preferred Securities (the `Capital Securities'), the
proceeds of which were invested by the trust in the same aggregate principal
amount of the Company's newly issued 9.77% Junior Subordinated Deferrable
Interest Debentures due February 1, 2027 (the `Junior Subordinated Debentures').
The $25,000,000 aggregate principal amount of the Junior Subordinated Debentures
represents the sole asset of the Trust. The Company has guaranteed, on a
subordinated basis, distributions and other payments due on the Capital
Securities (the `Guarantee'). The Guarantee, when taken together with the
Company's obligations under (i) the Debentures; (ii) the indenture pursuant to
which the Junior Subordinated Debentures were issued; and (iii) the Amended and
Restated Declaration of Trust governing the Trust constitutes a full and
unconditional guarantee of the Trust's obligations under the Capital Securities.
10. STOCKHOLDERS' EQUITY
The Company has three stock option plans: the Amended and Restated 1995 Stock
Plan, the Amended and Restated 1995 Non-Employee Director Stock Option Plan, and
the 1997 Employee Stock Purchase Plan.
Under the terms of the Amended and Restated 1995 Stock Plan, the Company may
grant options to purchase up to a maximum of 1,160,000 shares of Common Stock to
certain employees, consultants, directors and officers. The options may be
awarded as incentive stock options (employees only), non-qualified stock
options, stock awards or opportunities to make direct purchases of stock. Of the
1,160,000 shares of Common Stock authorized for issuance under the plan 516,290
were available for grant at December 31, 1998.
F-21
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
Under the terms of the 1995 Amended and Restated Non-Employee Director Stock
Option Plan as amended, the Company may grant options to non-employee directors
to purchase up to a maximum of 100,000 shares of Common Stock. Options to
purchase 2,500 shares of Common Stock were awarded on November 8, 1995 to each
director. Subsequently, any director elected or appointed after such date will
receive an automatic initial grant of options to purchase 2,500 shares upon
becoming a director. Thereafter, each director will receive an automatic grant
of options to purchase 2,500 shares effective upon each one-year anniversary of
the date of such director's original grant. Additionally, non-employee directors
may elect to receive options to acquire shares of the Company's Common Stock in
lieu of such director's cash retainer. Any election is subject to certain
restrictions under the 1995 Non-Employee Director Stock Option Plan. The number
of shares of stock underlying the option is equal to the quotient obtained by
dividing the cash retainer by the value of an option on the date of grant as
determined using the Black-Scholes model.
The exercise price of options under the 1995 Non-Employee Director Stock Option
Plan and the incentive options under the 1995 Stock Plan may not be less than
the fair market value at the date of the grant. The exercise price of the
non-qualified options from the 1995 Stock Plan is determined by the compensation
committee of the Board of Directors. All options become exercisable as specified
at the date of the grant.
In November 1995, the Company granted 114,000 of shares of Common Stock to
certain officers of the Company under the 1995 Stock Plan. Of these grants,
105,000 shares vest in sixty equal monthly installments, and the remainder vests
in five equal annual installments. Upon termination of employment, the Company
has the right to repurchase all unvested shares at a price equal to the fair
market value at the date of the grant. On March 31, 1998, the Company
repurchased 4,000 unvested shares for $77,000 under the terms of the 1995 Stock
Plan. On May 29, 1998, the Company granted 10,000 shares of Common Stock to an
officer of AMT Capital Services, Inc. in connection with the acquisition of AMT
Capital Services Inc. The Company has recorded deferred compensation of
$1,248,775 and $1,198,604 at December 31, 1997 and December 31, 1998
respectively, pursuant to these grants.
Under the terms of the 1997 Employee Stock Purchase Plan, the Company may issue
up to 140,000 shares of Common Stock pursuant to the exercise of nontransferable
options granted to participating employees. The 1997 Purchase Plan permits
eligible employees to purchase up to 1,000 shares of Common Stock per payment
period, subject to limitations provided by Section 423(b) of the Internal
Revenue Code, through accumulated payroll deductions. The purchases are made
twice a year at a price equal to the lesser of (i) 90% of the average market
value of the Common Stock on the first business day of the payment period, or
(ii) 90% of the average market value of the Common Stock on the last business
day of the payment period. Annual payment periods consist of two six-month
periods, January 1 through June 30 and July 1 through December 31.
A summary of option activity under the 1995 Non-Employee Director Stock Option
and the Amended and Restated 1995 Stock Plans is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------ ---------------------------- ------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 211,500 $17 345,150 $21 517,284 $30
Granted 141,150 26 187,262 43 237,363 49
Exercised (312) 21 (14,753) 17 (33,355) 52
Canceled (7,188) 17 (375) 17 (18,481) 25
---------- ----------- -----------
Outstanding at end of
year 345,150 21 517,284 30 702,811 42
---------- ----------- -----------
---------- ----------- -----------
Outstanding and
exercisable at year-
end 60,489 148,939 249,249
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
F-22
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarized information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE PRICE
PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE PRICE DECEMBER 31,
1998
--------------- ------------------ ------------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$17 150,535 1.9 years $17 111,133 $17
22-26 131,526 2.8 26 71,133 26
28-47 183,387 8.0 43 56,515 43
48-66 237,363 9.4 49 10,468 49
----------------- ----------------
17-66 702,811 6.2 36 249,249 26
----------------- ----------------
----------------- ----------------
</TABLE>
A summary of the 1997 Employee Stock Purchase Plan is as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
SHARES SHARES
-------------- ---------------
<S> <C> <C>
Total shares available under the
Plan beginning of year 140,000 128,752
Issued at June 30 - (10,366)
Issued at December 31 (11,248) (9,985)
-------------- ---------------
Total shares available under the
Plan end of year 128,752 108,401
-------------- ---------------
-------------- ---------------
</TABLE>
At December 31, 1997, the exercise price of the stock was $41.50, or 90% of the
average market value of the Common Stock on the last business day of the payment
period. During the year ended December 31, 1998, the exercise price of the stock
was $43.25, or 90% of the average market value of the Common Stock on the first
business day of the payment period ending June 30, 1998, and $47.75, or 90% of
the average market value of the Common Stock on the last business day of the
payment period ending December 31, 1998.
F-23
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK-BASED COMPENSATION - With respect to employee stock-based
compensation, the Company has adopted the disclosure-only requirements of SFAS
No. 123. Accordingly, no compensation cost has been recognized in the
accompanying financial statements for employee stock-based compensation awarded
under the three stock employee stock option plans because there was no intrinsic
value at the date of grant. If compensation cost had been determined for awards
granted under the employee stock option plans based on the fair value of the
awards at the date of grant in accordance with the provisions of SFAS No. 123,
the Company's net income and earnings per share for the years ended December 31,
1996, 1997 and 1998, respectively, would have decreased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C> <C>
Net income As reported $7,666,161 $12,629,880 $ 15,054,843
Pro forma 7,394,933 12,025,781 13,582,190
Basic earnings per share As reported $ 1.15 $ 1.90 $ 2.25
Pro forma 1.11 1.81 2.03
Diluted earnings per share As reported 1.14 1.85 2.18
Pro forma 1.10 1.76 1.97
</TABLE>
The fair value of each option grant under the employee stock option plan was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions for the years ended December 31, 1998, 1997, and 1996,
respectively: an assumed risk-free interest rate of 4.68%, 5.61%,and 6.25%, an
expected life of ten and five years, an expected volatility of 50%, 27%, and
20%, a dividend yield of 3.33%, 0.17% and 0.27%.
