[LOGO] STATE STREET RESEARCH
International Equity Fund
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Annual Report to Shareholders
October 31, 2000
[GRAPHIC]
In this Report
Year of
the Euro
plus
Mixed Economic Prospects
Around the World
Market Trends and Investment Themes
Fund Portfolio and Financials
<PAGE>
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Contents
2 12 Month Review
A look at the fund and its market
environment over the past 12 months
6 Performance in Perspective
The most recent performance in the
context of the fund's track record
8 The Fund in Detail
Portfolio holdings, financials and notes
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Introducing our New President
We are pleased to announce that Richard "Dick" S. Davis has joined State Street
Research & Management Company as president and chief executive officer. Dick
comes to his new position from our parent company, MetLife, where he has served
as senior vice president of fixed income investments and was responsible for the
firm's $110 billion fixed income portfolio.
[PHOTO]
Richard S. Davis
Dick began his professional investment career 30 years ago at First Boston
Corporation. He spent eight years at J.P. Morgan Investment Management and J.P.
Morgan Securities, where he held positions in global fixed income sales
management, client sales and service, risk management and product development.
Dick holds a BA from Georgetown University and an MBA from Columbia University.
We are delighted to welcome a new leader with such an exceptional track record
and outstanding business acumen. You can look forward to hearing from Dick in
the communications you receive from State Street Research in the months ahead.
[GRAPHIC]
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12 Month Review Management's Discussion of Fund Performance Part 1
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How State Street Research
International Equity Fund Performed
State Street Research International Equity Fund returned 13.80% for the 12-month
period ended October 31, 2000.(1) That was considerably higher than the Morgan
Stanley Capital International EAFE Index, a broad measure of stock market
performance in developed countries outside the U.S., which returned -2.90% over
the same period.(2)
Reasons for the Fund's Performance
Early in the fiscal year, technology and telecommunications stocks drove
performance for international markets and for the fund. However, midway through
the year, we trimmed our exposure to both groups and reinvested the proceeds
into sectors that were positioned to benefit from stronger global economic
growth. We added to investments in the energy sector, where rising commodity
prices lifted stock prices. Later in the year, we cut back on energy producers,
which had already generated strong gains, and we increased our exposure to oil
service companies such as Saipem, Technip and IHC Caland, where we believe
earnings are still below expectations. We also added to our investments in
pharmaceutical companies such as Aventis and Schering. We raised our exposure to
Japan, where we had been underweighted relative to the Morgan Stanley Capital
International EAFE Index, because we have become more optimistic about the
economic recovery in Japan.
Looking Ahead
Despite uncertainties about global economic growth going forward, we believe
that Europe and Japan have opportunities to improve corporate productivity
through technology, which could have a positive effect on stock prices. Our
emphasis is on bottom-up stock picking, which we believe will continue to serve
us well in a volatile market environment.
More Management's Discussion of Fund Performance on pages 6 and 7.
Because financial markets and mutual fund strategies are constantly evolving,
it's 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.
Class A Shares(1)
13.80% [UP ARROW]
"We believe that
Europe and Japan
have opportunities to
improve productivity
through technology."
[PHOTO]
Tom Moore
Portfolio Manager,
State Street Research
International Equity
Fund
Morgan Stanley
Capital International
EAFE Index(2)
-2.90% [DOWN ARROW]
2 State Street Research International Equity Fund
<PAGE>
[GRAPHIC] The Fund at a Glance as of 10/31/00
State Street Research International Equity Fund invests in the stocks of foreign
companies.
Saipem
This international energy contractor invested more than $1 billion to reshape
its businesses. The stock continues to sell at an attractive multiple to its
peer group. It has been a strong performer for the portfolio.
[GRAPHIC]
Hits & Misses
[GRAPHIC]
Net Com Services
Net Com Services is a Swedish telecommunications company with a presence in
mobile, fixed-line, data and cable communications. After strong performance in
1999, the company's margins dropped as a result of weak demand in its fixed-line
business. The stock price came down and we sold it.
Total Net Assets: $95 Million
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Top 10 Holdings
Issuer/Security % of fund assets
(1) Petrochina 4.9%
(2) Fujisawa Pharmaceutical 4.9%
(3) Saipem 4.5%
(4) Renault 3.6%
(5) L.M. Ericsson 3.5%
(6) Enterprise Oil 3.0%
(7) Total Fina 3.0%
(8) Royal Dutch Petroleum 3.0%
(9) Gulf Canada Resources 3.0%
(10) RTZ 2.9%
Total 36.3%
See page 11 for more detail.
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Performance: Class A
Fund average annual total return as of 10/31/00(1,3,5)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
-----------------------------------------------------------
13.80% 16.52% 9.80% 9.83%
MSCI EAFE Index as of 10/31/00(2)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
-----------------------------------------------------------
-2.90% 9.42% 8.65% 8.36%
Fund average annual total return as of 9/30/00(3,4,5)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
-----------------------------------------------------------
21.89% 14.03% 9.58% 10.14%
MSCI EAFE Index as of 9/30/00(2)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
-----------------------------------------------------------
3.18% 7.39% 8.58% 8.74%
See pages 6 and 7 for data on other share classes.
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5 Largest Country Positions
by % of fund assets
October 31, 1999 October 31, 2000
Japan 35.8% Japan 14.6%
------------------------------- --------------------------------
United Kingdom 12.0% France 13.4%
------------------------------- --------------------------------
France 7.3% Netherlands 12.9%
------------------------------- --------------------------------
Netherlands 6.0% Hong Kong 9.0%
------------------------------- --------------------------------
Sweden 5.2% United Kingdom 9.0%
------------------------------- --------------------------------
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Ticker Symbols
State Street Research International Equity Fund
Class A: SSIEX Class B(1): SSNPX* Class B: SSNBX Class C: SSNDX Class S: SSNCX
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(1) Does not reflect sales charge.
(2) The Morgan Stanley Capital International EAFE (MSCI EAFE Index) Index is
comprised of stocks from Europe, Australasia and the Far East. The index
is unmanaged and does not take sales charges into consideration. It is not
possible to invest directly in the index.
(3) Keep in mind that past performance is no guarantee of future results. The
fund's share price 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.
(4) Performance reflects a maximum 5.75% Class A front-end sales charge.
(5) Performance results for the fund are increased by the voluntary reduction
of fund fees and expenses; without subsidization, performance would have
been lower.
* Proposed.
3
<PAGE>
[GRAPHIC] The Way We Think
Year of
the Euro [GRAPHIC]
Since its debut last year, the euro--the common currency that links eleven
European economies and their financial markets--has lost 30% of its value,
although the European Central Bank raised interest rates last summer in an
attempt to stem the currency's decline.
A weak euro may make it difficult for many Eurozone companies to raise earnings
in 2001. It has also hurt the performance of international mutual funds, because
the value of foreign stocks is less when translated into a stronger U.S. dollar.
Eurogains
It's easy to get pessimistic about the euro's slide, but that would ignore the
many positive factors that have resulted from the European Union, which remains
committed to the success of the new currency. The euro has helped open capital
markets and improved the investment environment in euro-participating markets.
How? A weak euro makes European products cheaper in world markets and that has
helped raise earnings.
Eurozone companies also have the incentive to become more efficient and more
productive. Gone are the tariffs and other barriers that used to keep companies
on their own limited playing fields. Companies that once were forced to think in
terms of local products and local markets now have the opportunity to make their
bid to compete in a global marketplace. For the first time ever, there's a sense
of competition to attract business and add new jobs. That sort of competition
has gone on in the U.S. for
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Mixed Economic Prospects Around the World
As the year 2000 comes to a close, global economic growth has improved to over
4% compared to 2% two years ago, according to a recent report by the
Organization for Economic Cooperation and Development (OECD). However, prospects
for the year ahead have dimmed in most developed countries. The U.S. has
reported slower economic growth and a slowdown is beginning in Europe and in
parts of Asia. Among emerging nations, China has shown the strongest growth at
8% or more. Meanwhile, many of Asia's southern-tier countries are also slowing
down.
Dollar Dominates
A strong U.S. dollar has outperformed both the yen and the euro. However, some
economists believe that slower U.S. growth could help narrow the gap between the
euro and the dollar. Others fear that European economies still have a long way
to go before they are competitive with the U.S., and that's what it will take to
shore up confidence in the new currency.
The euro isn't the only embattled currency in the world. Concerns about global
credit quality and liquidity have also hurt currencies in Asia and Latin
America.
Renewed Optimism for Japan?
Although Japan's economy has had several false starts, some positive signs have
emerged this year. Gross domestic product is expected to rise by 2% in 2000, and
corporate profits outside the beleaguered financial sector are growing 30%
year-over-year. Technology exports continue to be the bedrock of economic
growth. However, still missing from Japan's economic comeback: consumers, who
have not opened their pocketbooks to provide a key stimulus to the economy.
Most Developed Economies Slow Down--Emerging Markets Pick Up
Country 2000 2001
-----------------------------------------
Britain +3.0 +2.7
-----------------------------------------
Canada +4.8 +3.4
-----------------------------------------
France +3.4 +3.1
-----------------------------------------
Germany +3.1 +2.9
-----------------------------------------
Italy +2.8 +2.6
-----------------------------------------
Japan +1.9 +2.1
-----------------------------------------
Spain +4.1 +3.5
-----------------------------------------
Sweden +4.1 +3.6
-----------------------------------------
United States +5.2 +3.3
-----------------------------------------
Euro-11 +3.5 +3.0
-----------------------------------------
Hong Kong +9.2 +7.1
-----------------------------------------
Indonesia +3.9 +5.5
-----------------------------------------
China +8.0 +7.7
-----------------------------------------
Thailand +5.9 +6.0
-----------------------------------------
Brazil +3.8 +4.0
-----------------------------------------
Argentina +2.0 +2.5
-----------------------------------------
Sources: Gross Domestic Product (GDP), 2000 and projected 2001 (% change at
annual rate), The Economist magazine and OECD. 11/30/00 GDP Forecasts.
4 State Street Research International Equity Fund
<PAGE>
decades where states vie with each other by offering tax-breaks or a strong
labor pool to attract large companies bent on expanding.
Borrowing Ideas from the U.S.
European companies have found that they can borrow other good ideas from the
U.S. For example, many have discovered that they can cut costs, maintain their
profitability, and improve productivity through technology. Tom Moore, portfolio
manager of State Street Research International Equity Fund, points out that
merger and acquisition activity in telecommunications, utilities and consumer
areas have already met with considerable success in achieving cost efficiencies.
Spending on information technology still lags the U.S., but that suggests that
as companies increase their spending there should be ample room for productivity
gains. "In the U.S., we've been working with this formula for at least 15
years," says Moore. "However, in Europe--and also in Japan--they are still in
the early innings of the game."
[The following information was represented by a line graph in the
printed materials.]
Euro slides
1/99 -- 1.1362
2/99 -- 1.1028
3/99 -- 1.0762
4/99 -- 1.057
5/99 -- 1.042
6-99 -- 1.0351
7/99 -- 1.0711
8/99 -- 1.0566
9/99 -- 1.0684
10/99 -- 1.0549
11/99 -- 1.0093
12/99 -- 1.0062
1/00 -- 0.9707
2/00 -- 0.9642
3/00 -- 0.9553
4/00 -- 0.9119
5/00 -- 0.938
6/00 -- 0.9525
7/00 -- 0.9266
8/00 -- 0.8878
9/00 -- 0.8827
10/00 -- 0.8489
Value of the euro 1/99-10/00
Source: Bloomberg
Focus on Earnings Growth
Although the euro has figured into the investment environment for 2000 in both
negative and positive ways, Moore's focus is on individual European companies
that are showing improved earnings. He invested in oil service companies, such
as Technip and Saipem, that stood to benefit from rising commodity prices. "We
felt their earnings potential was significantly above Wall Street's
expectations, and so far we have been right," says Moore.
Over the long term, Moore is also optimistic about opportunities for European
telecommunications companies such as Ericsson and Nokia. Many European companies
are at the cutting edge of wireless communications innovation. And although the
sector has been quite volatile this year, the increasing use of mobile
telephones for business and personal use suggests the potential for further
long-term gains.
Outside Europe
Although Moore concentrates on individual stock selection more than country
weightings, the portfolio has been overweighted in European stocks during the
year. However, during the final quarter he has started to look for opportunities
to build the fund's investments in Japan. "I may be in the minority right now,
but I'm actually optimistic on Japan. We see a bottoming in the economic cycle
in a nation where things move by consensus." Once that consensus turns positive,
says Moore, he expects to see companies improve their earnings, show
productivity gains and invest more in technology improvements. What's missing?
The Japanese consumer. In contrast to Europe, where consumer confidence recently
hit a ten-year high, the Japanese consumer is still holding out. Says Moore,
"For Europe as well as for Japan, the consumer will figure heavily into the
financial markets for the year ahead."
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A Closer Look [MAGNIFYING GLASS]
Market Trends and Investment Themes
[GRAPHIC]
Some trends have a tendency to affect the U.S. and foreign stock markets in the
same way: for example, in big global market sectors, such as energy,
pharmaceuticals, technology and telecommunications, many stocks tend to perform
with their sector rather than with their country of origin. However, if you look
at the overall markets, there is still a wide divergence of results between the
U.S. and foreign markets. In smaller countries, a single industry or stock can
be such a large component of the market index that it can determine that
market's direction. And in Japan, equities tend to go in one direction or the
other because consensus is a characteristic of Japanese culture.
With that experience in mind, we continue to manage State Street Research
International Equity Fund with an emphasis on individual stock selection. We
focus on companies that have the potential to deliver earnings growth above the
market's expectations. The only way to identify such companies is through
intense fundamental research including onsite visits to companies and their
management.
In Europe, our attention is focused on companies that could benefit from rising
commodity prices or grow in specific product niches. In Asia, we are looking for
companies with the potential to build earnings growth through restructuring,
technology-driven cost savings, and improved penetration of export markets.
-Tom Moore, portfolio manager
State Street Research International Equity Fund
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5
<PAGE>
[GRAPHIC]
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Performance in Perspective Management's Discussion of Fund Performance Part 2
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Performance Figures as of October 31, 2000
These two pages focus on the fund's long-term track record. While a mutual
fund's past performance is never a guarantee of future results, long-term
returns can serve as an important context for evaluating recent performance.
Three ways of measuring long-term performance are cumulative returns, average
annual 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
This 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. Performance would be lower if sales charges were reflected.
Average Annual Total Return
Average annual total return percentage is the rate you would have had to earn
during each year of a given time period -- say, five years -- in order to end up
with the fund's actual cumulative return for those five 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 Life of Fund
This example is similar to cumulative total return, but uses dollars rather than
percentages, and assumes that the lump sum you invested was $10,000. It also
compares fund performance to the performance of a market index.
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Class A Front Load
o Initial sales charge of 5.75% or less, with lower sales charges for larger
investments (see a prospectus for details)
o Lower annual expenses than Class B(1) or Class C shares because of lower
distribution/service (12b-1) fee of 0.30%
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Cumulative Total Return ---------------------------------------------
(does not reflect 13.80% 58.21% 59.56% 127.81%
sales charge)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Average Annual Total Return ---------------------------------------------
(at maximum applicable 7.26% 14.24% 8.50% 9.09%
sales charge)
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Life of Fund
Class A MSCI EAFE Index
"92" 8279 8784
"93" 12267 12074
"94" 15014 13293
"95" 13456 13243
"96" 13283 14631
"97" 13572 15308
"98" 14854 16784
"99" 18868 20650
"00" 21471 20052
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Class B(1) Back Load for accounts opened after 1/1/99
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within six years
o Annual distribution/service (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Cumulative Total Return ---------------------------------------------
(does not reflect 12.89% 54.87% 53.86% 116.92%
sales charge)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Average Annual Total Return ---------------------------------------------
(at maximum applicable 7.89% 14.95% 8.72% 9.22%
sales charge)
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Life of Fund
Class B(1) MSCI EAFE Index
"92" 8784 8784
"93" 13015 12074
"94" 15858 13293
"95" 14098 13243
"96" 13823 14631
"97" 14007 15308
"98" 15215 16784
"99" 19216 20650
"00" 21692 20052
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6 State Street Research International Equity Fund
<PAGE>
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Class B Back Load for accounts opened before 1/1/99
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within five years
o Annual distribution/service (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Cumulative Total Return ---------------------------------------------
(does not reflect 12.97% 54.98% 53.97% 117.08%
sales charge)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Average Annual Total Return ---------------------------------------------
(at maximum applicable 7.97% 14.97% 8.73% 9.23%
sales charge)
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Life of Fund
Class B MSCI EAFE Index
"92" 8784 8784
"93" 13015 12074
"94" 15858 13293
"95" 14098 13243
"96" 13823 14631
"97" 14007 15308
"98" 15215 16784
"99" 19216 20650
"00" 21708 20052
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--------------------------------------------------------------------------------
Class C Level Load
o No initial sales charge
o Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
o Lower deferred sales charge than Class B(1) shares
o Annual distribution/service (12b-1) fee of 1.00%
o No conversion to Class A shares after eight years, so annual expenses do
not decrease
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Cumulative Total Return ---------------------------------------------
(does not reflect 13.03% 54.92% 53.91% 116.99%
sales charge)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Average Annual Total Return ---------------------------------------------
(at maximum applicable 12.03% 15.71% 9.01% 9.22%
sales charge)
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Life of Fund
Class C MSCI EAFE Index
"92" 8784 8784
"93" 13015 12074
"94" 15858 13293
"95" 14098 13243
"96" 13808 14631
"97" 14007 15308
"98" 15215 16784
"99" 19197 20650
"00" 21699 20052
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Class S Special Programs
o Available through certain retirement accounts, advisory accounts of the
investment manager and other programs that usually involve special
conditions and separate fees (see a prospectus for details)
o No sales charges of any kind
o No distribution/service (12b-1) fees; annual expenses are lower than for
other share classes
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Cumulative Total Return --------------------------------------------
(does not reflect 14.16% 59.76% 61.80% 132.20%
sales charge)
Life of Fund
1 Year 3 Years 5 Years (1/22/92)
Average Annual Total Return --------------------------------------------
(at maximum applicable 14.16% 16.90% 10.10% 10.07%
sales charge)
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Life of Fund
Class S MSCI EAFE Index
"92" 8784 8784
"93" 13015 12074
"94" 15974 13293
"95" 14351 13243
"96" 14198 14631
"97" 14534 15308
"98" 15955 16784
"99" 20340 20650
"00" 23220 20052
A Closer Look [GRAPHIC]
12b-1 fees
12b-1 fees are named after the SEC rule that permits them.
The fund pays 12b-1 fees to cover service and distribution costs. The fees cover
personal services and the maintenance of shareholder accounts. The fees also
cover selling and marketing expenditures for the sale of fund shares.
The fund pays 12b-1 fees out of its assets, so shareholders see them as an
indirect charge rather than a direct charge.
All of the performance figures on these pages assume reinvestment of dividends
and distributions.
The average annual total returns for the fund also include the effects of any
fees and sales charges that would apply for each share class.
The MSCI EAFE Index is an unmanaged index and is comprised of stocks from
Europe, Australasia, and the Far East. The index does not take transaction
charges into consideration. It is not possible to invest directly in the index.
Keep in mind that past performance is no guarantee of future results. The fund's
share price and return will fluctuate and you may have a gain or loss when you
sell your shares.
Performance for Class B(1) reflects Class B performance through December 31,
1998. Class B(1) was introduced January 1, 1999.
7
<PAGE>
[GRAPHIC]
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The Fund in Detail
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The following pages describe the fund in detail as of the date of this report.
They provide a "snapshot" of the fund's holdings at one moment in time (the
report date), describe the financial dimensions of its operations for the past
fiscal year leading up to the report date and give a summary of operations on a
per share basis for the past five fiscal years. There's also an overview of the
fund and its business structure, as well as information on the accounting
policies the fund uses in arriving at the figures it presents here.
[PHOTO]
Together, the words and numbers in this section offer a comprehensive picture of
the fund and its recent activities. In fact, the text and notes on pages 9 to 20
are an integral part of the financial statements, which wouldn't be complete
without them.
For more information about the fund's strategies, risks and expenses, check the
fund's prospectus; you'll need to read it before making any investments. The
prospectus also has more details on the fund's share classes and its policies
for shareholder accounts. To get a copy of any State Street Research prospectus,
see the back cover of this report.
Keep in mind that in annual reports, the portfolio holdings and financial
statements are audited, while in semiannual reports they are unaudited.
8 State Street Research International Equity Fund
<PAGE>
About the Fund
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Business structure
State Street Research International Equity Fund is a mutual fund. A mutual fund
allows shareholders to pool their assets for investment in a portfolio of
securities. This fund is a series of State Street Research Financial Trust, a
Massachusetts business trust and is an open-end management investment company.
Four entities administer the fund's main business functions:
o The board of trustees oversees the fund with its shareholders' interests
in mind and have ultimate responsibility for the fund's activities.
o The investment manager, State Street Research & Management Company, is
responsible for the fund's investment and business activities and receives
the management fee as compensation.
o The distributor, State Street Research Investment Services, Inc., sells
shares of the fund, handles investor inquiries and transaction orders and
provides other shareholder services.
o The custodian, State Street Bank and Trust Company, holds fund securities,
provides data on their market value and handles related services.
The investment manager and the distributor are subsidiaries of MetLife. State
Street Bank and Trust Company is not affiliated with MetLife (the similarity
among its name and the names of the investment manager and distributor is
coincidental). A majority of the trustees consists of people who are not
affiliated with MetLife or any of its subsidiaries. The distributor pays a
portion of its fees to MetLife for services it provides, including maintaining
the accounts of some investors who hold shares through their firm's employee
benefit plans and other sponsored arrangements.
Goal and strategy
The fund seeks to provide long-term growth of capital by investing primarily in
common stocks and equity-related securities of non-U.S. companies.
Share classes
The fund generally offers four share classes, each with its own sales charge and
expense structure. The fund also offers an additional class of shares (Class B)
but only to current Class B shareholders through reinvestment of dividends and
distributions or through exchanges from existing Class B accounts of other State
Street Research funds.
Class A shares are subject to an initial sales charge of up to 5.75%. From
November 1, 1999 to April 30, 2000, Class A shares paid a service fee equal to
0.25% of average daily net assets. Beginning May 1, 2000, Class A shares pay an
annual service and distribution fee equal to 0.30% of average daily net assets.
Class B(1) and Class B shares pay annual service and distribution fees of 1.00%
and both classes automatically convert into Class A shares (which pay lower
ongoing expenses) at the end of eight years. Class B(1) and Class B shares are
subject to a contingent deferred sales charge on certain redemptions made within
six years and five years of purchase, respectively. Class C shares are subject
to a contingent deferred sales charge of 1.00% on any shares redeemed within one
year of their purchase and also pay annual service and distribution fees of
1.00%. Class S shares are only offered through certain retirement accounts,
advisory accounts of the investment manager 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 text and notes are an integral part of the financial statements.
9
<PAGE>
The Fund's Accounting Policies
--------------------------------------------------------------------------------
In keeping with accounting principles generally accepted in the United States,
the fund has used the following policies in preparing the portfolio holdings and
financial statements in this report:
The fund values all portfolio securities as of the date of this report (or, if
that day wasn't a business day, then the most recent business day). The fund
uses the following methods for determining the values of various types of
securities:
o Listed securities -- The fund uses the price of the last sale on a
national securities exchange that was quoted before the close of the New
York Stock Exchange.
o Over-the-counter securities -- The fund uses the closing prices quoted on
the Nasdaq system. If a security hasn't traded that day, or if it is not
quoted on the Nasdaq system, the value is set at halfway between the
closing bid and asked quotations.
o Securities maturing within sixty days -- The fund adjusts the value of
these securities daily, moving them closer to the amount due on maturity
as the maturity date approaches.
o Other securities -- The fund prices these securities at fair value under
procedures established and supervised by the trustees.
The fund accounts for each purchase and sale of portfolio securities on the
trade date. In calculating realized gains or losses, the fund takes as its cost
basis the identified cost of securities sold.
The fund records investment income from portfolio securities as follows:
o Interest -- The fund accrues interest daily as it earns it.
o Cash dividends -- The fund accrues these on the ex-dividend date.
The fund may seek additional income by lending portfolio securities to qualified
institutions. The fund will receive cash or securities as collateral in the
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 or losses. If the
borrower fails to return the securities and the collateral has declined in
value, the fund could lose money. The fund accounts for income from the lending
of its securities by including it in interest income.
The fund distributes its net earnings to its shareholders. The fund calculates
these distributions using federal income tax regulations. As a result, they may
be different than if the fund used accounting principles generally accepted in
the United States. The fund distributes its earnings on the following schedule:
o Dividends from net investment income -- The fund ordinarily declares and
pays these annually, if any.
o Net realized capital gains -- The fund distributes these annually, if any.
If the fund has no earnings to distribute, it won't make a distribution.
The fund does not intend to pay federal income tax. This is because it has
elected to be exempt from taxes under Subchapter M of the Internal Revenue Code,
in part because it makes distributions as described above.
The fund pays expenses as follows:
o Expenses attributed to the fund -- The fund pays these directly. Examples
of these expenses include the management fee, transfer agent fee,
custodian fee and distribution and service fees.
o Expenses attributed to the trust of which the fund is a series -- These
expenses are divided up among all funds in the trust. Each fund pays a
proportional share. Examples of these expenses include the legal fees and
trustees fees.
The fund has used certain estimates and assumptions in preparing this report.
Although they are necessary in order to follow generally accepted accounting
principles, these estimates and assumptions affect several key areas, including
the reported amounts of assets and liabilities and income and expenses. Actual
results could differ from those estimates.
The text and notes are an integral part of the financial statements.
10 State Street Research International Equity Fund
<PAGE>
Portfolio Holdings October 31, 2000
--------------------------------------------------------------------------------
The listings that begin on this page detail the fund's investment holdings as of
the report date. We have grouped the holdings by asset class and by smaller
sub-groups as well. For example, we have grouped this fund's stocks by country
of incorporation.
The solid colored circles (1) show the fund's ten largest holdings, with the
number in the circle showing where the holding ranks in the top ten.
--------------------------------------------------------------------------------
Notes about specific elements of the financials are called out in boxes such as
this.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
KEY TO SYMBOLS
* Denotes a security which has not paid a dividend during the last year.
# Denotes an American Depositary Receipt or a Global Depositary Receipt, a
form of ownership of foreign securities that is traded in the United
States and denominated in U.S. dollars.
--------------------------------------------------------------------------------
Market
Issuer Shares Value
-------------------------------------------------------------------------
Common Stocks 91.5% of net assets
Australia 0.6%
Rio Tinto Ltd. 12,950 $177,764
Woodside Petroleum Ltd. *# 56,300 411,482
-----------
589,246
-----------
Belgium 1.7%
UCB (GROUPE) 46,100 1,643,060
-----------
Canada 7.4%
Gulf Canada Resources Ltd. 654,100 2,804,815(9)
Nortel Networks Corp. 36,900 1,669,257
Sierra Wireless Inc. 38,600 2,537,950
-----------
7,012,022
-----------
Denmark 0.3%
ISS International Service Systems SA Cl. B 4,000 246,308
-----------
Finland 4.5%
F Secure Oy 335,000 1,904,683
Nokia AB Oy 58,500 2,407,195
-----------
4,311,878
-----------
France 13.4%
Alcatel Alsthom 12,375 755,053
Aventis SA 4,388 312,042
France Telecom SA 3,792 396,444
Lafarge SA 3,984 294,132
Renault SA 69,300 3,446,149(4)
Sanofi Synthelabo SA 13,340 701,860
Societe Generale de France SA 24,000 1,362,513
Technip 20,500 2,623,363
Total Fina SA Cl. B 19,693 2,817,557(7)
-----------
12,709,113
-----------
Germany 2.5%
Medigene AG * 8,900 830,780
Siemens AG 11,800 1,502,523
-----------
2,333,303
-----------
Hong Kong 9.0%
China Telecom Ltd.* 198,000 1,269,393
Giordano International Ltd. 1,260,000 739,133
Johnson Electric Holdings 927,600 1,867,332
Petrochina Co. Ltd. 22,253,400 4,679,520(1)
-----------
8,555,378
-----------
The text and notes are an integral part of the financial statements.
11
<PAGE>
Portfolio Holdings October 31, 2000 CONTINUED
Market
Issuer Shares Value
-------------------------------------------------------------------------
Italy 6.3%
Assicuraziono Generali SPA 13,650 $448,857
ENI SPA # 64,000 346,500
Montedison SPA 429,380 907,286
Saipem SPA 822,000 4,282,954(3)
-----------
5,985,597
-----------
Japan 14.6%
Citizen Watch Co. 206,000 2,021,959
Fujisawa Pharmaceutical Co. Ltd. 148,000 4,652,339(2)
Hoya Corp. 14,000 1,157,311
Kyocera Corp. 16,800 2,186,317
NEC Corp. * 22,000 419,374
Nikon Corp. 61,000 886,643
Ricoh Co. Ltd. 99,000 1,524,264
Shionogi & Co. Ltd. 54,000 1,054,117
-----------
13,902,324
-----------
Korea 0.2%
Samsung Electronics Ltd. # 1,339 167,743
-----------
Malaysia 1.2%
Malayan Banking BHD 215,000 860,000
Telekom Malaysia BHD 105,000 323,290
-----------
1,183,290
-----------
Netherlands 12.9%
Akzo Nobel NV 47,872 2,179,488
ASM Lithography Hl 80,000 2,186,674
Heineken NV 27,500 1,493,537
ING Groep NV 27,132 1,863,120
Philips Electronics NV 44,263 1,739,479
Royal Dutch Petroleum Co. 47,500 2,817,162(8)
-----------
12,279,460
-----------
Norway 1.2%
Norsk Hydro ASA 22,000 874,879
Petroleum Geo Services ASA 18,100 249,682
-----------
1,124,561
-----------
Spain 0.6%
Repsol SA 22,000 349,488
Terra Networks SA 10,000 239,305
-----------
588,793
-----------
Sweden 5.0%
L.M. Ericsson Telephone Co. Cl. B 247,700 3,296,949(5)
Skandia Foersaekrings AB 47,100 798,960
Skanska AB Cl. B 15,600 618,236
-----------
4,714,145
-----------
Switzerland 1.1%
CS Holding AG 1,424 266,961
Schweiz Ruckversicher AG 124 244,537
UBS AG 3,662 507,253
-----------
1,018,751
-----------
United Kingdom 9.0%
Barclays PLC 15,800 452,081
British Telecom PLC 59,650 699,317
Enterprise Oil PLC 357,000 2,823,039(6)
HSBC Holdings PLC 61,650 878,409
Reckitt & Benckiser 31,500 414,087
RTZ Corp. 171,700 2,777,777(10)
Zeneca Group PLC 10,080 472,113
-----------
8,516,823
-----------
Total Common Stocks 86,881,795(a)
-----------
Equity-Related Securities
0.5% of net assets
Samsung Electronics Ltd. Pfd. 9,500 486,901
-----------
Total Equity-Related Securities 486,901(b)
-----------
--------------------------------------------------------------------------------
(a) The fund paid a total of $68,375,549 for these securities.
