<Page>
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)
Richard S. Davis, President and Chief Executive Officer
State Street Research & Management Company
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: 10/31/04
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Date of reporting period: 11/1/03 - 10/31/04
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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.
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STATE STREET RESEARCH [Logo]
[BACKGROUND GRAPHIC]
Government Income Fund
October 31, 2004
Annual Report to Shareholders
FROM THE CHAIRMAN
State Street Research
Table of Contents
3 Performance Discussion
6 About Your Fund Expenses
7 Portfolio Holdings
10 Financial Statements
15 Financial Highlights
18 Report of Independent Registered Public Accounting Firm
19 Trustees and Officers
The pace of U.S. economic growth was robust over the twelve-month period ended
October 31, 2004, as the economy advanced on all fronts. Gross domestic product
(GDP) growth, a common measure of economic growth, averaged just short of 4.0%
for the period, solidly above the economy's long-term trend rate of 3.0%. We
expect the economy to grow between 3.5% and 4.0% for the remainder of 2004 and
into 2005.
Consumers continued to play a key role in the economy. Spending on retail goods,
autos and housing remained generally strong throughout the period. Retail sales
slowed during the summer months of 2004 as a result of higher energy prices and
weather-related events, but the pace of consumer spending picked back up in the
fall.
The number of new jobs continued to fall short of expectations. In the spring,
more than one million new jobs were added to the economy. But job growth was
disappointing again during the summer months. The economy has yet to replace all
the jobs lost in the downturn of 2000-2001.
Although business spending fell short of expectations, given the economy's
relatively strong growth cycle, a pick-up in business spending was one bright
spot in the economy. Industrial production moved steadily higher, as did
manufacturing capacity utilization. Outlays for new equipment and construction
enjoyed double-digit growth in the second half of the period. Strong spending by
businesses helped offset some of the slowdown in consumer-spending growth.
Stocks Stumble, Bonds Edge Higher
The U.S. stock market began the period on a strong note. However, the gains it
achieved early in the period were whittled away over the twelve months covered
by this report. By contrast, the bond market has held up in the face of three
increases in the federal funds rate (a key short-term interest rate) that
occurred late in the period. The yield on the 10-year benchmark U.S. Treasury
ended the period just about where it began, and bond prices moved higher across
all sectors.
Investing Despite Uncertainty
By all accounts, news on the economy and the markets has been overshadowed over
the past year by external events. As a result, many investors have remained on
the sidelines. With so much uncertainty, it may feel safer to wait out the
storm. Yet, it can be even more risky to try to time your entrances and exits as
the markets move through their natural cycles. If you're feeling uncertain about
your financial strategy, talk to your financial professional. With their advice
and guidance, you can keep your financial goals on track.
Sincerely,
/s/ Richard S. Davis
Richard S. Davis
Chairman
October 31, 2004
2
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PERFORMANCE
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Discussion as of October 31, 2004
How State Street Research Government Income Fund Performed
State Street Research Government Income Fund (Class A shares, without sales
charge) returned 3.07% for the twelve-month period ended October 31, 2004. The
fund underperformed both the Lehman Brothers Intermediate/Government Index,
which returned 4.33%, and the Lipper General U.S. Government Funds Average,
which returned 4.19%, over the same period.
- --------------------------------------------------------------------------------
Performance: Class A
- -------------------------------------------------------------------------------
Fund average annual total return as of 10/31/04
(does not reflect sales charge)
1 Year 5 Years 10 Years
3.07% 5.91% 6.67%
- --------------------------------------------------------------------------------
Lehman Brothers Intermediate/Government Index as of 10/31/04
1 Year 5 Years 10 Years
3.54% 6.60% 6.78%
- --------------------------------------------------------------------------------
Fund average annual total return as of 9/30/04
(at maximum applicable sales charge)
1 Year 5 Years 10 Years
-3.26% 4.86% 6.11%
- --------------------------------------------------------------------------------
Lehman Brothers Intermediate/Government Index as of 9/30/04
1 Year 5 Years 10 Years
1.91% 6.51% 6.72%
- --------------------------------------------------------------------------------
See pages 4 and 5 for additional performance data for Class A shares and for
performance data on other share classes.
Keep in mind that the performance data quoted represents past performance and
is no guarantee of future results. Current performance may be lower or higher
than the performance data quoted herein. For the most recent month-end
performance results, visit our website at www.ssrfunds.com. 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.
Average annual total return without sales charge does not reflect the maximum
applicable sales charges. If the applicable sales charges were deducted,
performance results would be lower.
Average annual total return at maximum applicable sales charge reflects a
maximum 4.50% Class A share front-end sales charge.
The Lehman Brothers Intermediate/Government Index is an unmanaged index 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 an index.
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 to competing funds.
- --------------------------------------------------------------------------------
Reasons for the Fund's Performance
Interest-rate volatility affected the bond market throughout the twelve-month
period as the outlook for the U.S. economy fluctuated from cautious to
optimistic. Several strong job reports in the spring of 2004 brightened the
economic outlook and the Federal Reserve Board raised a key short-term interest
rate, the federal funds rate, in an effort to restrain growth and combat
inflation. The federal funds rate was increased in three equal steps from 1.00%
to 1.75%, between June and September. The Fed's moves resulted in higher
interest rates for two-year Treasuries, but 10-year Treasury yields
declined--an indication that investors believe that the Fed is doing a good job
of controlling inflation. (Interest rates and bond prices move in opposite
directions.) The Treasury market was also helped by foreign
investors--particularly by Asian central banks--that continued to buy U.S.
bonds.
The fund's active management of interest-rate exposure had a neutral effect on
returns for the period. We focused on longer-maturity bonds in the first half
of the period, and as a result the fund's duration was longer than that of the
Lehman Brothers Intermediate Government Index. Duration is a measure of
interest-rate sensitivity; we lengthen duration when we expect rates to go
down. Intermediate- and long-term interest rates rose in the first half of the
period and our positioning slightly detracted from returns. However, the fund's
longer duration at the end of the period helped the fund's return because the
10-year Treasury yield came down and prices rose.
The fund also benefited from our decision to emphasize pass-through mortgage
securities and commercial mortgage-backed securities (CMBS), sectors that
outperformed Treasuries during the period.
Looking Ahead
At the end of the period, the fund remained slightly underweight in short-term
issues and overweight in long-term issues because we believe that the current
gap between short-term and long-term yields is likely to narrow further as
short-term interest rates continue to rise into 2005. We will continue to look
for opportunities to manage the fund's duration as opportunities arise.
Given the ongoing investigation into government-sponsored enterprises, such as
Fannie Mae and Freddie Mac, we continue to underweight the agency sector.
Instead, we have maintained a higher-than-benchmark weight in mortgage-backed
securities where the risk/return profile is more attractive.
A Word about Risk
The major risks of bond investing include the tendency for bond prices to fall
when interest rates rise. 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.
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.
State Street Research Government Income Fund 3
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PERFORMANCE
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Discussion as of October 31, 2004
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) 3.07% 33.23% 90.78%
- --------------------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) -1.57% 27.23% 82.20%
- --------------------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) -1.57% 4.93% 6.18%
- --------------------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[The following table was depicted as a line graph in the printed material.]
Merrill Lynch Lehman Brothers
Government Intermediate/
Class A Master Index Government Index
- --------------------------------------------------------------------------------
94 9425 10000 10000
95 11507 11541 11180
96 12114 12123 11813
97 13215 13176 12679
98 14442 14670 13884
99 14320 14496 13997
00 15238 15656 14939
01 17320 17996 17006
02 18155 19133 18144
03 18511 19686 18608
04 19078 20690 19266
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B(1)
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 2.38% 28.51% 76.77%
- --------------------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) -2.56% 26.51% 76.77%
- --------------------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) -2.56% 4.82% 5.86%
- --------------------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[The following table was depicted as a line graph in the printed material.]