The fair value of each option grant under the employee stock purchase plan was
estimated by computing the option discount which is the difference between the
average market value of the Company's Common Stock during the payment period and
the lesser of (i) 90% of the average market value of the Common Stock on the
first business day of the payment period, or (ii) 90% of the average market
value of the Common Stock on the last business day of the payment period.
F-24
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
EARNINGS PER SHARE - As a result of the EPS methods required to be disclosed by
the Company under SFAS No. 128, the Statement also requires disclosure of
reconciliation from Basic EPS to Diluted EPS for years ended December 31, 1996,
1997 and 1998 as follows:
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
--------------- ------------- ------
<S> <C> <C> <C>
DECEMBER 31, 1998
BASIC EPS
Income available to common stockholders $15,054,843 6,691,268 $ 2.25
------
------
Dilutive effect of common equivalent shares of stock options 213,430
-------------
DILUTED EPS
Income available to common stockholders $15,054,843 6,904,698 $ 2.18
--------------- ------------- ------
--------------- ------------- ------
DECEMBER 31, 1997
BASIC EPS
Income available to common stockholders $12,629,880 6,640,434 $ 1.90
------
------
Dilutive effect of common equivalent shares of stock options 169,175
-------------
DILUTED EPS
Income available to common stockholders $12,629,880 6,809,609 $ 1.85
--------------- -------------- ------
--------------- -------------- ------
DECEMBER 31, 1996
BASIC EPS
Income available to common stockholders $ 7,666,161 6,638,201 $ 1.15
------
------
Dilutive effect of common equivalent shares of stock options 60,187
-------------
DILUTED EPS
Income available to common stockholders $ 7,666,161 6,698,388 $ 1.14
--------------- ------------- ------
--------------- ------------- ------
</TABLE>
F-25
<PAGE>
11. EMPLOYEE BENEFIT PLANS
PENSION PLAN - The Company has a trusteed, noncontributory, qualified defined
benefit pension plan covering substantially all of its employees who were hired
before January 1, 1997. The benefits are based on years of service and the
employee's compensation during employment. The Company's funding policy is to
contribute annually the maximum amount, which can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for benefits expected to be earned in the
future.
The Company established a supplemental retirement plan in 1994 that covers
certain employees and pays benefits that supplements any benefits paid under the
qualified plan. Benefits under the supplemental plan are generally based on
compensation not includable in the calculation of benefits to be paid under the
qualified plan. The total cost of this plan to the Company was $36,960, $60,002
and $105,404 in the years ended December 31, 1996, 1997 and 1998 respectively.
The following table sets forth the funded status and accrued pension cost for
the Company's qualified defined benefit pension plan.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 6,885,605 $ 6,284,592
Service cost 540,446 619,354
Interest cost 556,956 598,489
Liability (gain)/loss (1,564,253) 1,587,995
Benefits paid (134,159) (163,674)
--------------------- ---------------------
Projected benefit obligation at the end of the year 6,284,595 8,926,756
--------------------- ---------------------
Change in assets:
Assets at the beginning of the year 6,213,136 8,167,813
Employer contributions 809,446 1,061,665
Actual return 1,279,390 1,282,208
Benefits paid (134,159) (163,674)
--------------------- ---------------------
Assets at the end of the year 8,167,813 10,348,012
--------------------- ---------------------
Funded status:
Projected benefit obligation (6,284,595) (8,926,756)
Fair value of plan assets 8,167,813 10,348,012
--------------------- ---------------------
Funded status 1,883,218 1,421,256
--------------------- ---------------------
Unrecognized net transition asset (339,275) (300,426)
Unrecognized prior service cost 209,710 180,969
Unrecognized net (gain) or loss (3,362,730) (2,227,565)
--------------------- ---------------------
(Accrued)/prepaid pension cost $ (1,609,077) $ (925,766)
--------------------- ---------------------
</TABLE>
Net pension cost included the following components for the years ended December
31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 848,000 $ 540,000 $ 619,000
Interest cost on projected benefit
obligations 520,000 557,000 598,000
Return on plan assets (1,013,000) (1,279,000) (1,282,000)
Net amortization and deferral 508,000 714,000 443,000
----------------- ---------------- ----------------
Net periodic pension cost $ 863,000 $ 532,000 $ 378,000
----------------- ---------------- ----------------
----------------- ---------------- ----------------
</TABLE>
F-26
<PAGE>
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Weighted average discount rate 7.50 % 6.75 %
Rate of increase in future compensation levels 5.00 5.00
Long-term rate of return on plan assets 8.50 8.50
</TABLE>
EMPLOYEE SAVINGS PLAN - The Company sponsors a qualified defined contribution
employee savings plan covering substantially all employees who elect to
participate. The Company matches employee contributions to the plan up to
specified amounts. The total cost of this plan to the Company was $208,000,
$436,000 and $378,400 in the years ended December 31, 1996, 1997 and 1998
respectively.
12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
LINES OF CREDIT - At December 31, 1998, the Company had commitments to
individuals under collateralized open lines of credit totaling $174,860,000,
against which $33,461,000 in loans were drawn. The credit risk involved in
issuing lines of credit is essentially the same as that involved in extending
loan facilities. The Company does not anticipate any loss as a result of these
lines of credit.
INTEREST-RATE CONTRACTS - The contractual or notional amounts of derivative
financial instruments, swap agreements, held by the Company at December 31, 1997
and 1998 were $340,000,000 and $420,000,000, respectively. Interest rate
contracts involve an agreement with a counterparty to exchange cash flows based
on an underlying interest rate index. A swap agreement involves the exchange of
a series of interest payments, either at a fixed or variable rate, based upon
the notional amount without the exchange of the underlying principal amount. The
Company's exposure from these interest rate contracts results from the
possibility that one party may default on its contractual obligation. The
Company experienced no terminations by counterparties of interest rate swaps
designated as hedges. Credit risk is limited to the positive fair value of the
derivative financial instrument, which is significantly less than the notional
value. During 1998, the Company entered into agreements to assume fixed-rate
interest payments in exchange for variable market-indexed interest payments. The
original terms range from 12 to 36 months. The weighted-average fixed-payment
rates were 5.90 percent at December 31, 1998. Variable-interest payments
received are indexed to 1 month LIBOR. At December 31, 1998, the
weighted-average rate of variable market-indexed interest payment obligations to
the Company was 5.55 percent. The effect of these agreements was to lengthen
short-term variable rate liabilities into longer-term fixed rate liabilities.
These contracts had no carrying value and the fair value was approximately
($2,771,000) at December 31, 1998.