--------------------------------------------------------------------------------
(b) The fund paid a total of $125,965 for these securities.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
12 State Street Research International Equity Fund
<PAGE>
<TABLE>
<CAPTION>
Coupon Maturity Amount of Market
Issuer Rate Date Principal Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper 19.1% of net assets
American Express Credit Corp. 6.57% 11/02/2000 $880,000 $880,000
Ford Motor Credit Co. 6.51% 11/03/2000 4,189,000 4,189,000
General Electric Capital Corp. 6.47% 11/01/2000 4,355,000 4,355,000
Household Finance Corp. 6.52% 11/08/2000 4,400,000 4,400,000
Merrill Lynch & Company Inc. 6.53% 11/06/2000 3,778,000 3,774,573
Verizon Network Funding Inc. 6.48% 11/03/2000 492,000 491,823
------------
Total Commercial Paper 18,090,396(1)
------------
<CAPTION>
% of
Net Assets
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Summary of Portfolio Assets
Total Investments 111.1% $105,459,092(2)
Cash and Other Assets, Less Liabilities (11.1%) (10,567,598)
----- ------------
Net Assets 100.0% $94,891,494
===== ============
</TABLE>
--------------------------------------------------------------------------------
(1) The fund paid a total of $18,090,396 for these securities.
--------------------------------------------------------------------------------
(2) The fund paid a total of $86,591,910 for these securities.
--------------------------------------------------------------------------------
Federal Income Tax Information
At October 31, 2000, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $86,918,280 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $19,553,803
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (1,012,991)
-----------
$18,540,812
===========
The text and notes are an integral part of the financial statements.
13
<PAGE>
Statement of
Assets and Liabilities October 31, 2000
--------------------------------------------------------------------------------
This is the fund's balance sheet as of the report date. It shows the fund's
total assets, its liabilities and, by subtraction, its net assets. It also shows
the share price for share class as of the report date.
Assets
Investments $105,459,092(1)
Cash 4,901
Receivable for fund shares sold 1,507,613
Dividends and interest receivable 108,508
Receivable from Distributor 78,549
Foreign tax receivable 62,062
Other assets 6,293
-------------
107,227,018
Liabilities
Payable for securities purchased 11,710,048
Accrued transfer agent and shareholder services 77,734
Payable for fund shares redeemed 77,181
Accrued management fee 60,083
Accrued distribution and service fees 56,792
Accrued administration fee 28,100
Accrued trustees' fees 8,424
Other accrued expenses 317,162
-------------
12,335,524
-------------
Net Assets $94,891,494
=============
Net Assets consist of:
Unrealized appreciation of investments $18,867,182
Unrealized depreciation of foreign currency (7,723)
Accumulated net realized gain on investments
and foreign currency 4,874,564
Paid-in capital 71,157,471
-------------
$94,891,494(2)
=============
--------------------------------------------------------------------------------
(1) The fund paid a total of $86,591,910 for these securities.
--------------------------------------------------------------------------------
(2) Net Asset Value (NAV) of Each Share Class
Except where noted, the NAV is the offering and the redemption price for each
class.
Net Assets / Number of Shares = NAV
A $44,084,052 3,107,563 $ 14.19*
B(1) $7,887,172 580,557 $ 13.59**
B $22,365,948 1,645,842 $ 13.59**
C $3,517,530 258,283 $ 13.62**
S $17,036,792 1,180,850 $ 14.43
* Maximum offering price per share $15.06 ($14.19 / .9425)
** When you sell Class B(1), Class B or Class C shares, you receive the net
asset value minus deferred sales charge, if any.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
14 State Street Research International Equity Fund
<PAGE>
Statement of
Operations For the year ended October 31, 2000
--------------------------------------------------------------------------------
This shows what the fund earned and lost over the report period, and what its
expenses were.
Investment Income
Dividends $975,457(1)
Interest 402,026
-----------
1,377,483
Expenses
Management fee 833,055(2)
Transfer agent and shareholder services 354,874(3)
Custodian fee 243,469
Reports to shareholders 58,335
Audit fee 22,230
Registration fees 60,225
Distribution and service fees-Class A 94,981(4)
Distribution and service fees-Class B(1) 59,549(4)
Distribution and service fees-Class B 257,100(4)
Distribution and service fees-Class C 29,358(4)
Legal fees 39,178
Administration fee 28,100(5)
Trustees' fees 8,424(6)
Miscellaneous 12,369
-----------
2,101,247
Expenses borne by the Distributor (208,931)(7)
Fees paid indirectly (4,443)(8)
-----------
1,887,873
-----------
Net investment loss (510,390)
-----------
Realized and Unrealized Gain (Loss)
on Investments, Foreign Currency and
Forward Contracts
Net realized gain on investments 5,303,470(9)
Net realized loss on foreign currency
and forward contracts (1,315,552)
-----------
Total net realized gain 3,987,918
-----------
Change in unrealized appreciation of investments 1,245,992
Change in unrealized appreciation of foreign
currency and forward contracts 1,255,765
-----------
Total change in unrealized appreciation 2,501,757
-----------
Net gain on investments, foreign currency
and forward contracts 6,489,675
-----------
Net increase in net assets resulting
from operations $5,979,285
===========
--------------------------------------------------------------------------------
(1) The fund paid foreign taxes of $127,870.
--------------------------------------------------------------------------------
(2) The management fee is 0.95% of fund net assets, annually.
--------------------------------------------------------------------------------
(3) Includes a total of $167,194 paid to the distributor for the services it
provided and to MetLife for similar services it provided, including
maintaining the accounts of some investors who hold shares through that
firm's employee benefit plans and other sponsored arrangements.
--------------------------------------------------------------------------------
(4) Payments made to the distributor under the fund's 12b-1 plans. The fees
cover personal services and the maintenance of shareholder accounts. The
fees also cover distribution and marketing expenditures for the sale of
fund shares.
--------------------------------------------------------------------------------
(5) Payments made to the investment manager for certain administrative costs
incurred in providing accounting services to the fund.
--------------------------------------------------------------------------------
(6) Paid only to trustees who aren't currently affiliated with the adviser
(the fund doesn't pay trustees' fees to affiliated trustees).
--------------------------------------------------------------------------------
(7) Represents the share of expenses that the fund's distributor and its
affiliates paid voluntarily.
--------------------------------------------------------------------------------
(8) Represents transfer agent credits earned from uninvested cash balances.
--------------------------------------------------------------------------------
(9) To earn this, the fund sold $63,452,758 of securities. During this same
period, the fund also bought $85,874,127 worth of securities. These
figures don't include short-term obligations or U.S. government
securities.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
15
<PAGE>
Statement of
Changes in Net Assets
--------------------------------------------------------------------------------
This shows how the fund's size changed over the report period, including changes
that resulted from investment performance as well as those that resulted from
shareholders buying and selling fund shares.
Years ended October 31
-----------------------------------------------------------------------------
1999 2000
-----------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $(418,931) $(510,390)
Net realized gain on investments, foreign
currency and forward contracts 4,848,994 3,987,918
Change in unrealized appreciation of
investments, foreign currency and
forward contracts 9,070,789 2,501,757
---------------------------
Net increase resulting from operations 13,500,852 5,979,285
---------------------------
Dividend from net investment income:
Class A (292,925) --
Class B(1) -- --
Class B (244,476) --
Class C (15,769) --
Class S (276,150) --
---------------------------
(829,320) --
---------------------------
Distribution from capital gains:
Class A -- (765,082)
Class B(1) -- (104,090)
Class B -- (723,766)
Class C -- (65,500)
Class S -- (494,397)
---------------------------
-- (2,152,835)(1)
---------------------------
Net increase (decrease)
from fund share transactions (3,314,527) 30,165,993(2)
---------------------------
Total increase in net assets 9,357,005 33,992,443
---------------------------
Net Assets
Beginning of year 51,542,046 60,899,051
---------------------------
End of year $60,899,051 $94,891,494
===========================
--------------------------------------------------------------------------------
(1) The fund has designated as long term all of this amount.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
16 State Street Research International Equity Fund
<PAGE>
--------------------------------------------------------------------------------
(2) These transactions break down by share class as follows:
<TABLE>
<CAPTION>
Years ended October 31
---------------------------------------------------------------------
1999 2000
---------------------------------------------------------------------
Class A Shares Amount Shares Amount
=================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 12,204,470 $136,019,145 5,046,226 $77,921,379*
Issued upon reinvestment of:
Dividend from net investment income 27,110 290,733 -- --
Distribution from capital gains -- -- 49,646 736,846
Shares redeemed (11,933,749) (133,507,842) (3,751,701) (58,370,939)
---------------------------------------------------------------------
Net increase 297,831 $2,802,036 1,344,171 $20,287,286
=====================================================================
<CAPTION>
Class B(1) Shares (a) Amount (a) Shares Amount
=================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 200,533 2,219,325 444,100 $6,814,862**
Issued upon reinvestment of
distribution from capital gains -- -- 7,248 104,090
Shares redeemed (4,603) (49,182) (66,721) (1,075,103)***
---------------------------------------------------------------------
Net increase 195,930 $2,170,143 384,627 $5,843,849
=====================================================================
<CAPTION>
Class B Shares Amount Shares Amount
=================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 196,958 $2,142,564 385,412 $5,907,787**
Issued upon reinvestment of:
Dividend from net investment income 22,009 229,109 -- --
Distribution from capital gains -- -- 47,643 682,088
Shares redeemed (740,587) (7,898,039) (387,004) (5,670,356)***
---------------------------------------------------------------------
Net increase (decrease) (521,620) ($5,526,366) 46,051 $919,519
=====================================================================
<CAPTION>
Class C Shares Amount Shares Amount
=================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 918,627 $10,353,880 1,261,536 $18,828,899**
Issued upon reinvestment of:
Dividend from net investment income 908 9,484 -- --
Distribution from capital gains -- -- 3,986 57,113
Shares redeemed (903,008) (10,171,596) (1,195,228) (17,903,029)****
---------------------------------------------------------------------
Net increase 16,527 $191,768 70,294 $982,983
=====================================================================
<CAPTION>
Class S Shares Amount Shares Amount
=================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 227,729 $2,532,707 787,426 $12,414,829
Issued upon reinvestment of:
Dividend from net investment income 24,820 269,057 -- --
Distribution from capital gains -- -- 32,335 486,654
Shares redeemed (513,083) (5,753,872) (682,220) (10,769,127)
---------------------------------------------------------------------
Net increase (decrease) (260,534) ($2,952,108) 137,541 $2,132,356
=====================================================================
</TABLE>
The trustees have the authority to issue an unlimited number of fund
shares, with a $.001 par value per share.
* Sales charges of $23,261 and $86,722 were collected by the distributor and
MetLife on sales of these shares.
** Like all broker-dealers, MetLife received commissions that were calculated
as a percentage of these sales but the commissions of $99,175, $1,077 and
$364 for Class B(1), Class B, and Class C were paid by the distributor,
not the fund.
*** Includes $12,753 and $24,748 in deferred sales charges collected by the
distributor for Class B(1) and Class B.
**** Includes $571 in deferred sales charges collected by the distributor.
(a) January 1, 1999 (commencement of share class) to October 31, 1999.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
17
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
These provide a summary of each share class's financial performance.
<TABLE>
<CAPTION>
Class A
======================================================================
Years ended October 31
----------------------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.34 9.22 9.42 10.31 12.85
---- ---- ----- ----- -----
Net investment loss ($)* (0.04) (0.02) (0.01) (0.06) (0.06)
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts ($) (0.08) 0.22 0.90 2.81 1.85
---- ---- ----- ----- -----
Total from investment operations ($) (0.12) 0.20 0.89 2.75 1.79
---- ---- ----- ----- -----
Dividend from net investment income ($) -- -- -- (0.21) --
Distribution from capital gains ($) -- -- -- -- (0.45)
---- ---- ----- ----- -----
Total distributions ($) -- -- -- (0.21) (0.45)
---- ---- ----- ----- -----
Net asset value, end of year ($) 9.22 9.42 10.31 12.85 14.19
==== ==== ===== ===== =====
Total return (%) (b) (1.28) 2.17 9.45 27.02 13.80
Ratios/Supplemental Data
===================================================================================================================================
Net assets at end of year ($ thousands) 21,116 16,346 15,104 22,667 44,084
Expense ratio (%)* 1.90 1.90 1.90 1.92 1.93
Expense ratio after expense reductions (%)* 1.90 1.90 1.90 1.90 1.93
Ratio of net investment loss to average net assets (%)* (0.37) (0.18) (0.20) (0.54) (0.35)
Portfolio turnover rate (%) 132.36 174.69 116.28 78.04 77.61
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.05 0.04 0.04 0.05 0.04
<CAPTION>
Class B(1)
==============================================================
January 1, 1999
(commencement of operations) Year ended
Per Share Data to October 31, 1999 (a) October 31, 2000 (a)
=======================================================================================================================
<S> <C> <C>
Net asset value, beginning of year ($) 10.63 12.42
----- -----
Net investment loss ($)* (0.11) (0.16)
Net realized and unrealized gain on investments,
foreign currency and forward contracts ($) 1.90 1.78
----- -----
Total from investment operations ($) 1.79 1.62
----- -----
Distribution from capital gains ($) -- (0.45)
----- -----
Total distributions ($) -- (0.45)
----- -----
Net asset value, end of year ($) 12.42 13.59
===== =====
Total return (%) (b) 16.84 (c) 12.89
Ratios/Supplemental Data
======================================================================================================================
Net assets at end of year ($ thousands) 2,433 7,887
Expense ratio (%)* 2.67 (d) 2.65
Expense ratio after expense reductions (%)* 2.65 (d) 2.65
Ratio of net investment loss to
average net assets (%)* (1.29) (d) (1.02)
Portfolio turnover rate (%) 78.04 77.61
*Reflects voluntary reduction of
expenses per share of these amounts ($) 0.01 0.04
</TABLE>
The text and notes are an integral part of the financial statements.
18 State Street Research International Equity Fund
<PAGE>
<TABLE>
<CAPTION>
Class B
==========================================================
Years ended October 31
----------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.22 9.04 9.16 9.95 12.42
---- ---- ---- ----- -----
Net investment loss ($)* (0.11) (0.09) (0.05) (0.14) (0.17)
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts ($) (0.07) 0.21 0.84 2.73 1.79
---- ---- ---- ----- -----
Total from investment operations ($) (0.18) 0.12 0.79 2.59 1.62
---- ---- ---- ----- -----
Dividend from net investment income ($) -- -- -- (0.12) --
Distribution from capital gains ($) -- -- -- -- (0.45)
---- ---- ---- ----- -----
Total distributions ($) -- -- -- (0.12) (0.45)
---- ---- ---- ----- -----
Net asset value, end of year ($) 9.04 9.16 9.95 12.42 13.59
==== ==== ==== ===== =====
Total return (%) (c) (1.95) 1.33 8.62 26.30 12.97
Ratios/Supplemental Data
========================================================================================================================
Net assets at end of year ($ thousands) 28,971 21,914 21,117 19,865 22,366
Expense ratio (%)* 2.65 2.65 2.65 2.67 2.65
Expense ratio after expense reductions (%)* 2.65 2.65 2.65 2.65 2.65
Ratio of net investment loss to average net assets (%)* (1.13) (0.94) (0.88) (1.28) (1.09)
Portfolio turnover rate (%) 132.36 174.69 116.28 78.04 77.61
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.05 0.04 0.04 0.05 0.04
<CAPTION>
Class C
==========================================================
Years ended October 31
----------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.22 9.03 9.16 9.95 12.44
---- ---- ---- ----- -----
Net investment loss ($)* (0.11) (0.09) (0.05) (0.14) (0.16)
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts ($) (0.08) 0.22 0.84 2.73 1.79
---- ---- ---- ----- -----
Total from investment operations ($) (0.19) 0.13 0.79 2.59 1.63
---- ---- ---- ----- -----
Dividend from net investment income ($) -- -- -- (0.10) --
Distribution from capital gains ($) -- -- -- -- (0.45)
---- ---- ---- ----- -----
Total distributions ($) -- -- -- (0.10) (0.45)
---- ---- ---- ----- -----
Net asset value, end of year ($) 9.03 9.16 9.95 12.44 13.62
==== ==== ==== ===== =====
Total return (%) (b) (2.06) 1.44 8.62 26.17 13.03
Ratios/Supplemental Data
========================================================================================================================
Net assets at end of year ($ thousands) 5,324 2,469 1,706 2,339 3,518
Expense ratio (%)* 2.65 2.65 2.65 2.67 2.65
Expense ratio after expense reductions (%)* 2.65 2.65 2.65 2.65 2.65
Ratio of net investment loss to average net assets ($)* (1.10) (0.97) (0.90) (1.29) (1.04)
Portfolio turnover rate (%) 132.36 174.69 116.28 78.04 77.61
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.05 0.04 0.04 0.04 0.04
</TABLE>
(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.
The text and notes are an integral part of the financial statements.
19
<PAGE>
Financial Highlights CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class S
=========================================================
Years ended October 31
---------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.39 9.29 9.51 10.44 13.03
---- ---- ----- ----- -----
Net investment income (loss) ($)* (0.02) 0.01 0.00 (0.03) (0.01)
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts ($) (0.08) 0.21 0.93 2.85 1.86
---- ---- ----- ----- -----
Total from investment operations ($) (0.10) 0.22 0.93 2.82 1.85
---- ---- ----- ----- -----
Dividend from net investment income ($) -- -- -- (0.23) --
Distribution from capital gains ($) -- -- -- -- (0.45)
---- ---- ----- ----- -----
Total distributions ($) -- -- -- (0.23) (0.45)
---- ---- ----- ----- -----
Net asset value, end of year ($) 9.29 9.51 10.44 13.03 14.43
==== ==== ===== ===== =====
Total return (%) (b) (1.06) 2.37 9.78 27.48 14.16
Ratios/Supplemental Data
==========================================================================================================================
Net assets at end of year ($ thousands) 26,649 21,230 13,615 13,595 17,037
Expense ratio (%)* 1.65 1.65 1.65 1.67 1.65
Expense ratio after expense reductions (%)* 1.65 1.65 1.65 1.65 1.65
Ratio of net investment income (loss) to average net assets (%)* (0.16) 0.06 0.06 (0.28) (0.08)
Portfolio turnover rate (%) 132.36 174.69 116.28 78.04 77.61
*Reflects voluntary reduction of
expenses per share of these amounts ($) 0.05 0.04 0.04 0.05 0.04
</TABLE>
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges.
The text and notes are an integral part of the financial statements.
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research International Equity Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio holdings, and the related statements of operations and of changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of State Street Research International Equity
Fund (the "Fund", a series of State Street Research Financial Trust, hereafter
referred to as the "Trust") at October 31, 2000, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion. The financial statements of the Fund for the periods
through October 31, 1998 were audited by other independent accountants whose
report dated December 4, 1998 expressed an unqualified opinion on those
statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 2000
--------------------------------------------------------------------------------
<PAGE>
Board of Trustees
Richard S. Davis
Chairman of the Board,
President, Chief Executive Officer and Director,
State Street Research & Management Company
Bruce R. Bond
Former Chairman of the Board,
Chief Executive Officer and President,
PictureTel Corporation
Steve A. Garban
Former Senior Vice President
for Finance and Operations and Treasurer,
The Pennsylvania State University
Dean O. Morton
Former Executive Vice President,
Chief Operating Officer and Director,
Hewlett-Packard Company
Susan M. Phillips
Dean, School of Business and Public Management,
George Washington University; former Member of
the Board of Governors of the Federal Reserve System
and Chairman and Commissioner of the Commodity
Futures Trading Commission
Toby Rosenblatt
President, Founders Investments Ltd.
President, The Glen Ellen Company
Michael S. Scott Morton
Jay W. Forrester Professor of Management,
Sloan School of Management,
Massachusetts Institute of Technology
21
<PAGE>
Glossary
12b-1 fees -- Fees paid from mutual fund assets for personal services and
for the maintenance of shareholder accounts and distribution and marketing
expenses. The fees are named after the SEC rule that permits them.
Average shares method -- The practice of basing a fund's calculations for
a given period on the average number of shares that were outstanding
during that period.
Nasdaq -- The stock price quotation system operated by the National
Association of Securities Dealers. The Nasdaq system operates as a
clearing house for transaction data about stocks that are traded "over the
counter" around the U.S.
New York Stock Exchange -- The largest stock exchange in the United
States, and the place where many of the largest company stocks are listed.
Unlike the Nasdaq system, the NYSE is a physical exchange, with all
trading occurring on the exchange's trading floor on Wall Street.
Principal Amount -- With bonds and certain other debt securities, the
amount of the underlying principal of the security. When the security
matures, the issuer is obligated to repay this amount to the holder of the
security. Also called "face value" or "par value."
22 State Street Research International Equity Fund
<PAGE>
[LOGO] STATE STREET RESEARCH
One Financial Center o Boston, MA 02111
------------------
PRSRT STD
AUTO
U.S. POSTAGE PAID
HOLLISTON, MA
PERMIT NO. 20
------------------
Contact Information for
INVESTOR SERVICES
--------------------------------------------------------------------------------
New accounts, mutual fund purchases, exchanges and account information
[INTERNET] internet
www.statestreetresearch.com
[COMPUTER] e-mail
[email protected]
[PHONE] phone
1-87-SSR-FUNDS (1-877-773-8637) 7 days a week, 24 hours a day
Hearing-impaired: 1-800-676-7876
Chinese and Spanish-speaking: 1-888-638-3193
[FAX] fax
1-617-737-9722 (request confirmation number first from the
Service Center by calling 1-87-SSR-FUNDS or 1-877-773-8637)
[MAILBOX] mail
State Street Research Service Center
P.O. Box 8408, Boston, MA 02266-8408
For 24-hour
Automated Access
to Your Account
[PHONE] 1-87-SSR-FUNDS
----------------
(1-877-773-8637)
www.statestreetresearch.com
OverView
--------------------------------------
For more information on the products
and services mentioned in OverView,
our shareholder newsletter, visit our
Web site at www.statestreetresearch.com
State Street Research
FYI
--------------------------------------------------------------------------------
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.
---------------------------
[LOGO]
DALBAR
HONORS COMMITMENT TO:
INVESTORS
1999
---------------------------
for Excellence in Service
1 An investment in the State Street Research Money Market Fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Although the fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by
investing in the fund.
--------------------------------------------------------------------------------
This report must be accompanied or preceded by a current State Street Research
International Equity Fund prospectus. When used after December 31, 2000 this
report must be accompanied by a current Quarterly Performance Update.
To obtain a prospectus of any State Street Research fund call 1-87-SSR-FUNDS
(1-877-773-8637). The prospectus contains more complete information, including
sales charges and expenses. Please read the prospectus carefully before
investing or sending money.
The Dalbar awards recognize quality shareholder service and 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
industry-wide.
State Street Research
Spectrum of Funds
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Growth & Income Growth
--------------------------------------------------------------------------------------------------
CONSERVATIVE AGGRESSIVE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
High Income Fund Argo Fund Global Resources Fund
Strategic Income Fund Investment Trust Emerging Growth Fund
New York Tax-Free Fund Alpha Fund Health Sciences Fund
Tax-Exempt Fund Strategic Growth & Income Fund Mid-Cap Growth Fund(1)
Government Income Fund Strategic Income Plus Fund Aurora Fund
Money Market Fund(1) Concentrated International Fund
International Equity Fund
Concentrated Growth Fund
Growth Fund
Galileo Fund
Legacy Fund
</TABLE>
(C) 2000 State Street Research Investment Services, Inc.,
One Financial Center, Boston, MA 02111
Control Number:(exp1201)SSR-LD IE-2850-1200
<PAGE>
[LOGO] STATE STREET RESEARCH
Government Income Fund
--------------------------------------------------------------------------------
Annual Report to Shareholders
October 31, 2000
In this Report Why the
Bond Market
Surprised Investors in 2000
[GRAPHIC]
plus
U.S. Economy Glides to a Slower Pace
About Bond Market Sectors
Fund Portfolio and Financials
<PAGE>
--------------------------------------------------------------------------------
Contents
2 12 Month Review
A look at the fund and its market
environment over the past 12 months
6 Performance in Perspective
The most recent performance in the
context of the fund's track record
8 The Fund in Detail
Portfolio holdings, financials and notes
--------------------------------------------------------------------------------
Introducing our New President
We are pleased to announce that Richard "Dick" S. Davis has joined State Street
Research & Management Company as president and chief executive officer. Dick
comes to his new position from our parent company, MetLife, where he has served
as senior vice president of fixed income investments and was responsible for the
firm's $110 billion fixed income portfolio.
[PHOTO]
Richard S. Davis
Dick began his professional investment career 30 years ago at First Boston
Corporation. He spent eight years at J.P. Morgan Investment Management and J.P.
Morgan Securities, where he held positions in global fixed income sales
management, client sales and service, risk management and product development.
Dick holds a BA from Georgetown University and an MBA from Columbia University.
We are delighted to welcome a new leader with such an exceptional track record
and outstanding business acumen. You can look forward to hearing from Dick in
the communications you receive from State Street Research in the months ahead.
[GRAPHIC]
--------------------------------------------------------------------------------
12 Month Review Management's Discussion of Fund Performance Part 1
--------------------------------------------------------------------------------
How State Street Research
Government Income Fund Performed
State Street Research Government Income Fund returned 6.41% for the 12-month
period ended October 31, 2000.(1) That was slightly less than both the Lehman
Government/Credit Index, which returned 7.13% over the same period(2), and the
Lipper U.S. Government Funds Average which returned 6.77%.(3)
Reasons for the Fund's Performance
A generally favorable environment for bonds helped the fund deliver returns that
were higher than many stock portfolios for the year. Income from mortgage
securities helped performance as did the fund's investment in agency bonds. As
spreads on mortgage and agency bonds widened during the year, we added to our
investment in both sectors. The fund's overweighted position in mortgages, its
underweighting in U.S. Treasury bonds and its slightly shorter duration
detracted somewhat from performance.
Our decision to keep the fund's duration--a measure of its sensitivity to
changing interest rates--shorter than Lehman Government/Credit Index was based
on the belief that the Federal Reserve would continue to raise short-term
interest rates, which it did through the first half of the year. However,
long-term interest rates did not follow short-term rates upward. Other factors,
such as the federal government's decision to use a portion of the fiscal surplus
to buy back long-term U.S. Treasury bonds, brought long-term interest rates
down.
Looking Ahead
Although the economy has shown signs of slowing, we remain cautious about
prospects for interest rates in the months ahead. In the near-term, we would not
be surprised to see higher rates, which would not be favorable for bonds. That's
why we have kept the fund's investment in mortgage bonds, which provide a
cushion of income for shareholders.
Class A Shares(1)
6.41% [UP ARROW]
"We remain cautious
about interest rates
in the months ahead."
[PHOTO]
Jack Kallis
Portfolio Manager,
State Street Research
Government Income Fund
Lehman
Government Growth
Index(2)
7.13% [UP ARROW]
More Management's Discussion of Fund Performance on pages 6 and 7. [BOX]
Because financial markets and mutual fund strategies are constantly evolving,
it's 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.
2 State Street Research Government Income Fund
<PAGE>
[GRAPHIC] The Fund at a Glance as of 10/31/00
State Street Research Government Income Fund is a bond fund focusing on
U.S. government securities.
10-year and 30-year Fannie Mae Bonds
We invested in these agency bonds at the right time. They were relatively
inexpensive when we bought them, and they have increased in value since we
bought them.
[GRAPHIC]
Hits & Misses
[GRAPHIC]
Duration
We did not expect long-term interest rates to fall while the Federal Reserve was
raising short-term interest rates. As a result, we shortened the fund's duration
and it hurt performance.
--------------------------------------------------------------------------------
Total Net Assets: $626 million
--------------------------------------------------------------------------------
Asset Allocation
[GRAPHIC]
o U.S. Agency Mortgages 56%
o U.S. Treasury 32%
o Other Mortgage 7%
o Foreign Government 2%
o Cash 3%
-----------------------------------
Total Net Assets 100%
See page 11 for more detail.
--------------------------------------------------------------------------------
Performance: Class A
Fund average annual total return as of 10/31/00(1, 4)
1 Year 5 Years 10 Years
------------------------------------------
6.41% 5.78% 7.67%
Lehman Government/Credit Index as of 10/31/00(2)
1 Year 5 Years 10 Years
------------------------------------------
7.13% 6.12% 8.00%
Fund average annual total return as of 9/30/00(4, 5)
1 Year 5 Years 10 Years
------------------------------------------
1.11% 4.96% 7.27%
Lehman Government/Credit Index as of 9/30/00(2)
1 Year 5 Years 10 Years
------------------------------------------
6.74% 6.30% 8.08%
See pages 6 and 7 for data on other share classes.
--------------------------------------------------------------------------------
Bond Yields
October 31, 1999 to October 31, 2000
<PLOT POINTS NEEDED>
Source: Bloomberg, 2000
--------------------------------------------------------------------------------
Ticker Symbols
State Street Research Government Income Fund
Class A: SSGIX Class B(1): SGIPX Class B: SSGBX Class C: SGIDX Class S: SGICX*
--------------------------------------------------------------------------------
1 Does not reflect sales charge.
2 The Lehman Government/Credit Index includes fixed-rate debt issues rated
investment grade or higher. The index is unmanaged and does not take sales
charges into consideration. It is not possible to invest directly in the
index.
