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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04911
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State Street Research Financial Trust
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, MA 02111
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(Address of principal executive offices) (Zip code)
Francis J. McNamara, III, Secretary
State Street Research
One Financial Center, Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 617-357-1200
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Date of fiscal year end: 10/31/03
-----------------
Date of reporting period: 11/01/02 - 10/31/03
----------------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
ITEM 1 (REPORT TO SHAREHOLDERS): The Annual Report is attached.
[BACKGROUND GRAPHIC]
[LOGO] STATE STREET RESEARCH
[PHOTO]
Government Income Fund
October 31, 2003
Annual Report to Shareholders
Table of Contents
3 Performance Discussion
6 Portfolio Holdings
8 Financial Statements
12 Financial Highlights
14 Independent Auditors'
Report
15 Trustees and Officers
FROM THE CHAIRMAN
State Street Research
Optimism in the Economy
The uncertainty that plagued the markets early in the 12-month period covered by
this report, gave way to optimism as economic news improved. Low short-term
interest rates, a significant income tax cut and higher government spending
worked together to boost economic growth to its highest level in four years.
Housing sales remained strong, although auto sales slipped late in the period.
Corporate profits staged a solid rebound. The employment picture brightened
during the month of October, as payrolls grew for the third consecutive month.
A Weak Start, Then Stocks Move Higher
The economy's weak showing early in the period held stocks back as investors
backed away from risk in the buildup to war with Iraq. However, in the second
quarter of 2003 stocks began an impressive rally that continued until the last
weeks of the period. Technology stocks were the strongest performers. Consumer
stocks also gained ground as spending remained strong. In general, small- and
mid-cap stocks outperformed large-caps, and growth stocks significantly outpaced
value. Although all stock market indexes reported solid gains for the period,
they were trimmed somewhat in the final weeks of September after news that
consumer confidence had dropped, and rebounded again in October.
Bonds Retreat in Second Half
As investors began to add risk back into their portfolios, lower-quality
segments of the bond market staged an impressive comeback. High-yield bonds and
emerging market bonds were the period's strongest performers. However, as
interest rates began to climb and as investors moved money into the stock
market, bonds gave back some of their gains in the second half of the period.
Mortgage bonds lagged as mortgage prepayment activity heated up in the spring.
Municipal bonds were hurt by concerns over state budget deficits and revenue
shortfalls.
Looking Ahead
A revival for riskier segments of both the stock and bond markets took many
investors by surprise over the past year. Yet, it provided an excellent reminder
that the best way to take advantage of the market's strongest gains is to own a
diversified portfolio of stocks and bonds. We hope you will take time to talk to
your financial advisor about diversification. And as always, we look forward to
helping you achieve your long-term financial goals with State Street Research
Funds.
Sincerely,
/s/ Richard S. Davis
Richard S. Davis
Chairman
October 31, 2003
- --------------------------------------------------------------------------------
A Special Message on Recent News
Recent articles in the press have highlighted investigations into after-hours
trading and frequent-trading practices in the mutual fund industry. These are
serious matters, and we want to assure you that State Street Research is
committed to maintaining full compliance with all legal requirements and ethical
standards regarding these and other mutual fund trading practices. In fact, our
mutual fund trading processes are designed to prevent these types of activities
from taking place, and we are committed to maintaining their integrity. Our
trade processing procedures carefully track the forward-pricing requirements
contained in federal regulations and in our funds' prospectuses. We closely
monitor trading in our funds and take measures to prevent market timing whenever
it is identified. Furthermore, we do not enter into any special arrangements
that would permit investors to avoid the forward-pricing or market-timing
provisions of our prospectuses.
In recent weeks, we have carefully reviewed our trading policies, procedures and
operations. In addition, our firm recommended early on that the funds' Trustees
engage an independent accounting firm, which has been reviewing trading issues
on behalf of our funds' Audit Committee. While there is always more work that
can be done, I am pleased to report that we believe our processes are working
effectively, based on our preliminary findings. We understand that our
relationship with our shareholders is based on trust, and we are committed to
acting in the best interests of our shareholders at all times.
- --------------------------------------------------------------------------------
2
- ---------------
PERFORMANCE
- ---------------
Discussion as of October 31, 2003
How State Street Research Government Income Fund Performed
State Street Research Government Income Fund returned 1.96% for the 12-month
period ended October 31, 2003.1 That was better than the Lipper General U.S.
Government Funds Average, which had an average return of 1.70%.2 However, the
fund underperformed the Merrill Lynch Government Master Index, which gained
2.89% for the period.3
Reasons for the Fund's Performance
Interest rates were volatile during the period. Short-term rates remained
largely unchanged while longer-term rates increased slightly. Overall, the
fund's shorter-than-benchmark duration and active interest-rate management
helped boost relative returns. Its allocation to mortgages made the portfolio
less sensitive to rising interest rates than its benchmark. Our modest exposure
to Commercial Mortgage-Backed Securities enjoyed strong performance during the
year.
In contrast, the fund's return was hurt by its lack of emphasis on government
agency securities, which outperformed Treasuries early in the year. Fund
performance was also hurt by an emphasis on conventional Mortgage-Backed
Securities, which detracted from relative returns as the sector underperformed
during the 12-month period.
Looking Ahead
We expect interest rates to remain range-bound in the near term. As a result, we
have maintained a relatively neutral position on interest rates relative to our
benchmark, with a slight underweight to the two-year portion of the yield curve.
Within the mortgage sector, we favor Commercial Mortgage-Backed Securities,
which we expect to generate more favorable returns than Treasuries. We have
scaled back the fund's conventional mortgage holdings and have emphasized
low-coupon issues, which offer attractive valuations.
Asset Allocation
- ------------------------------------------------
Issuer/Security % of Fund Net Assets
- ------------------------------------------------
U.S. Treasury 49%
- ------------------------------------------------
U.S. Agency Mortgage 42%
- ------------------------------------------------
Other Mortgage 7%
- ------------------------------------------------
Cash 2%
- ------------------------------------------------
Total 100%
- ------------------------------------------------
Interest Rates
- --------------------------------------------------------------------------------
(November 30, 2002 to October 30, 2003)
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
90-Day 90-day 10-year 30-year 30-year
Commercial Treasury Treasury Treasury Mortgage
11/02 1.37 1.22 4.229 5.044 6.13
12/02 1.32 1.19 3.814 4.779 5.93
1/03 1.27 1.169 3.962 4.841 5.9
2/03 1.25 1.19 3.69 4.669 5.79
3/03 1.21 1.108 3.796 4.815 5.91
4/03 1.24 1.09 3.84 4.77 5.79
5/03 1.23 1.08 3.37 4.37 5.31
6/03 1.1 0.83 3.52 4.56 5.24
7/03 1.06 0.92 4.41 5.36 5.94
8/03 1.1 0.95 4.46 5.22 6.32
9/03 1.1 0.92 3.94 4.88 5.98
10/03 1.11 0.93 4.29 5.13 5.94
Sources: Federal Reserve, Bloomberg
Performance: Class A
- --------------------------------------------------------------------------------
Fund average annual total return as of 10/31/03(4)
(does not reflect sales charge)
1 Year 5 Years 10 Years
1.96% 5.09% 5.96%
- --------------------------------------------------------
Merrill Lynch Government Master Index as of 10/31/03(3)
1 Year 5 Years 10 Years
2.89% 6.06% 6.53%
- --------------------------------------------------------
Fund average annual total return as of 9/30/03(4,5)
(at maximum applicable sales charge)
1 Year 5 Years 10 Years
-1.95% 4.26% 5.64%
- --------------------------------------------------------
Merrill Lynch Government Master Index as of 9/30/03(3)
1 Year 5 Years 10 Years
3.49% 6.28% 6.71%
- --------------------------------------------------------
See pages 4 and 5 for additional performance data for Class A shares and for
performance data on other share classes.
