<PAGE> 1
PUTNAM
GLOBAL
GOVERNMENTAL
INCOME TRUST
ANNUAL REPORT
October 31, 1994
[PUTNAM LOGO]
BOSTON-LONDON-TOKYO
<PAGE> 2
PERFORMANCE HIGHLIGHTS
- For the five years ended October 31, 1994, the fund's 55.01%
cumulative total return for class A shares at net asset value beat the
average 50.85% total return of the 26 general world income funds tracked
over the period, according to Lipper Analytical Services.*
- Performance should always be considered in light of a fund's
investment strategy. Putnam Global Governmental Income Trust is designed
for investors seeking high current income by investing principally in debt
securities of foreign or U.S. governmental entities, including
supranational issuers. Preservation of capital and long-term total return
are secondary objectives.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
FISCAL 1994 RESULTS AT A GLANCE
- -------------------------------------------------------------------------
Class A Class B
Total return: NAV POP NAV CDSC
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 months ended 10/31/94 -5.93% -10.39% -- --
- -------------------------------------------------------------------------
(change in value during period
plus reinvested distributions)
Life of class B (2/1/94) -- -- -9.52 -13.84
- -------------------------------------------------------------------------
Share value: NAV POP NAV
- -------------------------------------------------------------------------
10/31/93 $15.25 $16.01 --
- -------------------------------------------------------------------------
1/31/94 (Inception of class B) $15.38
- -------------------------------------------------------------------------
10/31/94 13.33 13.99 13.31
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Capital gains
Long- Short- Tax Return
Distributions: No. Income term term of Capital+ Total
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 12 $0.102 -- $0.149 $0.798 $1.049
- -------------------------------------------------------------------------
Class B 9 0.147 -- -- 0.467 0.614
</TABLE>
Performance data represent past results and will differ for each share
class. For performance over longer periods, see pages 10 and 11. POP assumes
4.75% maximum sales charge. CDSC assumes 5% maximum contingent deferred sales
charge. (1) Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period. (2) Based only on investment income, calculated
using SEC guidelines.
* Lipper Analytical Services is an industry research firm whose rankings
vary over time and do not include the effects of sales charges. For periods
ended 10/31/94, the Fund's class A shares ranked as follows: for 1 year, 71 out
of 94, and for 5 years, 10 out of 26 general world income funds, respectively.
Past performance is not indicative of future results.
+ See discussion on page 8 for details.
2
<PAGE> 3
FROM THE CHAIRMAN
DEAR SHAREHOLDER:
PUTNAM GLOBAL GOVERNMENTAL INCOME TRUST'S 1994 FISCAL YEAR HAD SCARCELY
BEGUN WHEN SIGNS APPEARED THAT THE SUSTAINED RISE IN THE WORLD'S BOND MARKETS
WAS ABOUT TO END. YOUR FUND'S MANAGEMENT TEAM IMMEDIATELY BEGAN TAKING
DEFENSIVE ACTION. HAD THEY NOT DONE SO, THE TOLL ON THE FUND'S RESULTS WOULD
LIKELY HAVE BEEN GREATER.
A MAJOR SELL-OFF BY AGGRESSIVELY MANAGED HEDGE FUNDS CREATED A BRIEF
WORLDWIDE LIQUIDITY CRUNCH. AT VIRTUALLY THE SAME TIME, THE fEDERAL RESERVE
BOARD INITIATED A SERIES OF INCREASES IN U.S. SHORT-TERM INTEREST RATES, WHICH
SENT THE ALREADY NERVOUS GLOBAL FIXED-INCOME MARKETS INTO A TAILSPIN.
MEANWHILE, JAPANESE INVESTORS CONTINUED TO DRAW CAPITAL BACK HOME, FURTHER
DISRUPTING THESE MARKETS.
THE AFTERSHOCKS OF THIS SUCCESSION OF EVENTS ARE LIKELY TO BE FELT FOR
SOME TIME TO COME. YOUR FUND'S MANAGERS HAVE POSITIONED THE PORTFOLIO WITH THIS
PROSPECT IN MIND. IN THE REPORT THAT FOLLOWS, THEY DISCUSS THE FUND'S FISCAL
'94 PERFORMANCE AND THE OUTLOOK FOR FISCAL '95 IN THE CONTEXT OF THIS
INVESTMENT CLIMATE.
RESPECTFULLY YOURS,
/S/ GEORGE PUTNAM
- ------------------------
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
DECEMBER 14, 1994
3
<PAGE> 4
REPORT FROM THE FUND MANAGERS
F. MARK TURNER
D. WILLIAM KOHLI
JONATHAN FRANCIS
MARK SIEGEL
The degree of correlation exhibited by global fixed-income markets this
year can only be described as unusual. Historically, global investing carried
with it the explicit advantage of diversification across markets that were
responding to different stages of the economic cycle. One could reasonably
expect that certain markets would "zig" while others "zagged." However, for
most of Putnam Global Governmental Income Trust's fiscal year ended October 31,
1994, historical norms and precedents did not apply. The fund's negative total
return at year's end serves as a clear testimony to this unfortunate fact.
While the behavior of global markets in 1994 may, to a large extent,
defy easy explanation, two significant factors emerge. Early in the year,
massive waves of selling by aggressively managed private partnerships known as
"hedge funds" and other leveraged investors, created a short-term global
liquidity crisis. Large blocks of bonds were dumped on the markets as these
players scrambled to cover mounting losses in heavily margined positions (that
is, investments made with significant amounts of borrowed funds). The shift to
a more restrictive monetary policy by the U.S. Federal Reserve Board, and the
concurrent increase in U.S. interest rates, spelled the end of what had been a
highly profitable run for the leverage gambit.
A second factor contributing to this year's market debacle was the
continued repatriation of capital by Japanese investors. Given the weakness of
the U.S. dollar relative to the yen, and the uncertainty that surrounded
U.S.-Japan trade negotiations, Japanese investors routinely sold
non-yen-denominated assets in favor of domestic securities. The persistent
weakness of the dollar deterred the Japanese from deploying capital outside
4
<PAGE> 5
their borders because conversion into the stronger yen would have diminished
investment returns.
Performance across virtually all world bond markets was negative in local
currency terms for the calendar year through October 31, 1994. More recent
performance has been better as certain markets recouped some of their earlier
losses. Your fund's performance likewise benefited from the recent improvement
in several markets, posting positive total returns for October; class A and
class B shares were up 0.64% and 0.58%, respectively, at net asset value for
the month.
- - MARKET HIGHLIGHTS: TAKING OUR CUE FROM THE LOCALS
An investment theme that has helped the fund's performance since May is our
focus on markets where there is significant participation by local investors.
Great Britain, Italy, and Sweden are notable examples. Of these three, Great
Britain has been the recent standout, outperforming all other European markets
since the middle of the year.
Economic data from Britain has been generally strong of late, causing investors
concern over the possibility of inflation. We believe, however, that the
inflationary psychology in Britain has changed significantly from the 1980s and
that the effect of this
[CHART SHOWING PORTFOLIO COMPOSITION INFORMATION]
++ Yankee bonds are dollar-denominated bonds issued in the U.S. by foreign
banks and corporations.