3 Lipper Government Funds Average shows the performance of a category of mutual
funds with similar goals. The Lipper average shows you how well the fund has
done compared with competing funds.
4 Keep in mind that past performance is no guarantee of future results. The
fund's share price, yield and return will fluctuate, and you may have a gain
or loss when you sell your shares. All returns assume reinvestment of capital
gains distributions and income dividends at net asset value.
5 Performance reflects maximum 4.5% Class A front end sales charge, or 5%
Class B or B(1), or 1% Class C share contingent deferred sales charge where
applicable.
*Proposed.
3
<PAGE>
[GRAPHIC] The Way We Think
Why the Bond Market Surprised Investors in 2000
If you were ready to throw out the conventional wisdom about diversification and
put all your money in the stock market, this year's market volatility should
make you glad you didn't. "If ever there was a year to be diversified into the
bond markets, the year 2000 was it," says Jack Kallis, portfolio manager of
State Street Research Government Income Fund. Some sectors of the bond market
outperformed stocks for the year. Long-term U.S. Treasury and government bonds
generated the best performance. Shorter term Treasuries and mortgage bonds
delivered more modest single-digit performance. Only high-yield bonds, which
tend to perform more like equities, drifted into negative territory.
What was behind the strong bond market last year? According to Kallis, three
major factors drove bond prices higher, at least one of which came as a surprise
to seasoned investment professionals: the significant divergence of long-and
short-term interest rates during a period of economic prosperity.
What the Fed Did
Over the past year, the Federal Reserve Board voted to change short-term
interest rates four times. The federal funds rate--the rate of interest the Fed
charges member banks to borrow money--rose from 5.25% last November to 6.50% in
May, where it stood five months later at the end of the period. The Fed has
indicated that it still has a bias toward higher rates because it is concerned
about a tight labor market and high energy prices and the implications that both
could have for inflation. On the other hand, the U.S. economy has started to
slow down, thanks, in part, to higher interest rates.
U.S. Economy Glides to a Slower Pace
With no further interest rate changes since May, it appears that the Federal
Reserve has managed to orchestrate a modest slowdown of the U.S. economy without
harsh effects on consumers, workers or the markets. Third-quarter gross domestic
product, the nation's total output of goods and services, was down significantly
from previous quarters--+2.7% versus +5.6% in the second quarter. As a result,
the Fed has let interest rates stand in its past two meetings. However, it
continues to warn that it is not entirely satisfied with the tight labor market,
relatively high consumer spending and rising energy prices, any of which could
threaten higher inflation.
More Share in Good Times
Prosperity has broadened its reach across the income spectrum. Poverty dropped
to a 20-year low last year. Real median household income rose to a record high
of $40,800 as personal income, in general, continued to climb. Consumer
confidence also remained high.
Financial Markets Reflect Uncertainty
The rocky performance by the U.S. stock market in the second half of the year
had less to do with the economy than a string of disappointing announcements
about sales and earnings from both old and new economy market leaders. The S&P
500 returned 6.08% over the 12 months ended in October. However, mid-cap growth
companies, as measured by the Russell Midcap Growth Index, soared 38.67% over
the same period. Long-term U.S. Treasury bonds were helped by optimism about the
economic slowdown plus a federal buyback of bonds. Foreign markets were
generally disappointing. Canada was the bright spot on the globe, as energy and
telecommunication companies have brought its stock market to life.
--------------------------------------------------------------------------------
Key Indicators Point
to Slower Growth
--------------------------------------------------------------------------------
[DOWN ARROW] Corporate profit growth slowed
from 4.8% to 3.0%
[DOWN ARROW] GDP growth declined from
5.6% to 2.7%
--------------------------------------------------------------------------------
But Pockets of Strength
Keep Fed on Vigil
--------------------------------------------------------------------------------
[UP ARROW] Consumer spending 4.5%
[UP ARROW] Personal income 5.5%
[UP ARROW] New home sales 9.2%
[DOWN ARROW] Jobless rate 3.9%
Source: U.S. Department of Commerce.
All figures are for third quarter of October 2000.
4 State Street Research Government Income Fund
<PAGE>
What the Treasury Did
When short-term interest rates rise, history shows that long-term rates often
follow upward too. However, while the Fed was raising short-term interest rates
there were things going on elsewhere in the market that had the effect of
reducing long-term interest rates. Here's what happened: With a budget surplus
in hand, the federal government decided to do what most of us would do if we
found ourselves with a little more money in our pockets than we had expected. It
paid off some of its debt and cut back on its borrowing. Since March, the U.S.
Treasury bought back approximately $23.5 billion out of more than $17 trillion
in outstanding long-term debt--enough to have an impact on the supply-demand
factors in the marketplace and to bring long-term interest rates down from more
than 6.6% at the beginning of 2000 to around 5 3/4% at the end of October.
Although the actual buyback was not a large percentage of outstanding long-term
debt, it was significant enough to effect another change: As of May, the bond
market has a new standard by which it measures its movements. The long-term
bond, now seen as a dying breed, was replaced by the 10-year U.S. Treasury.
What Congress Did
While the Fed's moves and the Treasury buyback received a lot of attention, a
third and less publicized move by a Congressional subcommittee had a negative
impact on bonds in the housing sector, says Kallis. Because they began to
question the government's relationship to government sponsored enterprises such
as the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac), they interjected a high degree of
uncertainty into the mortgage bond market last spring. Over the years, these
institutions have enjoyed a captive market and a great deal of success. They buy
loans (mostly mortgage loans) from local lenders, and repackage them as
securities for investors. These institutions have a line of credit with the U.S.
Treasury. When Congress began to examine the extent to which the federal
government was exposed to an implied liability on its guarantees, it sent the
value of mortgage bonds plummeting. Now, Kallis says the market has started to
work its way back up as Congress has worked with these agencies to redefine
their relationships. "The spreads that exist between the yields on U.S. Treasury
bonds and mortgage bonds have returned to near normal," says Kallis.
All Eyes on the Economy
Can bonds keep up their strong performance in the year ahead? A lot depends on
the economy, inflation and whether the Federal Reserve Board backs away from its
bias toward raising interest rates. Kallis is cautiously optimistic. "The Fed's
bias should shift if slower growth is achieved and oil prices recede."
But regardless of the market's next move, Kallis says it's important to remember
why you own bonds in your portfolio: for diversification. That means holding on
to them when the market weakens and enjoying the cushion of income they can
provide when stocks are on the skids. "It's more important to invest in both the
stock and bond markets than to try to figure out which one to be in--and when,"
says Kallis. Diversification worked in 2000, and it's worked for successful
investors for decades. Says Kallis, "That's why they call it conventional
wisdom." [BOX]
--------------------------------------------------------------------------------
A Closer Look [GRAPHIC]
[GRAPHIC] About bond market sectors
When stock investors talk about sectors, they are referring to big, broad
industry groups such as health care, technology or telecommunications. However,
each bond market sector represents a different type of bond.
Government and agency bonds U.S. Treasury bonds are the highest quality and the
most liquid of all bonds because they are backed by the full faith and credit of
the U.S. government.
Mortgage bonds Big institutions such as Fannie Mae and Freddie Mac have turned
mortgage loans into securities that can be purchased by investors all over the
country.
Corporate bonds The corporate bond sector exists so that companies can raise
money in the capital markets. Corporate bonds are considered riskier than
government and compensate investors with higher yields.
High-yield bonds The highest-yielding corporate bonds are also known as junk
bonds. They are issued by companies that can't borrow in the investment grade
market. They are riskier because issuers have a higher default rate.
Municipal bonds When state or local governments want to borrow money, they issue
bonds in the municipal market. Municipal bonds have lower yields because they
pay income that is generally tax free.
Foreign bonds The bonds of foreign nations can range from very high quality,
such as the bonds from other developed nations in Europe or Asia, or very low
quality such as emerging market bonds.
5
<PAGE>
--------------------------------------------------------------------------------
Performance in Perspective Management's Discussion of Fund Performance Part 2
--------------------------------------------------------------------------------
Performance Figures as of October 31, 2000
These two pages focus on the fund's long-term track record. While a mutual
fund's past performance is never a guarantee of future results, long-term
returns can serve as an important context for evaluating recent performance.
Three ways of measuring long-term performance are cumulative returns, average
annual 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
This 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. Performance would be lower if sales charges were reflected.
Average Annual Total Return
Average annual total return percentage is the rate you would have had to earn
during each year of a given time period--say, five years--in order to end up
with the fund's actual cumulative return for those five 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
This example is similar to cumulative total return, but uses dollars rather than
percentages, and assumes that the lump sum you invested was $10,000. It also
compares fund performance to the performance of a market index.
--------------------------------------------------------------------------------
Class A Front Load
o Initial sales charge of 4.50% or less, with lower sales charges for larger
investments (see a prospectus for details)
o Lower annual expenses than Class B(1) or Class C shares because of lower
service (12b-1) fee of 0.30%
Life of Fund
Cumulative Total Return 1 Year 5 Years 10 Years (3/23/87)
(does not reflect --------------------------------------------
sales charge) 6.41% 32.43% 109.46% 162.06%
Life of Fund
Average Annual Total Return 1 Year 5 Years 10 Years (3/23/87)
(at maximum applicable --------------------------------------------
sales charge) 1.62% 4.81% 7.18% 6.97%
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Ten Years
Class A Merrill Lynch Merrill Lynch
Mortgage Master Index Government Master Index
"90" 9550 10000 10000
"91" 11102 11676 11464
"92" 12196 12695 12649
"93" 13615 13720 14294
"94" 13127 13540 13676
"95" 15105 15563 15783
"96" 15903 16628 16580
"97" 17258 18139 18018
"98" 18958 19481 20060
"99" 18798 20050 19820
"00" 20003 21566 21405
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class B(1) Back Load for accounts opened after 1/1/99
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within six years
o Annual distribution/service (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Life of Fund
Cumulative Total Return 1 Year 5 Years 10 Years (3/23/87)
(does not reflect --------------------------------------------
sales charge) 5.60% 27.25% 97.28% 146.83%
Life of Fund
Average Annual Total Return 1 Year 5 Years 10 Years (3/23/87)
(at maximum applicable --------------------------------------------
sales charge) 0.62% 4.62% 7.03% 6.86%
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Ten Years
Class B(1) Merrill Lynch Merrill Lynch
Mortgage Master Index Government Master Index
"90" 10000 10000 10000
"91" 11625 11676 11464
"92" 12771 12695 12649
"93" 14203 13720 14294
"94" 13581 13540 13676
"95" 15503 15563 15783
"96" 16203 16628 16580
"97" 17444 18139 18018
"98" 19026 19481 20060
"99" 18681 20050 19820
"00" 19728 21566 21405
--------------------------------------------------------------------------------
6 State Street Research Government Income Fund
<PAGE>
--------------------------------------------------------------------------------
Class B Back Load for accounts opened before 1/1/99
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within five years
o Annual distribution/service (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Life of Fund
Cumulative Total Return 1 Year 5 Years 10 Years (3/23/87)
(does not reflect --------------------------------------------
sales charge) 5.67% 27.62% 97.86% 147.55%
Life of Fund
Average Annual Total Return 1 Year 5 Years 10 Years (3/23/87)
(at maximum applicable --------------------------------------------
sales charge) 0.68% 4.68% 7.06% 6.88%
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Ten Years
Class B Merrill Lynch Merrill Lynch
Mortgage Master Index Government Master Index
"90" 10000 10000 10000
"91" 11625 11676 11464
"92" 12771 12695 12649
"93" 14203 13720 14294
"94" 13581 13540 13676
"95" 15503 15563 15783
"96" 16203 16628 16580
"97" 17444 18139 18018
"98" 19026 19481 20060
"99" 18725 20050 19820
"00" 19786 21566 21405
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class C Level Load
o No initial sales charge
o Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
o Lower deferred sales charge than Class B(1) shares
o Annual distribution/service (12b-1) fee of 1.00%
o No conversion to Class A shares after eight years, so annual expenses do
not decrease
Life of Fund
Cumulative Total Return 1 Year 5 Years 10 Years (3/23/87)
(does not reflect --------------------------------------------
sales charge) 5.66% 27.60% 97.97% 147.69%
Life of Fund
Average Annual Total Return 1 Year 5 Years 10 Years (3/23/87)
(at maximum applicable --------------------------------------------
sales charge) 4.67% 5.00% 7.07% 6.89%
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Ten Years
Class C Merrill Lynch Merrill Lynch
Mortgage Master Index Government Master Index
"90" 10000 10000 10000
"91" 11625 11676 11464
"92" 12771 12695 12649
"93" 14202 13720 14294
"94" 13580 13540 13676
"95" 15515 15563 15783
"96" 16214 16628 16580
"97" 17455 18139 18018
"98" 19037 19481 20060
"99" 18736 20050 19820
"00" 19797 21566 21405
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Class S Special Programs
o Available through certain retirement accounts, advisory accounts of the
investment manager and other programs that usually involve special
conditions and separate fees (see a prospectus for details)
o No sales charges of any kind
o No distribution/service (12b-1) fees; annual expenses are lower than for
other share classes
Life of Fund
Cumulative Total Return 1 Year 5 Years 10 Years (3/23/87)
(does not reflect ---------------------------------------------
sales charge) 6.71% 34.16% 113.32% 166.89%
Life of Fund
Average Annual Total Return 1 Year 5 Years 10 Years (3/23/87)
(at maximum applicable ---------------------------------------------
sales charge) 6.71% 6.05% 7.87% 7.47%
[THE FOLLOWING INFORMATION WAS DEPICTED AS A LINE CHART IN THE PRINTED MATERIAL]
$10,000 Over Ten Years
Class S Merrill Lynch Merrill Lynch
Mortgage Master Index Government Master Index
"90" 10000 10000 10000
"91" 11625 11676 11464
"92" 12771 12695 12649
"93" 14271 13720 14294
"94" 13783 13540 13676
"95" 15901 15563 15783
"96" 16782 16628 16580
"97" 18260 18139 18018
"98" 20110 19481 20060
"99" 19991 20050 19820
"00" 21332 21566 21405
--------------------------------------------------------------------------------
A Closer Look [GRAPHIC]
12b-1 fees
12b-1 fees are named after the SEC rule that permits them.
The fund pays 12b-1 fees to cover service and distribution costs. The fees cover
personal services and the maintenance of shareholder accounts.
The fees also cover selling and marketing expenditures for the sale of fund
shares.
The fund pays 12b-1 fees out of its assets, so shareholders see them as an
indirect charge rather than a direct charge.
All of the performance figures on these pages assume reinvestment of dividends
and distributions.
The average annual total returns for the fund also include the effects of any
fees and sales charges that would apply for each share class.
Merrill Lynch Government and Mortgage Master Indices--Commonly used measures
of bond market performance. The indices are unmanaged and do not take sales
charges into consideration. It is not possible to invest directly in the
indices.
Keep in mind that past performance is no guarantee of future results. The fund's
share price and return will fluctuate and you may have a gain or loss when you
sell your shares.
Performance for Class B(1) reflects Class B performance through December 31,
1998. Class B(1) was introduced January 1, 1999.
7
<PAGE>
[GRAPHIC]
--------------------------------------------------------------------------------
The Fund in Detail
--------------------------------------------------------------------------------
The following pages describe the fund in detail as of the date of this report.
They provide a "snapshot" of the fund's holdings at one moment in time (the
report date), describe the financial dimensions of its operations for the past
fiscal year leading up to the report date and give a summary of operations on a
per share basis for the past five fiscal years. There's also an overview of the
fund and its business structure, as well as information on the accounting
policies the fund uses in arriving at the figures it presents here.
[PHOTO]
Together, the words and numbers in this section offer a comprehensive picture of
the fund and its recent activities. In fact, the text and notes on pages 9 to 22
are an integral part of the financial statements, which wouldn't be complete
without them.
For more information about the fund's strategies, risks and expenses, check the
fund's prospectus; you'll need to read it before making any investments. The
prospectus also has more details on the fund's share classes and its policies
for shareholder accounts. To get a copy of any State Street Research prospectus,
see the back cover of this report.
Keep in mind that in annual reports, the portfolio holdings and financial
statements are audited, while in semiannual reports they are unaudited.
8 State Street Research Government Income Fund
<PAGE>
About the Fund
--------------------------------------------------------------------------------
Business structure
State Street Research Government Income Fund is a mutual fund. A mutual fund
allows shareholders to pool their assets for investment in a portfolio of
securities. This fund is a series of State Street Research Financial Trust, a
Massachusetts business trust and is an open-end management investment company.
Four entities administer the fund's main business functions:
o The board of trustees oversees the fund with its shareholders' interests in
mind and have ultimate responsibility for the fund's activities.
o The investment manager, State Street Research & Management Company, is
responsible for the fund's investment and business activities and receives
the management fee as compensation.
o The distributor, State Street Research Investment Services, Inc., sells
shares of the fund, handles investor inquiries and transaction orders and
provides other shareholder services.
o The custodian, State Street Bank and Trust Company, holds fund securities,
provides data on their market value and handles related services.
The investment manager and the distributor are subsidiaries of MetLife Inc.
State Street Bank and Trust Company is not affiliated with MetLife (the
similarity between its name and the names of the investment manager and
distributor is coincidental). A majority of the trustees consists of people who
are not affiliated with MetLife or any of its subsidiaries. The distributor pays
a portion of its fees to MetLife for services it provides, including maintaining
the accounts of some investors who hold shares through their firm's employee
benefit plans and other sponsored arrangements.
Goal and strategy
The fund seeks to provide high current income. Under normal market conditions,
the fund invests at least 65% of total assets in U.S. government securities.
Share classes
The fund generally offers four share classes, each with its own sales charge and
expense structure. The fund also offers an additional class of shares (Class B)
but only to current Class B shareholders through reinvestment of dividends and
distributions or through exchanges from existing Class B accounts of other State
Street Research funds.
Class A shares are subject to an initial sales charge of up to 4.50%. From
November 1, 1999 to April 30, 2000, Class A shares paid a service fee equal to
0.25% of average daily net assets. Beginning May 1, 2000, Class A shares pay an
annual service and distribution fee equal to 0.30% of average daily net assets.
Class B(1) and Class B shares pay annual service and distribution fees of 1.00%
and both classes automatically convert into Class A shares (which pay lower
ongoing expenses) at the end of eight years. Class B(1) and Class B shares are
subject to a contingent deferred sales charge on certain redemptions made within
six years and five years of purchase, respectively. Class C shares are subject
to a contingent deferred sales charge of 1.00% on any shares redeemed within one
year of their purchase and also pay annual service and distribution fees of
1.00%. Class S shares are only offered through certain retirement accounts,
advisory accounts of the investment manager, 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 text and notes are an integral part of the financial statements.
9
<PAGE>
The Fund's Accounting Policies
--------------------------------------------------------------------------------
In keeping with accounting principles generally accepted in the United States,
the fund has used the following policies in preparing the portfolio holdings and
financial statements in this report:
The fund values all portfolio securities as of the date of this report (or, if
that day wasn't a business day, then the most recent business day). The fund
uses the following methods for determining the values of various types of
securities:
o Fixed income securities - The fund uses a pricing service that the fund's
trustees have approved.
o Securities maturing within sixty days - The fund adjusts the value of these
securities daily, moving them closer to the amount due on maturity as the
maturity date approaches.
The fund accounts for each purchase and sale of portfolio securities on the
trade date. In calculating realized gains or losses, the fund takes as its cost
basis the identified cost of securities sold.
The fund records investment income from portfolio securities as follows:
o Interest - The fund accrues interest daily as it earns it.
The fund may use forward foreign currency exchange contracts and futures
contracts for hedging purposes, attempting to offset a potential loss in one
position by establishing an interest in an opposite position. The fund accounts
for forward contracts by recording their total principal in its accounts and
then marking them to market. The fund accounts for futures contracts by
recording the variation margin, which is the daily change in the value of the
contract.
The fund may seek additional income by lending portfolio securities to qualified
institutions. The fund will receive cash or securities as collateral in the
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 or losses. If the
borrower fails to return the securities and the collateral has declined in
value, the fund could lose money. The fund accounts for income from the lending
of its securities by including it in interest income.
The fund distributes its net earnings to its shareholders. The fund calculates
these distributions using federal income tax regulations. As a result, they may
be different than if the fund used generally accepted accounting principles. The
fund distributes its earnings on the following schedule:
o Dividends from net investment income - The fund declares dividends daily
and pays them monthly.
o Net realized capital gains - The fund distributes these annually, if any.
If the fund has no earnings to distribute, it won't make a distribution.
The fund does not intend to pay federal income tax. This is because it has
elected to be exempt from taxes under Subchapter M of the Internal Revenue Code,
in part because it makes distributions as described above.
The fund pays expenses as follows:
o Expenses attributed to the fund - The fund pays these directly. Examples of
these expenses include the management fee, transfer agent fee, custodian
fee and distribution and service fees.
o Expenses attributed to the trust of which the fund is a series - These
expenses are divided up among all funds in the trust. Each fund pays a
proportional share. Examples of these expenses include the legal fees and
trustees fees.
The fund has used certain estimates and assumptions in preparing this report.
Although they are necessary in order to follow generally accepted accounting
principles, these estimates and assumptions affect several key areas, including
the reported amounts of assets and liabilities and income and expenses. Actual
results could differ from those estimates.
The text and notes are an integral part of the financial statements.
10 State Street Research Government Income Fund
<PAGE>
Portfolio Holdings October 31, 2000
--------------------------------------------------------------------------------
The listings that begin on this page detail the fund's investment holdings as of
the report date. We have grouped the holdings by asset class and by smaller
sub-groups as well.
--------------------------------------------------------------------------------
Notes about specific elements of the financials are called out in boxes such as
this.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Coupon Maturity Amount Market
Issuer Rate Date of Principal Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities 88.0% of net assets
U.S. Treasury 32.1%
U.S. Treasury Bond 13.75% 8/15/2004 $11,225,000 $14,164,491
U.S. Treasury Bond 11.625% 11/15/2004 39,400,000 47,341,464
U.S. Treasury Bond 10.75% 8/15/2005 9,500,000 11,397,055
U.S. Treasury Bond 10.375% 11/15/2012 9,525,000 11,869,007
U.S. Treasury Bond 12.00% 8/15/2013 8,600,000 11,753,792
U.S. Treasury Bond 11.25% 2/15/2015 5,500,000 8,246,535
U.S. Treasury Bond 10.625% 8/15/2015 10,925,000 15,830,980
U.S. Treasury Bond 9.875% 11/15/2015 8,500,000 11,728,640
U.S. Treasury Bond 9.25% 2/15/2016 8,500,000 11,234,620
U.S. Treasury Bond 8.875% 2/15/2019 4,750,000 6,242,545
U.S. Treasury Bond 6.75% 8/15/2026 28,100,000 30,936,414
U.S. Treasury Bond 6.25% 5/15/2030 2,575,000 2,742,375
U.S. Treasury Note 6.125% 8/31/2002 8,650,000 8,666,176
U.S. Treasury STRIPS 0.00% 11/15/2001 9,375,000 8,779,687
------------------------------------------------------------------------------------------------------------------------
200,933,781
-----------
</TABLE>
The text and notes are an integral part of the financial statements.
11
<PAGE>
Portfolio Holdings October 31, 2000 CONTINUED
<TABLE>
<CAPTION>
Coupon Maturity Amount Market
Issuer Rate Date of Principal Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Agency Mortgage 55.9%
Federal Home Loan Mortgage Corp. 9.00% 12/01/2009 $2,533,906 $2,589,703
Federal Home Loan Mortgage Corp. 6.75% 9/15/2029 8,325,000 8,293,781
Federal Housing Administration Charles River Project 9.625% 12/01/2033 9,343,680 9,650,270
Federal Housing Administration Court Yard Project 10.75% 8/01/2032 6,418,826 6,647,496
Federal Housing Administration East Bay Manor Project 10.00% 3/01/2033 6,681,734 6,904,110
Federal National Mortgage Association 7.00% 7/15/2005 14,975,000 15,258,177
Federal National Mortgage Association 6.625% 10/15/2007 8,650,000 8,652,681
Federal National Mortgage Association 8.00% 4/01/2008 2,035,422 2,084,415
Federal National Mortgage Association 6.00% 5/15/2008 5,475,000 5,258,573
Federal National Mortgage Association 8.00% 6/01/2008 2,905,996 2,947,639
Federal National Mortgage Association 5.25% 1/15/2009 12,200,000 11,100,048
Federal National Mortgage Association 8.50% 2/01/2009 3,717,926 3,816,823
Federal National Mortgage Association 9.00% 5/01/2009 3,420,271 3,520,485
Federal National Mortgage Association 6.375% 6/15/2009 5,975,000 5,843,371
Federal National Mortgage Association 6.625% 9/15/2009 5,125,000 5,094,558
Federal National Mortgage Association 9.00% 4/01/2016 835,043 859,510
Federal National Mortgage Association 6.50% 9/01/2028 12,134,065 11,667,632
Federal National Mortgage Association 6.50% 11/01/2028 30,579,460 29,403,985
Federal National Mortgage Association 6.50% 12/01/2028 5,712,767 5,493,168
Federal National Mortgage Association 6.00% 12/01/2028 9,569,705 8,974,565
Federal National Mortgage Association 6.00% 2/01/2029 12,721,285 11,930,148
Federal National Mortgage Association 6.50% 5/01/2029 6,622,009 6,363,287
Federal National Mortgage Association 7.50% 7/01/2029 10,529,598 10,526,334
Federal National Mortgage Association 7.00% 12/01/2029 51,133,310 50,094,281
Federal National Mortgage Association 7.25% 5/15/2030 5,725,000 6,082,812
Federal National Mortgage Association * 7.50% 12/01/2030 15,725,000 15,700,469
Federal National Mortgage Association * 7.00% 12/01/2030 18,650,000 18,533,437
Federal National Mortgage Association * 7.00% 12/01/2030 12,650,000 12,393,079
Government National Mortgage Association 9.50% 9/15/2009 1,266,610 1,312,048
Government National Mortgage Association 9.50% 10/15/2009 2,165,276 2,244,409
Government National Mortgage Association 9.50% 11/15/2009 1,020,523 1,057,719
Government National Mortgage Association 9.50% 11/15/2017 263,070 277,331
Government National Mortgage Association 9.50% 9/15/2019 52,294 55,268
Government National Mortgage Association 7.00% 6/15/2028 4,995,939 4,924,147
Government National Mortgage Association 7.00% 11/15/2028 21,207,455 20,902,704
Government National Mortgage Association 6.50% 11/15/2028 10,410,389 10,049,253
</TABLE>
The text and notes are an integral part of the financial statements.
12 State Street Research Government Income Fund
<PAGE>
<TABLE>
<CAPTION>
Coupon Maturity Amount Market
Issuer Rate Date of Principal Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association * 8.00% 12/15/2030 $ 9,925,000 $ 10,089,358
Government National Mortgage Association * 7.00% 12/15/2030 5,725,000 5,642,732
U.S. Department of Veterans Affairs REMIC 1998-3C 6.50% 6/15/2021 7,500,000 7,192,950
-----------
349,432,756
-----------
Total U.S. Government Securities 550,366,537(1)
-----------
Other Investments 10.1% of net assets
Trust Certificates 1.3%
------------------------------------------------------------------------------------------------------------------------
Government Backed Trust Class T-3 9.625% 5/15/2002 1,875,033 1,893,109
Government Trust Certificates Class 2-E 9.40% 5/15/2002 5,943,480 5,990,730
-----------
7,883,839
-----------
Foreign Government 1.6%
------------------------------------------------------------------------------------------------------------------------
Government of New Zealand 8.00% 4/15/2004 925,000 NZD 382,340
Government of New Zealand 8.00% 11/15/2006 4,050,000 NZD 1,714,167
Republic of Greece 8.80% 6/19/2007 2,853,100,000 GRD 8,232,066
-----------
10,328,573
-----------
Finance/Mortgage 7.2%
------------------------------------------------------------------------------------------------------------------------
Bear Stearns Commercial Mortgage Securities Inc. 2000-2 Cl. A1 7.11% 9/15/2009 3,100,000 3,083,047
Chase Commercial Mortgage Securities Corp. 1996-2 Cl. A2 6.90% 9/19/2006 4,675,000 4,647,242
Chase Commercial Mortgage Securities Corp. 1997-1 Cl. A1 7.27% 7/19/2004 2,342,837 2,354,551
DLJ Commercial Mortgage Corp. Series 2000 Cl. 1 7.50% 9/10/2010 3,000,000 3,014,520
First Union Lehman Brothers Bank Series 1998-C2 Cl. A1 6.28% 6/18/2007 13,029,417 12,764,757
GMAC Commercial Mortgage Security Inc. 99-C1 Cl. A2 6.18% 5/15/2033 4,550,000 4,297,262
LB Commercial Conduit Mortgage Trust 97-LL1-A1 6.79% 6/12/2004 6,142,283 6,128,847
Merrill Lynch Mortgage Investments Inc. Series 1997-C2 Cl. A1 6.46% 12/10/2029 2,709,648 2,683,398
Merrill Lynch Mortgage Investments Inc. Series 1998-C2 Cl. A1 6.22% 2/15/2030 3,910,279 3,843,071
Morgan Stanley Capital Inc. 98-A1 6.19% 1/15/2007 1,939,081 1,940,292
-----------
44,756,987
-----------
Total Other Investments 62,969,399(2)
-----------
</TABLE>
--------------------------------------------------------------------------------
(1) The fund paid a total of $558,644,086 for these securities.