Merrill Lynch Lehman Brothers
Government Intermediate/
Class B(1) Master Index Government Index
- --------------------------------------------------------------------------------
10000 10000 10000
95 11415 11541 11180
96 11930 12123 11813
97 12844 13176 12679
98 14009 14670 13884
99 13755 14496 13997
00 14526 15656 14939
01 16386 17996 17006
02 17064 19133 18144
03 17266 19686 18608
04 17677 20690 19266
- --------------------------------------------------------------------------------
Keep in mind that the performance data quoted represents past performance and
is no guarantee of future results. Current performance may be lower or higher
than the performance data quoted herein. For the most recent month-end
performance results, visit our website at www.ssrfunds.com. 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.
Cumulative Total Return without sales charge does not reflect the maximum
applicable sales charges. If the applicable sales charges were deducted,
performance results would be lower.
4
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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) 2.36% 28.68% 77.41%
- --------------------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) -2.57% 26.68% 77.42%
- --------------------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) -2.57% 4.84% 5.90%
- --------------------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[The following table was depicted as a line graph in the printed material.]
Merrill Lynch Lehman Brothers
Government Intermediate/
Class B Master Index Government Index
- --------------------------------------------------------------------------------
10000 10000 10000
95 11415 11541 11180
96 11930 12123 11813
97 12844 13176 12679
98 14009 14670 13884
99 13788 14496 13997
00 14569 15656 14939
01 16427 17996 17006
02 17117 19133 18144
03 17332 19686 18608
04 17741 20690 19266
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 2.36% 28.65% 77.49%
- -------------------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) 1.37% 28.65% 77.49%
- --------------------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) 1.37% 5.17% 5.91%
- --------------------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[The following table was depicted as a line graph in the printed material.]
Merrill Lynch Lehman Brothers
Government Intermediate/
Class C Master Index Government Index
- --------------------------------------------------------------------------------
10000 10000 10000
95 11424 11541 11180
96 11939 12123 11813
97 12853 13176 12679
98 14018 14670 13884
99 13796 14496 13997
00 14578 15656 14939
01 16435 17996 17006
02 17124 19133 18144
03 17339 19686 18608
04 17749 20690 19266
- --------------------------------------------------------------------------------
Class R
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 2.86% 32.77% 90.13%
- --------------------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) 2.86% 32.77% 90.13%
- --------------------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) 2.86% 5.83% 6.64%
- --------------------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[The following table was depicted as a line graph in the printed material.]
Merrill Lynch Lehman Brothers
Government Intermediate/
Class R Master Index Government Index
- --------------------------------------------------------------------------------
10000 10000 10000
95 11507 11541 11180
96 12114 12123 11813
97 13147 13176 12679
98 14442 14670 13884
99 14320 14496 13997
00 15238 15656 14939
01 17320 17996 17006
02 18155 19133 18144
03 18484 19686 18608
04 19013 20690 19266
- --------------------------------------------------------------------------------
Class S
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return
(does not reflect sales charge) 3.38% 35.23% 96.15%
- --------------------------------------------------------------------------------
Cumulative Total Return
(at maximum applicable sales charge) 3.38% 35.24% 96.15%
- --------------------------------------------------------------------------------
Average Annual Total Return
(at maximum applicable sales charge) 3.38% 6.22% 6.97%
- --------------------------------------------------------------------------------
$10,000 Over 10 Years
(reflects maximum applicable sales charge)
[The following table was depicted as a line graph in the printed material.]
Merrill Lynch Lehman Brothers
Government Intermediate/
Class S Master Index Government Index
- --------------------------------------------------------------------------------
10000 10000 10000
95 11537 11541 11180
96 12177 12123 11813
97 13248 13176 12679
98 14591 14670 13884
99 14504 14496 13997
00 15477 15656 14939
01 17633 17996 17006
02 18554 19133 18144
03 18974 19686 18608
04 19615 20690 19266
- --------------------------------------------------------------------------------
Cumulative and Average Annual Total Returns at maximum applicable sales charge
reflect a maximum 4.5% 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
Class S shares, offered without sales charge, are available through certain
retirement plans and special programs.
The Lehman Brothers Intermediate Government Index is an unmanaged index of
fixed-rate U.S. Treasury and agency securities. The Merrill Lynch Government
Master Index is comprised of fixed-rate U.S. Treasury and agency securities.
The indexes are unmanaged and do not take transaction charges into
consideration. It is not possible to invest directly in an index.
State Street Research Government Income Fund 5
Summary Portfolio Schedule
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Industries % of Fund Net Assets
U.S. Treasury 46%
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U.S. Agency Mortgage 45%
- --------------------------------------------------------------------------------
Other Mortgage 7%
- --------------------------------------------------------------------------------
Foreign 1%
- --------------------------------------------------------------------------------
Cash 1%
- --------------------------------------------------------------------------------
Total 100%
Because of active management, there is no guarantee that the fund currently
invests, or will continue to invest, in the securities referenced.
[The following table was depicted as a line graph in the printed material.]
Interest Rates
- --------------------------------------------------------------------------------
(November 1, 2003 to October 31, 2004)
90-day 90-Day 10-Year 30-Year 30-Year
Treasury Commercial Treasury Treasury Mortgage
- --------------------------------------------------------------------------------
3-Nov 1.08 0.91 4.33 5.13 5.93
3-Dec 1.07 0.9 4.25 5.07 5.88
4-Jan 1.03 0.89 4.13 4.96 5.71
4-Feb 1.03 0.92 3.97 4.84 5.64
4-Mar 1.02 0.92 3.83 4.77 5.45
4-Apr 1.08 0.94 4.51 5.28 6.01
4-May 1.11 1.07 4.7 5.4 6.27
4-Jun 1.26 1.34 4.58 5.29 6.29
4-Jul 1.46 1.5 4.45 5.19 6.06
4-Aug 1.56 1.62 4.18 4.98 5.87
4-Sep 1.7 1.75 4.12 4.89 5.75
4-Oct 1.92 1.95 4.07 4.84 5.72
Sources: Federal Reserve, Bloomberg
About Your Fund Expenses
As a fund shareholder, you incur two types of costs: (1) Transaction costs,
which include sales charges, and (2) ongoing expenses, which include management
fees, service/distribution fees (12b-1) and "other" expenses. The examples
below illustrate the ongoing cost in dollars of investing in the fund and allow
you to compare these costs with the expenses of other funds. The examples are
based on a $1,000 investment at the beginning of the period and held for the
entire period from April 30, 2004, to October 31, 2004.
Actual Fund Return is based on the fund's actual return and expenses. To
estimate the ongoing expenses you paid during the entire period shown, simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number shown for your
fund under the column "Expenses Paid during the Period".
Hypothetical 5% Return is based on the fund's actual expense ratio and an
assumed rate of 5% per year before expenses. Please note that the return used
is not the fund's actual return; therefore, this information may not be used to
estimate your actual ending balance and expenses paid during the period. To
compare your fund's ongoing expenses with those of other funds, simply compare
this 5% hypothetical example with the 5% hypothetical examples shown in the
shareholder reports of other funds.
Beginning Ending Expenses
Account Account Paid Annualized
Six months ended Value Value during Expense
10/31/04 4/30/04 10/31/04 Period* Ratio
- --------------------------------------------------------------------------------
Actual Fund Return
- --------------------------------------------------------------------------------
Class A $1,000 $ 1,021.67 $ 6.06 1.19%
- --------------------------------------------------------------------------------
Class B(1) $1,000 $ 1,014.85 $ 9.57 1.89%
- --------------------------------------------------------------------------------
Class B (closed) $1,000 $ 1,014.69 $ 9.57 1.89%
- --------------------------------------------------------------------------------
Class C $1,000 $ 1,014.67 $ 9.57 1.89%
- --------------------------------------------------------------------------------
Class R $1,000 $ 1,019.63 $ 7.07 1.39%
- --------------------------------------------------------------------------------
Class S $1,000 $ 1,024.74 $ 4.56 0.89%
- --------------------------------------------------------------------------------
Hypothetical 5% Return
- --------------------------------------------------------------------------------
Class A $1,000 $ 1,019.00 $ 6.06 1.19%
- --------------------------------------------------------------------------------
Class B(1) $1,000 $ 1,015.50 $ 9.57 1.89%
- --------------------------------------------------------------------------------
Class B (closed) $1,000 $ 1,015.50 $ 9.57 1.89%
- --------------------------------------------------------------------------------
Class C $1,000 $ 1,015.50 $ 9.57 1.89%
- --------------------------------------------------------------------------------
Class R $1,000 $ 1,018.00 $ 7.06 1.39%
- --------------------------------------------------------------------------------
Class S $1,000 $ 1,020.50 $ 4.55 0.89%
* Expenses are equal to the fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the number of days in
the period and then divided by the number of days in the year.