Because financial markets and mutual fund strategies are constantly evolving,
it is possible that the fund's holdings, market stance, outlook for various
industries or securities and other matters discussed in this report have
changed since this information was prepared. Portfolio changes should not be
considered recommendations for action by individual investors.
(1) Class A shares; does not reflect sales charge.
(2) The Lipper General U.S. Government Funds Average shows the performance of a
category of mutual funds with similar goals. The Lipper average shows you
how well the fund has done compared with competing funds.
(3) The Merrill Lynch Government Master Index is comprised of fixed-rate U.S.
Treasury and agency securities. The index is unmanaged and does not take
transaction charges into consideration. It is not possible to invest
directly in the index.
(4) Keep in mind that past performance is no guarantee of future results. The
fund's share price, yield and return will fluctuate, and you may have a
gain or loss when you sell your shares. All returns assume reinvestment of
capital gains distributions and income dividends at net asset value. The
returns shown do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares. Although
the U.S. government ensures the timely payment of principal and interest on
certain underlying securities, the value of fund shares is not guaranteed
and will fluctuate.
(5) Performance reflects a maximum 4.50% Class A share front-end sales charge.
State Street Research Government Income Fund 3
- ---------------
PERFORMANCE
- ---------------
Discussion as of October 31, 2003
These two pages focus on the fund's long-term track record. While a mutual
fund's past performance is not a guarantee of future results, long-term returns
can serve as an important context for evaluating recent performance. There are
three ways of measuring long-term performance: cumulative total returns,
average annual total returns and the change in dollar value over time of a
given investment. Information about these measures follows, while the share
class boxes contain the results of these measures for each share class.
Cumulative Total Return
Represents the total percentage you would have earned or lost if you had
invested a lump sum in the fund and left it there until the end of the period
indicated.
Average Annual Total Return
Represents the rate you would have had to earn during each year of a given time
period in order to end up with the fund's actual cumulative return for those
years. In reality, of course, fund performance varies from year to year.
Because of this, a fund's actual performance for a given year may be higher or
lower than an average annual performance figure.
$10,000 Over Ten Years
Similar to cumulative total return, but uses dollars rather than percentages,
and assumes that the lump sum you invested was $10,000 (less the applicable
maximum sales charge, if any) and compares fund performance to the performance
of a market index.
- --------------------------------------------------------------------------------
Class A
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 1.96% 28.17% 78.47%
- -----------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) -2.63% 22.40% 70.44%
- -----------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) -2.63% 4.13% 5.48%
- -----------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
Merrill Lynch Merrill Lynch
Government Mortgage
Class A Master Index Master Index
'93 9550 10000 10000
'94 9208 9567 9869
'95 10595 11041 11343
'96 11155 11599 12119
'97 12105 12604 13220
'98 13298 14033 14198
'99 13186 13864 14613
'00 14031 14973 15717
'01 15947 17210 17775
'02 16717 18298 18987
'03 17044 18827 19579
- --------------------------------------------------------------------------------
Class B(1)
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 1.19% 23.25% 65.10%
- -----------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) -3.69% 21.32% 65.10%
- -----------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) -3.69% 3.94% 5.14%
- -----------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[Data below was represented as line chart in printed report]
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
Merrill Lynch Merrill Lynch
Government Mortgage
Class B(1) Master Index Master Index
'93 10000 10000 10000
'94 9562 9567 9869
'95 10916 11041 11343
'96 11408 11599 12119
'97 12282 12604 13220
'98 13396 14033 14198
'99 13153 13864 14613
'00 13890 14973 15717
'01 15668 17210 17775
'02 16317 18298 18987
'03 16510 18827 19579
4
- --------------------------------------------------------------------------------
Class B (only available through exchanges from another Class B account)
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 1.26% 23.72% 65.73%
Cumulative Total Return
(at maximum applicable sales charge) -3.62% 21.78% 65.73%
Average Annual Total Return
(at maximum applicable sales charge) -3.62% 4.02% 5.18%
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
Merrill Lynch Merrill Lynch
Government Mortgage
Class B Master Index Master Index
'93 10000 10000 10000
'94 9562 9567 9869
'95 10916 11041 11343
'96 11408 11599 12119
'97 12282 12604 13220
'98 13396 14033 14198
'99 13184 13864 14613
'00 13931 14973 15717
'01 15708 17210 17775
'02 16367 18298 18987
'03 16573 18827 19579
- --------------------------------------------------------------------------------
Class C
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 1.26% 23.70% 65.80%
Cumulative Total Return
(at maximum applicable sales charge) 0.28% 23.70% 65.80%
Average Annual Total Return
(at maximum applicable sales charge) 0.28% 4.34% 5.19%
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
Merrill Lynch Merrill Lynch
Government Mortgage
Class C Master Index Master Index
'93 10000 10000 10000
'94 9562 9567 9869
'95 10924 11041 11343
'96 11416 11599 12119
'97 12290 12604 13220
'98 13404 14033 14198
'99 13192 13864 14613
'00 13939 14973 15717
'01 15715 17210 17775
'02 16374 18298 18987
'03 16580 18827 19579
- --------------------------------------------------------------------------------
Class R
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 1.81% 27.99% 78.22%
Cumulative Total Return
(at maximum applicable sales charge) 1.81% 27.99% 78.22%
Average Annual Total Return
(at maximum applicable sales charge) 1.81% 5.06% 5.95%
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
Merrill Lynch Merrill Lynch
Government Mortgage
Class R Master Index Master Index
'93 10000 10000 10000
'94 9642 9567 9869
'95 11095 11041 11343
'96 11680 11599 12119
'97 12676 12604 13220
'98 13925 14033 14198
'99 13807 13864 14613
'00 14692 14973 15717
'01 16699 17210 17775
'02 17504 18298 18987
'03 17822 18827 19579
- --------------------------------------------------------------------------------
Class S
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 2.26% 30.04% 83.24%
Cumulative Total Return
(at maximum applicable sales charge) 2.26% 30.04% 83.24%
Average Annual Total Return
(at maximum applicable sales charge) 2.26% 5.39% 6.24%
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
Merrill Lynch Merrill Lynch
Government Mortgage
Class S Master Index Master Index
'93 10000 10000 10000
'94 9658 9567 9869
'95 11142 11041 11343
'96 11760 11599 12119
'97 12795 12604 13220
'98 14091 14033 14198
'99 14008 13864 14613
'00 14947 14973 15717
'01 17029 17210 17775
'02 17919 18298 18987
'03 18324 18827 19579
Keep in mind that past performance is no guarantee of future results. The fund's
share price, yield and return will fluctuate, and you may have a gain or loss
when you sell your shares. All returns assume reinvestment of capital gains
distributions and income dividends at net asset value. Performance reflects a
maximum 4.50% Class A share front-end sales charge, or 5% Class B(1) or Class B
share or 1% Class C share contingent deferred sales charge, where applicable.
Performance for Class B(1) shares reflects Class B share performance through
December 31, 1998, and Class B(1) performance thereafter. Performance for Class
R shares reflects Class A share performance through April 2, 2003, and Class R
share performance thereafter. If the returns for Class B(1) and Class R shares
had reflected their current service/distribution (Rule 12b-1) fees for the
entire period, returns would have been lower. Class R and S shares, offered
without sales charge, are available through certain retirement plans and special
programs. The returns shown do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Although the U.S. government ensures the timely payment of principal and
interest on certain underlying securities, the value of fund shares is not
guaranteed and will fluctuate. The Merrill Lynch Government and Mortgage Master
Indexes are commonly used measures of bond market performance. The indexes are
unmanaged and do not take sales charges into consideration. It is not possible
to invest directly in an index.