F-27
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
RESTRICTIONS ON CASH BALANCES - The Company is required to maintain certain
average cash reserve balances. The reserve balance requirement with the Federal
Reserve Bank as of December 31, 1998 was $27,151,000. In addition, other cash
balances in the amount of $1,617,000 were pledged to secure clearings with a
depository institution, Depository Trust Company, as of December 31, 1998.
LEASE COMMITMENTS - Minimum future commitments on non-cancelable operating
leases at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING BANK PREMISES EQUIPMENT
<S> <C> <C>
1999 $ 6,787,000 $ 2,342,000
2000 6,669,000 1,214,000
2001 6,548,000 399,000
2002 6,091,000 17,000
2003 and beyond 28,444,000 3,000
</TABLE>
Total rent expense was $6,099,000, $6,605,000 and $9,472,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
On February 1, 1996, the Company entered into a five-year facility management
agreement with a third party provider of duplicating and delivery services.
Under the terms of the agreement, the Company agreed to pay minimum annual
charges of $406,788, $427,119, and $35,735 in the years ended 1999, 2000, and
2001, respectively. These minimum charges can increase due to certain usage
thresholds. Service expense under this contract was $599,000, $452,000, and
$240,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
CONTINGENCIES - The Company provides global custody, multicurrency accounting,
institutional transfer agency, performance measurement, foreign exchange,
securities lending and mutual fund administration services to a variety of
financial asset managers, including mutual fund complexes, investment advisors,
banks and insurance companies. Assets under custody and management, held by the
Company in a fiduciary capacity, are not included in the consolidated balance
sheets since such items are not assets of the Company. Management conducts
regular reviews of its fiduciary responsibilities and considers the results in
preparing its consolidated financial statements. In the opinion of management,
there are no contingent liabilities at December 31, 1998 that are material to
the consolidated financial position or results of operations of the Company.
F-28
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments are as
follows at December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
On-balance sheet amounts:
Cash and due from banks $ 17,299 $ 17,299 $ 18,775 $ 18,775
Federal funds sold 75,000 75,000 - -
Securities held to maturity 802,046 809,708 942,817 948,645
Securities available for sale 462,850 462,850 345,070 345,070
Loans 55,945 55,945 54,292 54,292
Deposits 846,740 846,740 905,305 905,305
Off-balance sheet amounts:
Commitments to lend - 62,845 - 141,399
Interest rate swap agreements
(notional amounts of $340,000 and $420,000
at December 31, 1997 and 1998) - (358) - (2,771)
</TABLE>
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1998. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been significantly revalued for purposes of
these consolidated financial statements since those dates and therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
F-29
<PAGE>
15. FOREIGN EXCHANGE CONTRACTS
A summary of foreign exchange contracts outstanding at December 31, 1997 and
December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------------------- --------------------------------------------
UNREALIZED UNREALIZED
CURRENCY PURCHASES SALES GAIN/LOSS PURCHASES SALES GAIN/LOSS
<S> <C> <C> <C> <C> <C> <C>
Japan (JPY) $ 5,000 $ 5,000 - $ 17,632 $ 17,632 -
France (FRF) 4,292 4,292 - 10,592 10,592 -
European Unit (XEU) - - - 8,791 8,791 -
Britain (GBP) 3,440 3,440 - 6,072 6,072 -
Hong Kong (HKD) 5,011 5,011 - 4,739 4,739 -
Switzerland (CHF) 483 483 - 2,037 2,037 -
Germany (DEM) 1,016 1,016 - 1,325 1,325 -
Singapore (SGD) 368 368 - 891 891 -
Italy (ITL) 145 145 - 864 864 -
Other currencies 3,187 3,187 - 173 173 -
-------------- -------------- ------------- ------------- --------------- --------------
$ 22,942 $ 22,942 - $ 53,116 $ 53,116 -
-------------- -------------- ------------- ------------- --------------- --------------
-------------- -------------- ------------- ------------- --------------- --------------
</TABLE>
The maturity of contracts outstanding as of December 31, 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
MATURITY PURCHASES SALES
<S> <C> <C>
January 1999 $44,083 $44,083
March 1999 653 653
May 1999 380 380
August 1999 8,000 8,000
</TABLE>
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company and the Bank as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier I risk based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Company's or the Bank's category. The
following table presents the capital ratios for the Bank and the Company for the
years ended December 31, 1998 and December 31, 1997:
F-30
<PAGE>
16. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
--------------------------- ----------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- --------- --------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital
(to Risk Weighted Assets-
the Company) $70,580,033 15.34% $36,798,822 8.00% N/A
(to Risk Weighted
Assets- the Bank) $67,866,671 14.81% $36,652,540 8.00% $45,815,675 10.00%
Tier I Capital
(to Risk Weighted Assets-
the Company) $70,480,033 15.32% $18,399,411 4.00% N/A
(to Risk Weighted
Assets- the Bank) $67,766,671 14.79% $18,326,270 4.00% $27,489,405 6.00%
Tier I Capital
(to Average Assets- the
Company) $71,480,033 4.61% $61,215,675 4.00% N/A
(to Average Assets- the
Bank) $67,766,671 4.43% $61,186,835 4.00% $76,483,544 5.00%
AS OF DECEMBER 31, 1997:
Total Capital
(to Risk Weighted Assets-
the Company) $98,507,386 29.20% $26,984,903 8.00% N/A
(to Risk Weighted
Assets- the Bank) $96,140,693 28.57% $26,918,947 8.00% $33,648,684 10.00%
Tier I Capital
(to Risk Weighted
Assets- the Company) $98,407,386 29.17% $13,492,452 4.00% N/A
(to Risk Weighted
Assets- the Bank) $96,040,693 28.54% $13,459,473 4.00% $20,189,210 6.00%
Tier I Capital
(to Average Assets- the
Company) $98,407,386 6.44% $61,105,815 4.00% N/A
(to Average Assets- the
Bank) $96,040,693 6.31% $60,892,699 4.00% $76,115,874 5.00%
</TABLE>
Under Massachusetts's law, trust companies such as the Bank may only pay
dividends out of `net profits' and only to the extent that such payments will
not impair the Bank's capital stock and surplus account. If, prior to
declaration of a dividend, the Bank's capital stock and surplus accounts do not
equal at least 10% of its deposit liabilities, then prior to the payment of the
dividend, the Bank must transfer from net profits to its surplus account the
amount required to make its surplus account equal to either (i) together with
capital stock, 10% of deposit liabilities, or (ii) subject to certain
adjustments, 100% of capital stock.