Please note that the expenses shown in the table are meant to highlight and
help you compare ongoing costs only and do not reflect transactional expenses
such as sales charges, which would result in higher total expenses. It should
also be noted that, for certain funds, expenses have been subsidized or reduced
through expense offset arrangements, which reduces costs for shareholders.
Generally, the fund expects that the expense subsidy or expense offset
arrangement will continue although there is no guarantee that it will. Please
see the fund's prospectus for more information.
6
- -----------
PORTFOLIO
- ------------
Holdings
October 31, 2004
Maturity Principal Market
Issuer Date Amount Value
- --------------------------------------------------------------------------------------
U.S. Government Securities 90.8%
U.S. Treasury 45.9%
U.S. Treasury Bond, 10.75%^ ..... 8/15/2005 $28,250,000 $ 30,131,506
U.S. Treasury Bond, 10.375%^ 11/15/2012 36,425,000 44,257,796
U.S. Treasury Bond, 12.00%^ ..... 8/15/2013 17,600,000 23,168,059
U.S. Treasury Bond,
10.625%^** .................... 8/15/2015 27,775,000 43,357,219
U.S. Treasury Bond, 9.875%^ ..... 11/15/2015 12,650,000 18,975,987
U.S. Treasury Note, 7.00% ....... 7/15/2006 24,125,000 25,942,867
U.S. Treasury Note, 2.375%^ ..... 8/15/2006 22,275,000 22,234,972
U.S. Treasury Note, 5.625% ...... 5/15/2008 225,000 245,004
U.S. Treasury Note, 6.50%^ ...... 2/15/2010 18,550,000 21,343,370
U.S. Treasury Note, 4.00%^ ...... 11/15/2012 5,175,000 5,232,412
------------
234,889,192
------------
U.S. Agency Mortgage 44.9%
ENSCO Offshore Co., 6.36% ....... 12/01/2015 2,664,209 2,957,406
Federal Home Loan Mortgage
Corp., 9.00% .................. 12/01/2009 632,948 679,613
Federal Home Loan Mortgage
Corp., 4.00% .................. 3/15/2010 2,925,000 2,959,381
Federal Home Loan Mortgage
Corp., 3.75% .................. 3/15/2011 4,706,000 4,747,225
Federal Home Loan Mortgage
Corp., 4.00% .................. 8/15/2013 3,000,000 3,035,924
Federal Home Loan Mortgage
Corp., 4.00% .................. 1/15/2015 2,800,000 2,836,322
Federal Home Loan Mortgage
Corp., 5.50% .................. 7/01/2033 4,713,733 4,814,377
Federal National Mortgage
Association, 5.50% ............ 5/02/2006 9,350,000 9,729,928
Federal National Mortgage
Association, 8.00% ............ 4/01/2008 453,763 477,667
Federal National Mortgage
Association, 8.00% ............ 6/01/2008 658,495 693,784
Federal National Mortgage
Association, 8.50% ............ 2/01/2009 956,226 1,017,882
Federal National Mortgage
Association, 9.00% ............ 5/01/2009 807,581 865,461
Federal National Mortgage
Association, 7.125% ........... 6/15/2010 19,575,000 22,814,976
Federal National Mortgage
Association, 6.02% ............ 11/25/2010 3,600,000 3,950,165
Federal National Mortgage
Association, 6.50% ............ 12/01/2014 945,048 1,003,384
Federal National Mortgage
Association, 9.00% ............ 4/01/2016 230,434 251,503
Federal National Mortgage
Association, 7.00% ............ 1/01/2017 1,588,766 1,686,668
Federal National Mortgage
Association, 5.00% ............ 6/01/2018 1,868,104 1,909,105
Federal National Mortgage
Association, 4.50% ............ 10/01/2018 1,401,134 1,408,568
Maturity Principal Market
Issuer Date Amount Value
- --------------------------------------------------------------------------------------
Federal National Mortgage
Association, 4.50%* ........... 11/18/2019 $13,075,000 $ 13,107,688
Federal National Mortgage
Association, 5.00%* ........... 11/18/2019 10,200,000 10,407,182
Federal National Mortgage
Association, 5.50%* ........... 11/18/2019 4,700,000 4,865,966
Federal National Mortgage
Association, 6.00%* ........... 11/18/2019 3,375,000 3,540,584
Federal National Mortgage
Association, 4.00%* ........... 11/18/2019 2,400,000 2,355,749
Federal National Mortgage
Association, 5.00% ............ 6/01/2023 2,099,257 2,122,081
Federal National Mortgage
Association, 7.50% ............ 7/01/2029 1,075,025 1,154,969
Federal National Mortgage
Association, 6.50% ............ 12/01/2029 1,859,993 1,962,307
Federal National Mortgage
Association, 7.00% ............ 4/01/2032 922,872 980,750
Federal National Mortgage
Association, 5.50% ............ 4/01/2033 2,911,613 2,970,377
Federal National Mortgage
Association, 5.50% ............ 11/01/2033 4,580,535 4,672,983
Federal National Mortgage
Association, 5.00% ............ 11/01/2033 5,359,141 5,354,798
Federal National Mortgage
Association, 5.50% ............ 1/01/2034 1,255,634 1,289,975
Federal National Mortgage
Association, 5.50% ............ 1/01/2034 7,735,251 7,891,369
Federal National Mortgage
Association, 5.00% ............ 3/01/2034 10,108,885 10,100,693
Federal National Mortgage
Association, 4.50%* ........... 11/15/2034 4,475,000 4,343,547
Federal National Mortgage
Association, 5.00%* ........... 11/15/2034 11,000,000 10,958,750
Federal National Mortgage
Association, 5.50%* ........... 11/15/2034 10,025,000 10,206,703
Federal National Mortgage
Association, 6.00%* ........... 11/15/2034 6,825,000 7,074,536
Federal National Mortgage
Association, 6.50%* ........... 11/15/2034 14,575,000 15,321,969
Government National Mortgage
Association, 9.50% ............ 9/15/2009 319,748 350,785
Government National Mortgage
Association, 9.50% ............ 10/15/2009 617,560 677,452
Government National Mortgage
Association, 9.50% ............ 11/15/2009 275,491 302,232
Government National Mortgage
Association, 9.50% ............ 9/15/2019 47,164 53,475
Government National Mortgage
Association, 7.00% ............ 5/15/2027 729,981 780,982
Government National Mortgage
Association, 6.50% ............ 11/15/2028 1,634,015 1,734,099
Government National Mortgage
Association, 7.00% ............ 11/15/2028 2,658,543 2,843,531
Government National Mortgage
Association, 6.50% ............ 9/15/2029 1,512,445 1,603,788
Government National Mortgage
Association, 7.50% ............ 6/15/2031 138,949 149,653
Government National Mortgage
Association, 5.50% ............ 4/15/2033 3,206,673 3,287,597
Government National Mortgage
Association, 6.00% ............ 9/20/2033 1,894,795 1,970,671
Government National Mortgage
Association, 5.00% ............ 10/20/2033 2,926,203 2,935,830
Government National Mortgage
Association, 6.00% ............ 10/20/2033 3,105,515 3,240,537
The notes are an integral part of the financial statements.