5
<PAGE> 6
change on consumer sentiment has been profound. This explains why, in
the midst of strong industrial production and growing exports, British retail
sales and consumer confidence have leveled off and are beginning to head
downward. We think, therefore, that the environment for bonds and the pound
sterling is quite favorable. The fund ended the fiscal year with Britain being
the largest single market exposure at nearly 17% of assets.
The Canadian market was another bright spot throughout much of the fiscal
year's second half. The narrow margin of victory registered by the separatist
Parti Quebecois in September's provincial election in Quebec relieved
investors and provided support for both Canada's bond market and the currency.
Bond yields fell and Canadian dollars jumped to a six- month high against the
U.S. dollar as the threat of outright secession by Quebec seemed less likely.
In addition, the Canadian government continues to implement meaningful
structural changes as it works to reduce the country's budget deficit.
- - AUSTRALIAN BONDS PROVE DISAPPOINTING; U.S. LARGELY AVOIDED
A market that has delivered disappointing results this year is Australia,
where we had approximately 6.5% of the fund's assets committed at the end of
the fiscal year. Although the Reserve Bank of Australia (RBA) has moved twice
during calendar 1994 to raise interest rates in fairly dramatic fashion,
investors as a whole remain unimpressed. Prime Minister Paul Keating broke
ranks with the RBA, the Treasury, and senior government ministers in his
resistance to cut the budget deficit more rapidly. Government bond yields were
approaching 10.5% at the end of October, while current inflation is in the 2.5%
to 3% range. We view the market as being extremely attractive at these levels;
however, a turnaround will require greater interest from domestic investors,
which has yet to occur.
6
<PAGE> 7
We have largely avoided the U.S. market this year, although the fund did
participate in the midsummer rally through a modest position in Treasury
securities. The continuing stream of strong economic reports reinforces our
conviction that the Federal Reserve Board has been much too restrained in its
efforts to moderate growth. As a result, we anticipate further near-term
pressure on the market and think that the best relative value remains outside
the United States.
- - MARKET SENTIMENT WEIGHS ON DOLLAR
The main determinant of the fund's underperformance this year has been lack of
exposure to foreign currencies, since most of our foreign currency holdings
have been hedged back into U.S. dollars. The original intent behind our dollar
hedging policy was to protect the fund from adverse foreign currency movements.
However, the dollar's unexpectedly protracted weakness this year against major
foreign currencies effectively negated the benefits of such protection.
Early in the fiscal year, we thought that the shift in relative monetary policy
between the United States and Germany would be supportive of the dollar. Since
the Fed was raising short-term interest rates to respond to an accelerating U.S
economy, while the Bundesbank continued to lower rates, the fundamental case
for a stronger dollar seemed clear. Such a supportive scenario, however, never
materialized, and we attribute the dollar's difficulties to two principal
sources: negative market sentiment toward the pace of Fed monetary action, and
the Clinton administration's approach to the dollar as a tool for producing
open markets.
- - TRIMMING THE HEDGES AS INTERNATIONAL FOCUS CONTINUES
Looking ahead, we expect the dollar to remain weak until the credibility of
the Fed is established in the eyes of global investors. Consequently, we have
moderately increased the fund's foreign currency exposure. At the end of
October, the fund was about 50% unhedged against European currencies. We have
also added some exposure to the Japanese yen and to Australian and New Zealand
dollars.
7
<PAGE> 8
Our emphasis on the European markets and Canada is likely to continue.
We are closely monitoring U.S. developments and anticipate that, as Fed
tightening has its intended effect during 1995, U.S. bonds will regain some
appeal. In relative terms, however, the best opportunities may continue to be
found overseas, and we will position the fund to take advantage of them.
- - A FINAL NOTE
Coincident with the year-end financial review of the portfolio, it was
determined that 76% of the fiscal year's distribution must be classified as a
return of capital and is therefore not taxable to shareholders. Your form 1099,
which will be mailed in January 1995, will indicate the exact amount of the
distribution not subject to tax. In addition, you will need to adjust the cost
basis of your shares when you eventually redeem or exchange them. This will
increase any resulting capital gain or decrease any capital loss you incur at
that time.
The return of capital is the result of a provision in federal tax law
which requires that certain capital gains and losses on foreign currency
transactions be reclassified as ordinary income or deductions from ordinary
income for tax purposes. As a result, losses on these transactions reduce the
amount of net investment income available for distribution.
As we discussed earlier, our use of currency hedging transactions is
designed to protect the fund's net asset value from adverse exchange rate
movements between the U.S. dollar and various foreign currencies. Without such
hedging activity, the fund would be subject to an increased level of risk
beyond general market risk. Our goal is to manage the fund's currency and
market risks prudently, while continuing to strive for a highly competitive
yield and long-term total return.
The views expressed in this report are exclusively those of Putnam
Management, and are not meant as investment advice. Although the described
holdings were viewed favorably as of October 31, 1994, there is no guarantee
the fund will continue to hold these securities in the future.
8
<PAGE> 9
- - INFORMATION ABOUT THE MANAGERS
D. William Kohli, senior vice president of Putnam Management, F. Mark
Turner, managing director of Putnam Management, Jonathan H. Francis, vice
president of Putnam Management, and Mark J. Siegel, vice president of Putnam
Management, each of whom is a vice president of the fund, are primarily
responsible for the day-to-day management of the Fund's portfolio.
Mr. Kohli has had this responsibility since October, 1994. Prior to his
employment by Putnam Management in 1994, Mr. Kohli was executive vice
president and co-director of global bond management from 1993 to 1994, and from
1988 to 1993 he was senior portfolio manager, at Franklin Advisors/Templeton
Investment Counsel.
Messrs. Turner and Francis have had this responsibility since April,
1994. Prior to Mr. Turner's employment by Putnam Management in 1992, he was
managing director at Scudder, Stevens & Clark. From 1991 until his employment
by Putnam Management in 1993, Mr. Francis was an independent consultant, and
from 1988 to 1991 he was chief economist, at RHO Management Company
Incorporated. Mr. Siegel has had this responsibility since November, 1994.
Prior to Mr. Siegel's employment by Putnam Management in 1993, he was vice
president, investment banking at Salomon Brothers International Ltd.
9
<PAGE> 10
PERFORMANCE SUMMARY
This section provides, at a glance, information about your
fund's performance. Total return shows how the value of
the fund's shares changed over time, assuming you held the
shares through the entire period and reinvested all
distributions back into the fund. We show total return in
two ways: on a cumulative long-term basis and on average
how the fund might have grown each year over varying
periods. For comparative purposes, we show how the fund
performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 10/31/94
<TABLE>
<CAPTION>
Salomon Bros.
Class A Class B World Govt.
NAV POP NAV CDSC Bond Index CPI
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year -5.93% -10.39% -- -- 3.62% 2.61%
5 years 55.01 47.63 -- -- 63.85 19.03
Annual average 9.16 8.10 -- -- 10.38 3.55
Life of class A 109.71 99.81 -- -- 92.96 32.18
Annual average 10.50 9.78 -- -- 9.27 3.83
Life of class B -- -- -9.52% -13.84% 2.66 2.26
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 9/30/94
(most recent calendar quarter)
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
- -----------------------------------------------------
<S> <C> <C> <C> <C>
1 year -6.00% -10.47% -- --
5 years 55.06 47.68 -- --
Annual average 9.17 8.11 -- --
Life of class A 108.38 98.54 -- --
Annual average 10.54 9.81 -- --
Life of class B -- -- -10.04% -14.36%
</TABLE>
Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions.