State Street Research Government Income Fund 5
- ---------------
PORTFOLIO
- ---------------
Holdings
October 31, 2003
Maturity Principal Market
Issuer Date Amount Value
- ------------------------------------------------------------------------------------------------------
U.S. Government Securities 91.4%
U.S. Treasury 49.3%
U.S. Treasury Bond, 13.75% .............................. 8/15/2004 $ 2,950,000 $ 3,236,241
U.S. Treasury Bond, 11.625% ............................. 11/15/2004 36,525,000 40,365,823
U.S. Treasury Bond, 10.75% .............................. 8/15/2005 14,075,000 16,295,106
U.S. Treasury Bond, 10.375% ............................. 11/15/2012 22,425,000 28,737,279
U.S. Treasury Bond, 12.00% .............................. 8/15/2013 22,250,000 30,877,949
U.S. Treasury Bond, 11.25%** ............................ 2/15/2015 31,925,000 50,972,764
U.S. Treasury Bond, 10.625% ............................. 8/15/2015 27,775,000 43,090,302
U.S. Treasury Bond, 9.875% .............................. 11/15/2015 12,650,000 18,786,730
U.S. Treasury Bond, 9.25% ............................... 2/15/2016 4,875,000 6,963,635
U.S. Treasury Bond, 8.875% .............................. 2/15/2019 6,800,000 9,666,622
U.S. Treasury Bond, 6.25% ............................... 8/15/2023 7,400,000 8,351,596
U.S. Treasury Bond, 6.75% ............................... 8/15/2026 35,700,000 42,842,784
U.S. Treasury Bond, 6.25% ............................... 5/15/2030 12,175,000 13,920,871
------------
314,107,702
------------
U.S. Agency Mortgage 42.1%
ENSCO Offshore Co., 6.36% ............................... 12/01/2015 2,895,864 3,180,788
Federal Home Loan Mortgage
Corp., 9.00% .......................................... 12/01/2009 975,090 1,053,248
Federal Housing Administration
Charles River Project, 9.625% ......................... 12/01/2033 9,196,705 9,226,870
Federal National Mortgage
Association, 5.50% .................................... 5/02/2006 9,350,000 10,003,369
Federal National Mortgage
Association, 6.625% ................................... 10/15/2007 7,175,000 8,086,663
Federal National Mortgage
Association, 8.00% .................................... 4/01/2008 717,402 766,482
Federal National Mortgage
Association, 8.00% .................................... 6/01/2008 1,054,767 1,127,611
Federal National Mortgage
Association, 8.50% .................................... 2/01/2009 1,458,481 1,590,728
Federal National Mortgage
Association, 9.00% .................................... 5/01/2009 1,226,911 1,336,032
Federal National Mortgage
Association, 7.125% ................................... 6/15/2010 25,075,000 29,352,218
Federal National Mortgage
Association, 6.02% .................................... 11/25/2010 3,600,000 3,931,290
Federal National Mortgage
Association, 6.50% .................................... 12/01/2014 1,455,204 1,532,084
Federal National Mortgage
Association, 9.00% .................................... 4/01/2016 340,660 374,067
Federal National Mortgage
Association, 7.00% .................................... 1/01/2017 2,605,501 2,768,050
Federal National Mortgage
Association, 6.00%* ................................... 11/18/2018 11,475,000 11,934,000
Federal National Mortgage
Association, 5.00%* ................................... 11/18/2018 22,075,000 22,419,922
Federal National Mortgage
Association, 4.50%* ................................... 11/18/2018 7,300,000 7,290,875
Federal National Mortgage
Association, 7.50% .................................... 7/01/2029 $ 1,920,245 $ 2,049,536
Federal National Mortgage
Association, 7.00% .................................... 4/01/2032 1,881,325 1,980,892
Federal National Mortgage
Association, 7.50%* ................................... 11/13/2033 2,650,000 2,823,906
Federal National Mortgage
Association, 7.00%* ................................... 11/13/2033 8,875,000 9,343,707
Federal National Mortgage
Association, 6.50%* ................................... 11/13/2033 22,500,000 23,371,875
Federal National Mortgage
Association, 6.00%* ................................... 11/13/2033 30,725,000 31,541,117
Federal National Mortgage
Association, 5.50%* ................................... 11/13/2033 32,475,000 32,769,290
Federal National Mortgage
Association, 5.00%* ................................... 11/13/2033 2,975,000 2,934,094
Federal National Mortgage
Association, 5.50%* ................................... 11/18/2018 9,300,000 9,573,187
Government National Mortgage
Association, 9.50% .................................... 9/15/2009 460,172 503,159
Government National Mortgage
Association, 9.50% .................................... 10/15/2009 899,125 983,086
Government National Mortgage
Association, 9.50% .................................... 11/15/2009 425,270 464,996
Government National Mortgage
Association, 9.50% .................................... 11/15/2017 68,379 75,874
Government National Mortgage
Association, 9.50% .................................... 9/15/2019 48,598 53,904
Government National Mortgage
Association, 7.00% .................................... 5/15/2027 1,280,979 1,359,416
Government National Mortgage
Association, 7.00% .................................... 6/15/2028 937,188 994,206
Government National Mortgage
Association, 7.00% .................................... 11/15/2028 4,843,785 5,139,883
Government National Mortgage
Association, 6.50% .................................... 11/15/2028 2,847,415 2,985,355
Government National Mortgage
Association, 6.50% .................................... 9/15/2029 2,742,490 2,874,348
Government National Mortgage
Association, 7.50% .................................... 6/15/2031 1,169,612 1,249,523
Government National Mortgage
Association, 6.00% .................................... 9/20/2033 2,439,950 2,513,487
Government National Mortgage
Association, 6.00% .................................... 10/20/2033 3,900,000 4,017,542
Government National Mortgage
Association*, 5.50% ................................... 11/19/2033 6,925,000 6,989,922
Overseas Private Investor Bond,
3.42% ................................................. 1/15/2015 3,300,000 3,179,979
U.S. Department of Housing &
Urban Development 2003-A,
4.44% ................................................. 8/01/2011 2,099,000 2,094,739
------------
267,841,320
------------
Total U.S. Government Securities (Cost $565,692,748) .... 581,949,022
------------
Other Investments 7.4%
Finance/Mortgage 7.4%
Bear Stearns Commercial
Mortgage Securities Inc.
2000 Cl. A1, 7.11% .................................... 10/15/2032 5,384,627 5,981,669
Chase Commercial Mortgage
Securities Corp. 1998 Cl
A1, 6.025% ............................................ 11/18/2030 1,665,210 1,777,830
Chase Commercial Mortgage
Securities Corp. 1998 Cl
A2, 6.39% ............................................. 11/18/2030 2,875,000 3,187,437
6 The notes are an integral part of the financial statements.
Maturity Principal Market
Issuer Date Amount Value
- --------------------------------------------------------------------------------------------------
First Union Lehman Brothers
Bank Series 1998 Cl. A1,
6.28% ............................................. 11/18/2035 $ 2,848,492 $ 3,000,540
LB Commercial Conduit
Mortgage Trust 1997 Cl. A1,
6.79% ............................................. 10/12/2034 2,040,901 2,092,410
LB Commercial Conduit
Mortgage Trust 1999 Cl. A1,
7.105% ............................................ 10/15/2032 3,080,977 3,343,376
LB-UBS Commercial Mortgage
Trust 2001 Cl. A4, 5.93% .......................... 12/15/2025 3,450,000 3,752,953
Merrill Lynch Mortgage
Investments Inc. Series 1997
Cl. A1, 6.46% ..................................... 12/10/2029 1,066,149 1,080,141
Morgan Stanley Capital Inc.
1998, 6.19% ....................................... 3/15/2030 333,627 339,938
Morgan Stanley Capital Inc.