State Street Research Government Income Fund 7
Maturity Principal Market
Issuer Date Amount Value
- ---------------------------------------------------------------------------------
Government National Mortgage
Association, 6.00% ................. 11/20/2033 $4,115,422 $ 4,280,221
Government National Mortgage
Association, 6.00% ................. 2/20/2034 2,861,686 2,975,706
Government National Mortgage
Association, 5.50%* ................ 11/22/2034 3,475,000 3,554,272
Overseas Private Investor Bond,
3.42% .............................. 1/15/2015 3,069,774 3,009,238
Private Export Funding Corp.,
3.375% ............................. 2/15/2009 5,250,000 5,229,792
U.S. Department Housing &
Urban Development 2003-A,
4.44% .............................. 8/01/2011 2,099,000 2,142,034
------------
229,644,210
------------
Total U.S. Government Securities (Cost $452,391,390) ............. 464,533,402
------------
Other Investments 8.2%
Foreign Government 0.6%
AUD
Republic of Australia, 6.25% ......... 4/15/2015 3,500,000 2,790,523
------------
Finance/Mortgage 7.6%
Bear Stearns Commercial
Mortgage Securities Inc.,
5.92% .............................. 10/15/2036 2,545,030 2,752,458
Bear Stearns Commercial
Mortgage Securities Inc.,
4.36% .............................. 6/11/2041 2,360,717 2,410,239
Chase Commercial Mortgage
Securities Corp. 1998 Cl. A1,
6.025% ............................. 11/18/2030 1,194,075 1,243,663
First Union Lehman Brothers
Bank Conduit Series 1998 Cl.
A1, 6.28% .......................... 11/18/2035 1,346,593 1,363,504
LB Commercial Conduit
Mortgage Trust, 3.25% .............. 3/15/2029 2,100,000 2,061,790
LB UBS Commercial Mortgage
Trust, 3.825% ...................... 6/11/2029 2,766,196 2,794,181
LB-UBS Commercial Mortgage
Trust 2001 Cl. A4, 5.64% ........... 12/15/2025 3,982,759 4,225,572
Morgan Stanley Capital Inc.
1999, 5.91% ........................ 11/15/2031 1,490,957 1,546,203
Morgan Stanley Dean Witter
Capital Inc. 2002 Cl. A1,
5.38% .............................. 1/15/2039 4,488,129 4,744,441
Nomura Asset Securities Corp.,
6.59% .............................. 3/15/2030 2,625,000 2,874,836
Wachovia Bank Commercial
Mortgage Trust 04-C12 A1,
3.40% .............................. 7/15/2041 2,726,492 2,725,145
Wachovia Bank Commercial
Mortgage Trust 2003-C5 A1,
2.99% .............................. 6/15/2035 2,692,552 2,586,075
Washington Mutual Mortgage
Inc. 2003, 3.42% ................... 5/25/2033 4,350,000 4,324,296
Washington Mutual Mortgage
Inc. 2003, 3.985% .................. 10/25/2033 3,275,000 3,292,973
------------
38,945,376
------------
Total Other Investments (Cost $41,389,705) ....................... 41,735,899
------------
Shares
- ---------------------------------------------------------------------------------
Short-Term Investments 25.4%
State Street Navigator Securities Lending Prime
Portfolio ....................................... 130,115,487 130,115,487
-----------
Total Short-Term Investments (Cost $130,115,487) .................. 130,115,487
-----------
Maturity Principal Market
Issuer Date Amount Value
- ---------------------------------------------------------------------------------
Commercial Paper 16.9%
Federal National Mortgage
Association, 1.69% ............ 11/08/2004 $13,400,000 $ 13,395,596
Federal National Mortgage
Association, 1.69% ............ 11/17/2004 10,301,000 10,293,263
Federal National Mortgage
Association, 1.79% ............ 12/15/2004 9,950,000 9,928,232
General Electric Capital Corp.,
1.78% ......................... 11/04/2004 10,000,000 9,998,517
International Lease Finance
Corp., 1.75% .................. 11/08/2004 9,194,000 9,190,872
International Lease Finance
Corp., 1.83% .................. 11/18/2004 8,882,000 8,874,324
Merck & Co. Inc., 1.74% ......... 11/02/2004 5,777,000 5,776,721
Morgan Stanley Dean Witter &
Co., 1.87% .................... 11/18/2004 11,805,000 11,794,575
UBS Finance Inc., 1.78% ......... 12/07/2004 7,036,000 7,023,546
------------
Total Commercial Paper (Cost $86,275,646) ....................... 86,275,646
------------
% of
Net Assets
- ---------------------------------------------------------------------------------
Summary of Portfolio Assets
Total Investments (Cost $710,172,228)..... 141.3% 722,660,434
Cash and Other Assets, Less Liabilities .. (41.3%) (211,365,293)
----- ------------
Net Assets ............................... 100.0% $511,295,141
===== ============
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, 2004.
^ A portion or all of the security was held on loan. At October 31, 2004, the
value of securities loaned was $127,711,837.
Federal Income Tax Information
At October 31, 2004, the net unrealized appreciation
of investments based on cost for federal income tax
purposes of $721,034,988 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost $9,449,179
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (7,823,733)
----------
$1,625,446
==========
8 The notes are an integral part of the financial statements.
Futures contracts open at October 31, 2004, are as follows:
Unrealized
Number Notional Expiration Appreciation
Type of Contracts Amount Month (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------
2-Year U.S. Treasury Notes Long ................... 116 $ 24,564,813 December 2004 $ 52,875
5-Year U.S. Treasury Notes Long ................... 56 6,237,000 December 2004 68,887
10-Year Interest Rate Swap Short .................. (125) (13,996,094) December 2004 (2,352)
10-Year U.S. Treasury Notes Short ................. (2) (227,125) December 2004 (357,984)
30-Year U.S. Treasury Notes Short ................. (20) (2,276,875) December 2004 (53,085)
----------
$ (291,659)
==========
Forward currency exchange contracts outstanding at October 31, 2004, are as
follows:
Total Contract Unrealized Delivery
Transaction Value Price Depreciation Date
- ---------------------------------------------------------------------------------------------------------------------------
Sell Australian Dollars, Buy U.S. dollars ......... 3,350,000 AUD 1.34474 AUD $(85,052) 12/15/04
========
The notes are an integral part of the financial statements.
State Street Research Government Income Fund 9
- -----------
FINANCIAL
- -----------
Statements
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
October 31, 2004
Assets
Investments, at value (cost $710,172,228) (Note 1) ............. $722,660,434
Cash ........................................................... 13,022
Receivable for securities sold ................................. 9,689,135
Interest receivable ............................................ 6,735,131
Receivable for fund shares sold ................................ 406,397
Other assets ................................................... 99,061
------------
739,603,180
------------
Liabilities
Payable for collateral received on securities loaned ........... 130,115,487
Payable for securities purchased ............................... 95,301,810
Payable for fund shares redeemed ............................... 795,061
Dividends payable .............................................. 730,649
Accrued transfer agent and shareholder services ................ 598,415
Accrued management fee ......................................... 259,968
Accrued distribution and service fees .......................... 197,293
Payable for forward currency contracts ......................... 85,052
Payable for variation margin ................................... 51,249
Accrued trustees' fees ......................................... 25,572
Accrued administration fee ..................................... 3,783
Other accrued expenses ......................................... 143,700
------------
228,308,039
------------
Net Assets ..................................................... $511,295,141
============
Net Assets consist of:
Unrealized appreciation of investments ....................... $ 12,488,206
Unrealized depreciation of futures contracts ................. (291,659)
Unrealized depreciation of forward currency contracts......... (85,052)
Accumulated net realized loss ................................ (19,441,981)
Paid-in capital .............................................. 518,625,627
------------
$511,295,141
============
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 $378,133,357 30,222,653 $ 12.51*
B(1) $ 87,987,737 7,093,595 $ 12.40**
B $ 21,777,139 1,747,446 $ 12.46**
C $ 14,696,956 1,178,601 $ 12.47**
R $ 96,687 7,726 $ 12.51
S $ 8,603,265 688,260 $ 12.50
* Maximum offering price per share = $13.10 ($12.51 [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 charges, if any.