The fund began operations on June 1, 1987, offering shares
now known as class A. Effective February 1, 1994, the fund
began offering class B shares. Performance data represent
past results and will differ for each share class.
Investment returns and principal value will fluctuate so
an investor's shares, when sold, may be worth more or less
than their original cost.
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon
redemption.
10
<PAGE> 11
[CHART SHOWING GROWTH OF A $10,000 INVESTMENT]
Past performance is no assurance of future results. A $10,000 investment in the
fund's class B shares at inception on (2/1/94) would have been valued at $8,996
(or $8,564 with a redemption at the end the period).
NET ASSET VALUE (NAV) is the value of all fund assets, minus liabilities,
divided by the number of outstanding shares. It does not include any initial or
contingent deferred sales charges.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 4.75% sales charge.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX is an unmanaged list of bonds
issued by 10 countries. It does not take into account brokerage commissions or
other costs. Securities in the fund do not match those in the index and may
pose different risks.
CONSUMER PRICE INDEX is a commonly used measure of inflation. It does not
represent an investment return.
11
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended October 31, 1994
To the Trustees and Shareholders of Putnam Global Governmental Income Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Global Governmental Income Trust, including the portfolio of investments
owned, as of October 31, 1994, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the "Financial Highlights" for each of the
periods indicated therein. These financial statements and "Financial
Highlights" are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
"Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and "Financial
Highlights" are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred
to above present fairly, in all material respects, the financial position of
Putnam Global Governmental Income Trust as of October 31, 1994, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the "Financial Highlights" for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 15, 1994
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS OWNED
October 31, 1994
<TABLE>
<CAPTION>
FOREIGN BONDS AND NOTES (78.8%)(a)(b)
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
ARA 1,500,000 Argentina (Republic of) Bocon Previs
zero %, 2001 (c) $ 1,001,250
AUD 43,465,000 Australia (Government of) bonds 6 3/4s, 2006 23,797,088
AUD 10,665,000 Australia (Government of) bonds 9 1/2s, 2003 7,465,500
ARA 1,000,000 Banco Nacional bonds 7 1/4s, 2004 807,500
$US 4,500,000 Bgaria FRB Sink Fund, zero %, 2012 1,023,750
CAD 14,185,000 Canada (Government of) bonds 5 3/4s, 1999 9,468,488
CAD 53,820,000 Canada (Government of) bonds 6.5s, 2004 33,301,125
CAD 6,110,000 Canada (Government of) bonds 8s, 2023 3,918,038
CAD 16,000,000 Canada (Government of) deb. 9s, 2004 11,740,000
CAD 10,105,000 Canada (Government of) notes 7 1/2s, 1997 7,376,650
PHP 2,250,000 Central Bank of Philippines bonds 5 1/4s, 2017 1,386,563
PHP 1,000,000 Central Bank of Philipines Floating Rate Note
(FRN)6s, 2005 872,500
DKK 77,500,000 Denmark (Government of) bonds 8s, 2003 12,400,000
$US 2,250,000 Essar Gujart Ltd. sub. deb. Floating Rate
Bond 7.9625s, 1999 2,250,000
ECU 8,500,000 European Invest Bank bonds 10 1/2s, 1999 14,550,938
FIM 49,000,000 Finland (Republic of) notes 10 3/4s, 2002 11,086,250
FRF 3,900,000 France (Government of) OAT 6s, 2004 4,121,813
$US 2,000,000 Indonesia (Government of) bonds 9 3/4s, 2001 1,900,000
THB 55,000,000 International Finance Corp. (Thailand of)
bonds 8s, 1996 2,200,000
ITL 50,730,000,000 Italy (Government of) bonds 8 1/2s, 2004 27,489,319
ITL 29,080,000,000 Italy (Government of) notes 8 1/2s, 1999 16,957,275
ECU 18,300,000 Italy (Government of) notes 9 1/4s, 2011 22,268,813
$US 3,000,000 Mexican Disc-B 12/31/19, zero %s 2,561,250
$US 4,500,000 Morocco (Government of) notes 4 1/2s, 1999 3,189,375
NGL 2,410,000 Netherlands (Government of) bonds 8 1/4s, 2007 1,480,644
NGL 8,595,000 Netherlands (Government of) debenture 7 1/2s,
2023 4,813,200
NZD 3,075,000 New Zealand (Government of) bonds 9s, 1996 1,898,813
NZD 19,255,000 New Zealand (Government of) notes 6 1/2s, 2000 10,638,388
CAD 16,580,000 Ontario (Province of) bonds 9 1/2s, 2022 11,885,788
AUD 10,000,000 Queensland Treasury bonds 8s, 1999 6,818,750
$US 2,000,000 Rogers Cablesystem 9.65s, 2014 1,262,500
SEK 47,000,000 Statens Bostadsfinansier deb. 11s, 1999 6,550,625
SEK 105,500,000 Sweden (Government of) bonds 14,308,438
SEK 67,000,000 Sweden (Government of) bonds 13s, 2001 10,343,125
GBP 29,525,000 United Kingdom Treasury bonds 50,506,203
GBP 5,230,000 United Kingdom Treasury bonds 6 3/4s, 2004 7,433,138
GBP 10,980,000 United Kingdom Treasury bonds 7 1/4s, 1998 17,293,500
GBP 3,910,000 United Kingdom Treasury bonds 9s, 2000 6,466,163
$US 1,500,000 Venezuela (Government of) bonds Ser. A, 6s,
2007 740,625
$US 1,500,000 Venezuela (Government of) bonds Ser. B, 6s,
2007 740,625
AUD 8,090,000 Victoria Treasury bonds 8 1/4s, 2003 5,157,375
------------
TOTAL FOREIGN BONDS AND NOTES
(cost $390,516,284) $381,471,385
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (4.3%)(a)
(cost $20,995,000)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
$26,000,000 U S Treasury Bonds 6 1/4s, 2023 $20,808,125
CORPORATE BONDS AND NOTES (3.2%)(a)
CONSUMER SERVICES (0.8%)
- ----------------------------------------------------------------------------------------------
100,000 Cablevision Systems Corp. sr. sub. reset deb. 10 3/4s, 2004 100,500
1,000,000 Casino America Inc. 1st mtge. deb. 11 1/2s, 2001 850,000
450,000 Century Communications Corp. sr. sub. deb. 11 7/8s, 2003 472,500
250,000 General Media sr. secd. notes 10 5/8s, 2000 233,750
225,000 Louisiana Casino Cruises Corp. sr. sub. deb. 11 1/2s, 1998 157,500
500,000 NEXTEL Communications Inc. sr. disc. notes
stepped-coupon zero % (11 1/2s, 9/1/98), 2003 (c)(h) 252,500
750,000 New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 731,250
750,000 President Riverboat Casinos, Inc. sr. sub. notes 13s, 2001 675,000
250,000 SFX Broadcasting Inc. sr. sub. notes 11 3/8s, 2000 252,500
200,000 Summit Communications Group, Inc. sr. sub. deb. 10 1/2s, 2005 211,500
50,000 Trump Plaza Funding, Inc. 1st mtge. notes 10 7/8s, 2001 36,250
-----------
3,973,250
CHEMICALS (0.4%)
- ----------------------------------------------------------------------------------------------
1,000,000 G-I Holdings Inc. sr. notes zero %, 1998 615,000
500,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 460,000
500,000 Premium Standard Farms sr. secd. notes 12s, 2000 (d) 537,500
500,000 UCC Investors Holding, Inc. sr. notes 10 1/2s, 2002 500,000