1999, 5.91% ....................................... 11/15/2031 2,278,324 2,431,978
Morgan Stanley Dean Witter
Capital Inc. 2002 Cl. A1,
5.38% ............................................. 1/15/2039 5,028,397 5,331,265
Salomon Brothers Commercial
Mortgage Trust 2001 Cl. A1,
5.14% ............................................. 12/18/2035 1,851,585 1,921,624
Salomon Brothers Commercial
Mortgage Trust 2001 Cl. A2,
6.23% ............................................. 12/18/2035 4,850,000 5,313,799
Washington Mutual Mortgage
Inc. 2003, 3.42% .................................. 5/25/2033 4,350,000 4,377,105
Washington Mutual Mortgage
Inc. 2003, 3.98% .................................. 10/25/2033 3,275,000 3,275,000
------------
Total Other Investments (Cost $44,871,105) .......... 47,207,065
------------
Short-Term Investments 22.1%
State Street Navigator Securities Lending
Prime Portfolio ................................... 140,648,308 140,648,308
------------
Total Short-Term Investments (Cost $140,648,308) .... 140,648,308
------------
Commercial Paper 25.8%
Federal Home Loan Bank, 1.00% ....................... 11/05/2003 9,150,000 9,148,984
Federal Home Loan Bank, 1.00% ....................... 11/07/2003 7,590,000 7,588,735
Federal Home Loan Bank, 1.01% ....................... 11/12/2003 10,420,000 10,416,784
Federal Home Loan Mortgage
Corp., 1.00% ...................................... 11/12/2003 6,154,000 6,152,119
Federal Home Loan Mortgage
Corp., 1.03% ...................................... 11/18/2003 $ 9,200,000 $ 9,195,525
Federal Home Loan Mortgage
Corp., 1.07% ...................................... 12/04/2003 10,000,000 $ 9,990,192
Federal National Mortgage
Association, 0.95% ................................ 11/03/2003 35,000,000 34,998,153
Federal National Mortgage
Association, 1.01% ................................ 11/05/2003 10,000,000 9,998,878
Federal National Mortgage
Association, 1.00% ................................ 11/05/2003 16,219,000 16,217,198
Federal National Mortgage
Association, 1.00% ................................ 11/06/2003 8,005,000 8,003,888
Federal National Mortgage
Association, 1.065% ............................... 1/07/2004 19,859,000 19,819,638
Federal National Mortgage
Association, 1.07% ................................ 1/14/2004 22,910,000 22,859,610
------------
Total Commercial Paper (Cost $164,389,704) .......... 164,389,704
------------
% of
Net Assets
- ----------------------------------------------------------------------------
Summary of Portfolio Assets
Investments (Cost $915,601,865) ............. 146.7% 934,194,099
Cash and Other Assets, Less Liabilities ..... (46.7%) (297,563,903)
----- -------------
Net Assets .................................. 100.0% $ 636,630,196
===== =============
KEY TO SYMBOLS
* Denotes a To Be Announced purchase commitment to purchase securities for a
fixed unit price at a future date beyond customary settlement time.
Although the unit price has been established, the principal value has not
been finalized.
** A portion of this security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at October 31, 2003.
Federal Income Tax Information
At October 31, 2003, the net unrealized depreciation
of investments based on cost for federal income tax
purposes of $934,398,268 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost $ 13,154,560
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (13,358,729)
-------------
$ (204,169)
=============
Futures contracts open at October 31, 2003 are as follows:
Unrealized
Number Notional Expiration Appreciation
Type of Contracts Amount Month (Depreciation)
- -------------------------------------------------------------------------------------------------------------------
2 Year U.S. Treasury Notes Long ........... 515 110,451,406 December 2003 $ 69,755
5 Year U.S. Treasury Notes Short .......... (121) (13,529,313) December 2003 (69,403)
10 Year U.S. Treasury Notes Short ......... (394) (44,244,969) December 2003 (877,567)
30 Year U.S. Treasury Notes Short ......... (30) (3,261,563) December 2003 (60,861)
----------
$ (938,076)
==========
The notes are an integral part of the financial statements.
State Street Research Government Income Fund 7
- --------------------
FINANCIAL
- --------------------
Statements
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
October 31, 2003
Assets
Investments, at value (cost $915,601,865) (Note 1) ........... $934,194,099
Cash ......................................................... 3,619
Receivable for securities sold ............................... 11,252,359
Interest receivable .......................................... 9,091,012
Receivable for fund shares sold .............................. 686,260
Other assets ................................................. 51,738
------------
955,279,087
------------
Liabilities
Payable for securities purchased ............................. 174,713,788
Payable for collateral received on securities loaned ......... 140,648,308
Payable for fund shares redeemed ............................. 1,103,832
Dividends payable ............................................ 899,848
Accrued transfer agent and shareholder services .............. 334,297
Accrued management fee ....................................... 323,392
Accrued distribution and service fees ........................ 269,322
Payable for variation margin ................................. 137,038
Accrued trustees' fees ....................................... 11,544
Accrued administration fee ................................... 8,079
Other accrued expenses ....................................... 199,443
------------
318,648,891
------------
Net Assets ................................................... $636,630,196
============
Net Assets consist of:
Undistributed net investment income ........................ $ 913,934
Unrealized appreciation of investments ..................... 18,592,234
Unrealized depreciation of futures contracts ............... (938,076)
Accumulated net realized loss .............................. (27,936,793)
Paid-in capital ............................................ 645,998,897
------------
$636,630,196
============
Net Asset Value (NAV) of Each Share Class
Except where noted, the NAV is the offering and the redemption price for each
class.
Class Net Assets [divided by] Number of Shares = NAV
A $440,597,147 34,780,420 $12.67*
B(1) $115,133,763 9,164,427 $12.56**
B $ 45,840,068 3,632,618 $12.62**
C $ 23,617,623 1,870,502 $12.63**
R $ 97,914 7,726 $12.67
S $ 11,343,681 896,130 $12.66
* Maximum offering price per share = $13.27 ($12.67 [divided by] 0.955)
** When you sell Class B(1), Class B or Class C shares, you receive the net
asset value minus deferred sales charge, if any.
Statement of Operations
- --------------------------------------------------------------------------------
For the year ended October 31, 2003
Investment Income
Interest (Note 1) .......................................... $31,633,454
-----------
Expenses
Management fee (Note 2) .................................... 4,240,263
Transfer agent and shareholder services (Note 2) ........... 1,529,141
Distribution and service fees - Class A (Note 4) ........... 1,469,399
Distribution and service fees - Class B(1) (Note 4) ........ 1,272,088
Distribution and service fees - Class B (Note 4) ........... 637,931
Distribution and service fees - Class C (Note 4) ........... 307,933
Distribution and service fees - Class R (Note 4) ........... 290
Custodian fee .............................................. 184,717
Administration fee (Note 2) ................................ 91,212
Registration fees .......................................... 51,830
Audit fee .................................................. 41,500
Trustees' fees (Note 2) .................................... 36,957
Legal fees ................................................. 5,989
Reports to shareholders .................................... 4,707
Miscellaneous .............................................. 13,048
-----------
9,887,005
Fees paid indirectly (Note 2) .............................. (10,320)
-----------
9,876,685
-----------
Net investment income ...................................... 21,756,769
-----------
Realized and Unrealized Gain (Loss) on
Investments and Futures Contracts
Net realized gain on investments (Notes 1 and 3) ........... 19,426,332
Net realized loss on futures contracts (Note 1) ............ (1,900,796)
-----------
Total net realized gain .................................. 17,525,536
-----------
Change in unrealized depreciation of investments ........... (28,768,225)
Change in unrealized appreciation of futures contracts ..... 2,221,492
-----------
Total change in unrealized depreciation .................. (26,546,733)
-----------
Net loss on investments and futures contracts .............. (9,021,197)
-----------
Net increase in net assets resulting from operations ....... $12,735,572
===========
8 The notes are an integral part of the financial statements.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Years ended
October 31
------------------------------
2003 2002*
------------------------------
Increase (Decrease) In Net Assets
Operations:
Net investment income ................... $ 21,756,769 $ 28,062,570
Net realized gain on investments and
future contracts ...................... 17,525,536 1,640,605
Change in unrealized appreciation
(depreciation) of investments and
futures contracts ..................... (26,546,733) 5,399,531
------------- -------------
Net increase resulting from
operations ............................ 12,735,572 35,102,706
------------- -------------
Dividends from net investment
income:
Class A ............................... (21,773,956) (28,363,714)
Class B(1) ............................ (4,783,459) (4,308,285)
Class B ............................... (2,405,307) (3,518,701)
Class C ............................... (1,160,250) (1,205,766)
Class R ............................... (2,293) --
Class S ............................... (658,794) (785,008)
------------- -------------
(30,784,059) (38,181,474)
------------- -------------
Net increase (decrease) from fund
share transactions (Note 6) ........... (144,063,764) 90,606,612
------------- -------------
Total increase (decrease) in
net assets ............................ (162,112,251) 87,527,844
------------- -------------
Net Assets
Beginning of year ....................... 798,742,447 711,214,603
------------- -------------
End of year (including undistributed
net investment income of $913,934
and $0, respectively) ................. $ 636,630,196 $ 798,742,447
============= =============
* Audited by other auditors
Notes to Financial Statements
- --------------------------------------------------------------------------------
October 31, 2003
Note 1
State Street Research Government Income Fund is a series of State Street
Research Financial Trust (the "Trust"), which was organized as a Massachusetts
business trust registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
The investment objective of this fund is to seek high current income. Under
normal market conditions, the fund invests at least 80% of net assets in U.S.
government securities.