Statement of Operations
- --------------------------------------------------------------------------------
For the year ended October 31, 2004
Investment Income
Interest, net of foreign taxes of $8,648 (Note 1)................ $23,275,210
Securities lending income (Note 1) .............................. 77,653
-----------
23,352,863
-----------
Expenses
Management fee (Note 2) ......................................... 3,373,356
Distribution and service fees - Class A (Note 4) ................ 1,227,225
Distribution and service fees - Class B(1) (Note 4) ............. 995,739
Distribution and service fees - Class B (Note 4) ................ 314,697
Distribution and service fees - Class C (Note 4) ................ 178,015
Distribution and service fees - Class R (Note 4) ................ 486
Transfer agent and shareholder services (Note 2) ................ 1,323,221
Custodian fee ................................................... 213,476
Administration fee (Note 2) ..................................... 100,850
Reports to shareholders ......................................... 53,650
Registration fees ............................................... 51,972
Trustees' fees (Note 2) ......................................... 49,684
Audit fee ....................................................... 44,770
Legal fees ...................................................... 15,926
Miscellaneous ................................................... 57,600
-----------
8,000,667
-----------
Net investment income ........................................... 15,352,196
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net increase from payment by affiliate (Note 2) ................. 138,757
-----------
Net realized gain on investments (Notes 1 and 3) ................ 8,516,358
Net realized loss on foreign currency (Note 1) .................. (158,509)
Net realized loss on futures contracts (Note 1) ................ (2,299,386)
-----------
Total net realized gain ....................................... 6,058,463
-----------
Change in unrealized depreciation of investments ................ (6,104,028)
Change in unrealized depreciation of foreign currency ........... (85,052)
Change in unrealized appreciation of futures contracts .......... 646,417
-----------
Total change in unrealized depreciation ....................... (5,542,663)
-----------
Net gain on investments ......................................... 654,557
-----------
Net increase in net assets resulting from operations ............ $16,006,753
===========
10 The notes are an integral part of the financial statements.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Years ended October 31
--------------------------------
2004 2003
---------------- -------------
Increase (Decrease) In Net Assets
Operations:
Net investment income ....................... $ 15,352,196 $ 21,756,769
Net increase from payment by
affiliate ................................. 138,757 --
Net realized gain on investments
and futures contracts ..................... 6,058,463 17,525,536
Change in unrealized depreciation
of investments and futures
contracts ................................. (5,542,663) (26,546,733)
-------------------------------
Net increase resulting
from operations ........................... 16,006,753 12,735,572
-------------------------------
Dividends from net investment income:
Class A ................................... (17,574,815) (21,773,956)
Class B(1) ................................ (3,617,832) (4,783,459)
Class B ................................... (1,136,731) (2,405,307)
Class C ................................... (643,264) (1,160,250)
Class R ................................... (3,973) (2,293)
Class S ................................... (454,494) (658,794)
-------------------------------
(23,431,109) (30,784,059)
-------------------------------
Net decrease from fund
share transactions (Note 6) ............... (117,910,699) (144,063,764)
-------------------------------
Total decrease in net assets ................ (125,335,055) (162,112,251)
Net Assets
Beginning of year ........................... 636,630,196 798,742,447
-------------------------------
End of year (including undistributed
net investment income of
$0 and $913,934 respectively) ............. $511,295,141 $636,630,196
===============================
Notes to Financial Statements
- --------------------------------------------------------------------------------
October 31, 2004
Note 1
State Street Research Government Income Fund is a series of State Street
Research Financial Trust (the "Trust"), which is organized as a Massachusetts
business trust registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. The Trust presently consists of
two separate funds: State Street Research Government Income Fund and State
Street Research Health Sciences Fund.
The investment objective of this fund is to seek high current income. Under
normal market conditions, the fund invests at least 80% of its 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) shares are subject to contingent deferred
sales charge on certain redemptions made within six years of purchase. 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 B shares are subject to a contingent
deferred sales charge on certain redemptions made within five years of
purchase. 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. Income expenses
(other than service and distribution fees), and realized and unrealized gains
or losses on investments are allocated to each class of shares based on its
relative net assets. 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
Securities are valued by a pricing service, which utilizes market transactions,
quotations from dealers, and various relationships among securities in
determining value. Securities for which there is no such valuation, if any, are
valued at their fair value as determined in accordance with established methods
consistently applied. Short-term securities maturing within sixty days are
valued at amortized cost. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. 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. In the event that the market quotations for a portfolio instrument
are not deemed to be readily available, the Investment Adviser's Valuation
Committee determines the fair value for such portfolio instrument. The fair
value of any such portfolio instruments are determined based upon a
consideration of all available facts and information. The fair valuation of a
restricted portfolio instrument reflects the inherent worth of the portfolio
instrument, without regard to the restrictive feature, adjusted for any
diminution in value resulting from the restrictive feature. The Investment
Adviser and the Custodian also monitor domestic and foreign markets and
State Street Research Government Income Fund 11
Notes (continued)
- --------------------------------------------------------------------------------
news information for any developing events that may have an impact on the
valuation of portfolio instruments.
Such monitoring includes general market news and financial market information
sources currently utilized in making investment decisions, trading and
investment personnel located abroad, foreign regional brokers, and/or foreign
custodians. The value assigned to these securities is based upon available
information at the time, and does not necessarily represent the amount which
might ultimately be realized upon sale.
B. Foreign Contracts and Foreign Currencies
The fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rate on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the fund to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the origination date of
the contract. Forward foreign currency exchange contracts establish an exchange
rate at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. Risks may arise from the potential inablility of a
counterparty to meet the terms of a contract and from unanticipated movements
in the value of foreign currencies relative to the U.S. dollar. The aggregate
principal amount of forward currency exchange contracts is recorded in the
fund's accounts. All commitments are marked-to-market at the applicable
transaction rates resulting in unrealized gains or losses. The fund records
realized gains or losses at the time the forward contracts are extinguished by
entry into a closing contract or by delivery of the currency. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations in
the prices of the fund's portfolio securities or in foreign exchange rates, or
prevent loss if the price of these securities should decline.
C. 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. As part of the custodian contract
between the custodian bank and the fund, the custodian bank has a lien on the
securities of the fund to the extent permitted by the fund's investment
restriction to cover any advances made by the custodian bank for the settlement
of securities purchased by the fund.
D. Net Investment Income
Net investment income is determined daily and consists of interest 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.
E. 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. The fund has designated $23,431,109 as ordinary income dividends
and $0 as long-term capital gains distributions.
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 premium amortization on fixed income securities.
F. 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, 2004, the fund had a capital loss carryforward of $19,680,348
available, to the extent provided in regulations, to offset future capital
gains, if any, of which, $492,884, $7,218,002, $2,367,580 and $9,601,882 expire
on October 31, 2007, 2008, 2010, and 2012, 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, 2004, the components of distributable earnings were
$1,992,430 in undistributed ordinary income and $0 in undistributed long-term
capital gains.
G. 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.
H. 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, 2004, the value of the securities loaned and the value of
collateral were $127,711,837 and $130,115,487 (consisting entirely of cash
collateral invested in State Street Navigator Securities Lending Prime
Portfolio), respectively. The collateral was marked to market the next business
day and made equal to at least 100% of the current market value of the loaned
securities and accrued interest. During the year ended October 31, 2004, income
from securities lending amounted to $77,653.
I. Futures
The fund may enter into futures contracts as a hedge against unfavorable market
conditions and to enhance income. The fund will not purchase any futures
contract if, after such purchase, more than one-third of net assets would be
represented by long future contracts. The fund will limit its risks by entering
into a futures position only if it appears to be a liquid investment.
Upon entering into a futures contract, the fund deposits with the selling
broker sufficient cash or U.S. government securities to meet the minimum
"initial margin" requirements. Thereafter, the fund receives from or pays to
the broker cash or U.S. government securities equal to the daily fluctuation in
value of the contract ("variation margin"), which is recorded as unrealized
gain or loss. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time it
has opened and the value at the time it was closed.
The potential risk to the fund is that the change in value of futures contracts
may not correspond to the change in value of the hedged instruments. In
addition, losses may arise in changes from the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or if
the counterparty to the contract is unable to perform.
J. Options
The fund may use options to hedge against changes in values of securities the
Portfolio owns or expects to purchase. Writing puts or buying calls tends to
increase the fund's exposure to the underlying instrument and writing calls or
buying puts tends to decrease the fund's exposure to the underlying instrument,
or hedge other fund investments.