-----------
2,112,500
HEALTH CARE (0.3%)
- ----------------------------------------------------------------------------------------------
250,000 Healthtrust, Inc. 10 1/4s, 2004 270,000
1,000,000 McGaW, Inc. sr. notes 10 3/8s, 1999 1,030,000
250,000 Ornda Healthcorp sr. sub. notes 12 1/4s, 2002 268,750
100,000 Paracelsus Healthcare Corp. sr. sub. notes 9 7/8s, 2003 95,250
-----------
1,664,000
FOREST PRODUCTS (0.3%)
- ----------------------------------------------------------------------------------------------
500,000 Container Corp. of America sr. notes Ser. A, 11 1/4s, 2004 516,250
1,000,000 Gaylord Container Corp. sr. sub. disc. deb. stepped-coupon
zero % (12 3/4s, 5/15/96), 2005 (c)(h) 895,000
250,000 Stone Container Corp. deb. sr. sub. notes 11 1/2s, 1999 248,750
-----------
1,660,000
INSURANCE AND FINANCE (0.2%)
- ----------------------------------------------------------------------------------------------
250,000 First Federal Financial Corp. notes 11 3/4s, 2004 249,375
600,000 Greate Bay Property Funding Corp. 1st. mtge. 10 7/8s, 2004 456,000
300,000 Penn Corp. Financial Group sr. sub. notes 9 1/4s, 2004 267,000
-----------
972,375
ENTERTAINMENT (0.2%)
- ----------------------------------------------------------------------------------------------
1,000,000 Viacom International sub. deb. 8s, 2006 867,500
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (3.2%)(a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
OIL AND GAS (0.2%)
- ----------------------------------------------------------------------------------------
$ 1,000,000 Triton Energy sr. sub. disc. notes stepped-coupon
zero % (9 3/4s, 12/15/96), 2000 (h) $ 757,500
UTILITIES (0.1%)
- ----------------------------------------------------------------------------------------
710,009 Midland Cogeneration Ventures deb. 10.33, 2002 (d) 685,159
BUILDING AND CONSTRUCTION (0.1%)
- ----------------------------------------------------------------------------------------
700,000 Presley Co. sr. notes 12 1/2s, 2001 665,000
FOOD AND BEVERAGES (0.1%)
- ----------------------------------------------------------------------------------------
750,000 Fresh Del Monte Produce Corp. sr. notes, Ser. B, 10s, 2003 648,750
BASIC INDUSTRIAL PRODUCTS (0.1%)
- ----------------------------------------------------------------------------------------
500,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 517,500
RETAIL (0.1%)
- ----------------------------------------------------------------------------------------
400,000 Loehmanns' Holdings, Inc. sr. sub. notes 13 3/4s, 1999 402,000
CONGLOMERATES (0.1%)
- ----------------------------------------------------------------------------------------
600,000 Jordan Industries, Inc. sr. sub. disc. deb. stepped-
coupon zero %, (11 3/4s, 8/1/98) 2002 (h) 306,000
FINANCE (-%)
- ----------------------------------------------------------------------------------------
200,000 Delaware Management sr. notes Ser. B, 10 1/4s, 2004 (d) 193,000
SPECIALTY CONSUMER PRODUCTS (-%)
- ----------------------------------------------------------------------------------------
250,000 International Semi-Tech. Corp. sr. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003 (h) 115,000
COMMUNICATIONS (-%)
- ----------------------------------------------------------------------------------------
250,000 NEXTEL Communications Inc. sr. disc. notes
stepped-coupon zero % (9 3/4s, 2/15/99), 2004 (h) 111,250
INSURANCE (-%)
- ----------------------------------------------------------------------------------------
50,000 American Life Holding Co. sr. sub. notes 11 1/4s, 2004 50,125
-----------
TOTAL CORPORATE BONDS AND NOTES
(cost $16,283,898) $15,700,909
YANKEE BONDS AND NOTES (2.0%)(a)(e)
- ----------------------------------------------------------------------------------------
4,500,000 Argentina (Republic of) sr. sub. notes 8 3/8s, 2003 3,808,125
931,000 Brazil (Government of) bonds 8 3/4s, 2001 762,256
6,500,000 Petro Mexico bonds 8.625s, 2023 5,139,063
-----------
TOTAL YANKEE BONDS AND NOTES
(cost $11,662,276) $ 9,709,444
EUROBONDS (1.9%)(a)(e)
- ----------------------------------------------------------------------------------------
5,000,000 Banco de Galicia Inc. global notes 9s, 2003 4,037,500
3,200,000 Petroleo Brasileiro S.A. FRN zero %, 1998 3,274,000
1,750,000 Telecomunication Brasilerias, S.A. unsubor.
debenture 10s, 1994 1,750,000
-----------
TOTAL EUROBONDS
(cost $10,185,800) $ 9,061,500
</TABLE>
15
<PAGE> 16
PUT OPTIONS ON FOREIGN BONDS (0.7%)(a)(b)
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
632,500 French Treasury Bonds Nov 94/FF 112 $ 2,499,250
86,750 German Treasury Bonds Nov 94/DM 90 685,325
-------------
TOTAL PUT OPTIONS ON U.S. TREASURY BONDS
(cost $2,721,194) $ 3,184,575
</TABLE>
PUT OPTIONS ON FOREIGN CURRENCIES (0.3%)(a)(cost $932,340)
<TABLE>
<CAPTION>
NUMBER OF IN EXCHANGE EXPIRATION DATE/
CONTRACTS FOR STRIKE PRICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
37,900 U.S. Dollars Deutschmarks Dec 94/DM 1.55 $ 1,243,120
</TABLE>
BRADY BONDS (0.7%)(a)(e)(cost $3,690,312)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
$4,750,000 Argentina (Republic of) notes 4.1885s, 2005 $ 3,431,875
</TABLE>
PREFERRED STOCKS ( -- %)(cost $207,000)(a)
NUMBER OF SHARES
<TABLE>
<CAPTION>
BANKS (0.0%)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
2,000 First Nationwide Bank Fsb 11.50 pfd. $ 205,000
</TABLE>
WARRANTS ( -- %)(a)(f)
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
250 General Media Corp. (d) 12/31/00 $ 2,500
6,622 President Riverboat Casinos, Inc. 9/15/01 23,177
------------
TOTAL WARRANTS
(cost $25,946) 25,677
</TABLE>
SHORT-TERM INVESTMENTS (8.0%)(a)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
$ 250,000 Federal Home Loan Mortgage Corp. 4.73s to 4.94s,
with various due dates to December 2, 1994 $ 246,767
10,000,000 Federal National Mortgage Assn. 4.77s to 4.81s,
with various due dates to December 2, 1994 9,959,328
20,698,000 Interest in $497,257,000 joint repurchase
agreement dated October 31, 1994 with
Lehman Brothers, Inc. due November 1, 1994
with respect to various U.S. Treasury Obligation
-- maturity value of $20,700,731 for an
effective yield of 4.75% 20,700,731
MXP 54,500,000 Mexican Cetes zero %, April 27, 1995 1,498,750
$US 1,500,000 Mexican Tesobono bonds zero %, August 3, 1995 1,410,000
MXP 7,047,945 Nafinsa Pagare zero %, December 29, 1994 1,999,854
MXP 10,355,307 Nafinsa Pagare zero %, December 22, 1994 2,944,790
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $38,836,370) $ 38,760,220
------------
TOTAL INVESTMENTS
(cost $496,060,421)(g) $483,601,830
============
</TABLE>
16
<PAGE> 17
NOTES
(a) Percentages indicated are based on total net assets of $483,892,209 which
corresponds to a net asset value for class A and class B shareholders of $13.33
and $13.31, respectively.