--------------------------------------------------------------------------------
(2) The fund paid a total of $65,888,250 for these securities.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
Coupon Maturity Amount Market
Issuer Rate Date of Principal Value
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper 10.9% of net assets
Federal Home Loan Bank 6.40% 11/01/2000 $ 3,790,000 $ 3,790,000
Federal Home Loan Bank 6.43% 11/03/2000 11,343,000 11,338,948
Federal Home Loan Bank 6.41% 11/03/2000 9,800,000 9,796,521
Federal Home Loan Bank 6.40% 11/03/2000 5,491,000 5,489,054
Federal National Mortgage Association 6.38% 11/01/2000 8,080,000 8,080,000
Federal National Mortgage Association 6.42% 11/02/2000 5,865,000 5,863,954
Federal National Mortgage Association 6.39% 11/02/2000 19,222,000 19,218,594
Federal National Mortgage Association 6.38% 11/02/2000 4,865,000 4,864,139
------------
Total Commercial Paper 68,441,210(1)
------------
<CAPTION>
Shares
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Investments 21.2% of net assets
State Street Navigator Securities Lending Prime Portfolio 132,800,424 $132,800,424
------------
Total Short-Term Investments 132,800,424(2)
------------
<CAPTION>
% of
Net Assets
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Summary of Portfolio Assets
Total Investments 130.2% $814,577,570
Cash and Other Assets, Less Liabilities (30.2%) (188,733,868)
----- ------------
Net Assets 100.0% $625,843,702(3)
===== ============
</TABLE>
--------------------------------------------------------------------------------
(1) The fund paid a total of $68,441,210 for these securities.
--------------------------------------------------------------------------------
(2) The fund paid a total of $132,800,424 for these securities.
--------------------------------------------------------------------------------
(3) The fund paid a total of $825,773,970 for these securities.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
14 State Street Research Government Income Fund
<PAGE>
Futures contracts open at October 31, 2000 are as follows:
<TABLE>
<CAPTION>
Notional Expiration Unrealized
Type Amount Month Depreciation
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10 year U.S. Treasury Notes $18,200,000 December, 2000 $(142,430)
---------
$(142,430)
=========
</TABLE>
Forward currency exchange contracts that were outstanding at October 31, 2000:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Transaction Total Value Price (Depreciation) Date
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Euro, Buy U.S. dollars 913,100 EUR 0.91423 EUR $59,196 11/20/00
Sell Euro, Buy U.S. dollars 822,400 EUR 0.84055 EUR (7,278) 11/20/00
Sell Greek drachma, Buy U.S. dollars 427,269,000 GRD 0.00269 GRD 80,024 11/09/00
Sell Greek drachma, Buy U.S. dollars 200,720,000 GRD 0.00269 GRD 38,090 11/20/00
Sell Greek drachma, Buy U.S. dollars 128,910,000 GRD 0.00257 GRD 9,445 12/11/00
Sell Greek drachma, Buy U.S. dollars 218,320,000 GRD 0.00257 GRD 16,111 12/11/00
Sell Greek drachma, Buy U.S. dollars 400,000,000 GRD 0.00248 GRD (9,935) 01/24/01
Sell New Zealand dollars, Buy U.S. dollars 495,000 NZD 0.45005 NZD 26,446 11/20/00
Sell New Zealand dollars, Buy U.S. dollars 2,029,000 NZD 0.44903 NZD 106,333 11/20/00
Sell New Zealand dollars, Buy U.S. dollars 2,015,000 NZD 0.40201 NZD 10,854 11/20/00
Sell New Zealand dollars, Buy U.S. dollars 677,000 NZD 0.40202 NZD 3,650 11/20/00
--------
$332,936
========
</TABLE>
Federal Income Tax Information
At October 31, 2000, the net unrealized depreciation of
investments based on cost for Federal income tax purposes of
$825,773,970 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 7,141,021
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (18,337,421)
------------
$(11,196,400)
============
At October 31, 2000, the fund had a capital loss carryforward of $33,669,306, of
which $17,196,293, $4,139,815, $5,115,196 and $7,218,002 expire on October 31,
2002, 2004, 2007 and 2008, respectively. Also, the fund acquired in a merger a
capital loss carryforward of $5,100,777, of which $3,074,207 and $2,026,570
expire on October 31, 2001 and 2002.
The text and notes are an integral part of the financial statements.
15
<PAGE>
Statement of
Assets and Liabilities October 31, 2000
--------------------------------------------------------------------------------
This is the fund's balance sheet as of the report date.
It shows the fund's total assets, its liabilities and, by subtraction, its net
assets. It also shows the price for share class as of the report date.
Assets
Investments, at value $814,577,570(1)
Cash 6,728
Receivable for securities sold 20,909,975
Interest receivable 8,575,400
Receivable for fund shares sold 2,274,636
Receivable for open forward contracts 350,149
Receivable for variation margin 41,771
Other assets 8,200
------------
846,744,429
Liabilities
Payable for collateral received on
securities loaned 132,800,424
Payable for securities purchased 84,472,044
Dividends payable 1,659,647
Payable for fund shares redeemed 956,228
Accrued management fee 312,521
Accrued transfer agent and shareholder services 262,257
Accrued distribution and service fees 236,901
Accrued administration fee 28,100
Payable for open forward contracts 17,213
Accrued trustees' fees 17,070
Other accrued expenses 138,322
------------
220,900,727
------------
Net Assets $625,843,702
============
Net Assets consist of:
Undistributed net investment income $1,521,256
Unrealized depreciation of investments (11,196,400)
Unrealized appreciation of forward contracts
and foreign currency 311,588
Unrealized depreciation of futures contracts (142,430)
Accumulated net realized loss (33,526,876)
Paid-in capital 668,876,564
------------
$625,843,702(2)
============
--------------------------------------------------------------------------------
(1) The fund paid a total of $825,773,970 for these securities.
--------------------------------------------------------------------------------
(2) Net Asset Value (NAV) of Each Share Class
Except where noted, the NAV is the offering and the redemption price for each
class.
Net Assets / Number of Shares = NAV
A $474,054,373 38,876,622 $12.19*
B(1) $34,533,130 2,851,772 $12.11**
B $84,326,502 6,941,136 $12.15**
C $19,511,957 1,604,685 $12.16**
S $13,417,740 1,101,592 $12.18
* Maximum offering price per share $12.76 ($12.19/.955)
** When you sell Class B(1), Class B or Class C shares, you receive the net
asset value minus deferred sales charge, if any.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
16 State Street Research Government Income Fund
<PAGE>
Statement of
Operations For the year ended October 31, 2000
--------------------------------------------------------------------------------
This shows what the fund earned and lost over the report period, and what its
expenses were.
Investment Income
Interest, net of foreign taxes $ 45,315,508(1)(2)
Expenses
Management fee 3,649,845(3)
Distribution and service fees-Class A 1,269,305(4)
Distribution and service fees-Class B(1) 286,493(4)
Distribution and service fees-Class B 920,130(4)
Distribution and service fees-Class C 213,806(4)
Transfer agent and shareholder services 1,045,780(5)
Custodian fee 229,944
Registration fees 92,905
Audit fee 68,016
Reports to shareholders 67,707
Trustees' fees 42,971
Administration fee 28,100(6)
Legal fees 15,370
Miscellaneous 26,454
------------
7,956,826
Fees paid indirectly (27,575)(7)
------------
7,929,251
------------
Net investment income 37,386,257
------------
Realized and Unrealized Gain (Loss)
on Investments, Forward Contracts, Foreign
Currency and Futures Contracts
Net realized loss on investments (6,102,393)(8)
Net realized gain on forward contracts
and foreign currency 2,618,056
Net realized loss on futures contracts (2,854,246)
------------
Total net realized loss (6,338,583)
------------
Change in unrealized appreciation of investments 6,326,480
Change in unrealized depreciation
of forward contracts and foreign currency (53,315)
Change in unrealized depreciation
of futures contracts (179,370)
------------
Total change in unrealized appreciation 6,093,795
------------
Net loss on investments, forward contracts,
foreign currency and futures contracts (244,788)
------------
Net increase in net assets resulting
from operations $ 37,141,469
------------
--------------------------------------------------------------------------------
(1) The fund paid foreign taxes of $24,664.
--------------------------------------------------------------------------------
(2) Includes $158,893 in income from the lending of portfolio securities. As
of the report date, the fund had a total of $130,040,107 of securities out
on loan and was holding a total of $132,800,424 in collateral related to
those loans.
--------------------------------------------------------------------------------
(3) The management fee is 0.60% of the first $500 million of fund assets,
annually, 0.55% of the next $500 million, and 0.50% of any amount over $1
billion.
--------------------------------------------------------------------------------
(4) Payments made to the distributor under the fund's 12b-1 plans. The fees
cover personal services and the maintenance of shareholder accounts. The
fees also cover distribution and marketing expenditures for the sale of
fund shares.
--------------------------------------------------------------------------------
(5) Includes a total of $658,561 paid to the distributor for the services it
provided and to MetLife for similar services it provided, including
maintaining the accounts of some investors who hold shares through that
firm's employee benefit plans and other sponsored arrangements.
--------------------------------------------------------------------------------
(6) Payments made to the investment manager for certain adminis-trative costs
incurred in providing accounting services to the fund.
--------------------------------------------------------------------------------
(7) Represents transfer agent credits earned from uninvested cash balances.
--------------------------------------------------------------------------------
(8) To earn this, the fund sold $919,680,065 of securities. During this same
period, the fund also bought $897,733,362 worth of securities. These
figures don't include short-term obligations.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
17
<PAGE>
Statement of
Changes in Net Assets
--------------------------------------------------------------------------------
This shows how the fund's size changed over the report period, including changes
that resulted from investments performing as well as those that resulted from
shareholders buying and selling fund shares.
Years ended October 31
----------------------------------------------------------------------------
1999 2000
----------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $39,129,270 $37,386,257
Net realized loss on investments,
forward contracts, foreign currency
and futures contracts (5,885,622) (6,338,583)
Change in unrealized appreciation
(depreciation) of investments,
forward contracts, foreign currency
and futures contracts (40,964,747) 6,093,795
---------------------------
Net increase (decrease)
resulting from operations (7,721,099) 37,141,469
---------------------------
Dividends from net investment income:
Class A (30,163,284) (29,494,303)
Class B(1) (584,095) (1,626,196)
Class B (6,293,781) (5,243,540)
Class C (1,534,694) (1,218,853)
Class S (1,279,031) (983,556)
---------------------------
(39,854,885) (38,566,448)
---------------------------
Net decrease from
fund share transactions (4,192,129) (28,717,872)(1)
---------------------------
Total decrease in net assets (51,768,113) (30,142,851)
---------------------------
Net Assets
Beginning of year 707,754,666 655,986,553
---------------------------
End of year $655,986,553 $625,843,702(2)
===========================
--------------------------------------------------------------------------------
(2) Includes undistributed net investment income of $2,234,804 and $1,521,256,
respectively.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
18 State Street Research Government Income Fund
<PAGE>
--------------------------------------------------------------------------------
(1) These transactions break down by share class as follows:
<TABLE>
<CAPTION>
Years ended October 31
-------------------------------------------------------------------
1999 2000
-------------------------------------------------------------------
Class A Shares Amount Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 18,496,573 $233,070,669 11,400,981 $137,514,812*
Issued upon reinvestment of dividends from net investment income 1,452,763 18,264,542 1,622,020 19,735,001
Shares redeemed (20,253,359) (254,382,165) (13,511,910) (162,980,841)
-------------------------------------------------------------------
Net decrease (304,023) ($3,046,954) (488,909) ($5,731,028)
===================================================================
<CAPTION>
Class B(1) Shares (a) Amount (a) Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 2,235,815 27,939,669 1,297,373 $15,547,635**
Issued upon reinvestment of dividends from net investment income 40,538 497,196 117,440 1,407,555
Shares redeemed (278,249) (3,442,549) (561,145) (6,702,853)***
-------------------------------------------------------------------
Net increase 1,998,104 $24,994,316 853,668 $10,252,337
===================================================================
<CAPTION>
Class B Shares Amount Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 1,837,925 $23,525,800 372,156 $4,445,531**
Issued upon reinvestment of dividends from net investment income 356,123 4,468,410 340,157 4,128,454
Shares redeemed (3,382,645) (42,650,050) (2,555,822) (30,697,842)***
-------------------------------------------------------------------
Net decrease (1,188,597) ($14,655,840) (1,843,509) ($22,123,857)
===================================================================
<CAPTION>
Class C Shares Amount Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 1,426,771 $17,998,565 679,695 $8,145,053**
Issued upon reinvestment of dividends from net investment income 81,440 1,019,668 92,810 1,134,466
Shares redeemed (1,508,907) (18,757,082) (1,288,291) (15,471,513)****
-------------------------------------------------------------------
Net increase (decrease) (696) $261,151 (515,786) ($6,191,994)
===================================================================
<CAPTION>
Class S Shares Amount Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Shares sold 691,706 $8,684,219 343,324 $4,121,627
Issued upon reinvestment of dividends from net investment income 68,557 859,445 64,164 772,304
Shares redeemed (1,662,738) (21,288,466) (812,478) (9,817,261)
-------------------------------------------------------------------
Net decrease (902,475) ($11,744,802) (404,990) ($4,923,330)
===================================================================
</TABLE>
The trustees have the authority to issue an unlimited number of fund
shares, with a $.001 par value per share. At October 31, 2000 MetLife
owned 104,725 Class S shares.
* Sales charges of $41,159 and $205,827 were collected by the distributor
and MetLife on sales of these shares.
** Like all broker-dealers, MetLife received commissions that were calculated
as a percentage of these sales but the commissions of $308,963, $645 and
$437 for Class B(1), Class B and Class C were paid by the distributor, not
the fund.
*** Includes $100,457 and $166,464 in deferred sales charges collected by the
distributor for Class B(1) and Class B.
**** Includes $13,541 in deferred sales charges collected by the distributor.
(a) January 1, 1999 (commencement of share class) to October 31, 1999.
--------------------------------------------------------------------------------
The text and notes are an integral part of the financial statements.
19
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
These provide a summary of each share class's financial performance.
<TABLE>
<CAPTION>
Class A
===============================================================
Years ended October 31
---------------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.58 12.43 12.65 13.07 12.21
------- ------- ------- ------- -------
Net investment income ($) 0.81 0.80 0.78 0.74 0.75
Net realized and unrealized gain (loss) on investments, options,
forward contracts, foreign currency and futures contracts ($) (0.17) 0.22 0.43 (0.85) 0.00
------- ------- ------- ------- -------
Total from investment operations ($) 0.64 1.02 1.21 (0.11) 0.75
------- ------- ------- ------- -------
Dividends from net investment income ($) (0.79) (0.80) (0.79) (0.75) (0.77)
------- ------- ------- ------- -------
Total distributions ($) (0.79) (0.80) (0.79) (0.75) (0.77)
------- ------- ------- ------- -------
Net asset value, end of year ($) 12.43 12.65 13.07 12.21 12.19
======= ======= ======= ======= =======
Total return (%) (b) 5.28 8.52 9.85 (0.84) 6.41
Ratios/Supplemental Data
===================================================================================================================================
Net assets at end of year ($ thousands) 584,313 524,565 518,651 480,643 474,054
Expense ratio (%) 1.09 1.08 1.09 1.05 1.13
Expense ratio after expense reductions (%) 1.09 1.08 1.09 1.04 1.13
Ratio of net investment income to
average net assets (%) 6.50 6.44 6.11 5.86 6.21
Portfolio turnover rate (%) 88.79 124.95 160.89 213.70 148.88
</TABLE>
<TABLE>
<CAPTION>
Class B(1)
==================================================
January 1, 1999
(commencement of operations) Year ended
Per Share Data to October 31, 1999 (a) October 31, 2000 (a)
=============================================================================================================================
<S> <C> <C>
Net asset value, beginning of year ($) 12.97 12.14
------ ------
Net investment income ($) 0.52 0.65
Net realized and unrealized gain (loss) on investments, options,
forward contracts, foreign currency and futures contracts ($) (0.82) 0.01
------ ------
Total from investment operations ($) (0.30) 0.66
------ ------
Dividends from net investment income ($) (0.53) (0.69)
------ ------
Total distributions ($) (0.53) (0.69)
------ ------
Net asset value, end of year ($) 12.14 12.11
====== ======
Total return (%) (b) (2.31) (c) 5.60
Ratios/Supplemental Data
=============================================================================================================================
Net assets at end of year ($ thousands) 24,250 34,533
Expense ratio (%) 1.80 (d) 1.85
Expense ratio after expense reductions (%) 1.79 (d) 1.85
Ratio of net investment income to
average net assets (%) 5.01 (d) 5.44
Portfolio turnover rate (%) 213.70 148.88
</TABLE>
The text and notes are an integral part of the financial statements.
20 State Street Research Government Income Fund
<PAGE>
<TABLE>
<CAPTION>
Class B
=============================================================================
Years ended October 31
-----------------------------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.55 12.40 12.61 13.03 12.17
------ ------ ------- ------- ------
Net investment income ($) 0.71 0.70 0.68 0.64 0.65
Net realized and unrealized gain (loss)
on investments, options, forward contracts,
foreign currency and futures contracts ($) (0.16) 0.22 0.43 (0.84) 0.02
------ ------ ------- ------- ------
Total from investment operations ($) 0.55 0.92 1.11 (0.20) 0.67
------ ------ ------- ------- ------
Dividends from net investment income ($) (0.70) (0.71) (0.69) (0.66) (0.69)
------ ------ ------- ------- ------
Total distributions ($) (0.70) (0.71) (0.69) (0.66) (0.69)
------ ------ ------- ------- ------
Net asset value, end of year ($) 12.40 12.61 13.03 12.17 12.15
====== ====== ======= ======= ======
Total return (%) (b) 4.51 7.66 9.07 (1.58) 5.67
Ratios/Supplemental Data
================================================================================================================================
Net assets at end of year ($ thousands) 95,218 97,253 129,976 106,902 84,327
Expense ratio (%) 1.84 1.83 1.84 1.80 1.85
Expense ratio after expense reductions (%) 1.84 1.83 1.84 1.79 1.85
Ratio of net investment income to
average net assets (%) 5.75 5.68 5.33 5.12 5.49
Portfolio turnover rate (%) 88.79 124.95 160.89 213.70 148.88
</TABLE>
<TABLE>
<CAPTION>
Class C
=============================================================================
Years ended October 31
-----------------------------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.56 12.41 12.62 13.04 12.18
------ ------ ------ ------ ------
Net investment income ($) 0.71 0.70 0.67 0.64 0.66
Net realized and unrealized gain (loss)
on investments, options, forward contracts,
foreign currency and futures contracts ($) (0.16) 0.22 0.44 (0.84) 0.01
------ ------ ------ ------ ------
Total from investment operations ($) 0.55 0.92 1.11 (0.20) 0.67
------ ------ ------ ------ ------
Dividends from net investment income ($) (0.70) (0.71) (0.69) (0.66) (0.69)
------ ------ ------ ------ ------
Total distributions ($) (0.70) (0.71) (0.69) (0.66) (0.69)
------ ------ ------ ------ ------
Net asset value, end of year ($) 12.41 12.62 13.04 12.18 12.16
====== ====== ====== ====== ======
Total return (%) (b) 4.51 7.65 9.06 (1.58) 5.66
Ratios/Supplemental Data
================================================================================================================================
Net assets at end of year ($ thousands) 14,473 16,301 27,659 25,818 19,512
Expense ratio (%) 1.84 1.83 1.84 1.80 1.85
Expense ratio after expense reductions (%) 1.84 1.83 1.84 1.79 1.85
Ratio of net investment income to average
net assets (%) 5.76 5.68 5.28 5.11 5.50
Portfolio turnover rate (%) 88.79 124.95 160.89 213.70 148.88
</TABLE>
(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.
The text and notes are an integral part of the financial statements.
21
<PAGE>
Financial Highlights CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class S
=============================================================================
Years ended October 31
-----------------------------------------------------------------------------
Per Share Data 1996 (a) 1997 (a) 1998 (a) 1999 (a) 2000 (a)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.57 12.42 12.64 13.06 12.20
----- ------ ------ ------ ------
Net investment income ($) 0.84 0.80 0.81 0.75 0.78
Net realized and unrealized gain (loss)
on investments, options, forward contracts,
foreign currency and futures contracts ($) (0.17) 0.25 0.43 (0.83) 0.01
----- ------ ------ ------ ------
Total from investment operations ($) 0.67 1.05 1.24 (0.08) 0.79
----- ------ ------ ------ ------
Dividends from net investment income ($) (0.82) (0.83) (0.82) (0.78) (0.81)
----- ------ ------ ------ ------
Total distributions ($) (0.82) (0.83) (0.82) (0.78) (0.81)
----- ------ ------ ------ ------
Net asset value, end of year ($) 12.42 12.64 13.06 12.20 12.18
===== ====== ====== ====== ======
Total return (%) (b) 5.55 8.80 10.13 (0.60) 6.71
Ratios/Supplemental Data
================================================================================================================================
Net assets at end of year ($ thousands) 7,767 32,115 31,468 18,373 13,418
Expense ratio (%) 0.84 0.82 0.84 0.80 0.85
Expense ratio after expense reductions (%) 0.84 0.82 0.84 0.79 0.85
Ratio of net investment income to
average net assets (%) 6.78 6.66 6.38 5.94 6.39
Portfolio turnover rate (%) 88.79 124.95 160.89 213.70 148.88
</TABLE>
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges.
The text and notes are an integral part of the financial statements.
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Government Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio holdings, and the related statements of operations and of changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of State Street Research Government Income Fund
(a series of State Street Research Financial Trust, hereafter referred to as the
"Trust") at October 31, 2000, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 2000
22 State Street Research Government Income Fund
<PAGE>
Board of Trustees
Richard S. Davis
Chairman of the Board,
President, Chief Executive Officer and Director,
State Street Research & Management Company
Bruce R. Bond
Former Chairman of the Board,
Chief Executive Officer and President,
PictureTel Corporation
Steve A. Garban
Former Senior Vice President
for Finance and Operations and Treasurer,
The Pennsylvania State University
Dean O. Morton
Former Executive Vice President,
Chief Operating Officer and Director,
Hewlett-Packard Company
Susan M. Phillips
Dean, School of Business and Public Management,
George Washington University; former Member of
the Board of Governors of the Federal Reserve
System and Chairman and Commissioner of the
Commodity Futures Trading Commission
Toby Rosenblatt
President, Founders Investments Ltd.
President, The Glen Ellen Company
Michael S. Scott Morton
Jay W. Forrester Professor of Management,
Sloan School of Management,
Massachusetts Institute of Technology
23
<PAGE>
[LOGO] STATE STREET RESEARCH
One Financial Center o Boston, MA 02111
-----------------
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PERMIT NO. 20
-----------------
Contact Information for
INVESTOR SERVICES
--------------------------------------------------------------------------------
New accounts, mutual fund purchases, exchanges and
account information
[INTERNET] internet
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[COMPUTER] e-mail
[email protected]
[PHONE] phone
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For 24-hour
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----------------
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OverView
---------------------------------------
For more information on the products
and services mentioned in OverView,
our shareholder newsletter, visit our
Web site at www.statestreetresearch.com
State Street Research
FYI
--------------------------------------------------------------------------------
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.
---------------------------
[LOGO]
DALBAR
HONORS COMMITMENT TO:
INVESTORS
1999
---------------------------
for Excellence in Service
1 An investment in the State Street Research Money Market Fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the fund.
--------------------------------------------------------------------------------
This report must be accompanied or preceded by a current State Street Research
Government Income Fund prospectus. When used after December 31, 2000 this report
must be accompanied by a current Quarterly Performance Update.
To obtain a prospectus of any State Street Research fund call 1-87-SSR-FUNDS
(1-877-773-8637). The prospectus contains more complete information, including
sales charges and expenses. Please read the prospectus carefully before
investing or sending money.
The Dalbar awards recognize quality shareholder service and 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
industry-wide.
State Street Research
Spectrum of Funds
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Growth & Income Growth
--------------------------------------------------------------------------------------------------
CONSERVATIVE AGGRESSIVE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
High Income Fund Argo Fund Global Resources Fund
Strategic Income Fund Investment Trust Emerging Growth Fund
New York Tax-Free Fund Alpha Fund Health Sciences Fund
Tax-Exempt Fund Strategic Growth & Income Fund Mid-Cap Growth Fund(1)
Government Income Fund Strategic Income Plus Fund Aurora Fund
Money Market Fund(2) Concentrated International Fund
International Equity Fund
Concentrated Growth Fund
Growth Fund
Galileo Fund
Legacy Fund
</TABLE>
(C)2000 State Street Research Investment Services, Inc.,
One Financial Center, Boston, MA 02111
Control Number:(exp1201)SSR-LD GI-2849-1200
<PAGE>
-------------------------------------------------------------------------------
STATE STREET RESEARCH
-------------------------------------------------------------------------------
STRATEGIC PORTFOLIOS: AGGRESSIVE
--------------------------------
ANNUAL REPORT
October 31, 2000
--------------------
WHAT'S INSIDE
--------------------
FROM THE CHAIRMAN
U.S. economy glides
to a slower pace
PORTFOLIO MANAGER'S REVIEW
Emphasis on bonds, Good stock selection
raises performance above peers
FUND INFORMATION
Facts and figures
PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS
-------------------
[DALBAR LOGO]
-------------------
For Excellence
in
Service
[Logo] STATE STREET RESEARCH
<PAGE>
FROM THE CHAIRMAN
[PHOTO OF RICHARD DAVIS]
DEAR SHAREHOLDER:
With no further interest rate changes since May, it appears that the
Federal Reserve has managed to orchestrate a modest slowdown of the U.S.
economy without harsh effects on consumers, workers or markets. Economic
growth has found a slower pace in the past two quarters. As a result, the
Fed has let short-term interest rates stand in its past three meetings.
However, it continues to warn that it is concerned about the tight labor
market, relatively high consumer spending and rising energy prices, any of
which could boost inflation higher.
STOCKS
The S&P Index returned 6.1% over the 12 months ended October 2000.(1) The
technology-driven Nasdaq returned 13.8%. However, it lost significant
ground in the second half of the fund's fiscal year. The best performing
group was mid-cap growth stocks, which soared 38.7% over the same period as
measured by the Russell Midcap Growth Index.(2)
BONDS
Long-term U.S. Treasury bonds were helped by optimism about the economic
slowdown plus a federal buyback of bonds. Government, mortgage and
municipal bonds were strong performers. Corporate bonds eked out modest
returns while high-yield bonds were weak, a reflection of slower economic
growth and rising defaults among telecommunications companies.
INTERNATIONAL
Global economic growth improved to over 4.0% compared to 2.0% two years
ago, according to the Organization for Economic Cooperation and Development
(OECD). Nearly all foreign stock markets delivered disappointing returns.
The few bright spots for the year included Canada and Israel.
OUTLOOK AND OPPORTUNITIES
It's a pleasure to have this opportunity to speak directly to shareholders
in my new capacity as President and Chief Executive Officer of State Street
Research & Management Company. Although it has been a challenging year for
stock market investors, there have been areas of opportunity among bonds
and certain sectors of the stock market, such as natural resources and mid-
cap stocks. The lesson? Diversification is still the best way to reduce the
impact of volatility. Now is a good time to consult your financial
professional for a review of the components of your portfolio. As always,
we thank you for your confidence in State Street Research.
Sincerely,
/s/ Richard S. Davis
Richard S. "Dick" Davis
President and Chief Executive Officer
State Street Research & Management Company
(1) The S&P 500 (officially the "S&P 500 Composite Stock Price Index") is an
unmanaged index of 500 U.S. stocks. The index does not take transaction charges
into consideration. It is not possible to invest directly in the index.
(2)The Russell Midcap Growth Index contains only those stocks within the
complete Russell Midcap Index (a mid-sized company index) that show above
average growth. The index does not take transaction charges into consideration.
It is not possible to invest directly in the index. Lipper Flexible Portfolio
Funds Average shows the performance of a category of mutual funds with similar
goals. The Lipper Average shows how well the fund has done compared with
competing funds.
(3)Keep in mind that past performance is no guarantee of future results. The
fund's share price, yield and return will fluctuate, and you may have a gain or
loss when you sell your shares. All returns assume reinvestment of capital gains
distributions and income dividends at net asset value.
(4)Class S shares, offered without a sales charge, are available through certain
employee benefit plans and special programs.
PLEASE NOTE THAT THE DISCUSSION THROUGHOUT THIS SHAREHOLDER REPORT IS DATED AS
INDICATED AND, BECAUSE OF POSSIBLE CHANGES IN VIEWPOINT, DATA AND TRANSACTIONS,
SHOULD NOT BE RELIED UPON AS BEING CURRENT THEREAFTER.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
<S> <C>
FUND INFORMATION (all data are for periods ended October 31, 2000, except where noted)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN(3)(4)
FOR PERIODS ENDED 9/30/00
-------------------------------------------------------------
LIFE OF FUND
(since 5/16/94) 5 YEARS 1 YEAR
-------------------------------------------------------------
Class S 14.70% 14.69% 21.75%
-------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN(3)(4)
-------------------------------------------------------------
LIFE OF FUND
(since 5/16/94) 5 YEARS 1 YEAR
-------------------------------------------------------------
Class S 14.08% 14.77% 16.27%
-------------------------------------------------------------
<PAGE>
PORTFOLIO MANAGER'S REVIEW
Strategic Portfolios: Aggressive: Emphasis on Bonds, Good Stock Selection
Raises Performance Above Peers
[PHOTO OF JACK KALLIS]
Jack Kallis
Portfolio Manager
We spoke with Jack Kallis, portfolio manager of State Street Research Strategic
Portfolios: Aggressive, about the year ended October 31, 2000 and his views on
the year ahead.
Q: HOW DID THE FUND PERFORM LAST YEAR?
A: It was a strong year for the fund. Class S shares returned 16.27% for the 12
months ended October 31, 2000. That was significantly higher than the Lipper
Flexible Portfolio Funds Average which generated a positive return of 9.34%.
Q: WHAT ACCOUNTED FOR THE FUND'S STRONG PERFORMANCE?
A: In a good year for bonds and a rocky year for stocks, the fund benefited from
investments in both. The fund maintained a heavy weighting in bonds, which
gained ground in most sectors as intermediate and long-term interest rates came
down after the Federal Reserve finished raising interest rates. Stocks were
underweighted versus the fund's normal asset allocation. However, stock
selection among large- and small-cap growth stocks helped the fund's equity
performance.
Q: DID YOU MAKE ANY CHANGES TO THE PORTFOLIO DURING THE YEAR?