The fund offers six classes of shares. Class A shares are subject to an initial
sales charge of up to 4.50% and pay annual service and distribution fees equal
to 0.30% of average daily net assets. Class B(1) and Class B shares pay annual
service and distribution fees equal to 1.00% of average daily net assets and
automatically convert into Class A shares (which pay lower ongoing expenses) at
the end of eight years. Class B(1) and Class B shares are subject to a
contingent deferred sales charge on certain redemptions made within six years
and five years of purchase, respectively. Class B shares are offered only to
current shareholders through reinvestment of dividends and distributions or
through exchanges from existing Class B accounts of State Street Research
funds. Class C shares are subject to a contingent deferred sales charge of
1.00% on any shares redeemed within one year of purchase. Class C shares also
pay annual service and distribution fees equal to 1.00% of average daily net
assets. Class R shares are offered to retirement plans participating in certain
platforms sponsored by broker-dealers which may involve multiple fund families.
Class R shares pay a service and distribution fee of 0.50%. No sales charge is
imposed at the time of purchase or redemption of Class R shares. Class S shares
are only offered through certain retirement accounts, advisory accounts of
State Street Research & Management Company (the "Adviser"), an investment
management subsidiary of MetLife, Inc. ("MetLife"), and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S
shares. Class S shares do not pay any service or distribution fees. The fund's
expenses are borne prorata by each class, except that each class bears
expenses, and has exclusive voting rights with respect to provisions of the
plans of distribution, related specifically to that class. The Trustees declare
separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
fund in preparing its financial statements, and such policies are in conformity
with accounting principles generally accepted in the United States of America.
A. Investment Valuation
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("Nasdaq") system are valued at closing prices
supplied through such system. If not quoted on the Nasdaq system, such
securities are valued at prices obtained from independent brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. If not valued by a pricing
service, such securities are valued at prices obtained from independent
brokers. Short-term securities maturing within sixty days are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in good faith under consistently applied procedures established by
and under the supervision of the Trustees. If trading or events occurring in
other markets after the close of the principal market in which foreign
securities are traded, and before the close of business of the fund, are
expected to materially affect the value of these securities, then they are
valued at their fair value taking this trading or these events into account.
The notes are an integral part of the financial statements.
State Street Research Government Income Fund 9
Notes (continued)
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of the
fund. The fund is charged for expenses directly attributable to it, while
indirect expenses are allocated among both funds in the Trust.
D. Dividends
Dividends from net investment income are declared daily and paid or reinvested
monthly. Net realized capital gains, if any, are distributed annually, unless
additional distributions are required for compliance with applicable tax
regulations.
Income dividends and capital gains distributions are determined in accordance
with federal income tax regulations which may differ from accounting principles
generally accepted in the United States of America. The difference is primarily
caused by differing treatment of accrued interest on defaulted bonds and
premium amortization on fixed income securities.
E. Federal Income Taxes
No provision for federal income taxes is necessary because the fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods.
At October 31, 2003, the fund had a capital loss carryforward of $10,078,466
available, to the extent provided in regulations, to offset future capital
gains, if any, of which, $492,884, $7,218,002, and $2,367,580 expire on October
31, 2007, 2008, and 2010, respectively.
To the extent book/tax differences are permanent in nature, such amounts are
reclassified within the capital accounts based on federal tax basis treatment.
The fund reclassified for book purposes amounts arising from permanent book/tax
differences primarily relating to paydown losses and premium amortization
adjustments. At October 31, 2003, the components of distributable earnings were
$1,813,782 in undistributed ordinary income and $0 in undistributed long-term
capital gains.
F. Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 income and
expenses during the reporting period. Actual results could differ from these
estimates.
G. Securities Lending
The fund may seek additional income by lending portfolio securities to
qualified institutions. The fund will receive cash or securities as collateral
in an amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it
receives in these transactions, the fund could realize additional gains and
losses. If the borrower fails to return the securities and the value of the
collateral has declined during the term of the loan, the fund will bear the
loss. At October 31, 2003, the value of the securities loaned and the value of
collateral were $138,368,705 and $140,648,308 (consisting entirely of cash
collateral invested in State Street Navigator Securities Lending Prime
Portfolio), respectively. During the year ended October 31, 2003, income from
securities lending amounted to $98,125 and is included in interest income.
Note 2
The Trust and the Adviser have entered into an agreement under which the
Adviser earns monthly fees at an annual rate of 0.60% of the first $500 million
of net assets annually, 0.55% of the next $500 million, and 0.50% of any amount
over $1 billion. In consideration of these fees, the Adviser furnishes the fund
with management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended October 31, 2003, the fees pursuant to
such agreement amounted to $4,240,263.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), provides certain shareholder services to the fund such as
responding to inquiries and instructions from investors with respect to the
purchase and redemption of shares of the fund. In addition, MetLife receives a
fee for maintenance of the accounts of certain shareholders who are
participants in sponsored arrangements, such as employee benefit plans, through
or under which shares of the fund may be purchased. Total shareholder service
costs are allocated to each fund in the same ratios as the transfer agent
costs. During the year ended October 31, 2003, the amount of such expenses
allocated to the fund was $804,716.
The fund has entered into an arrangement with its transfer agent whereby
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expense. During the year ended October 31, 2003, the
fund's transfer agent fees were reduced by $10,320 under this arrangement.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$36,957 during the year ended October 31, 2003.
The fund has agreed to pay the Adviser for certain administrative costs incurred
in providing other assistance and services to the fund. The fee was based on a
fixed amount that has been allocated equally among the State Street Research
funds. During the year ended October 31, 2003, the amount of such expenses was
$91,212.
Note 3
For the year ended October 31, 2003, purchases and sales of securities,
exclusive of short-term obligations, aggregated $1,947,950,718, and
$2,000,608,800 (including $1,942,803,366 and $1,984,846,089 of U.S. government
obligations), respectively.
Note 4
The Trust has adopted plans of distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plans, the fund pays annual service
fees to the Distributor at a rate of 0.25% of average daily net assets for
Class A, Class B(1), Class B, Class C and Class R shares. In addition, the fund
pays annual distribution fees of 0.05% of average daily net assets for Class A
shares. The fund pays annual distribution fees of 0.75% of average daily net
assets for Class B(1), Class B and Class C shares and 0.25% of average net
assets for Class R shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish ongoing
assistance to investors and to defray a portion of its distribution and
marketing expenses. For the year ended October 31, 2003, fees pursuant to such
plans amounted to $1,469,399, $1,272,088, $637,931, $307,933 and $290 for Class
A, Class B(1), Class B, Class C and Class R shares, respectively. For Class A,
Class B and Class C shares, the payments are intended to reimburse the
distributor for expenditures incurred under the plan, and any unused payments
are returnable to the fund. As of October 31, 2003, there were $5,784,802,
$1,204,621 and $2,452,079 for Class A, B and Class C shares, respectively, of
unreimbursed distribution and shareholder servicing related expenses to be
carried forward to future plan years. For Class B(1) and R shares, the payments
compensate the distributor for services and expenditures incurred under the
plan, and none of the payments are returnable to the fund.
The fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of MetLife, earned initial sales charges aggregating
$166,575 and $640,307, respectively, on sales of Class A shares of the fund
during the year ended October 31, 2003, and that MetLife Securities, Inc.
earned commissions aggregating $797,858 and $15,366 on sales of Class B(1) and
Class C shares, and the Distributor collected contingent deferred sales charges
aggregating $440,600, $33,611 and $13,029 on redemptions of Class B(1), Class B
and Class C shares, respectively, during the same period.
10
Note 5
PricewaterhouseCoopers LLP resigned as the fund's independent accountants as of
April 25, 2003. The Trustees voted to appoint Deloitte & Touche LLP as the
fund's independent accountants for the fund's fiscal year ended October 31,
2003. During the previous two years, PricewaterhouseCoopers LLP's audit reports
contained no adverse opinion or disclaimer of opinion; nor were its reports
qualified or modified as to uncertainty, audit scope or accounting principle.
Further, in connection with its audits for the two previous fiscal years and
through April 25, 2003, there were no disagreements between the fund and
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which if not
resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused it
to make reference to the disagreements in its report on the financial statements
for such years.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest at $0.001 par value per share. At October 31, 2003, the
Adviser held 7,716 Class R shares.
These transactions break down by share class as follows:
Years ended October 31
-------------------------------------------------------------
2003 2002*
-------------------------------------------------------------
Class A Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
Shares sold 16,756,640 $ 218,104,367 24,095,020 $ 307,041,292
Issued upon reinvestment of dividends from net investment income 1,104,644 14,289,248 1,402,351 17,888,808
Shares redeemed (25,899,151) (335,827,118) (22,047,118) (281,385,832)
----------- ------------- ----------- -------------
Net increase (decrease) (8,037,867) $(103,433,503) 3,450,253 $ 43,544,268
=========== ============= =========== =============
Class B(1) Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
Shares sold 2,905,289 $ 37,451,974 5,136,173 $ 65,240,581
Issued upon reinvestment of dividends from net investment income 315,320 4,044,422 281,462 3,562,378
Shares redeemed (3,428,090) (43,764,045) (1,842,428) (23,300,463)
----------- ------------- ----------- -------------
Net increase (decrease) (207,481) $ (2,267,649) 3,575,207 $ 45,502,496
=========== ============= =========== =============
Class B Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
Shares sold 581,326 $ 7,524,870 1,658,273 $ 21,198,889
Issued upon reinvestment of dividends from net investment income 141,611 1,825,769 202,472 2,572,159
Shares redeemed (2,867,374) (36,930,667) (2,454,077) (31,137,088)
----------- ------------- ----------- -------------
Net decrease (2,144,437) $ (27,580,028) (593,332) $ (7,366,040)
=========== ============= =========== =============
Class C Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
Shares sold 875,725 $ 11,343,080 1,588,076 $ 20,316,949
Issued upon reinvestment of dividends from net investment income 65,528 848,984 56,278 716,983
Shares redeemed (1,514,342) (19,422,859) (1,081,045) (13,754,403)
----------- ------------- ----------- -------------
Net increase (decrease) (573,089) $ (7,230,795) 563,309 $ 7,279,529
=========== ============= =========== =============
Class R Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
Shares sold 7,726 $ 100,128 -- $ --
----------- ------------- ----------- -------------
Net increase 7,726 $ 100,128 -- $ --
=========== ============= =========== =============
Class S Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
Shares sold 524,562 $ 6,797,691 1,184,505 $ 15,190,577
Issued upon reinvestment of dividends from net investment income 44,745 578,531 47,334 602,841
Shares redeemed (854,614) (11,028,139) (1,105,121) (14,147,059)
----------- ------------- ----------- -------------
Net increase (decrease) (285,307) $ (3,651,917) 126,718 $ 1,646,359
=========== ============= =========== =============
* Audited by other auditors
State Street Research Government Income Fund 11
- --------------------
FINANCIAL
- --------------------
Highlights
For a share outstanding throughout each year:
Class A - Years Ended October 31
------------------------------------------------------------------
2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.99 13.08 12.19 12.21 13.07
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.41 0.51 0.74 0.75 0.74
Net realized and unrealized gain (loss) on investments
and future contracts ($) (0.16) 0.09 0.88 0.00 (0.85)
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.25 0.60 1.62 0.75 (0.11)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.57) (0.69) (0.73) (0.77) (0.75)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.57) (0.69) (0.73) (0.77) (0.75)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.67 12.99 13.08 12.19 12.21
========== ========== ========== ========== ==========
Total return (%)(b) 1.96 4.82 13.66 6.41 (0.84)
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 440,597 556,251 514,750 474,054 480,643
Expense ratio (%) 1.15 1.17 1.23 1.13 1.05
Expense ratio after expense reductions (%) 1.15 1.16 1.22 1.13 1.04
Ratio of net investment income to average net assets (%) 3.21 4.02 5.87 6.21 5.86
Portfolio turnover rate (%) 273.16 175.05 134.55 148.88 213.70
Class B(1) - Years Ended October 31
------------------------------------------------------------------
2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(e)(h)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.89 12.98 12.11 12.14 12.97
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.32 0.41 0.64 0.65 0.52
Net realized and unrealized gain (loss) on investments
and future contracts ($) (0.17) 0.10 0.87 0.01 (0.82)
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.15 0.51 1.51 0.66 (0.30)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.48) (0.60) (0.64) (0.69) (0.53)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.48) (0.60) (0.64) (0.69) (0.53)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.56 12.89 12.98 12.11 12.14
========== ========== ========== ========== ==========
Total return (%)(b) 1.19 4.14 12.80 5.60 (2.31)(c)
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 115,134 120,766 75,219 34,533 24,250
Expense ratio (%) 1.85 1.87 1.93 1.85 1.80(d)
Expense ratio after expense reductions (%) 1.85 1.86 1.92 1.85 1.79(d)
Ratio of net investment income to average net assets (%) 2.50 3.29 5.12 5.44 5.01(d)
Portfolio turnover rate (%) 273.16 175.05 134.55 148.88 213.70
Class B - Years Ended October 31
------------------------------------------------------------------
2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.94 13.02 12.15 12.17 13.03
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.33 0.43 0.65 0.65 0.64
Net realized and unrealized gain (loss) on investments
and future contracts ($) (0.17) 0.09 0.86 0.02 (0.84)
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.16 0.52 1.51 0.67 (0.20)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.48) (0.60) (0.64) (0.69) (0.66)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.48) (0.60) (0.64) (0.69) (0.66)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.62 12.94 13.02 12.15 12.17
========== ========== ========== ========== ==========
Total return (%)(b) 1.26 4.20 12.75 5.67 (1.58)
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 45,840 74,747 82,963 84,327 106,902
Expense ratio (%) 1.85 1.87 1.93 1.85 1.80
Expense ratio after expense reductions (%) 1.85 1.86 1.92 1.85 1.79
Ratio of net investment income to average net assets (%) 2.52 3.34 5.20 5.49 5.12
Portfolio turnover rate (%) 273.16 175.05 134.55 148.88 213.70
12
- --------------------
FINANCIAL
- --------------------
Highlights
Class C - Years Ended October 31
-----------------------------------------------------------------
2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
-----------------------------------------------------------------
Net asset value, beginning of year ($) 12.95 13.03 12.16 12.18 13.04
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.33 0.42 0.65 0.66 0.64
Net realized and unrealized gain (loss) on investments
and future contracts ($) (0.17) 0.10 0.86 0.01 (0.84)
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.16 0.52 1.51 0.67 (0.20)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.48) (0.60) (0.64) (0.69) (0.66)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.48) (0.60) (0.64) (0.69) (0.66)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.63 12.95 13.03 12.16 12.18
========== ========== ========== ========== ==========
Total return (%)(b) 1.26 4.19 12.74 5.66 (1.58)
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 23,618 31,641 24,507 19,512 25,818
Expense ratio (%) 1.85 1.87 1.93 1.85 1.80
Expense ratio after expense reductions (%) 1.85 1.86 1.92 1.85 1.79
Ratio of net investment income to average net assets (%) 2.51 3.30 5.17 5.50 5.11
Portfolio turnover rate (%) 273.16 175.05 134.55 148.88 213.70
Class R
----------
2003(a)(g)
----------
Net asset value, beginning of period ($) 12.96
----------
Net investment income ($) 0.22
Net realized and unrealized loss on investments
and future contracts ($) (0.21)
----------
Total from investment operations ($) 0.01
----------
Dividend from net investment income ($) (0.30)
----------
Total distributions ($) (0.30)
----------
Net asset value, end of period ($) 12.67
==========
Total return (%)(b) (0.04)(c)
Ratios/Supplemental Data
----------
Net assets at end of period ($ thousands) 98
Expense ratio (%) 1.35(d)
Expense ratio after expense reductions (%) 1.35(d)
Ratio of net investment income to average net assets (%) 2.88(d)
Portfolio turnover rate (%) 273.16
Class s - Years Ended October 31
-----------------------------------------------------------------
2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
-----------------------------------------------------------------
Net asset value, beginning of year ($) 12.98 13.06 12.18 12.20 13.06
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.46 0.55 0.78 0.78 0.75
Net realized and unrealized gain (loss) on investments
and future contracts ($) (0.17) 0.10 0.87 0.01 (0.83)
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.29 0.65 1.65 0.79 (0.08)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.61) (0.73) (0.77) (0.81) (0.78)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.61) (0.73) (0.77) (0.81) (0.78)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.66 12.98 13.06 12.18 12.20
========== ========== ========== ========== ==========
Total return (%)(b) 2.26 5.22 13.93 6.71 (0.60)
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 11,344 15,338 13,775 13,418 187,373
Expense ratio (%) 0.85 0.87 0.93 0.85 0.80
Expense ratio after expense reductions (%) 0.85 0.86 0.92 0.85 0.79
Ratio of net investment income to average net assets (%) 3.54 4.33 6.18 6.39 5.94
Portfolio turnover rate (%) 273.16 175.05 134.55 148.88 213.70
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges.