F-31
<PAGE>
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Interest income $ 15,031,602 $ 16,991,919 $ 19,117,584 $ 21,894,824
Interest expense 8,575,466 10,402,357 13,020,232 14,865,176
Non-interest income 18,891,471 19,632,073 21,059,964 23,054,793
Operating expenses 20,252,299 20,976,977 21,752,152 24,380,963
Income before income taxes and
minority interest 5,095,308 5,244,658 5,405,164 5,703,478
Income taxes 1,827,581 1,759,506 1,876,470 1,917,895
Minority interest 258,498 392,835 395,143 390,800
Net income 3,009,229 3,092,317 3,133,551 3,394,783
Basic earnings per share 0.45 0.47 0.47 0.51
Diluted earnings per share 0.44 0.46 0.46 0.49
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Interest income $20,980,282 $20,969,697 $22,855,999 $20,925,904
Interest expense 13,856,161 15,177,451 16,332,317 13,672,196
Non-interest income 22,212,593 24,021,958 23,922,774 28,698,724
Operating expenses 23,677,105 23,564,795 23,807,411 28,534,803
Income before income taxes and
minority interest 5,659,609 6,249,409 6,639,045 7,417,629
Income taxes 2,057,148 2,322,983 2,297,172 2,670,346
Minority interest 390,800 390,800 390,800 390,800
Net income 3,211,661 3,535,626 3,951,073 4,356,483
Basic earnings per share 0.48 0.53 0.59 0.65
Diluted earnings per share 0.47 0.51 0.57 0.63
</TABLE>
F-32
<PAGE>
18. SEGMENT REPORTING
The Company does not utilize segment information for internal reporting as
management views the Company as one segment. The following represents net
operating revenue by geographic area for the years ended December 31, 1998,
1997, and 1996, and long-lived assets by geographic area for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
NET OPERATING NET OPERATING NET OPERATING LONG-LIVED LONG-LIVED
GEOGRAPHIC REVENUE REVENUE REVENUE ASSETS ASSETS
INFORMATION: 1998 1997 1996 1998 1997
-------------------- ---------------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
United States $117,958,896 $102,460,836 $ 72,829,636 $54,063,681 $ 8,016,915
Ireland 3,933,618 2,395,288 833,623 271,336 215,692
Canada 3,444,975 3,764,761 3,361,304 264,834 323,624
Cayman Islands 212,317 190,114 106,525 - -
---------------- ---------------- ----------------- --------------- ----------------
Total $ 125,549,806 $108,810,999 $ 77,131,088 $54,599,851 $ 8,556,231
---------------- ---------------- ----------------- --------------- ----------------
---------------- ---------------- ----------------- --------------- ----------------
</TABLE>
The following represents the Company's operating revenue by service line for the
years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
OPERATING REVENUE OPERATING REVENUE OPERATING REVENUE
SERVICE LINES: 1998 1997 1996
--------------------------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C>
Custody accounting, transfer agency,
and administration $ 87,869,653 $ 70,620,438 $ 53,891,944
Investment advisory 760,060 1,055,820 -
Securities lending 3,625,309 2,864,941 1,946,611
Foreign exchange 5,020,351 4,427,158 2,106,175
------------------ -------------------- --------------------
Total $ 97,275,373 $ 78,968,357 $ 57,944,730
------------------ -------------------- --------------------
------------------ -------------------- --------------------
</TABLE>
No one customer exceeded 10% of the Company's consolidated net operating
revenues for the year ended December 31, 1998. Revenues from one customer
represented approximately $11 million or 10%, and $7 million or 10%, of the
Company's consolidated net operating revenues for the years ended December 31,
1997 and 1996, respectively
F-33
<PAGE>
19. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
The following represents the separate condensed financial statements of IFSC as
of December 31, 1997 and 1998, and for the years ended December 31, 1996, 1997
and 1998.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
STATEMENTS OF INCOME 1996 1997 1998
<S> <C> <C> <C>
Equity in undistributed income/(loss) of
bank subsidiary $ 7,601,082 $ 11,026,680 $ 15,427,339
Equity in undistributed income/(loss) of
non-bank subsidiaries (107,801) 1,078,094 89,666
Dividend income from bank subsidiary 478,546 2,142,391 1,259,060
Dividend income from non-bank
subsidiaries - 69,528 75,620
Management fee paid by non-bank
subsidiaries - - 140,000
Interest expense on subordinated debt - (2,315,271) (2,518,120)
Income tax benefit - 908,284 961,541
Operating expenses (305,666) (279,826) (380,263)
--------------------- ------------------- --------------------
Net income $ 7,666,161 $ 12,629,880 $ 15,054,843
--------------------- ------------------- --------------------
--------------------- ------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1998
<S> <C> <C>
Assets:
Cash $ 1,154,645 $ 2,011,856
Investments in bank subsidiary 97,507,587 109,758,948
Investments in non-bank subsidiaries 1,545,241 1,569,104
Receivable due from bank subsidiary 1,455,953 -
Receivable due from non-bank subsidiary - 877,433
Income tax receivable 1,584 -
Other assets 5,168 2,559
------------------- --------------------
Total Assets $ 101,670,178 $ 114,219,900
------------------- --------------------
------------------- --------------------
Liabilities and Stockholders' Equity
Accrued expenses $ 23,426 $ 23,419
Payable due to non-bank subsidiary - 121,196
Income tax payable - 411
Other liabilities 159,576 17,971
Subordinated debt 25,774,000 25,774,000
------------------- --------------------
Total Liabilities 25,957,002 25,936,997
------------------- --------------------
Stockholders' Equity
Common stock 66,643 67,261
Surplus 55,903,286 57,705,468
Deferred compensation (1,248,775) (1,198,604)
Retained earnings 19,525,129 33,483,703
Net unrealized gains on available for
sale securities 1,466,893 (1,774,885)
Treasury stock - (40)
------------------- --------------------
Total Stockholders' Equity 75,713,176 88,282,903
------------------- --------------------
Total Liabilities and Stockholders' Equity $101,670,178 $ 114,219,900
------------------- --------------------
------------------- --------------------
</TABLE>
F-34
<PAGE>
19. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,666,161 $ 12,629,880 $ 15,054,843
-------------------- ------------------- -------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred compensation 430,112 438,900 550,171
Change in assets and liabilities:
Receivable due from bank subsidiary (416,376) (962,864) 1,455,953
Receivable due from non-bank subsidiary (877,433)
Income tax receivable - (1,584) 1,584
Income tax payable 411
Payable due to non-bank subsidiary 121,196
Accrued expenses - 23,426 (7)
Other assets (3,438) (1,731) 2,609
Other liabilities 5,000 154,576 (141,605)
Equity in undistributed earnings of
bank subsidiary (7,601,082) (11,026,680) (15,427,339)
Equity in undistributed earnings of
non-bank subsidiary 107,801 (1,078,094) (395,029)
-------------------- ------------------- -------------------
Total adjustments (7,477,983) (12,454,051) (14,709,489)
-------------------- ------------------- -------------------
Net cash provided by operating activities 188,178 175,829 345,354
-------------------- ------------------- -------------------
Cash flows from investing activities:
Payments for investments in and
advances to subsidiary (35,193) (25,000,000) -
-------------------- ------------------- -------------------
Net cash used by investing activities (35,193) (25,000,000) -
-------------------- ------------------- -------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 5,148 720,438 1,379,760
Purchase of treasury stock - - (77,000)
Proceeds from issuance of
subordinated debt, net of issuance costs - 25,774,000 -
Costs of stock issuance 35,193 - -
Dividends paid (193,326) (515,622) (790,903)
-------------------- ------------------- -------------------
Net cash provided (used) by financing
activities (152,985) 25,978,816 511,857
-------------------- ------------------- -------------------
Net increase in cash and due from banks - 1,154,645 857,211
Cash and Due from Banks, beginning of period - - 1,154,645
-------------------- ------------------- -------------------
Cash and Due from Banks, end of period $ - $ 1,154,645 $ 2,011,856
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
20. SUBSEQUENT EVENTS
On February 16, 1999, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable March 17,
1999 to stockholders of record on March 1, 1999. All share numbers shown in this
Report reflect shares outstanding prior to the two-for-one stock split.