(b) Foreign currency denominated. Market value is translated at current
exchange rate.
(c) Income may be received in cash or additional securities at the discretion
of the investor.
(d) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31, 1994,
these securities were valued at $1,418,158 or 0.3% of net assets.
(e) U.S. dollar denominated.
(f) Non-income-producing security.
(g) The aggregate identified cost for federal income tax purposes is
$496,967,850, resulting in gross unrealized appreciation and depreciation of
$495,919 and $13,861,939, respectively, or net unrealized depreciation of
$13,366,020.
(h) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin receiving interest at
this rate.
<TABLE>
<CAPTION>
FORWARD CURRENCY CONTRACTS OUTSTANDING AT OCTOBER 31, 1994
- ----------------------------------------------------------------------------------------
Unrealized
Aggregate Delivery Appreciation/
Market Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars (Sell) $19,815,116 $19,815,116 2/3/95 --
Australian Dollars (Sell) 16,302,000 16,268,120 12/5/94 $ (33,880)
Deutschemarks (Sell) 17,303,000 17,222,763 2/1/95 (80,237)
Deutschemarks (Sell) 25,422,100 25,208,698 2/1/95 (213,402)
Deutschemarks (Sell) 36,469,400 36,464,052 2/1/95 (5,348)
French Franc (Sell) 24,255,580 23,558,370 1/6/95 (697,210)
Japanese Yen (Buy) 56,210,158 55,895,741 11/21/94 314,417
New Zealand (Buy) 4,550,889 4,550,889 12/02/94 --
New Zealand (Buy) 3,930,240 3,888,282 12/19/94 41,958
---------
$(673,702)
</TABLE>
<TABLE>
<CAPTION>
FORWARD CROSS CURRENCY CONTRACTS OUTSTANDING AT OCTOBER 31, 1994
(Aggregate Face Value $53,051,460)
- --------------------------------------------------------------------------------------------------
Unrealized
In Delivery Appreciation/
Contracts Market Value Exchange for Market Value Date (Depreciation)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deutschmark (Sell) $16,675,530 Italian Lira $16,737,444 1/25/95 $ 61,914
Deutschmark (Sell) 12,619,370 Japanese Yen 12,718,555 1/20/95 99,185
Swiss Francs (Buy) 23,756,560 French Francs 24,014,257 12/21/94 (257,697)
---------
$ (96,598)
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
<TABLE>
<CAPTION>
U.S. TREASURY BONDS CALL OPTIONS OUTSTANDING AT OCTOBER 31, 1994
- -----------------------------------------------------------------------------------------------
Unrealized
Aggregate Delivery Appreciation/
Market Value Face Value Date (Depreciation)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Call Options $156,785 $137,187 11/2/94 $(19,598)
(Sell)
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY BOND FUTURES CONTRACTS OUTSTANDING AT OCTOBER 31, 1994
(AGGREGATE FACE VALUE $9,938,750)
- -----------------------------------------------------------------------------------------------
Expiration Date/ Unrealized
Number of Contracts Strike Price Appreciation
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
100 U.S. Treasury Bond Futures (Sell) Dec 94/98 11/32 $104,375
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFICATION OF FOREIGN BONDS AND NOTES
HELD AT OCTOBER 31, 1994 (AS A PERCENTAGE OF NET ASSETS):
- -----------------------------------------------------------------------------------------------
<S> <C>
United Kingdom 16.8%
Canada 16.0
Australia 9.1
Italy 9.2
Multi-National 7.6
Sweden 6.4
Denmark 2.6
New Zealand 2.6
Finland 2.3
Netherland 1.3
France 0.9
Morocco 0.7
India 0.5
Mexico 0.5
Philippines 0.5
Thailand 0.5
Argentina 0.4
Indonesia 0.4
Venezuela 0.3
Bulgaria 0.2
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments at value (identified cost $496,060,421) (Note 1) $483,601,830
Foreign currency (cost $835,024) 827,913
Cash 1,050
Interest and other receivables 11,671,366
Receivable for shares of the fund sold 540,734
Receivable for securities sold 1,506,881
Receivable for open forward currency contracts (Note 1) 517,474
Receivable for closed forward currency contracts 242,741
Receivable for variation margin on open futures 8,680
------------
TOTAL ASSETS $498,918,669
LIABILITIES
Payable for securities purchased $ 3,833,727
Written options outstanding at value (premium received $137,187) 156,785
Payable for shares of the fund repurchased 1,807,256
Distributions payable to shareholders 11,569
Payable for compensation of manager (Note 2) 1,001,153
Payable for administrative services (Note 2) 5,135
Payable for investor servicing and custodian fees (Note 2) 135,646
Payable for distribution fees (Note 2) 117,612
Payable for open forward currency contracts (Note 1) 1,287,774
Payable for closed forward currency contracts 6,602,486
Other accrued expenses 67,317
TOTAL LIABILITIES 15,026,460
------------
NET ASSETS $483,892,209
REPRESENTED BY
Paid-in capital (Note 4) $527,166,074
Accumulated net realized loss on investment transactions (30,923,328)
Undistributed net investment income 800,688
Net unrealized foreign currency translation loss (7,111)
Net unrealized depreciation of investments, options, futures,
and forward currency contracts (13,144,114)
------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO CAPITAL
SHARES OUTSTANDING $483,892,209
------------
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
Net asset value and redemption price of class A shares
($461,505,589 divided by 34,621,071 shares) $13.33
Offering price per share (100/95.25 of $13.33)* $13.99
Net asset value and offering price of class B shares
$22,386,620 divided by 1,681,699 shares)** $13.31
<FN>
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
19
<PAGE> 20
STATEMENT OF OPERATIONS
Year ended October 31, 1994
<TABLE>
<S> <C>
INTEREST INCOME (net of foreign tax of $641,797) $ 42,203,086
EXPENSES:
Compensation of Manager (Note 2) 4,261,246
Investor servicing fees and custodian fees (Note 2) 811,511
Compensation of Trustees (Note 2) 24,019
Reports to shareholders 109,065
Auditing 43,721
Legal 20,535
Postage 127,340
Administrative services (Note 2) 16,016
Distribution fees -- Class A (Note 2) 1,309,739
Distribution fees -- Class B (Note 2) 119,751
Registration fee 41,561
Other 16,373
------------
TOTAL EXPENSES 6,900,877
============
NET INVESTMENT INCOME 35,302,209
============
Net realized loss on investments (Notes 1 and 3) (35,198,719)
Net realized loss on options (Notes 1 and 3) (3,678,753)
Net realized gain on futures contracts (Notes 1 and 3) 2,790,440
Net realized loss on forward currency contracts (Notes1 and 3) (25,801,996)
Net realized loss on foreign currency (Note 1) (165,087)
Net unrealized foreign currency translation gains (1,143,268)
Net unrealized depreciation of investments, options, futures
and forward currency contracts during the year (6,553,478)
------------
NET LOSS ON INVESTMENT TRANSACTIONS (69,750,861)
============
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(34,448,652)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended October 31
------------------------------
1994 1993
INCREASE (DECREASE) IN NET ASSETS ------------ -------------
<S> <C> <C>
Operations:
Net investment income $ 35,302,209 $ 29,447,507
Net realized gain (loss) on investments (35,198,719) 7,990,015