For options purchased to hedge the fund's investments, the potential risk to
the fund is that the change in value of options contracts may correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market, or if the counter party is unable to perform. The maximum
loss for purchased options is limited to the premium initially paid for the
option. For options written by the fund, the maximum loss is not limited to the
premium initially received for the option.
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, 2004, the fees pursuant to
such agreement amounted to $3,373,356.
12
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, 2004, the amount of such expenses
allocated to the fund was $347,428.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$49,684 during the year ended October 31, 2004.
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, 2004, the amount of such
expenses was $100,850.
On February 19, 2004, the Distributor entered into an agreement with the NASD
resolving all outstanding issues relating to an investigation by the NASD of
the Distributor's e-mail retention practices and supervision of trading
activity in shares of the State Street Research funds. The Distributor, without
admitting or denying the allegations or the findings set forth in the
agreement, and solely for the purposes of the settlement, agreed to the entry
of certain findings by the NASD relating to the Distributor's compliance with
document retention requirements and the Distributor's supervision of
enforcement of shareholder exchange limitations set forth in the funds'
prospectuses. The agreement contains no allegations or findings of fraudulent
conduct by the Distributor. As part of this agreement, the Distributor made a
payment to the fund to compensate the fund for losses relating to the exchange
of fund shares beyond the annual limit set forth in the fund's prospectus. The
payment was allocated among the fund's share classes as follows: $99,915 to
Class A, $24,174 to Class B(1), $7,801 to Class B, $4,470 to Class C and $2,397
to Class S. These amounts are shown in the total amount of $138,757 as "Net
increase from payment by affiliate" in the Statement of Operations.
Note 3
For the year ended October 31, 2004, purchases and sales of securities,
exclusive of short-term obligations, aggregated $1,816,761,159, and
$1,907,634,126 (including $1,788,240,699 and $1,876,251,290 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, 2004, fees pursuant to such
plans amounted to $1,227,225, $995,739, $314,697, $178,015 and $486 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, 2004, there were $5,884,284,
$665,765 and $2,322,083 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
$244,532 and $1,165,496, respectively, on sales of Class A shares of the fund
during the year ended October 31, 2004, and that MetLife Securities, Inc.
earned commissions aggregating $728,658 and $26,738 on sales of Class B(1) and
Class C shares, and the Distributor collected contingent deferred sales charges
aggregating $410,007, $240 and $1,528 on redemptions of Class B(1), Class B and
Class C shares, respectively, during the same period.
Note 5
MetLife announced that it has entered into an agreement to sell the Adviser as
part of a larger transaction to sell MetLife's asset management business to
BlackRock, Inc ("BlackRock"). The acquisition by BlackRock of MetLife's asset
management business is expected to occur in the first quarter of 2005. At the
time of the closing, the advisory agreement between the fund and the Adviser
and the distribution agreement between the fund and the distrubutor will be
terminated. BlackRock Advisors, Inc. and BlackRock Distributors, Inc.,
wholly-owned subsidiaries of BlackRock, will serve as investment adviser and
distributor, respectively.
A Special Meeting of Shareholders of the fund has been tentatively scheduled
for December 27, 2004. At this meeting, shareholders of the fund will be asked
to consider and approve a plan of reorganization between the fund and the
BlackRock Intermediate Government Bond Portfolio. If the proposed
reorganization is approved by shareholders of the fund, the BlackRock
Intermediate Government Bond Portfolio would acquire substantially all of the
assets and liabilities of the fund. In exchange, shareholders of the fund would
receive shares of the BlackRock Intermediate Government Bond Portfolio with an
aggregate value equivalent to the aggregate net asset value of their fund
shares at the time of the transaction. If the proposed reorganization is not
approved by shareholders of the fund, the Board of Trustees will need to
consider other alternatives relating to the management and operations of the
fund, including without limitations, seeking an alternative investment adviser
for the fund or seeking shareholder approval to liquidate the fund.*
*The foregoing is not an offer to sell, nor a solicitation of an offer to buy,
shares of any fund, nor is it a solicitation of any proxy.
State Street Research Government Income Fund 13
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, 2004 and, the
Adviser held 7,716 Class R shares. These transactions break down by share class
as follows:
Years ended October 31
-----------------------------------------------------------------
2004 2003
-----------------------------------------------------------------
Class A Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold 3,275,174 $ 41,321,416 16,756,640 $ 218,104,367
Issued upon reinvestment of dividends from net investment income 941,807 11,833,639 1,104,644 14,289,248
Shares redeemed (8,774,748) (110,258,725) (25,899,151) (335,827,118)
------------- ------------- ------------- -------------
Net decrease (4,557,767) $ (57,103,670) (8,037,867) $(103,433,503)
============= ============= ============= =============
Class B(1) Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold 544,398 $ 6,800,961 2,905,289 $ 37,451,974
Issued upon reinvestment of dividends from net investment income 242,794 3,025,343 315,320 4,044,422
Shares redeemed (2,858,024) (35,683,375) (3,428,090) (43,764,045)
------------ ------------ ------------ ------------
Net decrease (2,070,832) $(25,857,071) (207,481) $ (2,267,649)
============ ============ ============ ============
Class B Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold 30,506 $ 387,686 581,326 $ 7,524,870
Issued upon reinvestment of dividends from net investment income 70,073 875,977 141,611 1,825,769
Shares redeemed (1,985,751) (24,927,873) (2,867,374) (36,930,667)
------------ ------------ ------------ ------------
Net decrease (1,885,172) $(23,664,210) (2,144,437) $(27,580,028)
============ ============ ============ ============
Class C Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold 140,562 $ 1,760,245 875,725 $ 11,343,080
Issued upon reinvestment of dividends from net investment income 37,907 475,346 65,528 848,984
Shares redeemed (870,370) (10,910,112) (1,514,342) (19,422,859)
------------ ------------ ------------ ------------
Net decrease (691,901) $ (8,674,521) (573,089) $ (7,230,795)
============ ============ ============ ============
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 123,446 $ 1,560,598 524,562 $ 6,797,691
Issued upon reinvestment of dividends from net investment income 31,137 390,979 44,745 578,531
Shares redeemed (362,453) (4,562,804) (854,614) (11,028,139)
------------ ------------ ------------ ------------
Net decrease (207,870) $ (2,611,227) (285,307) $ (3,651,917)
============ ============ ============ ============
14
- -----------
FINANCIAL
- -----------
Highlights
For a share outstanding throughout each year:
Class A
------------------------------------------------------------------------
Years ended October 31
------------------------------------------------------------------------
2004(a)(h) 2003(a) 2002(a)(e)(g) 2001(a)(g) 2000(a)(g)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.67 12.99 13.08 12.19 12.21
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.36 0.41 0.51 0.74 0.75
Net realized and unrealized gain (loss) on investments,
futures contracts and options ($) 0.02 (0.16) 0.09 0.88 0.00
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.38 0.25 0.60 1.62 0.75
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.54) (0.57) (0.69) (0.73) (0.77)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.54) (0.57) (0.69) (0.73) (0.77)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.51 12.67 12.99 13.08 12.19
========== ========== ========== ========== ==========
Total return (%)(b) 3.07 1.96 4.82 13.66 6.41
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 378,133 440,597 556,251 514,750 474,054
Expense ratio (%) 1.23 1.15 1.17 1.23 1.13
Expense ratio after expense reductions (%) 1.23 1.15 1.16 1.22 1.13
Ratio of net investment income to average net assets (%) 2.88 3.21 4.02 5.87 6.21
Portfolio turnover rate (%) 324.71 273.16 175.05 134.55 148.88
Class B(1)
------------------------------------------------------------------------
Years ended October 31
------------------------------------------------------------------------
2004(a)(h) 2003(a) 2002(a)(e)(g) 2001(a)(g) 2000(a)(g)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.56 12.89 12.98 12.11 12.14
---------- ---------- ---------- ---------- ----------
Net investment income ($) 0.27 0.32 0.41 0.64 0.65
Net realized and unrealized gain (loss) on investments,
futures contracts and options ($) 0.02 (0.17) 0.10 0.87 0.01
---------- ---------- ---------- ---------- ----------
Total from investment operations ($) 0.29 0.15 0.51 1.51 0.66
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ($) (0.45) (0.48) (0.60) (0.64) (0.69)
---------- ---------- ---------- ---------- ----------
Total distributions ($) (0.45) (0.48) (0.60) (0.64) (0.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ($) 12.40 12.56 12.89 12.98 12.11
========== ========== ========== ========== ==========
Total return (%)(b) 2.38 1.19 4.14 12.80 5.60
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 87,988 115,134 120,766 75,219 34,533
Expense ratio (%) 1.93 1.85 1.87 1.93 1.85
Expense ratio after expense reductions (%) 1.93 1.85 1.86 1.92 1.85
Ratio of net investment income to average net assets (%) 2.18 2.50 3.29 5.12 5.44
Portfolio turnover rate (%) 324.71 273.16 175.05 134.55 148.88
(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) 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 gain per
share by $0.16, and decrease the ratio of net investment income to average
net assets by 1.24%. The statement of changes and financial highlights for
the period prior to November 1, 2001, have not been restated for this
change in policy.