F-35
<PAGE>
Exhibit 10.1
INVESTORS FINANCIAL SERVICES CORP.
AMENDED AND RESTATED 1995 STOCK PLAN
------------------------------------
(as amended December 12, 1998)
1. PURPOSE. The purpose of the Investors Financial Services Corp.
1995 Stock Plan (the "Plan") is to encourage key employees of Investors
Financial Services Corp. (the "Company") and of any present or future parent or
subsidiary of the Company (collectively, "Related Corporations") and other
individuals who render services to the Company or a Related Corporation, by
providing opportunities to participate in the ownership of the Company and its
future growth through (a) the grant of options which qualify as "incentive stock
options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"); (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and
(d) opportunities to make direct purchases of stock in the Company
("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter
individually as an "Option" and collectively as "Options." Options, Awards and
authorizations to make Purchases are referred to hereafter collectively as
"Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation," respectively, as those terms are
defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board") or by
a committee appointed by the Board (the "Committee"); provided that the
Plan shall be administered: (i) to the extent required by applicable
regulations under Section 162(m) of the Code, by two or more "outside
directors" (as defined in applicable regulations thereunder) and (ii) to
the extent required by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 or any successor provision ("Rule 16b-3"), by a
disinterested administrator or administrators within the meaning of Rule
16b-3. Hereinafter, all references in this Plan to the "Committee" shall
mean the Board if no Committee has been appointed. Subject to ratification
of the grant or authorization of each Stock Right by the Board (if so
required by applicable state law), and subject to the terms of the Plan,
the Committee shall have the authority to (i) determine to whom (from
among the class of employees eligible under paragraph 3 to receive ISOs)
ISOs shall be granted, and to whom (from among the class of individuals
and entities eligible under paragraph 3 to receive Non-Qualified Options
and Awards and to make Purchases) Non-Qualified Options, Awards and
authorizations to make Purchases may be granted; (ii) determine the time
or times at which Options or Awards shall be granted or Purchases made;
(iii) determine the purchase price of shares subject to each Option or
Purchase, which prices shall not be less than the minimum price specified
in paragraph 6; (iv) determine whether each Option granted shall be an ISO
or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time
or times when each Option shall become exercisable and the duration of the
exercise period; (vi) extend the period during which outstanding Options
may be exercised; (vii) determine whether restrictions such as repurchase
options are to be imposed on shares subject to Options, Awards and
Purchases and the nature of such restrictions, if any, and (viii)
interpret the Plan and prescribe and rescind rules and regulations
relating to it. If the Committee determines to issue a Non-Qualified
Option, it shall take whatever actions it deems necessary, under Section
422 of the Code and the regulations promulgated thereunder, to ensure that
such Option is not treated as an ISO. The interpretation and construction
by the Committee of any provisions of the Plan or of any Stock Right
granted under it shall be final unless otherwise determined by the Board.
The Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. No member of the Board or
the Committee shall be liable for any action or determination made in good
faith with respect to the Plan or any Stock Right granted under it.
<PAGE>
-2-
B. COMMITTEE ACTIONS. The Committee may select one of its members
as its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts
of a majority of the members of the Committee at a meeting at which a
quorum is present, or acts reduced to or approved in writing by all the
members of the Committee (if consistent with applicable state law), shall
be the valid acts of the Committee. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all
members of the Committee and thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Subject to the
provisions of the first sentence of paragraph 2(A) above, if applicable,
Stock Rights may be granted to members of the Board. All grants of Stock
Rights to members of the Board shall in all other respects be made in
accordance with the provisions of this Plan applicable to other eligible
persons. Consistent with the provisions of the first sentence of Paragraph
2(A) above, members of the Board who either (i) are eligible to receive
grants of Stock Rights pursuant to the Plan or (ii) have been granted
Stock Rights may vote on any matters affecting the administration of the
Plan or the grant of any Stock Rights pursuant to the Plan, except that no
such member shall act upon the granting to himself or herself of Stock
Rights, but any such member may be counted in determining the existence of
a quorum at any meeting of the Board during which action is taken with
respect to the granting to such member of Stock Rights.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to
employees of the Company or any Related Corporation. Non-Qualified Options,
Awards and authorizations to make Purchases may be granted to any employee,
officer or director (whether or not also an employee) or consultant of the
Company or any Related Corporation. The Committee may take into consideration a
recipient's individual circumstances in determining whether to grant a Stock
Right. The granting of any Stock Right to any individual or entity shall neither
entitle that individual or entity to, nor disqualify such individual or entity
from, participation in any other grant of Stock Rights.
4. STOCK. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 1,160,000, subject to adjustment as provided in paragraph 13. If any Stock
Right granted under the Plan shall expire or terminate for any reason without
having been exercised in full or shall cease for any reason to be exercisable in
whole or in part or shall be repurchased by the Company, the shares of Common
Stock subject to such Stock Right shall again be available for grants of Stock
Rights under the Plan.
No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 448,000 of shares of Common
Stock under the Plan. If any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part or shall be repurchased by
the Company, the shares subject to such Option shall be included in the
determination of the aggregate number of shares of Common Stock deemed to have
been granted to such employee under the Plan. If, in accordance with the Plan,
an optionee uses shares of common stock of the Company to pay the exercise price
of an Option, only the number of shares issued net of shares tendered in payment
of such exercise price shall be deemed to be issued for purposes of determining
the maximum number of shares available under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the
Plan at any time on or after August 15, 1995 and prior to August 1, 2005. The
date of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
<PAGE>
-3-
date shall not be prior to the date on which the Committee acts to approve the
grant. Options granted under the Plan are intended to qualify as
performance-based compensation to the extent required under Proposed Treasury
Regulation Section 1.162-27.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. The
exercise price per share specified in the agreement relating to each
Non-Qualified Option granted, and the purchase price per share of stock
granted in any Award or authorized as a Purchase, under the Plan shall in
no event be less than the minimum legal consideration required therefor
under the laws of any jurisdiction in which the Company or its successors
in interest may be organized.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible
employee may be granted Options treated as ISOs only to the extent that,
in the aggregate under this Plan and all incentive stock option plans of
the Company and any Related Corporation, ISOs do not become exercisable
for the first time by such employee during any calendar year with respect
to stock having a fair market value (determined at the time the ISOs were
granted) in excess of $100,000. The Company intends to designate any
Options granted in excess of such limitation as Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option
is granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the date of grant or, if the
prices or quotes discussed in this sentence are unavailable for such date,
the last business day for which such prices or quotes are available prior
to the date of grant and shall mean (i) the average (on that date) of the
high and low prices of the Common Stock on the principal national
securities exchange on which the Common Stock is traded, if the Common
Stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Common Stock on the Nasdaq
National Market, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the
Nasdaq National Market. If the Common Stock is not publicly traded at the
time an Option is granted under the Plan, "fair market value" shall mean
the fair value of the Common Stock as determined by the Committee after
taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of the Common
Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i)
ten years from the date of grant in the case of Options generally and (ii)
five years from the date of grant in the case of ISOs granted to an employee
owning stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any Related
Corporation, as determined under paragraph 6(B). Subject to earlier
termination as provided in paragraphs 9 and 10, the term of each ISO shall be
the term set forth in the original instrument granting such ISO, except with
respect to any part of such ISO that is converted into a Non-Qualified Option
pursuant to paragraph 16.