Net realized gain (loss) on options (3,678,753) 5,274,427
Net realized gain (loss) on futures contracts 2,790,440 531,493
Net realized gain (loss) on forward currency contracts (25,801,996) 10,064,233
Net realized loss on foreign currency (165,087) (444,620)
Net unrealized foreign currency translation gains(loss) (1,143,268) 1,195,164
Net unrealized depreciation of investments, options,
futures, and forward currency contracts (6,553,478) (6,879,004)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS (34,448,652) 47,179,215
Undistributed net investment income included in
price of shares sold and repurchased, net -- 3,586
Distributions to shareholders from:
Net investment income
Class A (1,716,766) (29,451,093)
Class B (141,353) --
In excess of net investment income -- class A -- (15,180,972)
Return of capital
Class A shares (31,434,912) --
Class B shares (611,290) --
Net realized gain on investments (Note 1)
Class A (5,552,161) (20,633,000)
INCREASE FROM CAPITAL SHARE TRANSACTIONS (NOTE 4) 2,834,450 136,039,487
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (71,070,684) 117,957,223
NET ASSETS
Beginning of year 554,962,893 437,005,670
END OF YEAR (including undistributed
net investment income of $800,688
and distribution in excess of net
investment income of $15,180,972) $483,892,209 $554,962,893
============ ============
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
February 1, 1994
(commencement of
operations) to
October 31 Year Ended October 31
---------------- ----------------------------------------
1994 1994 1993 1992
---------------- ---- ---- ----
Class B
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.38 $ 15.25 $ 15.98 $ 15.70
INVESTMENT OPERATIONS:
Net investment income .64 0.97 1.07 1.07
Net realized and unrealized gain (loss) on investments (2.10) (1.84) .44 .56
TOTAL FROM INVESTMENT OPERATIONS (1.46) (0.87) 1.51 1.63
Distributions to shareholders from:
Net investment income: (0.14) (0.10) (0.98) (1.17)
In excess of net investment income -- (0.50)
Return of capital (0.47) (0.80) -- --
Net realized gain on investments -- (0.15) (0.76) (.18)
TOTAL DISTRIBUTIONS (0.61) (1.05) (2.24) (1.35)
NET ASSET VALUE, END OF PERIOD $ 13.31 $ 13.33 $ 15.25 $ 15.98
------- -------- -------- --------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE (%) (b) (9.52)(c) (5.93) 10.44 10.93
NET ASSETS, END OF PERIOD (in thousands) $22,387 $461,506 $554,963 $437,006
Ratio of expenses to average net assets (%) 1.49(c) 1.27 1.27 1.46
(a)(e)
Ratio of net investment income to average net assets (%) 4.76(c) 6.57 6.12 6.77
Portfolio turnover (%) 359.88 359.88 444.28 406.70
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
FOR THE PERIOD
June 1, 1987
(commencement
of operations)
Year ended October 31 to October 31
---------------------------------------------------------
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.95 $ 14.78 $ 16.22 $ 14.35 $ 14.12
INVESTMENT OPERATIONS:
Net investment income 1.24 1.29 1.46 1.61 .59(a)
Net realized and unrealized gain (loss) on investments .58 1.44 (1.02) 1.82 .16
TOTAL FROM INVESTMENT OPERATIONS 1.82 2.73 .44 3.43 .75
Distributions to shareholders from:
Net investment income: (1.24) (1.35) (1.58) (1.54) (.52)
In excess of net investment income
Return of capital -- -- -- -- --
Net realized gain on investments (.83) (.21) (.30) (.02) --
TOTAL DISTRIBUTIONS (2.07) (1.56) (1.88) (1.56) (.52)
NET ASSET VALUE, END OF PERIOD $15.70 $ 15.95 $ 14.78 $ 16.22 $ 14.35
-------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE (%) (b) 12.39 19.59 2.87 24.78 5.42(c)
NET ASSETS, END OF PERIOD (in thousands) $343,333 $180,941 $163,699 $115,554 $50,999
Ratio of expenses to average net assets (%) 1.48 1.58 1.62 1.66 .58(c)
(a)(e)
Ratio of net investment income to average net assets (%) 7.97 8.50 9.35 10.04 4.19(c)
Portfolio turnover (%) 313.87 498.27 386.73 249.27 34.96(c)
<FN>
(a) Reflects an expense limitation applicable during the period. As a
result of such limitation, expenses of the fund for the period ended
October 31, 1987 reflect a reduction of $0.05 per share. See Note 2.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Not annualized.
</TABLE>
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
October 31, 1994
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a non-diversified, open-end management investment company. The fund seeks high
current income by investing principally in a portfolio of governmental or
supranational debt securities denominated in any currency, and to a lesser
extent, in other debt and equity securities. The fund's secondary objectives
are preservation of capital and long-term total return, consistent with high
current income.
The fund offers both class A and class B shares. The fund commenced its public
offering of class B shares on February 1, 1994. Class A shares are sold with a
maximum front-end sales charge of 4.75%. Class B shares do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and may be subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Expenses of the fund are borne pro-rata
by the holders of both classes of shares, except that each class bears expenses
unique to that class (including the distribution fees applicable to such class)
and votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the Trustees.
Shares of each class should receive their pro-rata share of the net assets of
the fund, if the fund were liquidated. In addition, the Trustees declare
separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost which approximates market value, and other
investments are stated at fair value following procedures approved by the
Trustees.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. 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. The effects on net investment income arising from
changes in exchange rates are also not segregated.
B) Joint trading account Pursuant to an exemptive order issued by the Securities
and Exchange Commission the fund may transfer uninvested cash balances into a
joint trading account. The order permits the fund's cash balance to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Putnam Investment Management, Inc. (Putnam
Management), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc. and certain other accounts. These
24
<PAGE> 25
balances may be invested in one or more repurchase agreements and/or short-term
money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. The fund's Manager is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis.
Foreign currency-denominated receivables and payables are "marked-to-market"
using the current exchange rate. The fluctuation between the original exchange
rate and the current exchange rate is recorded as unrealized translation gain
or loss. Upon receipt or payment, the fund realizes a gain or loss on foreign
currency amounting to the difference between the original value and the ending
value of the receivable or payable. Foreign currency gains and losses related
to interest receivable are reported as part of interest income.