(f) April 3, 2003 (commencement of share class) to October 31, 2003
(g) Audited by other auditors
(h) During the year ended October 31, 2004, the Distributor made restitution
payments to the fund as part of a settlement with NASD. This had no effect
on net realized and unrealized gain on investments per share.
State Street Research Government Income Fund 15
- ----------
FINANCIAL
- ----------
Highlights
Class B
-----------------------------------------------------------------
Years ended October 31
-----------------------------------------------------------------
2004(a)(h) 2003(a) 2002(a)(e)(g) 2001(a)(g) 2000(a)(g)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.62 12.94 13.02 12.15 12.17
--------- --------- --------- --------- ---------
Net investment income ($) 0.27 0.33 0.43 0.65 0.65
Net realized and unrealized gain (loss) on investments,
futures contracts and options ($) 0.02 (0.17) 0.09 0.86 0.02
--------- --------- --------- --------- ---------
Total from investment operations ($) 0.29 0.16 0.52 1.51 0.67
--------- --------- --------- --------- ---------
Dividends from net investment income ($) (0.45) (0.48) (0.60) (0.64) (0.69)
--------- --------- --------- --------- ---------
Total distributions ($) (0.45) (0.48) (0.60) (0.64) (0.69)
--------- --------- --------- --------- ---------
Net asset value, end of year ($) 12.46 12.62 12.94 13.02 12.15
========= ========= ========= ========= =========
Total return (%)(b) 2.36 1.26 4.20 12.75 5.67
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 21,777 45,840 74,747 82,963 84,327
Expense ratio (%) 1.93 1.85 1.87 1.93 1.85
Expense ratio after expense reductions (%) 1.93 1.85 1.86 1.92 1.85
Ratio of net investment income to average net assets (%) 2.17 2.52 3.34 5.20 5.49
Portfolio turnover rate (%) 324.71 273.16 175.05 134.55 148.88
Class C
-----------------------------------------------------------------
Years ended October 31
-----------------------------------------------------------------
2004(a)(h) 2003(a) 2002(a)(e)(g) 2001(a)(g) 2000(a)(g)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.63 12.95 13.03 12.16 12.18
--------- --------- --------- --------- ---------
Net investment income ($) 0.27 0.33 0.42 0.65 0.66
Net realized and unrealized gain (loss) on investments,
futures contracts and options ($) 0.02 (0.17) 0.10 0.86 0.01
--------- --------- --------- --------- ---------
Total from investment operations ($) 0.29 0.16 0.52 1.51 0.67
--------- --------- --------- --------- ---------
Dividends from net investment income ($) (0.45) (0.48) (0.60) (0.64) (0.69)
--------- --------- --------- --------- ---------
Total distributions ($) (0.45) (0.48) (0.60) (0.64) (0.69)
--------- --------- --------- --------- ---------
Net asset value, end of year ($) 12.47 12.63 12.95 13.03 12.16
========= ========= ========= ========= =========
Total return (%)(b) 2.36 1.26 4.19 12.74 5.66
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 14,697 23,618 31,641 24,507 19,512
Expense ratio (%) 1.93 1.85 1.87 1.93 1.85
Expense ratio after expense reductions (%) 1.93 1.85 1.86 1.92 1.85
Ratio of net investment income to average net assets (%) 2.18 2.51 3.30 5.17 5.50
Portfolio turnover rate (%) 324.71 273.16 175.05 134.55 148.88
16
Class R
------------------------
Years ended October 31
------------------------
2004(a)(h) 2003(a)(f)
- --------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.67 12.96
------ ------
Net investment income ($) 0.34 0.22
Net realized and unrealized gain (loss) on investments,
futures contracts and options ($) 0.01 (0.21)
------ ------
Total from investment operations ($) 0.35 0.01
------ ------
Dividend from net investment income ($) (0.51) (0.30)
------ ------
Total distributions ($) (0.51) (0.30)
------ ------
Net asset value, end of year ($) 12.51 12.67
====== ======
Total return (%)(b) 2.86 (0.04)(c)
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 97 98
Expense ratio (%) 1.43 1.35(d)
Expense ratio after expense reductions (%) 1.43 1.35(d)
Ratio of net investment income to average net assets (%) 2.68 2.88(d)
Portfolio turnover rate (%) 324.71 273.16
Class S
-----------------------------------------------------------------
Years ended October 31
-----------------------------------------------------------------
2004(a)(h) 2003(a) 2002(a)(e)(g) 2001(a)(g) 2000(a)(g)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 12.66 12.98 13.06 12.18 12.20
--------- --------- --------- --------- ---------
Net investment income ($) 0.40 0.46 0.55 0.78 0.78
Net realized and unrealized gain (loss) on investments,
futures contracts and options ($) (0.02) (0.17) 0.10 0.87 0.01
--------- --------- --------- --------- ---------
Total from investment operations ($) 0.42 0.29 0.65 1.65 0.79
--------- --------- --------- --------- ---------
Dividends from net investment income ($) (0.58) (0.61) (0.73) (0.77) (0.81)
--------- --------- --------- --------- ---------
Total distributions ($) (0.58) (0.61) (0.73) (0.77) (0.81)
--------- --------- --------- --------- ---------
Net asset value, end of year ($) 12.50 12.66 12.98 13.06 12.18
========= ========= ========= ========= =========
Total return (%)(b) 3.38 2.26 5.22 13.93 6.71
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 8,603 11,344 15,338 13,775 13,418
Expense ratio (%) 0.93 0.85 0.87 0.93 0.85
Expense ratio after expense reductions (%) 0.93 0.85 0.86 0.92 0.85
Ratio of net investment income to average net assets (%) 3.19 3.54 4.33 6.18 6.39
Portfolio turnover rate (%) 324.71 273.16 175.05 134.55 148.88
(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) 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 for
the year ended October 31, 2002, was to decrease net investment income per
share by $0.16, increase net realized and unrealized gain 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.
(f) April 3, 2003 (commencement of share class) to October 31, 2003
(g) Audited by other auditors
(h) During the year ended October 31, 2004, the Distributor made restitution
payments to the fund as part of a settlement with NASD. This had no effect
on net realized and unrealized gain on investments per share.
State Street Research Government Income Fund 17
- --------------
REPORT OF
- --------------
Independent Registered Public Accounting Firm
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,
2004, and the related statement of operations for the year then ended, and the
statement of changes in net assets and the financial highlights for each of the
two years in the period then ended. 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 audits. The financial highlights for each of the years in the
three-year period ended October 31, 2002, were audited by other auditors whose
report dated December 13, 2002, expressed an unqualified opinion on such
financial highlights.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).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, 2004, 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 audits provide 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, 2004, the results of its operations for the year then
ended and the changes in its net assets and the financial highlights for each
of the two years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 20, 2004
18
- ------------------------
TRUSTEES AND OFFICERS
- ------------------------
State Street Research Financial Trust
Number
of Funds
in Fund
Complex
Name, Position(s) Term of Office Overseen Other
Address Held with and Length of Principal Occupations by Trustee/ Directorships Held
and Age(a) Fund Time Served(b) During Past 5 Years Officer(c) by Trustee/Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Independent Trustees
Bruce R. Bond Trustee Since Retired; formerly Chairman of the Board, 18 Avaya Inc.