<PAGE>
-4-
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9
through 12, each Option granted under the Plan shall be exercisable as
follows:
A. VESTING. The Option shall either be fully exercisable on
the date of grant or shall become exercisable thereafter in such
installments as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be
exercised at any time or from time to time, in whole or in part, for up to
the total number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes
exercisable; provided that the Committee shall not, without the consent of
an optionee, accelerate the permitted exercise date of any installment of
any Option granted to any employee as an ISO (and not previously converted
into a Non-Qualified Option pursuant to paragraph 16) if such acceleration
would violate the annual vesting limitation contained in Section 422(d) of
the Code, as described in paragraph 6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the
agreement relating to such ISO, if an ISO optionee ceases to be employed by the
Company and all Related Corporations other than by reason of death or disability
as defined in paragraph 10, no further installments of his or her ISOs shall
become exercisable, and his or her ISOs shall terminate on the earlier of (a)
thirty (30) days after the date of termination of his or her employment, or (b)
their specified expiration dates, except to the extent that such ISOs (or
unexercised installments thereof) have been converted into Non-Qualified Options
pursuant to paragraph 16. For purposes of this paragraph 9, employment shall be
considered as continuing uninterrupted during any bona fide leave of absence
(such as those attributable to illness, military obligations or governmental
service) provided that the period of such leave does not exceed 90 days or, if
longer, any period during which such optionee's right to reemployment is
guaranteed by statute. A bona fide leave of absence with the written approval of
the Committee shall not be considered an interruption of employment under this
paragraph 9, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the optionee
after the approved period of absence. ISOs granted under the Plan shall not be
affected by any change of employment within or among the Company and Related
Corporations, so long as the optionee continues to be an employee of the Company
or any Related Corporation. Nothing in the Plan shall be deemed to give any
grantee of any Stock Right the right to be retained in employment or other
service by the Company or any Related Corporation for any period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her death, any
ISO owned by such optionee may be exercised, to the extent otherwise
exercisable on the date of death, by the estate, personal representative
or beneficiary who has acquired the ISO by will or by the laws of descent
and distribution, until the earlier of (i) the specified expiration date
of the ISO or (ii) one year from the date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by
the Company and all Related Corporations by reason of his or her
disability, such optionee shall have the right to exercise any ISO held by
him or her on the date of termination of employment, for the number of
shares for which he or she could have exercised it on that date, until the
earlier of (i) the specified
<PAGE>
-5-
expiration date of the ISO or (ii) one year from the date of the
termination of the optionee's employment. For the purposes of the plan,
the term "disability" shall mean "permanent and total disability" as
defined in Section 22(e)(3) of the Code or any successor statute.
11. ASSIGNABILITY. No Stock Right shall be assignable or transferable
by the grantee except by will, by the laws of descent and distribution or, in
the case of Non-Qualified Options only, pursuant to a valid domestic relations
order. Except as set forth in the previous sentence, during the lifetime of a
grantee each Stock Right shall be exercisable only by such grantee.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events,
an optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"),
the Committee or the board of directors of any entity assuming the
obligations of the Company hereunder (the "Successor Board"), shall, as to
outstanding Options, either (i) make appropriate provision for the
continuation of such Options by substituting on an equitable basis for the
shares then subject to such Options either (a) the consideration payable
with respect to the outstanding shares of Common Stock in connection with
the Acquisition, (b) shares of stock of the surviving corporation or (c)
such other securities as the Successor Board deems appropriate, the fair
market value of which shall not materially exceed the fair market value of
the shares of Common Stock subject to such Options immediately preceding
the Acquisition; or (ii) upon written notice to the optionees, provide
that all Options must be exercised, to the extent then exercisable, within
a specified number of days of the date of such notice, at the end of which
period the Options shall terminate; or (iii) terminate all Options in
exchange for a cash payment equal to the excess of the fair market value
of the shares subject to such Options (to the extent then exercisable)
over the exercise price thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in subparagraph B above) pursuant to which
securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, an optionee upon
exercising an Option shall be entitled to
<PAGE>
-6-
receive for the purchase price paid upon such exercise the securities he
or she would have received if he or she had exercised such Option prior to
such recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs or would cause
adverse tax consequences to the holders, it may refrain from making such
adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under
the Plan and the optionee shall receive from the Company cash in lieu of
such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described
in subparagraphs A, B or C above, the class and aggregate number of shares
set forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the
specific adjustments to be made under this paragraph 13 and, subject to
paragraph 2, its determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the methods set forth in clauses (b), (c), (d) or
(e) of the preceding sentence, such discretion shall be exercised in writing at
the time of the grant of the ISO in question. The holder of an Option shall not
have the rights of a shareholder with respect to the shares covered by such
Option until the date of issuance of a stock certificate to such holder for such
shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date such
stock certificate is issued.
<PAGE>
-7-
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
August 15, 1995, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the approval
of stockholders is not obtained prior to August 15, 1996, any grants of ISOs
under the Plan made prior to that date will be rescinded. The Plan shall expire
at the end of the day on August 1, 2005 (except as to Options outstanding on
that date). Subject to the provisions of paragraph 5 above, Options may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following actions:
(a) the total number of shares that may be issued under the Plan may not be
increased (except by adjustment pursuant to paragraph 13); (b) the benefits
accruing to participants under the Plan may not be materially increased; (c) the
requirements as to eligibility for participation in the Plan may not be
materially modified; (d) the provisions of paragraph 3 regarding eligibility for
grants of ISOs may not be modified; (e) the provisions of paragraph 6(B)
regarding the exercise price at which shares may be offered pursuant to ISOs may
not be modified (except by adjustment pursuant to paragraph 13); (f) the
expiration date of the Plan may not be extended; and (g) the Board may not take
any action which would cause the Plan to fail to comply with Rule 16b-3. Except
as otherwise provided in this paragraph 15, in no event may action of the Board
or stockholders alter or impair the rights of a grantee, without such grantee's
consent, under any Option previously granted to such grantee.
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. The Committee, at
the written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action.
17. APPLICATION OF FUNDS. The proceeds received by the Company from
the sale of shares pursuant to Options granted and Purchases authorized under
the Plan shall be used for general corporate purposes.
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an
ISO granted under the Plan, each optionee agrees to notify the Company in
writing immediately after such optionee makes a Disqualifying Disposition (as
described in Sections 421, 422 and 424 of the Code and regulations thereunder)
of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includible in gross income. The Committee in its discretion may
condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or securities acquired
by exercising an Option, on the grantee's making satisfactory arrangement for
such withholding.