E) Option accounting principles When the fund writes a call or put option, an
amount equal to the premium received by the fund is included in the fund's
"Statement of assets and liabilities" as an asset and an equivalent liability.
The amount of the liability is subsequently "marked-to-market" to reflect the
current market value of the option written. The current market value of an
option is the last sale price or, in the absence of a sale, the last offering
price, except that certain options on U.S. government obligations are stated at
fair value on the basis of valuations furnished by a pricing service approved
by the Trustees. If an option expires on its stipulated expiration date, or if
the fund enters into a closing purchase transaction, the fund realizes a gain
(or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was written) without regard to any unrealized gain or
loss on the underlying security, and the liability related to such option is
extinguished. If a written call option is exercised, the fund realizes a gain
or loss from the sale of the underlying security and the proceeds of the sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of
the security which the fund purchases upon exercise of the option.
The fund writes covered call options; that is, options for which it holds the
underlying security or its equivalent. Accordingly, the risk in writing a call
option is that the fund relinquishes the opportunity to profit if the market
price of the underlying security increases and the option is exercised. In
writing a put option, the fund assumes the risk of incurring a loss if the
market price of the underlying security decreases and the option is exercised.
The premium paid by the fund for the purchase of a call or put option is
included in the fund's "Statement of assets and liabilities" as an investment
and subsequently "marked-to-market" to reflect the current market value of the
option. If an option the fund has purchased expires on the stipulated
expiration date, the fund realizes a loss in the amount of the cost of the
option. If the fund enters into a closing sale transaction, the fund realizes
a gain or loss, depending on whether proceeds from the closing sale transaction
are greater or less than the cost of the option. If the fund exercises a call
option, the cost of the securities acquired by exercising the call is increased
by the premium paid to buy
25
<PAGE> 26
the call. If the fund exercises a put option, it realizes a gain or loss from
the sale of the underlying security and the proceeds from such sale are
decreased by the premium originally paid.
Options on Foreign Currencies The fund writes and purchases put and call
options on foreign currencies. The accounting principles and risks involved
are similar to those described above relating to options on securities. The
amount of potential loss to the fund upon exercise of a written call option is
the value (in U.S. dollars) of the currency sold, converted at the spot price,
less the value of the U.S. dollars received in exchange. The amount of
potential loss to the fund upon exercise of a written put option is the value
(in U.S. dollars) of the currency received converted at the spot price, less
the value of the U.S. dollars paid in exchange.
Forward Currency Contracts A forward currency contract is an agreement between
two parties to buy and sell a currency at a set price on a future date. The
market value of the contract will fluctuate with changes in currency exchange
rates. The contract is marked- to-market daily and the change in market value
is recorded by the fund as an 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. The maximum potential loss from such contracts is the
aggregate face value in U.S. dollars at the time the contract was opened.
Futures A futures contract is an agreement between two parties to buy and sell
a security at a set price on a future date. Upon entering into such a contract
the fund is required to pledge to the broker an amount of cash or U.S.
government securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin," and are
recorded by the fund as unrealized gains or losses. 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. The potential risk to the fund is that the change in
value of the underlying securities may not correspond to the change in value of
the futures contracts.
F) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code of
1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held and excise tax on
income and capital gains.
At October 31, 1994, the fund had approximately $28,920,201 in capital loss
carryovers available to offset future realized capital gains, if any. The Fund
may at times continue to pay taxable distributions from a net realized
short-term gain which could have been retained by the Fund and offset by a
capital loss carryforward available to the Fund. In such circumstances the Fund
would lose the benefit of such a loss carryforward.
<TABLE>
<CAPTION>
Loss Carryover Expiration
- -----------------------------------
<S> <C>
$28,920,201 October 31, 2002
</TABLE>
G) Distributions to shareholders Distributions to shareholders are recorded by
the fund on the ex-dividend date.
26
<PAGE> 27
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund capital
accounts to reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations. For the year ended
October 31, 1994, the fund reclassified $5,900,818 to decrease distributed in
excess of net investment income, $26,818,825 to increase accumulated net
realized loss on investments, and $32,719,644 decrease paid-in capital.
H) Equalization Prior to November 1, 1993, the Fund used the accounting practice
known as equalization to keep a continuing shareholder's per share interest in
undistributed net investment income unaffected by sales or repurchases of Fund
shares. This was accomplished by allocating a per share portion of the proceeds
from sales and the costs of repurchases of shares to undistributed net
investment income.
As of November 1, 1993, the Fund discontinued using equalization. This change
has no effect on the Fund's total net assets, net asset value per share, its
net invested income or its net increase (decrease) in net assets from
operations. Discontinuing the use of equalization will result in simpler
financial statements. The cumulative effect of the change was to increase
overdistributed net investment income and increase paid-in-capital previously
reported through October 31, 1993 by $4,732,373.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund for the
quarter. Such fee is based on the following annual rates: 0.80% of the first
$500 million of average net assets, 0.70% of the next $500 million, 0.65% of
the next $500 million and 0.60% of any amount over $1.5 billion, subject to
reduction in any year to the extent that expenses (exclusive of brokerage,
interest and taxes) of the fund exceed 2.5% of the first $30 million of average
net assets, 2.0% of the next $70 million and 1.5% of any amount over $100
million, and by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of the Manager on the fund's portfolio
transactions.
The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative
services to the fund. The aggregate amount of all such reimbursements is
determined annually by the Trustees. For the year ended October 31, 1994, the
Trust paid $16,016 for these services.
Trustees of the fund receive an annual Trustee's fee of $1,470 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC. Fees paid for investor servicing and custodian functions for the year
ended October 31, 1994, amounted to $811,511.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended October 31, 1994 have been reduced by credits allowed by
PFTC.
The fund has adopted a distribution plan with respect to its class A shares
27
<PAGE> 28
(the "class A Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940. The purpose of the class A Plan is to compensate Putnam Mutual Funds
Corp., a wholly-owned subsidiary of Putnam Investments, Inc., for services
provided and expenses incurred by it in distributing class A shares. The
Trustees have approved payment by the fund to Putnam Mutual Funds Corp. at an
annual rate of 0.25% of the fund's average net assets attributable to class A
shares. For the year ended October 31, 1994, the fund paid $1,309,739 in
distribution fees for class A shares.
During the year ended October 31, 1994, Putnam Mutual Funds Corp., a
wholly-owned subsidiary of Putnam Investments, Inc., acting as an underwriter,
received net commissions of $277,974 from the sale of shares of the fund.
A deferred sales charge of 1% is assessed on certain redemptions of class A
shares purchased as part of an investment of $1 million or more. For the year
ended October 31, 1994, Putnam Mutual Funds Corp., acting as underwriter,
received $20,593 on such redemptions.
The fund has adopted a separate distribution plan with respect to its class B
shares (the "class B Plan") pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The purpose of the class B Plan is to compensate Putnam Mutual
Funds Corp. for services provided and expenses incurred by it in distributing
class B shares. The class B Plan provides for payments by the Fund to Putnam
Mutual Funds Corp. at an annual rate of 1.00% of the fund's average net assets
attributable to class B shares. For the year ended October 31, 1994, the Fund
incurred fees of $119,751 for class B shares.
Putnam Mutual Funds Corp. also receives the proceeds of contingent deferred
sales charges levied on class B share redemptions within six years of purchase.