(58) 1999 Chief Executive Officer and President,
PictureTel Corporation (video conferencing
systems)
- ------------------------------------------------------------------------------------------------------------------------------------
Peter S. Drotch (62) Trustee Since Retired, formerly Partner, 18 First Marblehead Corp.
2004 PricewaterhouseCoopers LLP
- ------------------------------------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Since Retired; formerly Senior Vice President 52 Metropolitan Series
(67) 1997 for Finance and Operations and Treasurer, Fund, Inc. and
The Pennsylvania State University Metropolitan Series
Fund II
- ------------------------------------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Since Dean, School of Business and Public 18 The Kroger Co.
(60) 1998 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 Investments Ltd. 52 A.P. Pharma, Inc.;
(66) 1993 (investments); President, Pacific Four Metropolitan Series
Investments (investments); formerly Fund, Inc.; and
President, The Glen Ellen Company (private Metropolitan Series
investment firm) Fund II
- ------------------------------------------------------------------------------------------------------------------------------------
Michael S. Scott Trustee Since Jay W. Forrester Professor of Management 52 Metropolitan Series
Morton (67) 1987 (Emeritus), Sloan School of Management, Fund, Inc. and
Massachusetts Institute of Technology Metropolitan Series
Fund II
- ------------------------------------------------------------------------------------------------------------------------------------
Interested Trustees
Richard S. Davis+ Trustee Since Chairman of the Board, President and Chief 18 None
(59) 2000 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 Investment 17 Akamai Technologies
(45) President 2002 Officer - Equities of State Street Inc.
Research & Management Company; formerly
Chief Investment Officer - U.S. Growth
Equities, American Century
- ------------------------------------------------------------------------------------------------------------------------------------
John S. Lombardo Vice Since Managing Director, Chief Financial Officer 18 None
(50) President 2001 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 A. Marinella Vice Since Managing Director and Chief Investment 8 None
(46) President 2003 Officer - Fixed Income of 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
- ------------------------------------------------------------------------------------------------------------------------------------
Elizabeth M. Vice Since Managing Director of State Street Research 8 None
Westvold (44) President 2003 & Management Company; formerly Senior Vice
President, State Street Research &
Management Company
- ------------------------------------------------------------------------------------------------------------------------------------
Erin Xie (36) Vice Since Senior Vice President of State Street 2 None
President 2003 Research & Management Company; formerly
Vice President, State Street Research &
Management Company; and research
associate, Sanford Bernstein & Company
- ------------------------------------------------------------------------------------------------------------------------------------
Douglas A. Romich Treasurer Since Senior Vice President and Treasurer of 18 None
(47) 2001 State Street Research & Management
Company; formerly Vice President and
Assistant Treasurer, 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 has served as sole investment adviser and all
series of Metropolitan Series Fund, Inc. and Metropolitan Series Fund II.
The primary adviser to Metropolitan Series Fund, Inc. and Metropolitan
Series Fund II is MetLife Advisers, LLC, which has retained State Street
Research & Management Company as sub-adviser to certain series of
Metropolitan Series Fund, Inc.
(+) 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 19
[LOGO] STATE STREET RESEARCH --------------
One Financial Center PRSRT STD
Boston, MA 02111-2690 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
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.
- --------------------------------------------------------------------------------
Investors should carefully consider the fund's investment objective, risks,
charges and expenses before investing. The fund's prospectus contains more
complete information on these and other matters. A prospectus for any State
Street Research fund is available through your financial professional, by
calling toll-free 1-87-SSR-FUNDS (1-877-773-8637) or by visiting our website at
www.ssrfunds.com. Please read the prospectus carefully before investing.
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, 2004, this report must be accompanied by a
current Quarterly Performance Update.
"State Street Research Proxy Voting Policies and Procedures"--which describes
how we vote proxies relating to portfolio securities is available upon request
free of charge, by calling the State Street Research Service Center toll-free at
1-87-SSR-FUNDS (1-877-773-8637) or by accessing the U.S. Securities and Exchange
Commission website at www.sec.gov.
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)2004 State Street Research Investment Services, Inc.
One Financial Center
Boston, MA 02111-2690
www.ssrfunds.com
CONTROL NUMBER:(exp1205)SSR-LD GI-2849-1204
<Page>
FORM N-CSR(2 OF 3)
ITEM 2: CODE OF ETHICS
(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) Omitted
(c) 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.
(d) 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.
(e) Not applicable.
(f) Not applicable.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT
The Registrant's Board of Trustees has determined that Steve A. Garban,
a member of the Registrant's Board of Trustees and Audit Committee,
qualifies as an "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
<Table>
<Caption>
(a) Audit Fee
Fiscal year ended October 31, 2003 $38,500
Fiscal year ended October 31, 2004 $33,000
(b) Audit-Related Fees - Represents fees for assurance and related services
related to the audit of the registrant's financial statements.
Fiscal year ended October 31, 2003 $0
Fiscal year ended October 31, 2004 $0
(c) Tax Fees - Represents fees for professional services rendered by the
principal accountant for tax compliance, tax provision review, and the
tax return preparation.
Fiscal year ended October 31, 2003 $4,950
Fiscal year ended October 31, 2004 $5,000
(d) All other fees - Represents fees paid to Deloitte & Touche LLP to provide a
special review of late trading, market timing and related issues concerning
the Registrant.
Fiscal year ended October 31, 2003 $0
Fiscal year ended October 31, 2004 $14,000
</Table>
The Registrant's independent accountants, Deloitte & Touche LLP, did not
bill fees for audit-related, tax, or other non-audit services that required
pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X during the Registrant's last two fiscal years.
(e)(1) The Audit Committee has determined that all work performed for the
Registrant by Deloitte & Touche LLP will be pre-approved by the full Audit
Committee and, therefore, has not adopted pre-approval procedures.
(2) None.
(f) Not applicable.
(g) Non-Audit Fees - Represents fees for audit-related, tax and other non-audit
services rendered by the principal accountant to the Registrant, the
Registrant's investment adviser and any entity controlling, controlled by, or
under common control with the investment adviser that provides ongoing
services to the Registrant.
Fiscal Year Ended October 31, 2003 $4,950
Fiscal Year Ended October 31, 2004 $65,000
(h) The Audit Committee of the Registrant has considered whether the
non-audit services that were rendered by the Registrant's principal
accountant to the Registrant's investment adviser (not including any
subadviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser) and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the Registrant and
that were not pre-approved by the Audit Committee are compatible with
maintaining the principal accountant's independence.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6: SCHEDULE OF INVESTMENTS
Not applicable.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES & PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 8: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable.
ITEM 9: SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
The Governance Committee will consider nominees recommended by
shareholders. Shareholders may submit recommendations to the
attention of the Secretary of the Trust, State Street Research
& Management Company, One Financial Center, 30th Floor, Boston
MA 02111.
ITEM 10: CONTROLS AND PROCEDURES
(a) The Registrant's principal executive and principal financial officers
have concluded, based on their evaluation of the Registrant's disclosure
controls and procedures as of a date within 90 days of the filing date
of this report, that the Registrant's disclosure controls and procedures
are reasonably designed to ensure that information required to be
disclosed by the Registrant on Form N-CSR is recorded, processed,
summarized and reported within the required time periods and that
information required to be disclosed by the Registrant in the reports
that it files or submits on Form N-CSR is accumulated and communicated
to the Registrant's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
(b) There were no changes in the Registrant's internal control over financial
reporting during the Registrant's second fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
internal control over financial reporting.
ITEM 11: 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 Financial Trust
By: /s/ Richard S. Davis
------------------------------------------------------
Richard S. Davis, President, Chairman and
Chief Executive Officer
Principal Executive Officer
Date January 6, 2005
------------------------------------------------------
<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 January 6, 2005
------------------------
By: /s/ Douglas A. Romich
------------------------------------------------------
Douglas A. Romich, Treasurer
Principal Financial Officer
Date January 6, 2005
------------------------