<PAGE>
-8-
Such arrangement may include payment by the grantee in cash or by check of the
amount of the withholding taxes or, at the discretion of the Committee, by the
grantee's delivery of previously held shares of Common Stock or the withholding
from the shares of Common Stock otherwise deliverable upon exercise of a Option
shares having an aggregate fair market value equal to the amount of such
withholding taxes.
20. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Options in connection with
the Plan.
21. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Options shall be governed by the laws of the Commonwealth
of Massachusetts, or the laws of any jurisdiction in which the Company or its
successors in interest may be organized.
<PAGE>
Exhibit 10.14
APPENDIX A
-------------
INVESTORS FINANCIAL SERVICES CORP.
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
AMENDED AND RESTATED AS OF JANUARY 12, 1999
1. PURPOSE. This Non-Qualified Stock Option Plan, to be known as the 1995
Non-Employee Director Stock Option Plan (hereinafter, this "Plan") is intended
to promote the interests of Investors Financial Services Corp. (hereinafter, the
"Company") by providing an inducement to obtain and retain the services of
qualified persons who are not employees or officers of the Company to serve as
members of its Board of Directors (the "Board").
2. AVAILABLE SHARES. The total number of shares of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") for which options may be
granted under this Plan shall not exceed 100,000 shares, subject to adjustment
in accordance with paragraph 12 of this Plan. Shares subject to this Plan are
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company. If any options granted under this Plan are
surrendered before exercise or lapse without exercise, in whole or in part, the
shares reserved therefor shall continue to be available under this Plan. If, in
accordance with the Plan, an optionee uses shares of common stock of the Company
to pay the exercise price of an Option, only the number of shares issued net of
shares tendered in payment of such exercise price shall be deemed to be issued
for purposes of determining the maximum number of shares available under the
Plan.
3. ADMINISTRATION. This Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board shall have all
power and authority to administer this Plan. In such event, the word "Committee"
wherever used herein shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to this Plan or any option granted
under it.
4. AUTOMATIC GRANT OF OPTIONS. Subject to the availability of shares under
this Plan, (a) each person who is or becomes a member of the Board and who is
not an employee or officer of the Company (a "Non-Employee Director") shall be
automatically granted on the later of (i) the date such person is first elected
to the Board or (ii) the date of pricing of the Company's initial public
offering of shares of Common Stock (the "Approval Date") (such later date being
referred to herein as the "Grant Date"), without further action by the Board, an
option to purchase 2,500 shares of the Common Stock, and (b) each person
receiving an option pursuant to clause (a) above who is a Non-Employee Director
shall be, on each successive one-year anniversary of such person's Grant Date
during the term of this Plan, automatically granted on each such date an option
to purchase 2,500 shares of the Common Stock.
5. ELECTION TO RECEIVE STOCK OPTIONS. In addition to the automatic grant
of options under Section 4, subject to the availability of shares under this
Plan, each Non-Employee Director may make an election (the "Election") to
receive, in lieu of his or her cash retainer, options to acquire shares of
Common Stock. The Election must be in writing and must be delivered to the
Secretary of the Company at least six months prior to the scheduled payment date
of the cash retainer which it is intended to replace.
<PAGE>
-2-
(a) Any Election shall be irrevocable for six months and may only be
revoked after such six-month period by a written revocation which shall take
effect six months after receipt of such revocation by the Company.
(b) Each Non-Employee Director who elects to receive options in lieu of
his or her cash retainer shall be granted an option to purchase shares on the
first day of each calendar quarter provided that at least six months has lapsed
since the Election. The total number of shares of stock to be covered by the
option shall be equal to the quotient obtained by dividing the cash retainer by
the value of an option on the date of grant as determined using the
Black-Scholes model.
6. RELOAD OPTIONS. If an optionee makes payment for the exercise of an
option granted hereunder through the delivery to the Company of shares of the
Company's Common Stock pursuant to paragraph 11(b) of this Plan, such optionee
shall be granted automatically a new "reload" stock option. Such new "reload"
stock option shall (i) be an option to purchase the number of shares provided as
consideration for the exercise price in connection with the exercise of the
original stock option, (ii) have a per share exercise price equal to the fair
market value of such shares as of the date of exercise of the original stock
option, (iii) be immediately exercisable and have a term of ten years from the
date of the original stock option, and (iv) otherwise have the same terms and
conditions as the original stock option, except that it will not provide for the
automatic grant of additional reload stock options upon its exercise.
7. OPTION PRICE. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of paragraph 12 of this Plan. For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the date of grant or, if prices or quotes are unavailable for
such date, the last business day for which such prices or quotes are available
prior to the date of grant and shall mean (i) the average (on that date) of the
high and low prices of the Common Stock on the principal national securities
exchange on which the Common Stock is traded, if the Common Stock is then traded
on a national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market, if the Common Stock is
not then traded on a national securities exchange; or (iii) the closing bid
price (or average of bid prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Common Stock is not
reported on the Nasdaq National Market List. Notwithstanding, the purchase price
of the stock underlying the options granted upon the pricing of the Company's
initial public offering pursuant to Section 4(a)(ii) above shall be the initial
public offering price of the Company's Common Stock. However, if the Common
Stock is not publicly traded at the time an option is granted under the Plan,
"fair market value" shall be deemed to be the fair value of the Common Stock as
determined by the Committee after taking into consideration all factors which it
deems appropriate, including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at arm's length.
8. PERIOD OF OPTION. Unless sooner terminated in accordance with the
provisions of paragraph 10 of this Plan, an option granted hereunder shall
expire on the date which is ten (10) years after the date of grant of the
option. Notwithstanding, options granted prior to January 12, 1999 shall expire
on the date which is five (5) years after the date of grant.
9. (a) VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS. Options
granted under this Plan shall not be exercisable until they become vested.
Options granted under Section 4 of this Plan shall vest in the optionee and thus
become exercisable in 48 equal monthly installments beginning one month from the
date of grant, provided that the optionee has continuously served as a member of
the Board through such vesting date. Options granted under Section 5 of this
Plan shall vest in the optionee and thus become exercisable on the date of
grant.
<PAGE>
-3-
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan.
(b) NON-TRANSFERABILITY. Any option granted pursuant to this Plan
shall not be assignable or transferable other than by will or the laws of
descent and distribution or pursuant to a domestic relations order and shall be
exercisable during the optionee's lifetime only by him or her.
10. TERMINATION OF OPTION RIGHTS.
(a) In the event an optionee ceases to be a member of the Board
for any reason other than death or permanent disability, any then unexercised
portion of options granted to such optionee shall, to the extent not then
vested, immediately terminate and become void; and any portion of an option
which is then vested but has not been exercised at the time the optionee so
ceases to be a member of the Board shall remain exercisable until the scheduled
expiration date of the option.
(b) In the event that an optionee ceases to be a member of the
Board by reason of his or her death or permanent disability, any option granted
to such optionee shall be immediately and automatically accelerated and become
fully vested and all unexercised options shall be exercisable by the optionee
(or by the optionee's personal representative, heir or legatee, in the event of
death) until the scheduled expiration date of the option.