A: Near the end of the period, we increased the fund's investment in stocks from
73% to 75% -- still five points under its normal position. We also shifted a
small percentage out of international and cash to add to value stocks. If
economic growth continues to slow, we believe the fund's value tilt could be a
plus.
Q: WHERE WERE THE FUND'S DISAPPOINTMENTS?
A: The fund's investments in high-yield and nondollar bonds hurt performance. In
general, it was a challenging year for the high-yield market. When the economy
slows, the rate of default among high-yield bonds rises and that was the case
this year. International bonds suffered from a weak euro.
Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD? A: If the economy continues to
maintain slow, steady growth, it could be a better environment for stocks and
another good year for bonds. The fund is well positioned for that environment,
with an emphasis on bond sectors that have lagged this year and a tilt toward
value stocks. If the euro strengthens, that would also boost the fund's modest
investment in international bonds.
October 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Equities 73% Ace 2.0% Drugs &
Cash 5% Anadarko 1.3% Biotechnology 6.2%
Bonds 22% EMC 1.2% Communications
Citigroup 1.2% Technology 4.4%
AMBAC 1.1% Miscellaneous
Total: 6.8% Financial 4.3%
Insurance 4.2%
Multi-Sector 3.5%
Total: 22.6%
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
--------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
October 31, 2000
--------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
--------------------------------------------------------------------------------
EQUITY SECURITIES 72.5%
AUTOMOBILES & TRANSPORTATION 1.4%
AUTOMOTIVE PARTS 0.6%
Delphi Automotive Systems Corp. ...................... 22,600 $ 354,537
-----------
RAILROADS 0.3%
Canadian Pacific Ltd. ................................ 5,300 153,535
-----------
TRUCKERS 0.5%
CNF Transportation Inc. .............................. 12,100 322,919
-----------
Total Automobiles & Transportation ................... 830,991
-----------
CONSUMER DISCRETIONARY 10.2%
ADVERTISING AGENCIES 0.9%
Valassis Communications Inc.* ........................ 19,200 532,800
-----------
CASINOS/GAMBLING, HOTEL/MOTEL 2.3%
Extended Stay America Inc.* .......................... 7,700 94,806
Harrah's Entertainment Inc.* ......................... 13,565 388,298
Hilton Hotels Corp. .................................. 32,900 312,550
International Game Technology Inc.* .................. 15,592 571,057
Motels of America Inc.*+ ............................. 175 44
-----------
1,366,755
-----------
COMMERCIAL SERVICES 2.4%
A.C. Nielsen Corp.* .................................. 17,800 426,088
Cendant Corp.* ....................................... 38,900 466,800
Corporate Executive Board Co.* ....................... 1,400 64,575
Hotel Reservations Network Inc. Cl. A* ............... 5,400 189,000
Republic Services Inc.* .............................. 21,200 284,875
-----------
1,431,338
-----------
COMMUNICATIONS, MEDIA & ENTERTAINMENT 1.1%
TiVo Inc.* ........................................... 12,600 164,588
Walt Disney Co. ...................................... 8,500 304,406
World Wrestling Federation Entertainment Inc. Cl. A* . 12,000 181,500
-----------
650,494
-----------
CONSUMER PRODUCTS 0.3%
Oakley Inc.* ......................................... 9,500 199,500
-----------
PRINTING & PUBLISHING 1.0%
Hollinger International, Inc. Cl. A .................. 39,600 611,325
-----------
RESTAURANTS 0.4%
Darden Restaurants Inc. .............................. 11,300 254,250
-----------
RETAIL 1.8%
Federated Department Stores Inc.* .................... 11,300 367,956
Home Depot Inc. ...................................... 2,600 111,800
Staples Inc.* ........................................ 20,900 297,825
TJX Companies, Inc. .................................. 11,900 324,275
-----------
1,101,856
-----------
Total Consumer Discretionary ......................... 6,148,318
-----------
CONSUMER STAPLES 2.1%
BEVERAGES 0.8%
Anheuser-Busch Companies, Inc. ....................... 10,200 466,650
-----------
DRUG & GROCERY STORE CHAINS 0.5%
Safeway Inc.* ........................................ 5,500 300,781
-----------
FOODS 0.3%
Unilever ............................................. 28,500 192,804
-----------
TOBACCO 0.5%
UST Inc. ............................................. 12,600 318,150
-----------
Total Consumer Staples ............................... 1,278,385
-----------
FINANCIAL SERVICES 10.5%
BANKS & SAVINGS & LOAN 2.0%
BankNorth Group Inc.* ........................ 12,162 220,436
Golden West Financial Corp.* ................. 5,600 313,950
Hudson City Bancorp Inc. ..................... 6,400 116,400
Investors Financial Services Co. ............. 2,000 143,376
Mercantile Bankshares Corp. .................. 4,900 184,362
North Fork BanCorp., Inc. .................... 5,600 113,050
SouthTrust Corp. ............................. 3,100 100,363
-----------
1,191,937
-----------
INSURANCE 4.2%
Ace Ltd. ..................................... 30,800 1,208,900
Everest Reinsurance Group, Ltd. .............. 2,700 158,287
Partnerre Ltd.* .............................. 2,500 136,250
Saint Paul Companies, Inc. ................... 9,500 486,875
XL Capital Ltd. Cl. A ........................ 7,650 588,094
-----------
2,578,406
-----------
MISCELLANEOUS FINANCIAL 4.3%
AMBAC Financial Group, Inc. .................. 8,200 654,462
Citigroup, Inc. .............................. 13,400 705,175
Marsh & McLennan Companies, Inc. ............. 3,300 431,475
MBNA Corp. ................................... 10,640 399,665
Metris Companies Inc. ........................ 2,300 74,463
Morgan Stanley Dean Witter & Co. ............. 4,200 337,313
-----------
2,602,553
-----------
Total Financial Services ..................... 6,372,896
-----------
HEALTH CARE 8.2%
DRUGS & BIOTECHNOLOGY 6.2%
Abbott Laboratories Inc. ..................... 7,340 387,644
Alpharma Inc. ................................ 3,800 147,487
Amgen Inc.* .................................. 4,250 246,234
Barr Laboratories, Inc.* ..................... 3,500 220,937
Biogen Inc.* ................................. 4,000 240,750
Biovail Corp.* ............................... 1,200 50,475
Cephalon Inc.* ............................... 900 48,263
DYAX Corp.* .................................. 4,300 159,637
Esperion Therapeutics Inc.* .................. 4,100 56,631
Genentech, Inc.* ............................. 1,600 132,000
Genzyme Corp.* ............................... 2,600 184,600
Intermune Pharmaceuticals Inc.* .............. 4,400 222,001
Invitrogen Corp.* ............................ 2,500 190,156
Pain Therapeutics Inc.* ...................... 2,800 60,025
Pfizer Inc. .................................. 12,375 534,445
Pharmacia Corp. .............................. 10,570 581,350
Priority Healthcare Corp. Cl. B* ............. 2,600 139,750
Versicor Inc.* ............................... 6,100 80,063
XOMA Ltd.* ................................... 3,800 46,313
-----------
3,728,761
-----------
HEALTH CARE FACILITIES 0.1%
Tenet Healthcare Corp.* ...................... 2,000 78,625
-----------
HEALTH CARE SERVICES 0.6%
Community Health Systems Inc.* ............... 6,500 183,219
Lincare Holdings Inc.* ....................... 4,500 189,281
-----------
372,500
-----------
HOSPITAL SUPPLY 1.3%
American Medical Systems Inc.* ............... 13,900 244,987
Aradigm Corp.* ............................... 3,700 81,863
Sybron International Corp.* .................. 6,800 168,300
Zoll Medical Corp.* .......................... 5,500 272,594
-----------
767,744
-----------
Total Health Care ............................ 4,947,630
-----------
INTEGRATED OILS 2.0%
INTEGRATED DOMESTIC 1.2%
Petroleo Brasileiro SAADR* ................... 4,600 133,688
Unocal Corp. ................................. 10,700 365,137
USX-Marathon Group ........................... 7,500 203,906
-----------
702,731
-----------
INTEGRATED INTERNATIONAL 0.8%
Exxon Mobil Corp. ............................ 4,020 358,534
Petro-Canada Ltd. ADR* ....................... 7,400 155,400
-----------
513,934
-----------
Total Integrated Oils ........................ 1,216,665
-----------
MATERIALS & PROCESSING 3.4%
BUILDING & CONSTRUCTION 0.2%
York International Corp. ..................... 5,100 138,656
-----------
CHEMICALS 0.9%
Cambrex Corp. ................................ 2,000 79,875
Rohm & Haas Co. .............................. 11,800 354,737
Solutia Inc. ................................. 6,900 87,975
-----------
522,587
-----------
DIVERSIFIED MANUFACTURING 0.6%
Ball Corp. ................................... 10,400 365,300
-----------
FERTILIZERS 0.3%
Agrium Inc. .................................. 14,900 155,519
-----------
PAPER & FOREST PRODUCTS 0.9%
Fort James Corp. ............................. 10,340 340,574
Westvaco Corp. ............................... 6,400 182,400
-----------
522,974
-----------
STEEL 0.5%
Harsco Corp. ................................. 8,000 161,500
Nucor Corp. .................................. 5,100 174,704
-----------
336,204
-----------
Total Materials & Processing ................. 2,041,240
-----------
OTHER 3.5%
MULTI-SECTOR 3.5%
General Electric Co.* ........................ 11,600 635,825
Monsanto Co. ................................. 12,700 323,850
Ogden Corp.* ................................. 28,700 394,625
SPX Corp.* ................................... 1,800 222,525
Tyco International Ltd.* ..................... 9,300 527,194
-----------
Total Other .................................. 2,104,019
-----------
OTHER ENERGY 3.6%
OIL & GAS PRODUCERS 2.4%
Anadarko Petroleum Corp. ..................... 11,998 768,472
Burlington Resources Inc. .................... 3,400 122,400
Cabot Oil & Gas Corp. Cl. A .................. 1,800 35,325
Cross Timbers Oil Co. ........................ 2,550 47,972
HS Resources, Inc.* .......................... 1,100 34,238
Hydrogenics Corp ............................. 1,700 20,506
Ocean Energy Inc.* ........................... 26,600 369,075
St. Mary Land & Exploration Co. .............. 3,600 84,375
-----------
1,482,363
-----------
OIL WELL EQUIPMENT & SERVICES 1.2%
Baker Hughes Inc. ................................ 4,700 161,562
Halliburton Co.* ................................. 9,860 365,436
National Oilwell Inc.* ........................... 2,854 83,480
Veritas DGC Inc.* ................................ 3,800 114,000
-----------
724,478
-----------
Total Other Energy ............................... 2,206,841
-----------
PRODUCER DURABLES 1.5%
ELECTRONICS: INDUSTRIAL 0.3%
ASM Lithography Holdings Inc.* ................... 7,000 191,334
-----------
INDUSTRIAL PRODUCTS 0.1%
Parker Hannifin Corp. ............................ 1,100 45,512
-----------
OFFICE FURNITURE & BUSINESS EQUIPMENT 0.4%
Pitney Bowes Inc. ................................ 8,400 249,375
-----------
TELECOMMUNICATIONS EQUIPMENT 0.7%
American Tower Corp. Cl. A* ...................... 4,300 176,031
Endwave Corp.* ................................... 1,800 25,875
MCK Communications Inc.* ......................... 13,500 210,938
-----------
412,844
-----------
Total Producer Durables .......................... 899,065
-----------
TECHNOLOGY 14.0%
COMMUNICATIONS TECHNOLOGY 4.4%
Cisco Systems Inc.* .............................. 7,190 387,361
Comverse Technology Inc.* ........................ 2,450 273,787
Corning Inc. ..................................... 5,100 391,335
DMC Stratex Networks Inc.* ....................... 9,620 222,463
General Motors Corp. Cl. H* ...................... 5,700 184,680
Inrange Technologies Corp. Cl. B* ................ 300 10,988
Natural Microsystems Corp.* ...................... 2,300 103,931
NCR Corp.* ....................................... 4,400 189,750
Nortel Networks Corp. ............................ 11,300 513,362
Packeteer Inc.* .................................. 5,800 144,275
Spectrasite Holdings, Inc.* ...................... 12,300 242,925
-----------
2,664,857
-----------
COMPUTER SOFTWARE 2.9%
Acxiom Corp.* .................................... 10,000 402,500
Click Commerce, Inc.* ............................ 2,800 80,150
E Piphany Inc.* .................................. 3,000 270,375
i2 Technologies Inc.* ............................ 1,850 314,500
Manugistics Group Inc.* .......................... 2,400 273,450
Microsoft Corp.* ................................. 5,350 368,481
Vastera, Inc.* ................................... 2,000 35,500
-----------
1,744,956
-----------
COMPUTER TECHNOLOGY 1.9%
EMC Corp.* ....................................... 8,340 742,782
Radiant Systems Inc.* ............................ 7,500 138,281
Sun Microsystems Inc.* ........................... 2,560 283,840
-----------
1,164,903
-----------
ELECTRONICS 2.7%
Aeroflex Inc.* ................................... 9,375 557,812
Nokia Corp. ADR .................................. 9,200 393,300
PE Biosystems Group Corp. ........................ 5,050 590,850
Rockwell International Corp. ..................... 2,800 110,075
-----------
1,652,037
-----------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS 2.1%
Analog Devices Inc.* ............................. 2,200 143,000
Cree Inc.* ....................................... 2,000 198,500
Cypress Semiconductor Corp.* ..................... 2,650 99,209
Galileo Technology Ltd.* ......................... 1,600 43,400
International Rectifier Corp.* ................... 4,800 214,200
Texas Instruments Inc. ........................... 5,400 264,938
TriQuint Semiconductors Inc.* .................... 7,600 291,175
-----------
1,254,422
-----------
Total Technology ................................. 8,481,175
-----------
UTILITIES 3.0%
ELECTRICAL 1.9%
Energy East Corp. ................................ 8,400 169,575
Niagara Mohawk Holdings Inc.* .................... 8,300 132,800
OGE Energy Corp. ................................. 8,900 183,006
Pinnacle West Capital Corp. ...................... 9,800 425,688
Scana Corp. ...................................... 9,800 259,700
-----------
1,170,769
-----------
GAS DISTRIBUTION 0.5%
National Fuel Gas Co. ............................ 2,500 134,062
Nicor Inc. ....................................... 1,800 63,563
Questar Corp. .................................... 4,000 108,250
-----------
305,875
-----------
TELECOMMUNICATIONS 0.6%
AirGate PCS, Inc.* ............................... 1,271 49,410
Rural Celluar Corp. Cl. A* ....................... 800 43,000
Viatel Inc.* ..................................... 300 2,888
XO Communications Inc.* .......................... 7,840 264,477
-----------
359,775
-----------
Total Utilities .................................. 1,836,419
-----------
NON-U.S. EQUITIES 9.1%
Actelion Ltd*+ ................................... 800 353,805
Allied Irish Banks PLC ........................... 19,100 194,499
Aventis SA ....................................... 2,000 144,262
Canon Sales Co., Inc. ............................ 11,000 158,173
Citizen Watch Co. ................................ 13,000 127,599
Danone Groupe .................................... 1,355 189,496
Deutsche Bank AG ................................. 2,000 163,746
Heineken NV ...................................... 3,600 195,517
Hutchison Whampoa ................................ 10,000 124,375
IHC Caland ....................................... 5,900 260,351
Johnson Matthey .................................. 100 1,560
Kone Corp. Series B .............................. 4,400 257,635
Nutreco Holdings ................................. 4,500 193,990
Petrochina Co. Ltd. .............................. 1,411,900 296,899
Reed International PLC ........................... 17,300 159,896
Renault SA ....................................... 5,100 253,613
Saipem SPA ....................................... 48,200 251,142
Sampo Insurance Co. Cl. A ........................ 4,600 187,371
Schering AG ...................................... 2,600 145,620
Shohkoh Fund & Co. ............................... 900 73,904
Skandia Foersaekrings ............................ 7,200 122,134
Societe Generale de France Cl. A ................. 2,500 141,928
Sony Corp. ....................................... 1,000 79,916
Technip .......................................... 2,900 371,110
Tesco ............................................ 47,400 180,706
The Swatch Group AG .............................. 300 397,196
Volkswagen AG .................................... 4,200 209,820
Wolters Kluwer ................................... 5,000 112,524
Woolworths Ltd. .................................. 39,600 157,768
-----------
Total Non-U.S. Equities .......................... 5,506,555
-----------
Total Equity Securities (Cost $36,139,170) ....... 43,870,199
-----------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
--------------------------------------------------------------------------------------------------------------------------
FIXED INCOME SECURITIES 21.9%
U.S. TREASURY 2.4%
<S> <C> <C> <C>
U.S. Treasury Bond, 11.25% ........................................... $ 50,000 2/15/2015 74,969
U.S. Treasury Bond, 10.625% .......................................... 225,000 8/15/2015 326,038
U.S. Treasury Bond, 8.875% ........................................... 50,000 2/15/2019 65,711
U.S. Treasury Bond, 3.875% ........................................... 105,087 4/15/2029 105,481
U.S. Treasury Bond, 6.125% ........................................... 125,000 8/15/2029 129,452
U.S. Treasury Bond, 6.25% ............................................ 35,000 5/15/2030 37,275
U.S. Treasury Note, 6.125% ........................................... 150,000 8/31/2002 150,281
U.S. Treasury Note, 5.875% ........................................... 100,000 9/30/2002 99,812
U.S. Treasury Note, 5.875% ........................................... 275,000 11/15/2004 275,258
U.S. Treasury Note, 5.75% ............................................ 100,000 8/15/2010 99,906
U.S. Treasury Note STRIPS, 0.00% ..................................... 125,000 2/15/2003 109,319
------------
1,473,502
------------
U.S. AGENCY MORTGAGE 7.3%
Federal Home Loan Mortgage Corp., 6.75% .............................. 125,000 9/15/2029 124,531
Federal National Mortgage Association, 6.625% ........................ 150,000 10/15/2007 150,047
Federal National Mortgage Association, 6.50% ......................... 84,854 9/01/2028 81,592
Federal National Mortgage Association, 6.50% ......................... 221,824 11/01/2028 213,298
Federal National Mortgage Association, 6.50% ......................... 114,250 12/01/2028 109,858
Federal National Mortgage Association, 6.50% ......................... 89,349 3/01/2029 85,915
Federal National Mortgage Association, 6.50% ......................... 132,440 5/01/2029 127,265
Federal National Mortgage Association, 7.50% ......................... 137,257 7/01/2029 137,215
Federal National Mortgage Association, 7.00% ......................... 142,966 12/01/2029 140,061
Federal National Mortgage Association, 7.00% ......................... 407,827 12/01/2029 399,540
Federal National Mortgage Association, 7.00% ......................... 263,535 12/01/2029 258,180
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 7.125%......................... 25,000 1/15/2030 26,129
Federal National Mortgage Association, 7.00% ......................... 166,556 2/01/2030 163,225
Federal National Mortgage Association, 7.00% ......................... 98,080 5/01/2030 96,087
Federal National Mortgage Association, 7.25% ......................... 275,000 5/15/2030 292,188
Federal National Mortgage Association TBA, 7.00% ..................... 200,000 12/01/2030 198,750
Federal National Mortgage Association TBA, 7.00% ..................... 200,000 12/01/2030 195,938
Federal National Mortgage Association TBA, 7.50% ..................... 500,000 12/01/2030 499,220
Government National Mortgage Association, 6.50% ...................... 21,032 2/15/2009 20,849
Government National Mortgage Association, 6.50% ...................... 51,609 7/15/2009 51,166
Government National Mortgage Association, 6.50% ...................... 74,076 11/15/2010 73,427
Government National Mortgage Association, 7.50% ...................... 47,759 12/15/2010 48,535
Government National Mortgage Association, 7.00% ...................... 14,598 1/15/2025 14,434
Government National Mortgage Association, 7.00% ...................... 124,908 3/15/2028 123,103
Government National Mortgage Association, 7.00% ...................... 233,680 5/15/2028 230,322
Government National Mortgage Association, 7.00% ...................... 40,783 6/15/2028 40,197
Government National Mortgage Association, 6.50% ...................... 129,054 11/15/2028 124,578
Government National Mortgage Association, 7.00% ...................... 102,203 11/15/2028 100,734
Government National Mortgage Association TBA, 7.00% .................. 75,000 12/15/2030 73,922
Government National Mortgage Association TBA, 8.00% .................. 225,000 12/15/2030 228,726
------------
4,429,032
------------
YANKEE 0.4%
British Sky Broadcasting Group Note, 6.875% .......................... 130,000 2/23/2009 110,902
Province of Quebec, 7.50% ............................................ 50,000 9/15/2029 50,688
United Mexican States, 9.875% ........................................ 25,000 2/01/2010 25,938
Woodside Finance Ltd. Note, 6.60%+ ................................... 50,000 4/15/2008 47,231
------------
234,759
------------
FOREIGN GOVERNMENT 1.1%
Greek Drachma
Republic of Greece, 8.60% ............................................ 148,000,000 3/26/2008 427,782
New Zealand Dollar
Government of New Zealand, 7.00% ..................................... 600,000 7/15/2009 243,520
------------
671,302
------------
FINANCE/MORTGAGE 2.8%
AT&T Capital Corp. Note, 6.75% ....................................... 100,000 2/04/2002 98,742
Bear Stearns Commercial Mortgage Secs Inc., 7.08% .................... 100,000 7/15/2031 99,641
Capital One Bank Note, 6.62% ......................................... 50,000 8/04/2003 48,476
Citibank Credit Card Issuance Trust, 7.45% ........................... 325,000 9/15/2007 321,802
Citibank Credit Card Master Trust Series 1999-A,
5.875% ............................................................. 25,000 3/10/2011 23,258
Countrywide Funding Corp. Note, 6.58% ................................ 75,000 9/21/2001 74,521
DLJ Commercial Mortgage Corp., 7.50% ................................. 25,000 9/10/2010 25,121
DLJ Commercial Mortgage Corp. 99-C1, 6.46% ........................... 100,000 1/10/2009 96,218
General Motors Acceptance Corp., 6.40% ............................... 50,000 9/21/2001 49,661
General Motors Acceptance Corp. Note, 7.103% ......................... 100,000 10/07/2002 100,782
GMAC Commercial Mortgage Security Inc. 99-C1 Cl. A2,
6.175% ............................................................. 75,000 5/15/2033 70,834
Household Finance Corp. Sr. Note, 6.125% ............................. 50,000 7/15/2012 49,269
J.P. Morgan Commercial Mortgage Finance Corp.,
6.507% ............................................................. 150,000 10/15/2035 145,295
MBNA Corp. Sr. Note, 6.12% ........................................... 100,000 8/13/2001 99,092
MBNA Master Credit Card Trust, 6.60% ................................. 75,000 4/16/2007 74,297
MBNA Master Credit Card Trust, 6.90% ................................. 100,000 1/15/2008 100,687
MBNA Master Credit Card Trust, 5.90% ................................. 50,000 8/15/2011 46,930
MBNA Master Credit Card Trust, 7.00% ................................. 50,000 2/15/2012 49,815
Morgan Project Commercial Mortgage Finance
Corp.,7.238% ....................................................... 50,000 9/15/2029 49,480
Prime Credit Card Master Trust Series 1996-1A, 6.70%.................. 50,000 7/15/2004 49,922
------------
1,673,843
------------
CORPORATE 7.9%
Abbey Healthcare Group Inc. Note, 9.50% .............................. 25,000 11/01/2002 24,813
Advanced Radio Telecom Corp. Sr. Note, 14.00% ........................ 30,000 2/15/2007 18,000
AES Corp. Sr. Note, 9.375% ........................................... 20,000 9/15/2010 19,510
AES Drax Energy Ltd. Sr. Note, 11.50%+ ............................... 25,000 8/30/2010 26,471
AirGate PCS Inc. Sr. Sub. Note, 0.00% to 9/30/2004,
13.50% from 10/1/2004 to maturity .................................. 15,000 10/01/2009 8,625
Alaska Steel Corp. Sr. Note, 9.125% .................................. 10,000 12/15/2006 9,850
Alcoa Inc. Note, 7.375% .............................................. 50,000 8/01/2010 50,210
Anchor Gaming Sr. Note, 9.875%+ ...................................... 10,000 10/15/2008 10,100
Apple South Inc. Sr. Note, 9.75% ..................................... 10,000 6/01/2006 7,500
Archibald Candy Corp. Sr. Sec. Note, 10.25% .......................... 50,000 7/01/2004 29,250
Arizona Public Service Co. Note, 7.625% .............................. 75,000 8/01/2005 75,841
Beckman Instruments Inc. Sr. Note, 7.10% ............................. 5,000 3/04/2003 4,854
Bio-Rad Laboratories Inc. Sr. Note, 11.625% .......................... 10,000 2/15/2007 10,400
Bombardier Capital Inc.Note, 7.30%+ .................................. 100,000 12/15/2002 99,895
Buckeye Technologies Inc. Sr. Sub. Note, 8.00% ....................... 50,000 10/15/2010 46,500
Call-Net Enterprises Inc. Sr. Note, 9.375% ........................... 100,000 5/15/2009 35,000
Charter Communication Holding LLC Sr. Note, 8.625% ................... 40,000 4/01/2009 35,700
Chesapeake Energy Corp. Sr. Note Series B, 9.625% .................... 55,000 5/01/2005 55,206
Citigroup Inc., 7.25% ................................................ 100,000 10/01/2010 99,363
CK Witco Corp. Sr. Note, 8.50% ....................................... 25,000 3/15/2005 24,061
Clear Channel Communications Sr. Note, 7.25% ......................... 100,000 9/15/2003 99,404
Coca-Cola Enterprises Inc. Deb., 6.95% ............................... 25,000 11/15/2026 22,225
Coca-Cola Enterprises Inc. Deb., 6.75% ............................... 75,000 9/15/2028 64,720
Columbia/HCA Healthcare Corp. Note, 7.69% ............................ 50,000 6/15/2025 41,625
Crown Castle International Corp. Sr. Note, 10.75% .................... 25,000 8/01/2011 25,500
Deutsche Telekom International Finance BV, 7.75% ..................... 75,000 6/15/2005 76,246
Dominion Resources Inc., 7.625% ...................................... 50,000 7/15/2005 50,496
Dover Corp. Deb., 6.65% .............................................. 100,000 6/01/2028 86,374
Drypers Corp. Series B Sr. Note,
10.25% [] .......................................................... 110,000 6/15/2007 17,050
Duke Energy Co., 7.125% .............................................. 100,000 9/03/2002 100,436
Duke Energy Co. Sr. Note, 7.375% ..................................... 50,000 3/01/2010 50,169
Dynegy Holdings Inc. Sr. Note, 8.125% ................................ 50,000 3/15/2005 51,106
Echostar Broadband Corp. Sr. Note, 10.375%+ .......................... 75,000 10/01/2007 75,375
El Paso Energy Corp. Sr. Note, 6.625% ................................ 100,000 7/15/2001 99,415
Electronic Data Systems Corp., 7.45% ................................. 25,000 10/15/2029 23,818
Empire Gas Corp. Sr. Sec. Note,
12.875% [] ......................................................... 50,000 7/15/2004 15,000
Envirosource Inc. Note, 9.75% ........................................ 500,000 6/15/2003 177,500
Extended Stay America Inc. Sr. Sub. Note, 9.15% ...................... 25,000 3/15/2008 23,375
First Wave Marine Inc. Sr. Note, 11.00% .............................. 100,000 2/01/2008 26,750
Fisher Scientific International Inc. Sr. Sub. Note,
9.00% .............................................................. 10,000 2/01/2008 9,150
Fort James Corp. Note, 6.234% ........................................ 50,000 3/15/2011 49,736
Four M Corp. Sr. Sec. Note Series B, 12.00% .......................... 35,000 6/01/2006 33,163
Fresenius Med Care Capital Trust, 9.00% .............................. 50,000 12/01/2006 49,625
Frontier Corp. Sr. Note, 9.125% ...................................... 50,000 2/15/2006 45,000
Gentek Inc. Sr. Sub. Note, 11.00% .................................... 15,000 8/01/2009 15,038
Gulfmark Offshore Inc. Sr. Note, 8.75% ............................... 25,000 6/01/2008 23,594
HCA Healthcare Co. Note, 8.75% ....................................... 45,000 9/01/2010 45,562
Healthsouth Corp. Sr. Note, 6.875% ................................... 10,000 6/15/2005 8,593
Healthsouth Corp. Sr. Note, 7.00% .................................... 15,000 6/15/2008 12,114
Henry Co. Sr. Note Series B, 10.00% .................................. 50,000 4/15/2008 20,250
Hollinger International Publishing Inc. Sr. Sub. .....................