(c) Not annualized
(d) Annualized
(e) January 1, 1999 (commencement of share class) to October 31, 1999
(f) Effective November 1, 2001, the fund has adopted the provisions on the AICPA
Audit and Accounting Guide, Audit of Investment Companies and began
amortizing premium on all fixed income securities. The effect of this change
for the year ended October 31, 2002, was to decrease net investment income
per share by $0.16, increase net realized and unrealized loss per share by
$0.16, and decrease the ratio of net investment income to average net assets
by 1.24%. The statement of changes and financial highlights for the period
prior to November 1, 2001, have not been restated for this change in policy.
(g) April 3, 2003 (commencement of share class) to October 31, 2003
(h) Audited by other auditors
State Street Research Government Income Fund 13
- --------------------------------------------
INDEPENDENT AUDITORS'
- --------------------------------------------
Report
To the Board of Trustees and Shareholders of State Street Research Government
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio holdings, of State Street Research Government Income Fund (the
"Fund"), a series of State Street Research Financial Trust, as of October 31,
2003, and the related statement of operations, the statement of changes in net
assets, and the financial highlights for the year ended October 31, 2003. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the year ended October 31, 2002, and the financial
highlights for each of the years in the four-year period ended October 31, 2002,
were audited by other auditors whose report dated December 13, 2002, expressed
an unqualified opinion on such statement and financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2003, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of October 31, 2003, and the results of its operations, the changes in
its net assets, the financial highlights for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 15, 2003
14
- -----------------------------------------------
TRUSTEES AND OFFICERS
- -----------------------------------------------
State Street Research Financial Trust
Number of Funds
Name, Position(s) Term of Office in Fund Complex Other
Address Held with and Length of Principal Occupations Overseen by Directorships Held
and Age(a) Fund Time Served(b) During Past 5 Years Trustee/Officer(c) by Trustee/Officer
===================================================================================================================================
Independent Trustees
Bruce R. Bond Trustee Since Retired; formerly Chairman of 19 Ceridian Corporation
(57) 1999 the Board, Chief Executive
Officer and President,
PictureTel Corporation (video
conferencing systems)
- -----------------------------------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Since Retired; formerly Senior Vice 55 Metropolitan Series Fund, Inc.(d)
(65) 1997 President for Finance and
Operations and Treasurer, The
Pennsylvania State University
- -----------------------------------------------------------------------------------------------------------------------------------
Dean O. Morton Trustee Since Retired; formerly Executive 55 The Clorox Company; KLA-Tencor
(71) 1987 Vice President, Chief Corporation; BEA Systems, Inc.;
Operating Officer and Cepheid; Pharsight Corporation; and
Director, Hewlett-Packard Metropolitan Series Fund, Inc.(d)
Company (computer
manufacturer)
- -----------------------------------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Since Dean, School of Business and 19 The Kroger Co.
(59) 1998 Public Management, George
Washington University;
formerly a member of the
Board of Governors of the
Federal Reserve System; and
Chairman and Commissioner of
the Commodity Futures Trading
Commission
- -----------------------------------------------------------------------------------------------------------------------------------
Toby Rosenblatt Trustee Since President, Founders 55 A.P. Pharma, Inc.; and Metropolitan
(65) 1993 Investments Ltd. Series Fund, Inc.(d)
(investments); formerly
President, The Glen Ellen
Company (private investment
firm)
- -----------------------------------------------------------------------------------------------------------------------------------
Michael S. Trustee Since Jay W. Forrester Professor of 55 Metropolitan Series Fund, Inc.(d)
Scott Morton (66) 1987 Management, Sloan School of
Management, Massachusetts
Institute of Technology
- -----------------------------------------------------------------------------------------------------------------------------------
James M. Storey Trustee Since Attorney; formerly Partner, 19 SEI Investments Funds (consisting of
(72) 2002 Dechert (law firm) 104 portfolios); and The
Massachusetts Health & Education
Tax-Exempt Trust
===================================================================================================================================
Interested Trustees
Richard S. Davis(+) Trustee Since Chairman of the Board, 19 None
(58) 2000 President and Chief Executive
Officer of State Street
Research & Management
Company; formerly Senior Vice
President, Fixed Income
Investments, Metropolitan
Life Insurance Company
===================================================================================================================================
Officers
C. Kim Goodwin Vice Since Managing Director and Chief 18 None
(44) President 2002 Investment Officer - Equities
of State Street Research &
Management Company; formerly
Chief Investment Officer -
U.S. Growth Equities,
American Century; and Senior
Vice President and portfolio
manager, Putnam Investments
- -----------------------------------------------------------------------------------------------------------------------------------
John S. Lombardo Vice Since Managing Director, Chief 19 None
(49) President 2001 Financial Officer and
Director of State Street
Research & Management
Company; formerly Executive
Vice President, State Street
Research & Management
Company; and Senior Vice
President, Product and
Financial Management, MetLife
Auto & Home
- -----------------------------------------------------------------------------------------------------------------------------------
Mark Marinella (45) Vice Since Managing Director and Chief 9 None
President 2003 Investment Officer - Fixed
Income, State Street Research
& Management Company;
formerly Executive Vice
President and Senior Vice
President, State Street
Research & Management
Company; and Chief Investment
Officer and Head of Fixed
Income, Columbia Management
Group
- -----------------------------------------------------------------------------------------------------------------------------------
Ajay Mehra Vice Since Managing Director - Equities 2 None
(39) President 2003 Research of State Street
Research & Management Company;
formerly Senior Vice President
and Portfolio Manager for
Columbia Management Group;
and Equity Research Analyst
for Morgan Stanley & Co.