11. EXERCISE OF OPTION. Subject to the terms and conditions of this Plan
and the option agreements, an option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to the
Company by mail or in person addressed to the Company, at its principal
executive offices, stating the number of shares with respect to which the option
is being exercised, accompanied by payment in full for such shares. Payment may
be (a) in United States dollars in cash or by check, (b) through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) consistent with
applicable law, through the delivery of an assignment to the Company of a
sufficient amount of the proceeds from the sale of the Common Stock acquired
upon exercise of the option and an authorization to the broker or selling agent
to pay that amount to the Company, which sale shall be at the participant's
direction at the time of exercise, or (d) at the discretion of the Committee, by
any combination of (a), (b) and (c) above. There shall be no such exercise at
any one time as to fewer than one hundred (100) shares or all of the remaining
shares then purchasable by the person or persons exercising the option, if fewer
than one hundred (100) shares. The Company's transfer agent shall, on behalf of
the Company, prepare a certificate or certificates representing such shares
acquired pursuant to exercise of the option, shall register the optionee as the
owner of such shares on the books of the Company and shall cause the fully
executed certificate(s) representing such shares to be delivered to the optionee
as soon as practicable after payment of the option price in full. The holder of
an option shall not have any rights of a stockholder with respect to the shares
covered by the option, except to the extent that one or more certificates for
such shares shall be delivered to him or her upon the due exercise of the
option.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER EVENTS. Upon the
occurrence of any of the following events, an optionee's rights with respect to
options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of
shares or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
<PAGE>
-4-
(b) RECAPITALIZATION ADJUSTMENTS. If the Company is to be
consolidated with or acquired by another entity in a merger, sale of all
or substantially all of the Company's assets or otherwise, each option
granted under this Plan which is outstanding but unvested as of the
effective date of such event shall become exercisable in full 15 days
prior to the effective date of such event. In the event of a
reorganization, recapitalization, merger, consolidation, or any other
change in the corporate structure or shares of the Company, to the extent
permitted by Rule 16b-3 under the Securities Exchange Act of 1934,
adjustments in the number and kind of shares authorized by this Plan and
in the number and kind of shares covered by, and in the option price of
outstanding options under this Plan necessary to maintain the
proportionate interest of the optionee and preserve, without exceeding,
the value of such option, shall be made. Notwithstanding the foregoing, no
such adjustment shall be made which would, within the meaning of any
applicable provisions of the Internal Revenue Code of 1986, as amended,
constitute a modification, extension or renewal of any Option or a grant
of additional benefits to the holder of an Option.
(c) ISSUANCES OF SECURITIES. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
(d) ADJUSTMENTS. Upon the happening of any of the foregoing
events, the class and aggregate number of shares set forth in paragraphs
2, 4, 5 and 6 of this Plan that are subject to options which previously
have been or subsequently may be granted under this Plan shall also be
appropriately adjusted to reflect such events. The Board shall determine
the specific adjustments to be made under this paragraph 12 and its
determination shall be conclusive.
13. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions of
paragraphs 4, 5, 6 and 12 of this Plan, the Company shall have no obligation to
deliver any certificate or certificates upon exercise of an option until one of
the following conditions shall be satisfied:
(i) The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively
registered under applicable Federal and state securities laws as now in
force or hereafter amended; or
(ii) Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and
state securities laws as now in force or hereafter amended; and the
Company has complied with all applicable laws and regulations with respect
thereto, including without limitation all regulations required by any
stock exchange upon which the Company's outstanding Common Stock is then
listed.
14. LEGEND ON CERTIFICATES. The certificates representing shares issued
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1933 or any state securities laws.
15. REPRESENTATION OF OPTIONEE. If requested by the Company, the optionee
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1933).
16. OPTION AGREEMENT. Each option granted under the provisions of this
Plan shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company
<PAGE>
-5-
and by the optionee to whom such option is granted. The option agreement shall
contain such terms, provisions and conditions not inconsistent with this Plan as
may be determined by the officer executing it.
17. TERMINATION AND AMENDMENT OF PLAN. Options may no longer be granted
under this Plan after October 1, 2005, and this Plan shall terminate when all
options granted or to be granted hereunder are no longer outstanding. The Board
may at any time terminate this Plan or make such modification or amendment
thereof as it deems advisable; PROVIDED, HOWEVER, that the Board may not,
without approval by the affirmative vote of the holders of a majority of the
shares of Common Stock present in person or by proxy and voting on such matter
at a meeting, (a) increase the maximum number of shares for which options may be
granted under this Plan (except by adjustment pursuant to Section 12), (b)
materially modify the requirements as to eligibility to participate in this
Plan, (c) materially increase benefits accruing to option holders under this
Plan or (d) amend this Plan in any manner which would cause Rule 16b-3 under the
Securities Exchange Act (or any successor or amended provision thereof) to
become inapplicable to this Plan; and PROVIDED FURTHER that the provisions of
this Plan specified in Rule 16b-3(c)(2)(ii)(A) (or any successor or amended
provision thereof) under the Securities Exchange Act of 1934 (including without
limitation, provisions as to eligibility, amount, price and timing of awards)
may not be amended more than once every six months, other than to comport with
changes in the Internal Revenue Code, the Employee Retirement Income Security
Act, or the rules thereunder. Termination or any modification or amendment of
this Plan shall not, without consent of a participant, affect his or her rights
under an option previously granted to him or her.
18. WITHHOLDING OF INCOME TAXES. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect of amounts considered
to be compensation includible in the optionee's gross income.
19. COMPLIANCE WITH REGULATIONS. It is the Company's intent that the Plan
comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934
(or any successor or amended provision thereof) and any applicable Securities
and Exchange Commission interpretations thereof. If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.
20. GOVERNING LAW. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the Commonwealth
of Massachusetts, without giving effect to the principles of conflicts of law
thereof.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
---------------------------
All subsidiaries do business under the respective names listed below.
1. Investors Capital Trust I
Delaware trust
2. Investors Capital Services, Inc.
Delaware corporation
3. Investors Bank & Trust Company
Massachusetts chartered trust company
4. Investors Safe Deposit Corp.
Massachusetts corporation
5. IBT Trust Company (Cayman) Ltd.
Cayman Islands trust company
6. Investors Securities Corporation
Massachusetts securities corporation
7. IBT Fund Services (Canada) Inc.
incorporated in Canada
8. Investors Trust Holdings Ireland
organized in the Republic of Ireland
9. Investors Financial Services (Ireland) Ltd.
organized in the Republic of Ireland
10. Investors Trust & Custodial Services (Ireland) Ltd.
organized in the Republic of Ireland
11. Investors Fund Services (Ireland) Ltd.
organized in the Republic of Ireland
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 333-3440 and 333-43353 of Investors Financial Services Corp. (the
"Company") on Form S-8 and in Registration Statement No. 333-58031 of the
Company on Form S-3 of our report dated February 16, 1999, appearing in the
Annual Report on Form 10-K of the Company for the year ended December 31,
1998.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 26, 1999
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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