Note, 9.25% ........................................................ 20,000 3/15/2007 19,800
Hollinger International Sr. Sub. Note, 9.25% ......................... 30,000 2/01/2006 29,400
Hollywood Casino Shreveport Inc. Note, 13.00% ........................ 50,000 8/01/2006 53,875
Honeywell International Inc. Note, 7.50% ............................. 25,000 3/01/2010 25,737
Horizon PCS Inc. Sr. Note, 0.00% to 9/30/2005,
14.00% from 10/1/2005 to maturity+ ................................. 45,000 10/01/2010 21,375
Hyperion Telecommunication Inc. Sr. Sub. Note,
12.00% ............................................................. 25,000 11/01/2007 11,250
Iasis Healthcare Corp. Sr. Sub. Note, 13.00% ......................... 45,000 10/15/2009 41,175
Intermedia Communications Inc. Sr. Note, 8.60% ....................... 10,000 6/01/2008 9,350
International Game Technology Sr. Note, 8.375% ....................... 45,000 5/15/2009 43,650
International Knife & Saw Inc. Sr. Sub. Note,
11.375% ............................................................ 55,000 11/15/2006 29,219
International Paper Co. Note, 8.00%+ ................................. 100,000 7/08/2003 101,294
International Shipholding Corp. Sr. Note Series B, 7.75% ............. 45,000 10/15/2007 39,206
IPCS Inc. Sr. Sub. Note, 0.00% to
7/14/2005, 14.00% from 7/15/2005 to maturity+ ...................... 10,000 7/15/2010 4,600
J. Crew Group Inc. Sr. Deb., 0.00% to 10/14/2002,
13.125% from 10/15/2002 to maturity ................................ 120,000 10/15/2008 69,000
J.B. Poindexter Inc. Sr. Note, 12.50% ................................ 75,000 5/15/2004 70,125
K-III Communications Corp. Sr. Note, 8.50% ........................... 25,000 2/01/2006 23,813
Kaiser Aluminum & Chemical Corp. Sub. Note, 12.75% ................... 50,000 2/01/2003 37,500
Kroger Co. Sr. Note Series B, 7.25% .................................. 25,000 6/01/2009 23,983
Lear Corp. Sr. Note Series B, 7.96% .................................. 50,000 5/15/2005 46,657
LIN Televison Corp. Sr. Sub. Note, 8.375% ............................ 5,000 3/01/2008 4,650
Luiginos Inc. Sr. Sub Note, 10.00% ................................... 40,000 2/01/2006 31,600
Magellan Health Services Inc. Sr. Sub. Note, 9.00% ................... 5,000 2/15/2008 3,300
Mandalay Resort Group Sr. Sub. Note, 10.25% .......................... 30,000 8/01/2007 30,750
MGM Grand Inc. Sr. Sub. Note, 9.75% .................................. 35,000 6/01/2007 36,269
MGM Mirage Inc. Sr. Note, 8.50% ...................................... 20,000 9/15/2010 19,786
Mohegan Tribal Gaming Authority Sr. Note, 8.125% ..................... 120,000 1/01/2006 115,800
New Jersey Economic Development Authority,7.425% ..................... 125,000 2/15/2029 123,595
Newpark Resources Inc. Sr. Sub. Note Series B, 8.625% ................ 65,000 12/15/2007 60,125
News America Inc. Sr. Deb., 7.125% ................................... 50,000 4/08/2028 41,525
Nextel Partners Inc. Sr. Note, 11.00% ................................ 20,000 3/15/2010 20,000
NorthPoint Communications Group Inc. Sr. Note,12.875% ................ 65,000 2/15/2010 61,425
Ocean Energy Inc. Series B Sr. Note, 7.625% .......................... 50,000 7/01/2005 48,375
Owens Illinois Inc. Sr. Note, 7.85% .................................. 40,000 5/15/2004 30,000
Packaging Resources Inc. Sr. Sec. Note, 11.625%[] .................... 50,000 5/01/2003 49,250
Park Place Entertainment Corp. Sr. Sub. Note,9.375% .................. 75,000 2/15/2007 75,562
Peco Energy Transport Trust Series 99-A Cl. A7,6.13% ................. 100,000 3/01/2009 94,772
Plains Resources Inc. Sr. Sub. Note, 10.25%+ ......................... 15,000 3/15/2006 15,075
Pogo Producing Co. Sr. Sub. Note, 8.75% .............................. 25,000 5/15/2007 24,250
Pool Energy Services Co. Sr. Sub. Note, 8.625% ....................... 20,000 4/01/2008 20,300
Prime Succession Inc. Sr. Sub. Note, 10.75%[] ........................ 150,000 8/15/2004 22,500
Primus Telecommunications Group Sr. Note, 11.75% ..................... 85,000 8/01/2004 43,775
PSINet Inc. Sr. Note, 10.50% ......................................... 20,000 12/01/2006 11,000
PSINet Inc. Sr. Note, 11.00% ......................................... 35,000 8/01/2009 16,975
Qwest Capital Funding Inc. Note, 7.90%+ .............................. 100,000 8/15/2010 101,441
Raytheon Co. Note, 8.20% ............................................. 75,000 3/01/2006 77,599
RBF Finance Co. Sr. Note, 11.375% .................................... 20,000 3/15/2009 22,950
Rhythms Netconnections Inc. Note, 12.75% ............................. 50,000 4/15/2009 23,000
Rhythms Netconnections Inc. Note, 14.00% ............................. 25,000 2/15/2010 11,500
Rose Hills Co. Sr. Sub. Note, 9.50% .................................. 250,000 11/15/2004 149,375
Safety-Kleen Services Inc. Sr. Sub. Note, 9.25%[] .................... 30,000 6/01/2008 488
Safeway Inc. Note, 7.00% ............................................. 75,000 9/15/2002 75,021
Sheffield Steel Corp. Note Series B, 11.50% .......................... 35,000 12/01/2005 19,250
Simonds Industries Inc. Sr. Sub. Note, 10.25% ........................ 10,000 7/01/2008 7,050
Sprint Capital Corp. Note,7.625% ..................................... 50,000 6/10/2002 50,157
Staples Inc. Note, 7.54%+ ............................................ 25,000 11/26/2001 24,959
Startec Global Communications Sr. Note,12.00% ........................ 25,000 5/15/2008 18,625
Stater Brothers Holdings Inc. Sr. Note, 10.75% ....................... 25,000 8/15/2006 19,750
Stericycle Inc. Sr. Sub. Note Series B, 12.375% ...................... 25,000 11/15/2009 26,375
Tekni Plex Inc. Sr. Sub. Note, 12.75% ................................ 20,000 6/15/2010 19,912
Tembec Industries Inc. Sr. Note, 8.625% .............................. 50,000 6/30/2009 49,500
Terra Industries Sr. Note, 10.50% .................................... 5,000 6/15/2005 3,113
Textron Finance Corp. Note, 6.125%+ .................................. 25,000 3/15/2001 24,928
Tyco International Group SA, 6.25% ................................... 50,000 6/15/2003 48,603
United Technologies Corp. Sr. Deb., 7.50% ............................ 25,000 9/15/2029 24,950
US Unwired Inc. Sr. Sub.Note, 0.00% to 10/31/
2004,13.375% from 11/1/2004 to maturity ............................ 90,000 11/01/2009 44,550
USA Waste Services Inc. Sr. Note, 7.00% .............................. 50,000 10/01/2004 47,137
Williams Communications Group Inc. Sr. Note,10.70% ................... 5,000 10/01/2007 4,300
Williams Communications Group Inc. Sr. Note,11.70%+ .................. 5,000 8/01/2008 4,437
Williams Communications Group Inc. Sr. Note,10.875% .................. 50,000 10/01/2009 42,125
Winstar Communications Inc. Sr. Note, 12.50% ......................... 40,000 4/15/2008 29,000
Winstar Communications Inc. Sr. Note, 12.75%+ ........................ 10,000 4/15/2010 7,150
------------
4,808,471
------------
Total Fixed Income Securities (Cost $14,239,379) ................................................. 13,290,909
------------
COMMERCIAL PAPER 10.0%
American Express Credit Corp., 6.47% ................................. $ 1,443,000 11/01/2000 $ 1,443,000
American Express Credit Corp., 6.57% ................................. 1,136,000 11/03/2000 1,136,000
Ford Motor Credit Co.,6.52% .......................................... 1,858,000 11/08/2000 1,858,000
Merrill Lynch & Company Inc., 6.48% .................................. 830,000 11/01/2000 830,000
Merrill Lynch & Company Inc., 6.48% .................................. 775,000 11/13/2000 773,326
------------
Total Commercial Paper (Cost $6,040,326) ......................................................... 6,040,326
------------
SHORT-TERM INVESTMENTS 7.1%
State Street Navigator Securities Lending ........................................... 4,296,307 4,296,307
------------
Total Short-Term Investments (Cost 4,296,307) .................................................... 4,296,307
------------
Total Investments (Cost $60,715,182) - 111.5% .................................................... 67,497,741
Cash and Other Assets, Less Liabilities-(11.5%) .................................................. (6,958,937)
------------
Net Assets - 100.0% .............................................................................. $ 60,538,804
============
</TABLE>
Federal Income Tax Information:
At October 31, 2000 the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$61,020,173 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost ............. $9,400,370
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............. (2,922,802)
----------
$6,477,568
==========
*Nonincome-producing securities
--------------------------------------------------------------------------------
ADR Stands for American Depositary Receipt, representing ownership of foreign
securities.
* Non-income-producing securities.
TBA Represents "TBA" (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.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 2000 were $893,827 and $918,180 (1.52% of net assets),
respectively.
[ ] Security is in default.
Futures contracts open at October 31, 2000, are as follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
TYPE NOTIONAL AMOUNT MONTH DEPRECIATION
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5 year U.S. Treasury Notes $300,000 December, 2000 $ 448
10 year U.S. Treasury Notes $200,000 December, 2000 (1,842)
-------
$(1,394)
=======
</TABLE>
<TABLE>
Forward currency exchange contracts outstanding at October 31, 2000, are as follows:
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
---------------------------------------------------------------------------------- -------------- --------------- ----------
<S> <C> <C> <C> <C>
Buy Euro, Sell U.S. dollars 1,269,427 EUR 0.84105 EUR $ 9,635 11/01/00
Sell Euro, Buy U.S. dollars 63,580 EUR 0.91423 EUR 4,122 11/20/00
Sell Euro, Buy U.S. dollars 28,600 EUR 0.84055 EUR (253) 11/20/00
Buy Great British pound, Sell U.S. dollar 51,878.45 GBP 1.45410 GBP (159) 11/03/00
Buy Great British pound, Sell U.S. dollar 82,950.78 GBP 1.45290 GBP (149) 11/06/00
Buy Greek drachma, Sell U.S. dollars 5,100,000 GRD 0.00247 GRD 162 11/09/00
Sell Greek drachma, Buy U.S. dollars 3,500,000 GRD 0.00268 GRD 652 11/09/00
Sell Greek drachma, Buy U.S. dollars 42,938,000 GRD 0.00269 GRD 8,042 11/09/00
Sell Greek drachma, Buy U.S. dollars 6,105,000 GRD 0.00269 GRD 1,158 11/20/00
Sell Greek drachma, Buy U.S. dollars 15,500,000 GRD 0.00257 GRD 1,136 12/11/00
Sell Greek drachma, Buy U.S. dollars 6,645,000 GRD 0.00257 GRD 490 12/11/00
Sell New Zealand dollars, Sell U.S. dollars 258,000 NZD 0.44903 NZD 13,521 11/20/00
Sell New Zealand dollars, Sell U.S. dollars 45,000 NZD 0.45005 NZD 2,404 11/20/00
Sell New Zealand dollars, Sell U.S. dollars 304,000 NZD 0.40202 NZD 1,639 11/20/00
---------
$ 42,400
---------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
October 31, 2000
ASSETS
Investments, at value (Cost $60,715,182) (Note 1) .. $ 67,497,741
Foreign currency, at value (cost $317,740) ......... 317,740
Cash ............................................... 66,937
Receivable for securities sold ..................... 1,271,290
Interest and dividends receivable .................. 257,619
Receivable from Distributor (Note 3) ............... 124,840
Receivable for open forward contracts .............. 42,961
Receivable for fund shares sold .................... 8,425
Receivable for variation margin (Note 1) ........... 281
Other assets ....................................... 11,267
------------
69,599,101
LIABILITIES
Payable for collateral received on securities loaned 4,296,307
Payable for securities purchased ................... 4,549,316
Accrued management fee (Note 2) .................... 37,938
Accrued administration fee (Note 2) ................ 28,100
Accrued transfer agent and shareholder services
(Note 2) ......................................... 22,063
Accrued trustees' fees (Note 2) .................... 12,620
Payable for fund shares redeemed ................... 4,225
Payable for open forward contracts ................. 561
Other accrued expenses ............................. 109,167
------------
9,060,297
------------
NET ASSETS ......................................... $ 60,538,804
============
Net Assets consist of:
Undistributed net investment income .............. $ 388,573
Unrealized appreciation of investments ........... 6,782,559
Unrealized appreciation of forward contracts and
foreign currency ............................... 28,588
Unrealized depreciation of futures contracts ..... (1,394)
Accumulated net realized gain .................... 8,795,864
Paid-in capital .................................. 44,544,614
------------
$ 60,538,804
============
Net Asset Value, offering price and redemption
price per share of Class S shares
($60,538,804 / 4,908,121 shares) ................. $12.33
======
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
For the year ended October 31, 2000
INVESTMENT INCOME
Interest, net of foreign taxes of $11,404 (Note 1) ........... $ 1,669,931
Dividends .................................................... 396,688
-----------
2,066,619
EXPENSES
Management fee (Note 2) ...................................... 466,593
Custodian fee ................................................ 172,623
Transfer agent and shareholder services (Note 2) ............. 83,904
Audit fee .................................................... 30,324
Reports to shareholders ...................................... 30,390
Administration fee ........................................... 28,100
Registration fees ............................................ 16,146
Trustees' fees (Note 2) ...................................... 12,620
Legal fees ................................................... 1,140
Miscellaneous ................................................ 49,035
-----------
890,875
Expenses borne by the Distributor (Note 3) ................... (205,539)
Fees paid indirectly (Note 2) ................................ (1,000)
-----------
684,336
-----------
Net investment income ........................................ 1,382,283
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, FORWARD CONTRACTS AND FUTURES CONTRACTS
Net realized gain on investments (Notes 1 and 4) ............. 8,821,235
Net realized loss on foreign currency and
forward contracts (Note 1) ................................. (210,005)
Net realized loss on futures contracts (Note 1) .............. (23,086)
-----------
Total net realized gain .................................... 8,588,144
-----------
Change in unrealized depreciation of investments ............. (781,359)
Change in unrealized appreciation of foreign
currency and forward contracts ............................. 165,498
Change in unrealized depreciation of futures contracts ....... (1,857)
-----------
Total change in unrealized depreciation .................... (617,718)
-----------
Net gain on investments, foreign currency, forward
contracts and futures contracts ............................ 7,970,426
-----------
Net increase in net assets resulting from operations ......... $ 9,352,709
===========
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------------
1999 2000
------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ..................................... $ 1,072,842 $ 1,382,283
Net realized gain on investments, foreign currency, forward
contracts and futures contracts ......................... 1,105,796 8,588,144
Net unrealized appreciation (depreciation) of investments,
foreign currency, forward contracts and futures contracts 5,411,590 (617,718)
------------ ------------
Net increase resulting from operations .................... 7,590,228 9,352,709
------------ ------------
Dividends from net investment income --
Class S ................................................. (765,775) (1,021,200)
------------ ------------
Distributions from net realized gains --
Class S ................................................. (8,002,009) (1,625,786)
------------ ------------
Class S share transactions (Note 6):
Proceeds from sale of shares ............................ 5,716,393 3,933,244
Net asset value of shares issued in payment of:
Dividends from net investment income .................. 298,971 348,148
Distributions from capital gains ...................... 8,001,998 1,625,782
Cost of shares repurchased .............................. (10,960,555) (9,801,243)
------------ ------------
Net increase (decrease) from fund share
transactions ............................................ 3,056,807 (3,894,069)
------------ ------------
Total increase in net assets .............................. 1,879,251 2,811,654
NET ASSETS
Beginning of year ......................................... 55,847,899 57,727,150
------------ ------------
End of year (including undistributed
net investment income of $564,286
and $388,573, respectively) ............................. $ 57,727,150 $ 60,538,804
============ ============
Number of Class S shares:
Sold .................................................... 517,034 320,814
Issued upon reinvestment of:
Dividends from net investment income .................. 27,969 29,185
Distributions from capital gains ...................... 779,162 139,672
Repurchased ............................................. (988,554) (796,840)
------------ ------------
Net increase (decrease) in fund shares .................. 335,611 (307,169)
============ ============
</TABLE>
NOTE 1
State Street Research Strategic Portfolios: Aggressive (the "Fund") is a
series of State Street Research Financial Trust (the "Trust"), which was
organized as a Massachusetts business Trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company. The Trust consists presently of six
separate funds: State Street Research Strategic Portfolios: Aggressive, State
Street Research Government Income Fund, State Street Research Strategic Income
Plus Fund, State Street Research Concentrated Growth Fund, State Street
Research Health Sciences Fund and State Street Research International Equity
Fund.
The investment objective of the Fund is to provide high total return from,
primarily, growth of capital and secondarily, current income, consistent with
reasonable investment risk.
The Fund is authorized to issue five classes of shares. Only Class S shares
are presently available for purchase. Class A, Class B(1), Class B and Class C
shares are not being offered at this time. Class A shares are subject to an
initial sales charge of up to 5.75%. Class A shares are subject to an initial
sales charge of 5.75% and an annual service charge of 0.25% of average daily
net assets. Class B shares are subject to a contingent deferred sales charge
on certain redemptions made within five years of purchase and paid annual
service and distribution fees of 1.00%. Class A shares are subject to an
initial sales charge of 5.75% and an annual service charge of 0.25% of average
daily net assets. Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) at the end of eight years after the
issuance of the Class B shares. Class C shares are subject to a contingent
deferred sales charge of 1.00% on any shares redeemed within one year of their
purchase. Class C shares also pay annual service and distribution fees of
1.00%. Class S shares are only offered through certain retirement accounts,
advisory accounts of State Street Research & Management Company (the
"Adviser"), an indirect wholly owned 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 pro-rata by each class,
except that each class bears expenses, and has exclusive voting rights with
respect to provisions of the plans of distribution, related specifically to
that class. The Trustees declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system are valued at closing prices supplied
through such system. If not quoted on the Nasdaq system, such securities are
valued at prices obtained from brokers. In the absence of recorded sales,
valuations are at the mean of the closing bid and asked quotations. Fixed
income securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. 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.
B. SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. NET INVESTMENT INCOME
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. DIVIDENDS
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations. For the year ended October 31, 2000, the Fund has designated
as long-term $965,442 of the distributions from net realized gains.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions.
E. FEDERAL INCOME TAXES
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. FORWARD 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 rates 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 inability 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 exchange 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.
G. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those 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, 2000, the value of the securities loaned and the value of
collateral were $4,092,867 and $4,296,307, respectively. During the year ended
October 31, 2000, income from securities lending amounted to
$77,311 and is included in interest income.
I. FUTURES CONTRACTS
The Fund may enter into futures contracts as a hedge against unfavorable
market conditions and to enhance income. 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
was opened and the value at the time it was closed.
NOTE 2
The Trust and the Adviser have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.75% of the Fund's average daily net
assets. 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, 2000, the fees pursuant to such
agreement amounted to $466,593.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of MetLife 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, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended October
31, 2000, the amount of such expenses was $79,852.
The Fund has entered into an arrangement with its transfer agent whereby
credits realized as a result of uninvested cash balances were used to reduce a
portion of the Fund's expense. During the year ended October 31, 2000, the
Fund's transfer agent fees were reduced by $1,000, under this arrangement.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$12,620 during the year ended October 31, 2000.
Effective May 3, 2000, the Fund has agreed to pay the Adviser for certain
administrative costs incurred in providing accounting services to the Fund.
The fee was based on a fixed annual amount that has been allocated equally
among the State Street Research Funds. During the year ended October 31, 2000,
the amount of such expenses was $28,100.
NOTE 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 2000, the amount of such expenses
assumed by the Distributor and its affiliates was $205,539.
NOTE 4
For the year ended October 31, 2000, purchases and sales of securities,
exclusive of short-term obligations, aggregated $80,154,095 and $88,181,451
(including $15,767,745 and $16,547,607 of U.S. Government obligations),
respectively.
NOTE 5
The Trust has adopted plans of distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. Under the plans, the Fund will pay
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 and Class C shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets for
Class B(1), Class B and Class C shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts, to
compensate or 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.
NOTE 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 2000, MetLife
owned 3,418,962 Class S shares of the Fund.
<PAGE>
For a share outstanding throughout each year:
CLASS A
---------------------------------
YEAR ENDED NOVEMBER 1, 1996
OCTOBER 31, TO MARCH 27, 1997(a)
1996(a)
----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR
($) ............................... 10.93 12.45
----- -----
Net investment income ($)* ...... 0.14 0.10
Net realized and unrealized gain
on investments, foreign
currency and
forward contracts ($) ......... 1.79 0.41
----- -----
TOTAL FROM INVESTMENT OPERATIONS
($) ............................... 1.93 0.51
----- -----
Dividends from net investment
income ($) .................... (0.17) (0.13)
Distributions from net realized
gains ($) ..................... (0.24) (1.48)
----- -----
TOTAL DISTRIBUTIONS ($) ........... (0.41) (1.61)
----- -----
NET ASSET VALUE, END OF YEAR ($) .. 12.45 11.35
===== =====
Total return(b) (%) ............... 18.05 4.18(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
($ thousands) ................... 623 --
Expense ratio ..................... 1.35 1.35(d)
Ratio of net investment income to
average net assets (%)* ......... 1.43 1.69(d)
Portfolio turnover rate (%) ....... 145.59 136.48
*Reflects voluntary reduction of
expenses per share of these
amounts (Note 3) ($) ............. 0.01 0.02
<TABLE>
<CAPTION>
CLASS S
-------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
-------------------------------------------------------------------
1996(a) 1997(a) 1998(a) 1999(a) 2000(a)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR ($) ........................ 10.94 12.43 13.18 11.44 11.07
----- ----- ----- ----- -----
Net investment income ($)* ...... 0.22 0.22 0.21 0.20 0.27
Net realized and unrealized gain
on investments, foreign
currency, forward contracts and
futures contracts ($) ......... 1.74 2.27 0.17 1.25 1.50
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS ($) .................. 1.96 2.49 0.38 1.45 1.77
----- ----- ----- ----- -----
Dividends from net investment
income ($) .................... (0.23) (0.26) (0.24) (0.15) (0.20)
Distributions from capital
gains ($) ..................... (0.24) (1.48) (1.88) (1.67) (0.31)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) ........... (0.47) (1.74) (2.12) (1.82) (0.51)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) .. 12.43 13.18 11.44 11.07 12.33
===== ===== ===== ===== =====
Total return(b) (%) ............... 18.37 22.54 3.69 13.89 16.27
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($
thousands) ........................ 63,272 77,753 55,848 57,727 60,539
Expense ratio (%)* ................ 1.10 1.10 1.10 1.10 1.10
Expense ratio after expense
reductions (%)* ................. 1.10 1.10 1.10 1.10 1.10
Ratio of net investment income to
average net assets (%)* ......... 1.78 1.79 1.81 1.82 2.22
Portfolio turnover rate (%) ....... 145.59 136.48 124.15 108.44 138.29
*Reflects voluntary reduction of
expenses per share of
these amounts (Note 3) ($) ....... 0.03 0.02 0.02 0.02 0.04
------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<PAGE>
TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: AGGRESSIVE
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of State Street Research Strategic
Portfolios: Aggressive (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 2000, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 2000
For the year ended October 31, 2000, State Street Research Strategic
Portfolios: Aggressive Class S shares returned 16.27%. The fund outperformed
both the Lipper Flexible Portfolio Funds Average, which returned 9.34% over
the same period, and the S&P 500 Index, which generated a positive return of
6.08%.
The fund benefited from investments in both stocks and bonds. It maintained a
heavy weighting in bonds, which gained ground in most sectors as intermediate
and long-term interest rates came down. Stocks were underweighted versus the
fund's normal asset allocation. However, stock selection among large and
small-cap growth stocks helped the fund's equity performance.
The fund's major disappointments were also in the bond market -- specifically,
in high-yield and nondollar bonds. It was a challenging year for the high-
yield market, in general. International bonds suffered from a weak euro.
Near the end of the period, the fund's investment in stocks was 73% -- still
five points under its normal position. We also shifted a small percentage out
of international and cash to add to value stocks.
October 31, 2000
Keep in mind that past performance is no guarantee of future results. The
Fund's share price, yield and return will fluctuate, and you may have a gain
or loss when you sell your shares. All returns assume reinvestment of capital
gain distributions and income dividends at net asset value. Class S shares,
offered without a sales charge, are available only through certain employee
benefit plans and special programs. The S&P 500 (officially the "S&P 500
Composite Stock Price Index") is an unmanaged index of 500 U.S. stocks. The
Lehman Brothers Government/Corporate Bond Index is a market-value weighted
index of U.S. government treasury and agency securities, corporate and yankee
bonds. The indices are unmanaged and do not take sales charges into
consideration. Direct investment in the indices is not possible; results are
for illustrative purposes only.
CHANGE IN VALUE OF $10,000 BASED ON THE
S&P 500 AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX COMPARED
TO CHANGE IN VALUE OF $10,000 INVESTED IN
STRATEGIC PORTFOLIOS: AGGRESSIVE
----------------------------------------------
Average Annual Total Return
----------------------------------------------
1 Year 5 Years Life of Fund
----------------------------------------------
16.27% 14.77$ 1.08%
----------------------------------------------
Strategic Portfolios: Lehman Brothers
Aggressive Gov't Corp. Index S&P 500
--------------------- ----------------- -------
10/31/94 $10,250 $10,006 $10,549
10/31/95 11,772 11,622 13,334
10/31/96 13,935 12,250 16,546
10/31/97 17,076 13,329 21,856
10/31/98 17,706 14,698 26,667
10/31/99 20,165 14,600 33,512
10/31/00 23,445 15,641 35,549
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FUND INFORMATION OFFICERS TRUSTEES
STATE STREET RESEARCH RICHARD S. DAVIS RICHARD S. DAVIS
STRATEGIC PORTFOLIOS: AGGRESSIVE Chairman of the Board, Chairman of the Board,
One Financial Center President, and President, Chief Executive
Boston, MA 02111 Chief Executive Officer Officer and Director,
State Street Research &
INVESTMENT ADVISER JOHN BORZILLERI Management Company
State Street Research & Vice President
Management Company
One Financial Center BRUCE A. EBEL BRUCE R. BOND
Boston, MA 02111 Vice President Former Chairman of the Board
Chief Executive Officer and
DISTRIBUTOR JOHN H. KALLIS President, PictureTel Corporation
State Street Research Vice President
Investment Services, Inc.
One Financial Center THOMAS P. MOORE, JR. STEVE A. GARBAN
Boston, MA 02111 Vice President Former Senior Vice President
for Finance and Operations and
SHAREHOLDER SERVICES E.K. EASTON RAGSDALE, JR. Treasurer, The Pennsylvania
State Street Research Vice President State University
Service Center
P.O. Box 8408 THOMAS A. SHIVELY
Boston, MA 02266-8408 Vice President DEAN O. MORTON
1-87-SSR-FUNDS (1-877-773-8637) Former Executive Vice President,
JAMES M. WEISS Chief Operating Officer and
CUSTODIAN Vice President Director, Hewlett-Packard
State Street Bank and Company
Trust Company KENNARD WOODWORTH, JR.
225 Franklin Street Vice President
Boston, MA 02110 SUSAN M. PHILLIPS
GERARD P. MAUS Dean, School of Business and
LEGAL COUNSEL Treasurer Public Management, George
Goodwin, Procter & Hoar LLP Washington University; former
Exchange Place DOUGLAS A. ROMICH Member of the Board of Governors
Boston, MA 02109 Assistant Treasurer of the Federal Reserve System and
Chairman and Commissioner of
INDEPENDENT ACCOUNTANTS FRANCIS J. MCNAMARA, III the Commodity Futures Trading
PricewaterhouseCoopers LLP Secretary and General Counsel Commission
160 Federal Street
Boston, MA 02110 DARMAN A. WING
Assistant Secretary and TOBY ROSENBLATT
Assistant General Counsel President,
Founders Investments Ltd.
SUSAN E. BREEN President,
Assistant Secretary The Glen Ellen Company
AMY L. SIMMONS
Assistant Secretary MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATGEGIC PORTFOLIOS: AGGRESSIVE -------------------
One Financial Center PRSTD AUTO STD
Boston, MA 02111 U.S. POSTAGE PAID
HOLLISTON, MA
PERMIT NO. 20
-------------------
QUESTIONS? COMMENTS?
E-MAIL us at:
[email protected]
INTERNET site:
www.StateStreetResearch.com
CALL us at 1-87-SSR-FUNDS (1-877-773-8637) or
[hearing-impaired 1-800-676-7876]
[Chinese and Spanish-speaking 1-888-638-3193]
WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
[Logo] STATE STREET RESEARCH
(C) State Street Research Investment Services, Inc.,
One Financial Center, Boston, MA 02111
This report is prepared for the general information of current shareholders.
This publication must be preceded or accompanied by a current State Street
Research Galileo Fund prospectus.
When used after December 31, 2000, this report must be accompanied by a current
Quarterly Performance Update.
Portfolio changes should not be considered recommendations for action by
individual investors.
The Dalbar awards recognize quality shareholder service 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
industry-wide.
CONTROL NUMBER: (exp1201)SSR-LD SP-2852-1200
<PAGE>
-------------------------------------------------------------------------------
STATE STREET RESEARCH
-------------------------------------------------------------------------------
STRATEGIC INCOME PLUS FUND
--------------------------
ANNUAL REPORT
October 31, 2000
--------------------
WHAT'S INSIDE
--------------------
FROM THE CHAIRMAN
U.S. economy glides
to a slower pace
PORTFOLIO MANAGER'S REVIEW
Bonds help boost performance
in a volatile year
FUND INFORMATION
Facts and figures
PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS
-------------------
[DALBAR LOGO]
-------------------
For Excellence
in
Service
[Logo] STATE STREET RESEARCH
<PAGE>
FROM THE CHAIRMAN
[Photo of Richard S. Davis]
DEAR SHAREHOLDER:
With no further interest rate changes since May, it appears that the Federal
Reserve has managed to orchestrate a modest slowdown of the U.S. economy without
harsh effects on consumers, workers or markets. Economic growth has found a
slower pace in the past two quarters. As a result, the Fed has let short-term
interest rates stand in its past three meetings. However, it continues to warn
that it is concerned about the tight labor market, relatively high consumer
spending and rising energy prices, any of which could boost inflation higher.
STOCKS
The S&P 500 Index returned 6.1% over the 12 months ended October 2000.(1) The
technology-driven Nasdaq returned 13.8%. However, it lost significant ground in
the second half of the fund's fiscal year. The best performing group was mid-cap
growth stocks, which soared 38.7% over the same period as measured by the
Russell Midcap Growth Index.(1)
BONDS
Long-term U.S. Treasury bonds were helped by optimism about the economic
slowdown plus a federal buyback of bonds. Government, mortgage and municipal
bonds were strong performers. Corporate bonds eked out modest returns while
high-yield bonds were weak, a reflection of slower economic growth and rising
defaults among telecommunications companies.