- -----------------------------------------------------------------------------------------------------------------------------------
Elizabeth McCombs Vice Since Managing Director of State 8 None
Westvold (43) President 2003 Street Research & Management
Company; formerly Senior Vice
President, State Street
Research & Management Company
- -----------------------------------------------------------------------------------------------------------------------------------
Erin Xie (35) Vice Since Senior Vice President, State 2 None
President 2003 Street Research & Management
Company; formerly associate
in Pharmaceutical Equity
Research, Sanford Bernstein
- -----------------------------------------------------------------------------------------------------------------------------------
Douglas A. Romich Treasurer Since Senior Vice President and 19 None
(47) 2001 Treasurer of State Street
Research & Management
Company; formerly Vice
President and Assistant
Treasurer, State Street
Research & Management Company
- -----------------------------------------------------------------------------------------------------------------------------------
Francis J. Secretary Since Managing Director, General 19 None
McNamara, III (48) 1995 Counsel and Secretary of
State Street Research &
Management Company; formerly
Executive Vice President,
State Street Research &
Management Company
The fund's Statement of Additional Information includes additional information
about the fund's trustees, and is available without charge, by contacting State
Street Research, One Financial Center, Boston, Massachusetts 02111-2690, or by
calling toll-free 1-87-SSR-FUNDS (1-877-773-8637).
(a) The address of each person is c/o State Street Research & Management
Company, One Financial Center, Boston, MA 02111-2690.
(b) A Trustee serves until he or she retires, resigns or is removed as provided
in the master trust agreement of the respective Trust. Each Trust has
adopted a mandatory retirement age of 72. Each officer holds office until he
or she resigns, is removed or a successor is elected.
(c) Includes all series of 9 investment companies for which State Street
Research & Management Company serves as sole investment adviser and all
series of Metropolitan Series Fund, Inc. The primary adviser to Metropolitan
Series Fund, Inc., is MetLife Advisers, LLC, which has retained State Street
Research & Management Company as sub-adviser to certain series of
Metropolitan Series Fund, Inc.
(d) Serves as Director of Metropolitan Series Fund, Inc., an investment company
comprising 36 separate portfolios.
++ Mr. Davis is an "interested person" of the Trust under the Investment
Company Act of 1940 by reason of his affiliation with the Trust's Investment
Manager, State Street Research & Management Company, as noted.
State Street Research Government Income Fund 15
[LOGO] STATE STREET RESEARCH
One Financial Center
Boston, MA 02111-2690
----------------
PRSRT STD
U.S. POSTAGE
PAID
PERMIT #6
HUDSON, MA
----------------
- --------------------------------------------------------------------------------
New accounts, mutual fund purchases,
exchanges and account information
Internet www.ssrfunds.com
E-mail info@ssrfunds.com
Phone 1-87-SSR-FUNDS (1-877-773-8637),
toll-free, 7 days a week, 24 hours a day
Hearing-impaired: 1-800-676-7876
Chinese- and Spanish-speaking: 1-888-638-3193
Fax 1-617-737-9722 (request confirmation number
first from the Service Center by calling 1-877-773-8637)
Mail State Street Research Service Center
P.O. Box 8408, Boston, MA 02266-8408
Did You Know?
State Street Research offers electronic delivery of quarterly statements,
shareholder reports and fund prospectuses. If you elect this option, we will
send these materials to you via e-mail. To learn more, visit us on the Web at
www.ssrfunds.com and click on "Go to Your Account" or call us at 1-87-SSR-FUNDS
(1-877-773-8637).
Did you know that you can give a State Street Research mutual fund as a gift?
Call a service center representative at 1-87-SSR-FUNDS (1-877-773-8637), Monday
through Friday, 8am-6pm eastern time, to learn more.
- --------------------------------------------------------------------------------
OverView
For more information on the products and services we offer, refer to OverView,
our quarterly shareholder newsletter.
Webcasts
For a professional perspective on the markets, the economy and timely investment
topics, tune in to a State Street Research webcast by visiting our website at
www.ssrfunds.com.
Complete Fund Listing
For a list of our funds, visit our website at www.ssrfunds.com under Research
Our Funds.
[GRAPHIC]
for Excellence in
Shareholder Communications
[GRAPHIC]
for Excellence in Service
This report must be accompanied or preceded by a current prospectus. When used
as sales material after December 31, 2003, this report must be accompanied by a
current Quarterly Performance Update.
To obtain a prospectus for any State Street Research fund call 1-87-SSR-FUNDS
(1-877-773-8637) or by visiting our website at www.ssrfunds.com. The prospectus
contains more complete information, including sales charges and expenses. Please
read the prospectus carefully before investing or sending money.
The DALBAR awards recognize quality shareholder service and quality shareholder
communications, and should not be considered a rating of fund performance. The
survey included mutual fund complexes that volunteered or were otherwise
selected to participate and was not industrywide.
Member NASD, SIPC
(C)2003 State Street Research Investment Services, Inc.
One Financial Center
Boston, MA 02111-2690
www.ssrfunds.com
CONTROL NUMBER:(exp1204)SSR-LD GI-2849-1203
<Page>
FORM N-CSR(2 OF 3)
ITEM 2:
(a) The Registrant has, as of the end of the period covered by this
report, adopted a code of ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in the instructions to Form N-CSR
that applies to the Registrant's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of
whether these individuals are employed by the Registrant or a third
party.
(b) During the period covered by this report, there were not any amendments
to the provisions of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, there were not any waivers or
implicit waivers to a provision of the code of ethics adopted in 2(a)
above.
ITEM 3:
The Registrant's Board of Directors has determined that Steve A. Garban,
a member of the Registrant's Board of Directors and Audit Committee,
qualifies as the "audit committee financial expert" as such term is
defined in the instructions to Form N-CSR. Mr. Garban is "independent,"
as defined in the instructions to Form N-CSR.
ITEM 4 (PRINCIPAL ACCOUNTANT FEES AND SERVICES): Not applicable to this filing.
ITEM 5 (RESERVED)
ITEM 6 (RESERVED)
ITEM 7 (DISCLOSURE OF PROXY VOTING POLICIES & PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES): Not applicable to this filing.
ITEM 8 (RESERVED)
ITEM 9 (CONTROLS AND PROCEDURES):
SUB-ITEM 9a - The Principal Executive Officer and the Principal
Financial Officer have concluded that the State Street Research
Financial Trust disclosure controls and procedures (as defined in
Rule 30-a2(c) under the Investment Company Act) provide reasonable
assurances that material information relating to the State Street
Research Financial Trust is made known to them by the appropriate
persons, based on their evaluation of these controls and procedures
as of a date within 90 days of the filing date of this report.
SUB-ITEM 9b - There were no significant changes in the registrant's
internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation referenced in
(a)(i) above.
ITEM 10 (EXHIBITS):
(a)(1) Code of Ethics required to be disclosed under Item 2 of Form
N-CSR attached hereto as Exhibit 99.CODE ETH
(a)(2) Certification for each principal executive and principal
financial officer of the Registrant required by Rule 30a-2(a)
under the Investment Company Act of 1940, as amended
(17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.302CERT
(b) Certification required by Rule 30a-2(b) under the Investment
Company Act of 1940, as amended (17 CFR 270.30a-2(b)) attached
hereto as Exhibit 99.906CERT
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
State Street Research Income Trust
By: /s/ Richard S. Davis
------------------------------------------------------
Richard S. Davis, President, Chairman and
Chief Executive Officer
Principal Executive Officer
Date December 31, 2003
------------------------------------------------------
<Page>
FORM N-CSR(3 OF 3)
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities, and on the
dates indicated.
By: /s/ Richard S. Davis
------------------------------------------------------
Richard S. Davis, President, Chairman and
Chief Executive Officer
Principal Executive Officer
Date December 31, 2003
------------------------
By: /s/ Douglas A. Romich
------------------------------------------------------
Douglas A. Romich, Treasurer
Principal Financial Officer
Date December 31, 2003
------------------------