INTERNATIONAL
Global economic growth improved to over 4.0% compared to 2.0% two years ago,
according to the Organization for Economic Cooperation and Development (OECD).
Nearly all foreign stock markets delivered disappointing returns. The few bright
spots for the year included Canada and Israel.
OUTLOOK AND OPPORTUNITIES
It's a pleasure to have this opportunity to speak directly to shareholders in my
new capacity as President and Chief Executive Officer of State Street Research &
Management Company. Although it has been a challenging year for stock market
investors, there have been areas of opportunity among bonds and certain sectors
of the stock market, such as natural resources and mid-cap stocks. The lesson?
Diversification is still the best way to reduce the impact of volatility. Now is
a good time to consult your financial professional for a review of the
components of your portfolio. As always, we thank you for your confidence in
State Street Research.
Sincerely,
[Graphic Omitted]
Richard S. "Dick" Davis
President and Chief Executive Officer
State Street Research & Management Company
(1) The S&P 500 (officially the "S&P 500 Composite Stock Price Index") is an
unmanaged index of 500 U.S. stocks. The index does not take transaction
charges into consideration. It is not possible to invest directly in the
index. The Russell Midcap Growth Index contains only those stocks within the
complete Russell Midcap Index (a mid-sized company index) that show above
average growth. The index does not take transaction charges into
consideration. It is not possible to invest directly in the index. Lipper
Flexible Income Funds Average shows the performance of a category of mutual
funds with similar goals. The Lipper average shows how well the fund has
done compared with competing funds.
(2) 7.11% for Class B(1) shares; 7.16% for Class B shares; 7.16% for Class C
shares; 8.22% for Class S shares.
(3) Keep in mind that past performance is no guarantee of future results. The
fund's share price, yield and return will fluctuate, and you may have a gain
or loss when you sell your shares. All returns assume reinvestment of
capital gains distributions and income dividends at net asset value.
(4) Performance reflects a maximum 5.75% 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. The fund's returns include performance
before the creation of share classes. If this performance reflected the
share classes' current 12b-1 fees, the fund's returns may have been lower.
(5) Class S shares, offered without a sales charge, are available through
certain employee benefit plans and special programs.
(6) Performance for the period May 16, 1994 to March 27, 1997 reflects actual
performance of the fund prior to the liquidation of outstanding Class A
shares in 1997. Returns shown for all other periods, including periods prior
to the reintroduction of Class A shares in 1999, reflect performance of
Class S shares. Returns shown are for periods prior to the creation of the
class in 1999. They reflect performance of Class S shares, adjusted for
shareholder and annual fund operating expenses.
PLEASE NOTE THAT THE DISCUSSION THROUGHOUT THIS SHAREHOLDER REPORT IS DATED AS
INDICATED AND, BECAUSE OF POSSIBLE CHANGES IN VIEWPOINT, DATA AND TRANSACTIONS,
SHOULD NOT BE RELIED UPON AS BEING CURRENT THEREAFTER.
-------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 2000, except where
noted)
-------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIOD ENDED 9/30/00
(at maximum applicable sales charge)(3)(4)(5)(6)
-------------------------------------------------------------------
LIFE OF FUND
(since 5/16/94) 5 YEARS 1 YEAR
-------------------------------------------------------------------
Class A 8.33% 7.34% 2.14%
-------------------------------------------------------------------
Class B(1) 8.54% 7.53% 2.63%
-------------------------------------------------------------------
Class B 8.53% 7.52% 2.58%
-------------------------------------------------------------------
Class C 8.53% 7.82% 6.58%
-------------------------------------------------------------------
Class S 9.63% 8.92% 8.76%
-------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(does not reflect sales charge)(3)(5)(6)
-------------------------------------------------------------------
LIFE OF FUND
(Since 5/16/94) 5 YEARS 1 YEAR
-------------------------------------------------------------------
Class A 9.20% 8.57% 7.85%
-------------------------------------------------------------------
Class B(1) 8.39% 7.76% 7.11%
-------------------------------------------------------------------
Class B 8.39% 7.77% 7.16%
-------------------------------------------------------------------
Class C 8.39% 7.77% 7.16%
-------------------------------------------------------------------
Class S 9.48% 8.86% 8.22%
-------------------------------------------------------------------
Performance results for the fund are increased by the voluntary reduction of
fund fees and expenses; without subsidization, performance would have been
lower.
<PAGE>
PORTFOLIO MANAGER'S REVIEW
Stretegic Income Plus Fund: Bonds help boost performance in a volatile year
[Photo of Jack Kalis]
Jack Kallis
Portfolio Manager
We spoke with Jack Kallis, portfolio manager of State Street Research Strategic
Income Plus Fund, about the year ended October 31, 2000 and his views on the
year ahead.
Q: HOW DID THE FUND PERFORM LAST YEAR?
A: It was a good year for the fund. Class A shares returned 7.85% [without sales
charge](2) for the 12 months ended October 31, 2000. The fund significantly
outperformed the Lipper Flexible Income Funds Average, which returned 3.97% over
the same period.
Q: WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE?
A: In a good year for bonds and a rocky year for stocks, the fund benefited by
having a heavier weighting in bonds than many other funds in our peer group. We
increased the fund's emphasis on bonds midway through the year. However, in the
last months, when the stock market had come down and looked more attractively
valued, we began to increase our exposure to stocks once again. In the last
quarter, our investments in large-cap growth and value stocks also helped
performance on the equity side of the portfolio.
Q: DID YOU MAKE ANY OTHER CHANGES IN THE PORTFOLIO DURING THE YEAR?
A: We also changed the fund's value sector manager. We lowered our exposure to
high-yield bonds last quarter, and we added modestly to the fund's cash
position.
Q: WHERE WERE THE FUND'S DISAPPOINTMENTS?
A: Our investment in high-yield bonds hurt performance two ways: first, it was
a challenging year for the high-yield sector all around. Plus, we owned three
positions that encountered serious credit problems. They lost value. We sold
two of them and held on to a third because we believe it has the potential to
recover.
Our investment in nondollar bonds was also a negative for the portfolio. A weak
euro translated into poor performance for European bonds. That said, we have
held on to our investments because we believe they have the potential to rebound
if the euro recovers.
Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: If the economy continues to maintain slow, steady growth, it could be a
better environment for stocks and bonds. The fund is well positioned for a
rebound among bond sectors that have lagged U.S. Treasury bonds -- mortgages,
corporate, asset backed and agency bonds. A stronger euro could also help the
fund's international investments.
October 31, 2000
-------------------------------------------------------------------------------
------------------------------------------------------------------------------
ASSET ALLOCATION
(by percentage of net assets)
Bonds 70%
Cash 5%
Equities 25%
TOP 5 BOND SECTORS
(by percentage of net assets)
U.S. AGENCY MORTGAGE 32.6%
FINANCE/MORTGAGE 13.5%
CORPORATE 10.1%
U.S. TREASURY 9.5%
FOREIGN GOVERNMENT 2.1%
TOP 5 EQUITY INDUSTRIES
(by percentage of net assets)
MISCELLANEOUS FINANCIAL 1.8%
DRUGS & BIOTECHNOLOGY 1.7%
INSURANCE 1.5%
COMMUNICATIONS TECHNOLOGY 1.4%
MULTI-SECTOR 1.3%
Total: 7.7%
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
October 31, 2000
--------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
--------------------------------------------------------------------------------
EQUITY SECURITIES 25.4%
AUTOMOBILES & TRANSPORTATION 0.6%
AUTOMOTIVE PARTS 0.3%
Delphi Automotive Systems Corp. ............. 4,700 $ 73,731
----------
MISCELLANEOUS TRANSPORTATION 0.1%
Canadian Pacific Ltd. ....................... 1,400 40,557
----------
TRUCKERS 0.2%
CNF Transportation Inc. ..................... 2,500 66,719
----------
Total Automobiles & Transportation .......... 181,007
----------
CONSUMER DISCRETIONARY 3.3%
ADVERTISING AGENCIES 0.3%
Valassis Communications Inc.* ............... 4,000 111,000
----------
CASINOS/GAMBLING, HOTEL/MOTEL 0.6%
Harrah's Entertainment Inc.* ................ 2,835 81,152
Hilton Hotels Corp. ......................... 6,900 65,550
International Game Technology Inc.* ......... 940 34,428
----------
181,130
----------
COMMERCIAL SERVICES 0.8%
A.C. Nielsen Corp.* ......................... 3,700 88,569
Cendant Corp.* .............................. 8,100 97,200
Republic Services Inc.* ..................... 4,400 59,125
----------
244,894
----------
COMMUNICATIONS, MEDIA & ENTERTAINMENT 0.1%
Walt Disney Co. ............................. 1,300 46,556
----------
PRINTING & PUBLISHING 0.5%
Hollinger International, Inc. Cl. A ......... 8,700 134,306
Reed International PLC ...................... 1,000 37,375
----------
171,681
----------
RESTAURANTS 0.2%
Darden Restaurants Inc. ..................... 2,400 54,000
----------
RETAIL 0.8%
Federated Department Stores Inc.* ........... 2,400 78,150
Home Depot Inc. ............................. 700 30,100
Staples Inc.* ............................... 4,400 62,700
TJX Companies, Inc. ......................... 2,500 68,125
----------
239,075
----------
Total Consumer Discretionary ................ 1,048,336
----------
CONSUMER STAPLES 0.8%
BEVERAGES 0.4%
Anheuser-Busch Companies, Inc. .............. 2,540 116,205
----------
DRUG & GROCERY STORE CHAINS 0.2%
Safeway Inc.* ............................... 1,400 76,563
----------
TOBACCO 0.2%
UST Inc. .................................... 2,600 65,650
----------
Total Consumer Staples ...................... 258,418
----------
FINANCIAL SERVICES 4.0%
BANKS & SAVINGS & LOAN 0.7%
Banknorth Group Inc.* ....................... 2,549 46,200
Golden West Financial Corp. ................. 1,200 67,275
Hudson City Bancorp Inc. .................... 1,300 23,644
Mercantile Bankshares Corp. ................. 1,000 37,625
North Fork BanCorp., Inc. ................... 1,200 24,225
SouthTrust Corp. ............................ 600 19,425
----------
218,394
----------
INSURANCE 1.5%
Ace Ltd. .................................... 6,750 264,938
Saint Paul Companies, Inc. .................. 2,000 102,500
XL Capital Ltd. Cl. A ....................... 1,653 127,074
----------
494,512
----------
MISCELLANEOUS FINANCIAL 1.8%
AMBAC Financial Group, Inc. ................. 1,700 135,682
Citigroup, Inc. ............................. 2,266 119,248
Marsh & McLennan Companies, Inc. ............ 800 104,600
MBNA Corp. .................................. 2,480 93,155
Morgan Stanley Dean Witter & Co. ............ 1,360 109,225
----------
561,910
----------
Total Financial Services .................... 1,274,816
----------
HEALTH CARE 1.9%
DRUGS & BIOTECHNOLOGY 1.7%
Abbott Laboratories Inc. .................... 2,000 105,625
Amgen Inc.* ................................. 600 34,762
Biogen Inc.* ................................ 800 48,150
Genentech, Inc.* ............................ 480 39,600
Genzyme Corp.* .............................. 500 35,500
Pfizer Inc. ................................. 2,975 128,483
Pharmacia Corp. ............................. 2,680 147,400
----------
539,520
----------
HEALTH CARE FACILITIES 0.1%
Tenet Healthcare Corp.* ..................... 400 15,725
----------
HOSPITAL SUPPLY 0.1%
Sybron International Corp.* ................. 1,400 34,650
----------
Total Health Care ........................... 589,895
----------
INTEGRATED OILS 0.8%
INTEGRATED DOMESTIC 0.5%
Petroleo Brasileiro SA* ..................... 1,200 34,875
Unocal Corp. ................................ 2,200 75,075
USX-Marathon Group .......................... 1,600 43,500
----------
153,450
----------
INTEGRATED INTERNATIONAL 0.3%
Exxon Mobil Corp. ........................... 950 84,728
Petro-Canada* ............................... 1,500 31,500
----------
116,228
----------
Total Integrated Oils ....................... 269,678
----------
MATERIALS & PROCESSING 1.4%
BUILDING & CONSTRUCTION 0.1%
York International Corp. .................... 1,100 29,906
----------
CHEMICALS 0.3%
Rohm & Haas Co. ............................. 2,500 75,157
Solutia Inc. ................................ 1,500 19,125
----------
94,282
----------
DIVERSIFIED MANUFACTURING 0.2%
Ball Corp. .................................. 2,200 77,275
----------
FERTILIZERS 0.1%
Agrium Inc. ................................. 3,100 32,356
----------
PAPER & FOREST PRODUCTS 0.4%
Fort James Corp. ............................ 2,190 72,133
Westvaco Corp. .............................. 1,300 37,050
----------
109,183
----------
STEEL 0.3%
Alaska Steel Holding Corp. .................. 2,916 26,973
Harsco Corp. ................................ 1,700 34,319
Nucor Corp. ................................. 1,100 37,681
----------
98,973
----------
Total Materials & Processing ................ 441,975
----------
OTHER 1.3%
MULTI-SECTOR 1.3%
General Electric Co. ........................ 2,910 159,504
Monsanto Co.* ............................... 2,600 66,300
Ogden Corp.* ................................ 6,000 82,500
SPX Corp.* .................................. 400 49,450
Tyco International Ltd. ..................... 1,140 64,624
----------
Total Other ................................. 422,378
----------
OTHER ENERGY 1.7%
OIL & GAS PRODUCERS 0.9%
Anadarko Petroleum Corp. .................... 2,617 167,619
Burlington Resources Inc. ................... 700 25,200
Ocean Energy Inc.* .......................... 6,200 86,025
----------
278,844
----------
OIL WELL EQUIPMENT & SERVICES 0.8%
Baker Hughes Inc. ........................... 1,000 34,375
Schlumberger Ltd. ........................... 2,900 220,762
----------
255,137
----------
Total Other Energy .......................... 533,981
----------
PRODUCER DURABLES 0.4%
ELECTRONICS: INDUSTRIAL 0.2%
ASM Lithography Holding NV* ................. 2,000 54,667
----------
INDUSTRIAL PRODUCTS 0.0%
Parker Hannifin Corp. ....................... 200 8,275
----------
OFFICE FURNITURE & BUSINESS EQUIPMENT 0.2%
Pitney Bowes Inc. ........................... 1,800 53,437
----------
Total Producer Durables ..................... 116,379
----------
TECHNOLOGY 3.6%
COMMUNICATIONS TECHNOLOGY 1.4%
Cisco Systems Inc.* ......................... 1,670 89,971
Comverse Technology Inc.* ................... 750 83,812
Corning Inc. ................................ 1,150 87,975
General Motors Corp. Cl. H* ................. 1,100 35,640
NCR Corp.* .................................. 900 38,813
Nortel Networks Corp. ....................... 2,550 115,841
----------
452,052
----------
COMPUTER SOFTWARE 0.5%
i2 Technologies Inc.* ....................... 450 76,500
Microsoft Corp.* ............................ 1,110 76,451
----------
152,951
----------
COMPUTER TECHNOLOGY 0.7%
EMC Corp.* .................................. 1,420 126,469
International Business Machines Corp. ....... 410 40,385
Sun Microsystems Inc.* ...................... 580 64,307
----------
231,161
----------
ELECTRONICS 0.8%
Nokia Corp. ADR ............................. 2,220 94,905
PE Biosystems Group Corp. ................... 1,150 134,550
Rockwell International Corp. ................ 600 23,588
----------
253,043
----------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS 0.2%
Cypress Semiconductor Corp.* ................ 745 27,891
PMC Sierra Inc.* ............................ 150 25,425
----------
53,316
----------
Total Technology ............................ 1,142,523
----------
UTILITIES 1.2%
ELECTRICAL 0.8%
Energy East Corp. ........................... 1,800 36,337
Niagara Mohawk Holdings Inc.* ............... 1,700 27,200
OGE Energy Corp. ............................ 2,000 41,125
Pinnacle West Capital Corp. ................. 2,100 91,219
Scana Corp. ................................. 2,100 55,650
----------
251,531
----------
GAS DISTRIBUTION 0.2%
National Fuel Gas Co. ....................... 500 26,813
Nicor Inc. .................................. 500 17,656
Questar Corp. ............................... 800 21,650
----------
66,119
----------
TELECOMMUNICATIONS 0.2%
XO Communications Inc.* ..................... 1,810 61,059
----------
Total Utilities ............................. 378,709
----------
NON-U.S. EQUITIES 4.4%
Actelion Ltd.* .............................. 200 88,451
Allied Irish Banks PLC ...................... 4,900 49,898
Aventis SA* ................................. 500 36,066
Canon Sales Company, Inc. ................... 4,000 57,517
Citizen Watch Co. ........................... 3,000 29,446
Danone Groupe ............................... 348 48,668
Deutsche Bank AG ............................ 500 40,936
Heineken NV ................................. 900 48,879
Hutchison Whampoa ........................... 3,000 37,312
IHC Caland NV ............................... 1,500 66,191
Kone Oyj Cl. B .............................. 1,100 64,409
Nutreco Holding NV .......................... 1,200 51,731
Petrochina Co. Ltd.* ........................ 365,300 76,817
Renault SA .................................. 1,300 64,646
Saipem SPA .................................. 12,500 65,130
Sampo Insurance Co. ......................... 1,200 48,879
Schering AG ................................. 700 39,205
Shohkoh Fund & Co. .......................... 200 16,423
Skandia Foersaekrings AB .................... 1,900 32,230
Societe Generale de France .................. 600 34,063
Sony Corp. .................................. 800 63,933
Technip ..................................... 800 102,375
Tesco ....................................... 12,200 46,511
Unilever PLC* ............................... 7,300 49,385
Volkswagen AG ............................... 1,100 54,953
Wolters Kluwer .............................. 1,300 29,256
Woolworths Ltd. ............................. 10,200 40,637
----------
Total Non-U.S. Equities ..................... 1,383,947
----------
Total Equity Securities (Cost $6,790,141) ... 8,042,042
----------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 69.7%
U.S. TREASURY 9.5%
U.S. Treasury Bond, 11.25% ......................... $ 275,000 2/15/2015 $ 412,327
U.S. Treasury Bond, 10.625% ........................ 350,000 8/15/2015 507,171
U.S. Treasury Bond, 8.875% ......................... 400,000 2/15/2019 525,688
U.S. Treasury Bond, 6.75% .......................... 375,000 8/15/2026 412,852
U.S. Treasury Bond, 6.125% ......................... 250,000 8/15/2029 258,905
U.S. Treasury Bond, 6.25% .......................... 75,000 5/15/2030 79,875
U.S. Treasury Note, 6.125% ......................... 500,000 8/31/2002 500,935
U.S. Treasury Note, 6.75% .......................... 50,000 5/15/2005 51,836
U.S. Treasury TIPS, 3.875% ......................... 262,628 4/15/2029 263,613
-----------
3,013,202
-----------
U.S. AGENCY MORTGAGE 32.6%
Federal National Mortgage Association, 7.00% ....... 350,000 7/15/2005 356,619
Federal National Mortgage Association, 6.625% ...... 325,000 10/15/2007 325,101
Federal National Mortgage Association, 7.25% ....... 50,000 1/15/2010 51,828
Federal National Mortgage Association, 5.50% ....... 86,191 2/01/2014 81,207
Federal National Mortgage Association, 6.50% ....... 233,347 9/01/2028 224,377
Federal National Mortgage Association, 6.50% ....... 329,000 11/01/2028 316,354
Federal National Mortgage Association, 6.50% ....... 285,635 12/01/2028 274,655
Federal National Mortgage Association, 6.00% ....... 157,118 2/01/2029 147,347
Federal National Mortgage Association, 7.50% ....... 372,556 7/01/2029 372,440
Federal National Mortgage Association, 7.00% ....... 500,382 12/01/2029 490,214
Federal National Mortgage Association, 7.00% ....... 1,055,553 12/01/2029 1,034,104
Federal National Mortgage Association, 7.00% ....... 694,775 12/01/2029 680,657
Federal National Mortgage Association, 7.125% ...... 275,000 1/15/2030 287,419
Federal National Mortgage Association, 7.00% ....... 951,746 2/01/2030 932,711
Federal National Mortgage Association, 7.25% ....... 225,000 5/15/2030 239,063
Federal National Mortgage Association TBA, 7.00% ... 1,075,000 12/01/2030 1,068,281
Federal National Mortgage Association TBA, 7.50% ... 550,000 12/01/2030 549,142
Government National Mortgage Association, 6.50% .... 144,504 7/15/2009 143,265
Government National Mortgage Association, 7.50% .... 143,276 12/15/2010 145,604
Government National Mortgage Association, 7.00% .... 184,978 1/15/2025 182,897
Government National Mortgage Association, 7.00% .... 55,112 10/15/2025 54,406
Government National Mortgage Association, 7.00% .... 224,307 6/15/2028 221,084
Government National Mortgage Association, 7.00% .... 477,912 10/15/2028 471,044
Government National Mortgage Association, 6.50% .... 600,469 11/15/2028 579,638
Government National Mortgage Association, 7.00% .... 139,523 11/15/2028 137,518
Government National Mortgage Association TBA, 7.50% 550,000 12/15/2030 551,892
Government National Mortgage Association TBA, 8.00% 400,000 12/15/2030 406,624
-----------
10,325,491
-----------
YANKEE 1.8%
British Sky Broadcasting Group Inc. Note, 6.875% ... 75,000 2/23/2009 63,982
Province of Quebec Deb., 7.50% ..................... 125,000 9/15/2029 126,720
Vodafone AirTouch PLC, 7.75%+ ...................... 225,000 2/15/2010 228,440
Woodside Finance Ltd. Note, 6.60%+ ................. 125,000 4/15/2008 118,079
-----------
537,221
-----------
FOREIGN GOVERNMENT 2.2%
Greek Drachma
Republic of Greece, 8.80% .......................... 181,600,000 6/19/2007 523,972
Republic of Greece, 6.95% .......................... 50,000 3/04/2008 49,691
New Zealand Dollar
Government of New Zealand, 8.00% ................... 50,000 4/15/2004 20,667
Government of New Zealand, 8.00% ................... 250,000 11/15/2006 105,813
---------------
700,143
---------------
FINANCE/MORTGAGE 13.5%
Arcadia Automobile Trust 97-B A5,
6.70% ............................................ 125,000 2/15/2005 125,054
Arcadia Automobile Trust 97-C A5,
6.55% ............................................ 125,000 6/15/2005 124,771
AT&T Capital Corp. Note, 6.875% .................... 125,000 1/16/2001 124,701
Capital One Bank Note, 6.62% ....................... 125,000 8/04/2003 121,190
Chase Commercial Mortgage Securities Corp. 1997-1
Cl. A1, 7.27% .................................... 72,422 7/19/2004 72,784
Citibank Credit Card Issuance Trust, 7.45% ......... 150,000 9/15/2007 148,524
Commercial Credit Group Inc. Sr. Note, 5.55% ....... 250,000 2/15/2001 248,793
Countrywide Funding Corp. Note, 6.58% .............. 175,000 9/21/2001 173,883
Countrywide Funding Corp. Note, 6.28% .............. 200,000 1/15/2003 196,722
DLJ Commercial Mortgage Corp.,
7.50% ............................................ 50,000 9/10/2010 50,242
DLJ Commercial Mortgage Corp. 98-C2, 6.24% ......... 75,000 11/12/2031 71,320
DLJ Commercial Mortgage Corp. 98-C2 Cl. A1-A, 5.88% 167,125 11/12/2031 160,649
DLJ Commercial Mortgage Corp. 99-C1, 6.46% ......... 50,000 1/10/2009 48,109
Florida Windstorm Underwriting Sr. Sec. Note, 7.125%+ 125,000 2/25/2019 118,980
Ford Credit Auto Owner Trust, 6.58% ................ 100,000 11/15/2004 99,672
Ford Motor Credit Co., 7.50% ....................... 125,000 6/15/2003 125,884
Ford Motor Credit Co., 7.375% ...................... 50,000 10/28/2009 48,548
Ford Motor Credit Co., 7.875% ...................... 150,000 6/15/2010 150,415
Ford Motor Credit Co. Note, 7.50% .................. 75,000 3/15/2005 75,239
GE Global Insurance Holding Corp. Note, 7.00% ...... 100,000 2/15/2026 92,073
General Motors Acceptance Corp., 6.40% ,............ 125,000 9/21/2001 124,153
GMAC Commercial Mortgage Security Inc. 99-C1 A2,
6.175% ........................................... 150,000 5/15/2033 141,668
Household Finance Corp., 7.875% .................... 200,000 3/01/2007 203,572
J.P. Morgan Commercial Mortgage Finance Corp., 6.507% 100,000 10/15/2035 96,863
LB Commercial Conduit Mortgage Trust 97-LL1-A1, 6.79% 231,784 6/12/2004 231,277
LB Commercial Conduit Mortgage Trust 98-C4 Cl. A1,
5.87% ............................................ 111,513 8/15/2006 107,784
LB Commercial Conduit Mortgage Trust 98-C4 Cl. A1,
6.21% ............................................ 60,000 10/15/2008 56,962
MBNA Master Credit Card Trust II, 6.90% ............ 300,000 1/15/2008 302,062
MBNA Master Credit Card Trust Series 1999-J-A, 7.00% 225,000 2/15/2012 224,165
MBNA Master Credit Card Trust Series 99-B, 5.90% ... 25,000 8/15/2011 23,465
Morgan Stanley Capital Inc. 98- A1, 6.19% .......... 40,658 1/15/2007 40,684
Nationslink Funding Corp., 6.476% .................. 100,000 7/20/2008 96,500
Prime Credit Card Master Trust Series 1995-1A, 6.75% 125,000 11/15/2005 125,039
Qwest Capital Funding Inc., 7.90%+ ................. 125,000 8/15/2010 126,801
-----------
4,278,548
-----------
CORPORATE 10.1%
Albertsons Inc. Sr. Deb., 7.45% .................... 125,000 8/01/2029 111,970
Alcoa Inc., 7.375% ................................. 125,000 8/01/2010 125,525
Arizona Public Service Co., 7.625% ................. 250,000 8/01/2005 252,805
Atlantic Richfield Co. Note, 5.90% ................. 175,000 4/15/2009 163,280
Bell Atlantic Financial Services Inc., 7.60% ....... 175,000 3/15/2007 178,412
Citigroup Inc., 7.25% .............................. 225,000 10/01/2010 223,567
CK Witco Corp., 8.50% .............................. 50,000 3/15/2005 48,122
Clear Channel Communications, 7.25% ................ 125,000 9/15/2003 124,255
Coca-Cola Enterprises Inc., 5.75% .................. 250,000 11/01/2008 224,007
Coca-Cola Enterprises Inc. Deb., 6.75% ............. 50,000 9/15/2028 43,148
Columbia/HCA Healthcare Corp. Note, 6.87% .......... 150,000 9/15/2003 144,188
Dynergy Inc. Sr. Note, 6.875% ...................... 250,000 7/15/2002 248,402
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ........................................... 88,168 9/15/2003 85,647
El Paso Energy Corp. Sr. Note, 6.625% .............. 250,000 7/15/2001 248,537
Electronic Data Systems Corp., 7.45% ............... 75,000 10/15/2029 71,454
Enron Corp., 7.875% ................................ 125,000 6/15/2003 127,524
Honeywell International Inc., 7.50% ................ 75,000 3/01/2010 77,211
International Paper Co., 7.603%+ ................... 75,000 1/08/2001 75,262
International Paper Co., 8.00%+ .................... 100,000 7/08/2003 101,294
Lockheed Martin Corp. Note, 7.95% .................. 125,000 12/01/2005 127,998
New Jersey Economic Development Authority, 7.425% .. 125,000 2/15/2029 123,595
News America Inc. Sr. Deb., 7.125% ................. 125,000 4/08/2028 103,813
NRG Energy Inc. Note, 8.00% ........................ 125,000 11/01/2003 126,980
Tyco International Group Note, 6.25% ............... 50,000 6/15/2003 48,483
-----------
3,205,479
-----------
Total Fixed Income Securities (Cost $22,186,452) .......................................... 22,060,084
-----------
COMMERCIAL PAPER 12.7%
American Express Credit Corp., 6.48% ............... 1,310,000 11/08/2000 1,310,000
Ford Motor Credit Co., 6.50% ....................... 773,000 11/01/2000 773,000
General Electric Capital Corp., 6.47% .............. 725,000 11/20/2000 725,000
Merrill Lynch & Company Inc., 6.48% ................ 930,000 11/13/2000 927,991
Wells Fargo Financial Inc., 6.51% .................. 298,000 11/06/2000 298,000
-----------
Total Commercial Paper (Cost $4,033,991) .................................................. 4,033,991
- ----------
-----------------------------------------------------------------------------------------------------------------
SHARES
-----------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 12.6%
State Street Navigator Securities Lending Prime
Portfolio ........................................ 3,993,979 3,993,979
-----------
Total Short-Term Investments (Cost $3,993,979) ............................................ 3,993,979
-----------
Total Investments (Cost $37,004,563) - 120.4% ............................................. 38,130,096
Cash and Other Assets, Less Liabilities-(20.4%) ........................................... (6,450,036)
-----------
Net Assets - 100.0% ....................................................................... $31,680,060
===========
Federal Income Tax Information:
AtOctober 31, 2000, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $37,126,482 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of value over tax cost ................................................................ $ 1,627,055
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value ................................................................ (623,441)
-----------
$ 1,003,614
===========
</TABLE>
--------------------------------------------------------------------------------
* Nonincome-producing securities.
+ Security restricted in accordance with Rule 144A under the Securities Act of
1933, which allows for the resale of such securit ies among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 2000 were $856,477 and $854,503 (2.70% of net assets),
respectively.
ADR Stands for American Depositary Receipt, representing ownership of foreign
securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond c ustomary settlement
time. Although the unit price has been established, the principal value has not
been finalized.
Forward currency exchange contracts outstanding at October 31, 2000, are as
follows:
<TABLE>
<CAPTION>
CONTRACT UNREALIZED DELIVERY
TRANSACTION TOTAL VALUE PRICE APPRECIATION DATE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Euro, Buy U.S. dollars 102,500 EUR 0.91423 EUR $ 6,645 11/20/00
Sell Greek drachma, Buy U.S. dollars 49,466,000 GRD 0.00269 GRD 9,264 11/09/00
Sell Greek drachma, Buy U.S. dollars 4,800,000 GRD 0.00268 GRD 894 11/09/00
Sell Greek drachma, Buy U.S. dollars 15,455,000 GRD 0.00269 GRD 2,933 11/20/00
Sell Greek drachma, Buy U.S. dollars 16,815,000 GRD 0.00257 GRD 1,241 12/11/00
Sell New Zealand dollars, Buy U.S. dollars 155,000 NZD 0.44903 NZD 8,123 11/20/00
Sell New Zealand dollars, Buy U.S. dollars 52,000 NZD 0.45005 NZD 2,778 11/20/00
Sell New Zealand dollars, Buy U.S. dollars 53,000 NZD 0.40202 NZD 286 11/20/00
Sell New Zealand dollars, Buy U.S. dollars 50,000 NZD 0.40201 NZD 269 11/20/00
-------
$32,433
=======
Futures contracts open at October 31, 2000, are as follows:
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION
TYPE NOTIONAL AMOUNT MONTH (DEPRECIATION)
---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
5 year U.S. Treasury Notes $1,000,000 December, 2000 $1,336
10 year U.S. Treasury Notes 600,000 December, 2000 (5,885)
------
(4,549)
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
October 31, 2000
ASSETS
Investments, at value (Cost $37,004,563) (Note 1) ............... $38,130,096
Foreign currency, at value (Cost $96,508) ....................... 96,508
Cash ............................................................ 1,824
Receivable for securities sold .................................. 1,583,698
Interest and dividends receivable ............................... 239,772
Receivable from Distributor (Note 3) ............................ 171,589
Receivable for open forward contracts ........................... 32,433
Receivable for fund shares sold ................................. 2,483
Receivable for variation margin (Note 1) ........................ 781
Other assets .................................................... 61,116
-----------
40,320,300
LIABILITIES
Payable for securities purchased ................................ 4,498,734
Payable for collateral received on securities loaned ............ 3,993,979
Accrued administration fee ...................................... 28,100
Accrued management fee (Note 2) ................................. 15,990
Accrued transfer agent and shareholder services
(Note 2) ...................................................... 14,993
Accrued trustees' fees (Note 2) ................................. 5,932
Accrued distribution and service fees (Note 5) .................. 1,560
Other accrued expenses .......................................... 80,952
-----------
8,640,240
-----------
NET ASSETS $31,680,060
===========
Net Assets consist of:
Undistributed net investment income ........................... $ 514,363
Unrealized appreciation of investments ........................ 1,125,533
Unrealized depreciation of futures contracts .................. (4,549)
Unrealized appreciation of forward contracts and
foreign currency ............................................ 32,351
Accumulated net realized gain ................................. 638,528
Paid-in capital ............................................... 29,373,834
-----------
$31,680,060
===========
Net Asset Value and redemption price per share of Class A shares
($649,199 / 62,274 shares) .................................... $10.42
======
Maximum Offering Price per share of Class A shares
($10.42 / .9425) ............................................. $11.06
======
Net Asset Value and offering price per share of
Class B(1) shares ($690,024 / 66,325 shares)* ................. $10.40
======
Net Asset Value and offering price per share of
Class B shares ($531,551 / 51,065 shares)* .................... $10.41
======
Net Asset Value and offering price per share of
Class C shares ($525,452 / 50,481 shares)* .................... $10.41
======
Net Asset Value, offering price and redemption price per share
of Class S shares ($29,283,834 / 2,807,229 shares) ............ $10.43
======
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
For the year ended October 31, 2000
INVESTMENT INCOME
Interest (Note 1) ............................................ $1,806,581
Dividends, net of foreign taxes of $2,188 .................... 87,794
----------
1,894,375
EXPENSES
Management fee (Note 2) ...................................... 192,782
Custodian fee ................................................ 166,852
Registration fees ............................................ 82,015
Transfer agent and shareholder services (Note 2) ............. 53,889
Reports to shareholders ...................................... 44,210
Audit fee .................................................... 29,041
Administration fee ........................................... 28,100
Legal fees ................................................... 14,040
Trustee's fees (Note 2) ...................................... 5,932
Distribution and service fees - Class A (Note 4) ............. 1,471
Distribution and service fees - Class B(1) (Note 4) .......... 5,451
Distribution and service fees - Class B (Note 4) ............. 5,122
Distribution and service fees - Class C (Note 4) ............. 5,096
Miscellaneous ................................................ 12,774
----------
646,775
Expenses borne by the Distributor (Note 3) ................... (339,473)
Fees paid indirectly (Note 2) ................................ (1,000)
----------
306,302
----------
Net investment income ........................................ 1,588,073
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FOREIGN CURRENCY, FORWARD CONTRACTS
AND FUTURES CONTRACTS
Net realized gain on investments (Notes 1 and 4) ............. 853,553
Net realized loss on futures contracts (Note 1) .............. (53,696)
Net realized loss on forward contracts and foreign
currency (Note 1) .......................................... (59,524)
----------
Total net realized gain .................................... 740,333
----------
Change in unrealized appreciation of investments ............. 130,867
Change in unrealized depreciation of futures contracts ....... (5,887)
Change in unrealized appreciation of forward contracts
and foreign currency........................................ 83,464
----------
Total change in unrealized appreciation .................... 208,444
----------
Net gain on investments, foreign currency and forward
contracts and futures contracts ............................ 948,777
----------
Net increase in net assets resulting from operations ......... $2,536,850
==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------------
1999 2000
------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ......................................... $ 1,463,692 $ 1,588,073
Net realized gain (loss) on investments, foreign currency,
forward contracts and futures contracts ..................... (143,033) 740,333
Change in unrealized appreciation (depreciation) of
investments, foreign currency, forward contracts and futures
contracts ................................................... (297,120) 208,444
----------- -----------
Net increase resulting from operations ........................ 1,023,539 2,536,850
----------- -----------
Dividends from net investment income:
Class A ..................................................... (4,941) (22,697)
Class B(1) .................................................. (4,941) (20,254)
Class B ..................................................... (4,941) (18,815)
Class C ..................................................... (4,941) (18,770)
Class S ..................................................... (1,428,809) (1,375,972)
----------- -----------
(1,448,573) (1,456,508)
----------- -----------
Dividends from capital gains:
Class A ..................................................... -- (1,136)
Class B(1) .................................................. -- (1,136)
Class B ..................................................... -- (1,136)
Class C ..................................................... -- (1,136)
Class S ..................................................... (2,273,855) (70,420)
----------- -----------
(2,273,855) (74,964)
----------- -----------
Net decrease from fund share
transactions ................................................ (249,691) (2,612,828)
----------- -----------
Total decrease in net assets .................................. (2,948,580) (1,607,450)
NET ASSETS
Beginning of year ............................................. 36,236,090 33,287,510
----------- -----------
End of year (including undistributed net investment income of
$443,408 and $514,363, respectively) ........................ $33,287,510 $31,680,060
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
October 31, 2000
NOTE 1
State Street Research Strategic Income Plus Fund (the "Fund") is a series of
State Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Trust consists presently of six separate funds: State Street
Research Strategic Income Plus Fund, State Street Research Government Income
Fund, State Street Research Strategic Portfolios: Aggressive, State Street
Research Concentrated Growth Fund, State Street Research Health Sciences Fund
and State Street Research International Equity Fund.
The investment objective of the Fund is to provide, primarily, a high level of
current income and, secondarily, long-term growth of capital, consistent with
the preservation of capital and reasonable investment risk.
The Fund offers five classes of shares. Class A shares are subject to an initial
sales charge of up to 5.75%. From November 1, 1999 to April 30, 2000, Class A
shares paid a service fee equal to 0.25% of average daily net assets. Beginning
May 1, 2000, Class A shares pay an annual service and distribution fee equal to
0.30% of average daily net assets. Class B shares are being 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(1) and Class B pay annual service and distribution fees of 1.00% and
both classes automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years. Class B (1) shares are subject to a
contingent deferred sales charge on certain redemptions made within six years of
purchase. 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 their purchase. Class C shares also pay annual service and
distribution fees of 1.00%. Class S shares are only offered through certain
retirement accounts, advisory accounts of State Street Research & Management
Company (the "Adviser"), an indirect wholly owned 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 pro-rata by each class,
except that each class bears expenses, and has exclusive voting rights with
respect to provisions of the plans of distribution, related specifically to that
class. The Trustees declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing prices supplied
through such system. If not quoted on the Nasdaq system, such securities are
valued at prices obtained from brokers. In the absence of recorded sales,
valuations are at the mean of the closing bid and asked quotations. Fixed income
securities are valued by a pricing service, which utilizes market transactions,
quotations from dealers, and various relationships among securities in
determining value. 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.
B. SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. NET INVESTMENT INCOME
Net investment income is determined daily and consists of interest and dividends
accrued and discount earned, less the estimated daily expenses of the Fund.
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. Discount on debt obligations is amortized under the effective
yield method. The Fund is charged for expenses directly attributable to it,
while indirect expenses are allocated among all funds in the Trust.
D. DIVIDENDS
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually, unless
additional distributions are required for compliance with applicable tax
regulations. For the year ended October 31, 2000, the Fund has designated as
long term all of the distributions from net realized gains.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions.
E. FEDERAL INCOME TAXES
No provision for Federal income taxes is necessary because the Fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods.
F. FORWARD 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 rates 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 inability 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 exchange 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.
G. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those 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, 2000, the value of the securities loaned and the value of collateral were
$3,909,939 and $3,993,979, respectively. During the year ended October 31, 2000,
income from securities lending amounted to $19,038 and is included in interest
income.
I. FUTURES CONTRACTS
The Fund may enter into futures contracts as a hedge against unfavorable market
conditions and to enhance income. 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 was opened and
the value at the time it was closed.
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 Fund's average daily net
assets. 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, 2000, the fees pursuant to such
agreement amounted to $192,782.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of MetLife, 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,
employee benefit plans and similar programs or plans, through or under which
shares of the Fund may be purchased. During the year ended October 31, 2000, the
amount of such expenses was $44,934.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$5,932 during the year ended October 31, 2000.
The Fund has entered into an arrangement with its transfer agent whereby credits
realized as a result of uninvested cash balances were used to reduce a portion
of the Fund's expense. During the year ended October 31, 2000, the Fund's
transfer agent fees were reduced by $1,000 under this agreement.
Effective May 3, 2000, the Fund has agreed to pay the Adviser for certain
administrative costs incurred in providing accounting services to the Fund. The
fee was based on a fixed annual amount that has been allocated equally among the
State Street Research Funds. During the year ended October 31, 2000, the amount
of such expenses was $28,100.
NOTE 3
The Distributor and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund. During
the year ended October 31, 2000, the amount of such expenses assumed by the
Distributor and its affiliates was $339,473.
NOTE 4
For the year ended October 31, 2000, purchases and sales of securities,
exclusive of short-term obligations, aggregated $56,436,305 and $60,262,997
(including $43,933,786 and $41,974,551 of U.S. Government obligations),
respectively.
NOTE 5
The Trust has adopted plans of distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. 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 and Class C shares. In addition,
beginning May 1, 2000, 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. The Distributor uses such payments for personal service and/or the
maintenance or servicing of shareholder accounts, to compensate or 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, 2000, fees pursuant to such
plans amounted to $1,471, $5,451, $5,122 and $5,096 for Class A, Class B(1),
Class B and Class C, respectively.
NOTE 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 2000, MetLife
owned 49,520 shares of each of Class A, Class B(1), Class B and Class C and
2,264,093 Class S shares of the Fund.
These transactions break down by share class as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 2000
------------------------------- -------------------------------
CLASS A SHARES(a) AMOUNT(a) SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 49,422 $ 500,141 12,693 $ 131,310
Issued upon reinvestment of:
Dividend from net investment income -- -- 65 683
Distribution from capital gains -- -- 113 1,136
Shares redeemed -- -- (19) (194)
----------- ----------- ----------- -----------
Net increase 49,422 $ 500,141 12,852 $ 132,935
=========== =========== =========== ===========
<CAPTION>
CLASS B(1) SHARES(a) AMOUNT(a) SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 49,422 $ 500,150 16,665 $ 173,109
Issued upon reinvestment of:
Dividend from net investment income -- -- 125 1,198
Distribution from capital gains -- -- 113 1,136
----------- ----------- ----------- -----------
Net increase 49,422 $ 500,150 16,903 $ 175,443
=========== =========== =========== ===========
<CAPTION>
CLASS B SHARES(a) AMOUNT(a) SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 49,422 $ 500,150 1,526 $ 15,886
Issued upon reinvestment of:
Dividend from net investment income -- -- 4 44
Distribution from capital gains -- -- 113 1,136
----------- ----------- ----------- -----------
Net increase 49,422 $ 500,150 1,643 $ 17,066
=========== =========== =========== ===========
<CAPTION>
CLASS C SHARES(a) AMOUNT(a) SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 49,422 $ 500,150 940 $ 9,809
Issued upon reinvestment of:
Dividend from net investment income -- -- 6 61
Distribution from capital gains -- -- 113 1,136
----------- ----------- ----------- -----------
Net increase 49,422 $ 500,150 1,059 $ 11,006
=========== =========== =========== ===========
<CAPTION>
CLASS S SHARES(a) AMOUNT(a) SHARES AMOUNT
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 203,903 $ 2,109,092 80,688 $ 830,392
Issued upon reinvestment of:
Dividends from net investment
income 30,849 315,412 28,058 286,775
Distributions from net realized
gains 213,806 2,197,784 7,007 70,420
Shares redeemed (672,928) (6,872,570) (403,206) (4,136,865)
----------- ----------- ----------- -----------
Net decrease (224,370) $(2,250,282) (287,453) $(2,949,278)
=========== =========== =========== ===========
--------------------------------------------------------------------------------------------------------------------
(a) September 30, 1999 (commencement of share class) to October 31, 1999.
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
October 31, 2000
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------
NOVEMBER 1, SEPTEMBER 30,
YEAR ENDED 1996 1999 YEAR ENDED
OCTOBER 31, MARCH 27, OCTOBER 31, OCTOBER 31
1996(a) 1997(a) 1999(a) 2000(a)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 10.56 11.03 10.12 10.11
------ ------ ------ ------
Net investment income($) 0.42 0.21 0.04 0.48
Net realized and unrealized gain on
investments, foreign currency,
forward contracts and futures
contracts ($) 0.66 0.08 0.05 0.30
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ($) 1.08 0.29 0.09 0.78
------ ------ ------ ------
Dividends from net investment income (0.36) (0.19) (0.10) (0.45)
Distributions from capital gains (0.25) (0.55) -- (0.02)
------ ------ ------ ------
TOTAL DISTRIBUTIONS ($) (0.61) (0.74) (0.10) (0.47)
------ ------ ------ ------
NET ASSET VALUE, END OF YEAR 11.03 10.58 10.11 10.42
====== ====== ====== ======
Total return (%)(b) 10.55 2.67(c) 0.89(c) 7.85
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 552 -- 499 649
Expense ratio (%)* 1.15 1.15(d) 1.15(d) 1.18
Expense ratio after expense reductions (%)* 1.15 1.15(d) 1.15(d) 1.18
Ratio of net investment income to average net assets 4.35 4.18(d) 4.01(d) 4.72
Portfolio turnover rate 126.41 117.66 209.77 181.36
*Reflects voluntary reduction of expenses
of these amounts (Note 3) ($) 0.07 0.03 0.00 0.12
<CAPTION>
CLASS B(1)
---------------------------------------------------------------------
SEPTEMBER 30, 1999
(COMMENCEMENT
OF SHARE CLASS) YEAR ENDED
TO OCTOBER 31, 1999(a) OCTOBER 31, 2000(a)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 10.12 10.10
----- -----
Net investment income ($)* 0.03 0.41
Net realized and unrealized gain on
investments, foreign currency,
forward contracts and futures
contracts ($) 0.05 0.30
----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.08 0.71
----- -----
Dividends from net investment income($) (0.10) (0.39)
Distribution from capital gains ($) -- (0.02)
----- -----
TOTAL DISTRIBUTIONS ($) (0.10) (0.41)
----- -----
NET ASSET VALUE, END OF YEAR ($) 10.10 10.40
===== =====
Total return (%)(b) 0.79(c) 7.11
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 499 690
Expense ratio (%)* 1.90(d) 1.90
Expense ratio after reductions (%)* 1.90(d) 1.90
Ratio of net investment income to
average net assets (%)* 3.26(d) 4.01
Portfolio turnover rate (%) 209.77 181.36
*Reflects voluntary reduction of
expenses per share of these amounts
(Note 3) ($) 0.00 0.12
------------------------------------------------------------------------------------------------------
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(c) Not annualized.
(d) Annualized.
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------
SEPTEMBER 30, 1999
(COMMENCEMENT
OF SHARE CLASS) YEAR ENDED
TO OCTOBER 31, 1999(a) OCTOBER 31, 2000(a)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 10.12 10.10
----- -----
Net investment income ($)* 0.03 0.41
Net realized and unrealized gain on
investments, foreign currency,
forward contracts and futures
contracts ($) 0.05 0.30
----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.08 0.71
----- -----
Dividends from net investment income ($) (0.10) (0.38)
Distribution from capital gains ($) -- (0.02)
----- -----
TOTAL DISTRIBUTIONS ($) (0.10) (0.40)
----- -----
NET ASSET VALUE, END OF YEAR ($) 10.10 10.41
===== =====
Total return (%)(b) 0.79(c) 7.16
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 499 532
Expense ratio (%)* 1.90(d) 1.90
Expense ratio after expense reductions
(%)* 1.90(d) 1.90
Ratio of net investment income to
average net assets (%)* 3.26(d) 4.00
Portfolio turnover rate (%) 209.77 181.36
*Reflects voluntary reduction of
expenses per share of these amounts
(Note 3) ($) 0.00 0.12
<CAPTION>
CLASS C
---------------------------------------------------------------------
SEPTEMBER 30, 1999
(COMMENCEMENT
OF SHARE CLASS) YEAR ENDED
TO OCTOBER 31, 1999(a) OCTOBER 31, 2000(a)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 10.12 10.10
----- -----
Net investment income ($)* 0.03 0.41
Net realized and unrealized gain on
investments, foreign currency,
forward contracts and futures
contracts ($) 0.05 0.30
----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.08 0.71
----- -----
Dividends from net investment income
($) (0.10) (0.38)
Distribution from capital gains ($) -- (0.02)
----- -----
TOTAL DISTRIBUTIONS ($) (0.10) (0.40)
----- -----
NET ASSET VALUE, END OF YEAR ($) 10.10 10.41
===== =====
Total return (%)(b) 0.79(c) 7.16
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 499 525
Expense ratio (%)* 1.90(d) 1.90
Expense ratio after expense reductions
(%)* 1.90(d) 1.90
Ratio of net investment income to
average net assets (%)* 3.26(d) 4.00
Portfolio turnover rate (%) 209.77 181.36
*Reflects voluntary reduction of
expenses per share of these amounts
(Note 3) ($) 0.00 0.12
------------------------------------------------------------------------------------------------------------
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the
Distributor and its affiliates had not voluntarily assumed a portion of the Fund's expenses.
(c) Not annualized.
(d) Annualized.
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (cont'd)
--------------------------------------------------------------------------------
October 31, 2000
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS S
--------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31
--------------------------------------------------------------------------------
1996(a) 1997(a) 1998(a) 1999(a) 2000(a)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 10.56 10.93 11.32 10.92 10.11
--------- --------- --------- --------- ---------
Net investment income($)* 0.50 0.49 0.47 0.43 0.51
Net realized and unrealized
gain (loss) on investments,
foreign currency, forward
contracts and futures contracts ($) 0.60 0.95 0.42 (0.12) 0.30
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS ($) 1.10 1.44 0.89 0.31 0.81
--------- --------- --------- --------- ---------
Dividends from net investment income ($) (0.48) (0.50) (0.50) (0.43) (0.47)
Distributions from capital gains ($) (0.25) (0.55) (0.79) (0.69) (0.02)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS ($) (0.73) (1.05) (1.29) (1.12) (0.49)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF YEAR ($) 10.93 11.32 10.92 10.11 10.43
========= ========= ========= ========= =========
Total return (%)(b) 10.82 14.11 8.60 2.84 8.22
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 33,236 38,501 36,236 31,291 29,284
Expense ratio (%)* 0.90 0.90 0.90 0.90 0.90
Expense ratio after expense
reductions (%)* 0.90 0.90 0.90 0.90 0.90
Ratio of net investment income to
average net assets (%)* 4.50 4.47 4.35 4.07 5.00
Portfolio turnover rate(%) 126.41 117.66 186.03 209.77 181.36
*Reflects voluntary reduction of
expenses per share of these
amounts (Note 3) ($) 0.06 0.05 0.04 0.04 0.11
-------------------------------------------------------------------------------------------------------------------------------
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
REPORT OF INDEPENDEN ACCOUNTANTS
--------------------------------------------------------------------------------
TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH
STRATEGIC INCOME PLUS FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of State Street Research Strategic
Income Plus Fund (a series of State Street Research Financial Trust, hereafter
referred to as the "Trust") at October 31, 2000, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 2000
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
--------------------------------------------------------------------------------
State Street Research Strategic Income Plus Fund Class A shares returned 7.85%
[without sales charge](2) for the 12 months ended October 31, 2000. The fund
outperformed the Lipper Flexible Income Funds Average, which returned 3.97% over
the same period.
The fund benefited by having a heavier weighting in bonds than many other funds
in its peer group. We increased the fund's emphasis on bonds midway through the
year. However, we began to increase our exposure to stocks again in the last
month of the period. Our investment in large-cap growth and value stocks also
helped performance.
In a year that favored bonds of the highest quality, our investment in nondollar
and high-yield bonds hurt performance. Plus, we owned three positions that
encountered serious credit problems. We sold two of them and held on to a third
because we believe it has the potential to cover. In the last quarter, we
lowered our exposure to high-yield bonds and added to cash.
October 31, 2000
Keep in mind that past performance is no guarantee of future results. The Fund's
share price, yield and return will fluctuate, and you may have a gain or loss
when you sell your shares. All returns assume reinvestment of capital gain
distributions and income dividends at net asset value. Class S shares, offered
without a sales charge, are available only through certain employee benefit
plans and special programs. The S&P 500 (officially the "S&P 500 Composite Stock
Price Index") is an unmanaged index of 500 U.S. stocks. The Lehman Brothers
Government/Corporate Bond Index is a market-value weighted index of U.S.
government treasury and agency securities, corporate and yankee bonds. The
indices are unmanaged and do not take sales charges into consideration. Direct
investment in the indices is not possible; results are for illustrative purposes
only. Performance results for the Fund are increased by the voluntary reduction
of Fund fees and expenses; without subsidization, performance would be lower.
CHANGE IN VALUE OF $10,000 BASED ON THE
S&P 500 AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX COMPARED
TO CHANGE IN VALUE OF $10,000 INVESTED IN
STRATEGIC INCOME PLUS FUND
CLASS A SHARES
------------------------------------
Average Annual Total Return
------------------------------------
1 Year 5 Years Life of Fund
------------------------------------
1.55% 7.29% 8.20%
------------------------------------
Strategic Income Lehman Brothers
Plus A S&P 500 Government/Corporate
----------------------------------------------------------
5/16/94 $10,000 $10,000 $10,000
10/31/94 9,532 10,549 10,006
10/31/95 11,039 13,334 11,622
10/31/96 12,203 16,546 12,250
10/31/97 13,890 21,856 13,329
10/31/98 15,046 26,667 14,698
10/31/99 15,438 33,512 14,600
10/31/00 16,650 35,549 15,641
CLASS B(1) SHARES
------------------------------------
Average Annual Total Return
------------------------------------
1 Year 5 Years Life of Fund
------------------------------------
2.11% 7.47% 8.39%
------------------------------------
Strategic Income Lehman Brothers
Plus - Class B(1) S&P 500 Government/Corporate
--------------------------------------------------------------------------------
5/16/94 $10,000 $10,000 $10,000
10/31/94 10,078 10,549 10,006
10/31/95 11,585 13,334 11,622
10/31/96 12,711 16,546 12,250
10/31/97 14,360 21,856 13,329
10/31/98 15,440 26,667 14,698
10/31/99 15,718 33,512 14,600
10/31/00 16,836 35,549 15,641
CLASS B SHARES
------------------------------------
Average Annual Total Return
------------------------------------
1 Year 5 Years Life of Fund
------------------------------------
2.16% 7.48% 8.39%
------------------------------------
Strategic Income Lehman Brothers
Plus - Class B S&P 500 Government/Corporate
--------------------------------------------------------------------------------
5/16/94 $10,000 $10,000 $10,000
10/31/94 10,078 10,549 10,006
10/31/95 11,585 13,334 11,622
10/31/96 12,711 16,546 12,250
10/31/97 14,360 21,856 13,329
10/31/98 15,440 26,667 14,698
10/31/99 15,718 33,512 14,600
10/31/00 16,844 35,549 15,641
CLASS C SHARES
------------------------------------
Average Annual Total Return
------------------------------------
1 Year 5 Years Life of Fund
------------------------------------
6.16% 7.77% 8.39%
------------------------------------
Strategic Income Lehman Brothers
Plus - Class C S&P 500 Government/Corporate
--------------------------------------------------------------------------------
5/16/94 $10,000 $10,000 $10,000
10/31/94 10,078 10,549 10,006
10/31/95 11,585 13,334 11,622
10/31/96 12,711 16,546 12,250
10/31/97 14,360 21,856 13,329
10/31/98 15,440 26,667 14,698
10/31/99 15,718 33,512 14,600
10/31/00 16,844 35,549 15,641
CLASS S SHARES
------------------------------------
Average Annual Total Return
------------------------------------
1 Year 5 Years Life of Fund
------------------------------------
8.22% 8.86% 8.39%
------------------------------------
Strategic Income Lehman Brothers
Plus - Class S S&P 500 Government/Corporate
--------------------------------------------------------------------------------
5/16/94 $10,000 $10,000 $10,000
10/31/94 10,125 10,549 10,006
10/31/95 11,755 13,334 11,622
10/31/96 13,027 16,546 12,250
10/31/97 14,865 21,856 13,329
10/31/98 16,143 26,667 14,698
10/31/99 16,602 33,512 14,600
10/31/00 17,967 35,549 15,641
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND
--------------------------------------------------------------------------------
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND INFORMATION OFFICERS TRUSTEES
<S> <C> <C>
STATE STREET RESEARCH RICHARD S. DAVIS RICHARD S. DAVIS
STRATEGIC INCOME PLUS FUND Chairman of the Board, Chairman of the Board,
One Financial Center President and Chief Executive President, Chief Executive
Boston, MA 02111 Officer Officer and Director,
State Street Research &
INVESTMENT ADVISER JOHN BORZILLERI Management Company
State Street Research & Vice President
Management Company
One Financial Center BRUCE A. EBEL BRUCE R. BOND
Boston, MA 02111 Vice President Former Chairman of the Board,
Chief Executive Officer and
DISTRIBUTOR JOHN H. KALLIS President, PictureTel Corporation
State Street Research Vice President
Investment Services, Inc.
One Financial Center THOMAS P. MOORE, JR. STEVE A. GARBAN
Boston, MA 02111 Vice President Former Senior Vice President
for Finance and Operations and
SHAREHOLDER SERVICES E.K. EASTON RAGSDALE, JR. Treasurer, The Pennsylvania
State Street Research Vice President State University
Service Center
P.O. Box 8408 THOMAS A. SHIVELY
Boston, MA 02266-8408 Vice President DEAN O. MORTON
1-87-SSR-FUNDS (1-877-773-8637) Former Executive Vice President,
JAMES M. WEISS Chief Operating Officer and
CUSTODIAN Vice President Director, Hewlett-Packard
State Street Bank and Company
Trust Company KENNARD WOODWORTH, JR.
225 Franklin Street Vice President
Boston, MA 02110,000 SUSAN M. PHILLIPS
GERARD P. MAUS Dean, School of Business and
LEGAL COUNSEL Treasurer Public Management, George
Goodwin, Procter & Hoar LLP Washington University; former
Exchange Place DOUGLAS A. ROMICH Member of the Board of Governors
Boston, MA 02109 Assistant Treasurer of the Federal Reserve System and
Chairman and Commissioner of
INDEPENDENT ACCOUNTANTS FRANCIS J. MCNAMARA, III the Commodity Futures Trading
PricewaterhouseCoopers LLP Secretary and General Counsel Commission
160 Federal Street
Boston, MA 02110,000 DARMAN A. WING
Assistant Secretary and TOBY ROSENBLATT
Assistant General Counsel President,
Founders Investments Ltd.
SUSAN E. BREEN President,
Assistant Secretary The Glen Ellen Company
AMY L. SIMMONS
Assistant Secretary MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC INCOME PLUS FUND ------------
One Financial Center BULK RATE
Boston, MA 02111 U.S. POSTAGE
PAID
HOLLISTON, MA
PERMIT #313
------------
QUESTIONS? COMMENTS?
E-MAIL us at:
[email protected]
INTERNET site:
www.statestreetresearch.com
CALL us at 1-87-SSR-FUNDS (1-877-773-8637) or
[hearing-impaired 1-800-676-7876]
[Chinese and Spanish-speaking 1-888-638-3193]
WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
[Logo] STATE STREET RESEARCH
(C) State Street Research Investment Services, Inc.,
One Financial Center, Boston, MA 02111
This report is prepared for the general information of current shareholders.
This publication must be preceded or accompanied by a current State Street
Research Strategic Income Plus Fund prospectus.
When used after December 31, 2000, this report must be accompanied by a current
Quarterly Performance Update.
Portfolio changes should not be considered recommendations for action by
individual investors.
The Dalbar awards recognize quality shareholder service 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
industry-wide.
CONTROL NUMBER: (exp1201)SSR-LD STP-2853-1200