The charge is based on declining rates, which begin at 5.0% of the lower of
cost or net asset value of the redeemed shares. Putnam Mutual Funds Corp.
received contingent deferred sales charges of $22,942 from such redemptions for
the year ended, October 31, 1994.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the year ended October 31, 1994, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $1,692,157,334 and $1,714,813,990, respectively. In determining the
net gain or loss on securities sold, the cost of securities has been determined
on the identified cost basis.
Written put option transactions on foreign currencies during the year are
summarized as follows:
<TABLE>
<CAPTION>
COST
--------
<S> <C>
Outstanding at prior year end $ --
Options written 728,799
Options closed 728,799
--------
WRITTEN OPTIONS
OUTSTANDING AT END OF YEAR $ --
========
</TABLE>
Transactions in U.S. Treasury Bond futures contracts during the year are
summarized as follows:
<TABLE>
<CAPTION>
SALES OF FUTURES CONTRACTS
NUMBER OF AGGREGATE
CONTRACTS FACE VALUE
--------- ------------
<S> <C> <C>
Contracts
outstanding at
prior year end 700 $ 82,818,750
Contracts opened 7070 785,953,969
Contracts closed 7670 858,833,969
------- ------------
OPEN AT END OF YEAR 100 $ 9,938,750
======= ============
</TABLE>
28
<PAGE> 29
Written option transactions on foreign currencies during the year are
summarized as follows:
<TABLE>
<CAPTION>
PREMIUMS
RECEIVED
--------
<S> <C>
Options written $137,187
Options closed --
--------
WRITTEN OPTIONS OUTSTANDING
AT END OF YEAR $137,187
========
</TABLE>
Transactions in forward futures contracts during the year are summarized as
follows:
<TABLE>
<CAPTION>
SALES OF FUTURES CONTRACTS
AGGREGATE
FACE VALUE
-----------
<S> <C>
Contracts
outstanding at
prior year end $28,887,529
Contracts opened --
Contracts closed 28,887,529
-----------
OPEN AT END OF YEAR $ --
===========
</TABLE>
Transactions in forward currency contracts during the year are summarized as
follows:
<TABLE>
<CAPTION>
PURCHASES OF FORWARD
CURRENCY CONTRACTS
AGGREGATE
FACE VALUE
--------------
<S> <C>
Contracts outstanding at
beginning of year $ 142,011,108
Contracts opened 1,324,085,738
--------------
1,466,096,846
Contracts closed 1,377,743,030
--------------
OPEN AT END OF YEAR $ 88,353,816
==============
</TABLE>
<TABLE>
<CAPTION>
SALES OF FORWARD
CURRENCY CONTRACTS
AGGREGATE
FACE VALUE
--------------
<S> <C>
Contracts outstanding at
beginning of year $ 292,735,260
Contracts opened 3,246,660,883
--------------
3,539,396,143
Contracts closed 3,371,487,921
--------------
OPEN AT END OF YEAR $ 167,908,222
==============
</TABLE>
NOTE 4
CAPITAL SHARES
At October 31, 1994, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1994
---------------------------
CLASS A SHARES AMOUNT
- ------- ------------ -------------
<S> <C> <C>
Shares sold 9,595,670 $ 140,467,719
Shares issued in
connection with
reinvestment
of distributions 1,887,452 26,856,105
----------- -------------
11,483,122 167,323,824
Shares
repurchased (13,251,878) (188,605,364)
----------- -------------
NET DECREASE (1,768,756) $ (21,281,540)
=========== =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1993
---------------------------
CLASS A SHARES AMOUNT
- ------- ------------ -------------
<S> <C> <C>
Shares sold 18,986,679 $ 288,425,499
Shares issued in
connection with
reinvestment
of distributions 3,004,256 44,684,292
----------- -------------
21,990,935 333,109,791
Shares
repurchased (12,955,144) (197,066,718)
----------- -------------
Portion
represented
by undistributed
net investment
income -- (3,586)
----------- -------------
NET INCREASE 9,035,791 $ 136,039,487
=========== =============
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
FROM FEBRUARY 1,1994
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 1994
----------------------------
CLASS B SHARES AMOUNT
- ------- ------------ -----------
<S> <C> <C>
Shares sold 2,439,453 $34,493,046
Shares issued in
connection with
reinvestment of
distributions 45,301 615,670
---------- -----------
2,484,754 35,108,716
---------- -----------
Shares
repurchased (803,055) (10,992,726)
---------- -----------
NET INCREASE 16,816,699 $24,115,990
========== ===========
</TABLE>
NOTE 5
RECLASSIFICATION OF CAPITAL ACCOUNTS
Effective November 1, 1993 Putnam Global Governmental Income Trust has adopted
the provisions of the AICPA Statement of Position (SOP) 93-2 "Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies." The purpose of this
SOP is to report the accumulated net investment income and accumulated net
realized gain (loss) accounts in such a manner as to approximate amounts
available for future distributions (or to offset future realized capital gains)
and to achieve uniformity in the presentation of distributions by investment
companies.
As a result of the SOP, the Fund has reclassified $13,415,326 to decrease
distributions in excess of net investment income and $12,244,956 to increase
accumulated net realized loss and $1,170,370 to decrease paid-in capital.
These adjustments represent the cumulative amounts necessary to report these
balances through October 31, 1993, the close of the fund's most recent fiscal
year end for financial reporting and tax purposes.
Federal Tax Information The fund had $0.102 distributions from net investment
income, $0.149 from "short-term capital gain" and $0.798 return of capital
totaling $1.049 for class A shares. The class B shares had distributions of
$0.147 from net investment income and $0.467 return of capital totalling
$0.614. The $0.251 for class A shares and $0.147 for class B shares
distributions constitute dividend income for federal income tax purposes.
The Form 1099 you receive in January 1995 will show the tax status of all
distributions paid to your account in calendar 1994.
If you are a shareholder in an IRA or other tax-sheltered retirement plan, this
statement is for information only and will serve as a record of distributions
reinvested in your account during the fiscal year. Money invested in these
plans generally is not subject to federal income tax until you withdraw it.
As required by law, your Fund reports to the Internal Revenue Service on a
calendar year basis the amount of distributions paid to each shareholder.
76% of the fiscal year's distribution represents a return of capital and is
therefore not taxable to shareholders.
30
<PAGE> 31
FUND INFORMATION
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT MANAGER OFFICERS
Putnam Investment Management, Inc. George Putnam
One Post Office Square President
Boston, MA 02109 Charles E. Porter
Executive Vice President
MARKETING SERVICES Patricia C. Flaherty
Putnam Mutual Funds Corp. Senior Vice President
One Post Office Square John R. Verani
Boston, MA 02109 Vice President
Gordon H. Silver
CUSTODIAN Vice President
Putnam Fiduciary Trust Company Gary Coburn
Vice President
LEGAL COUNSEL E. Mark Turner
Ropes & Gray Vice President and Fund Manager
D. William Kohli
INDEPENDENT ACCOUNTANTS Senior Vice President and Fund Manager
Coopers & Lybrand L.L.P. Jonathan Francis
Vice President and Fund Manager
TRUSTEES William N. Shiebler
George Putnam, Chairman Vice President
William F. Pounds, Vice Chairman Paul M. O'Neil
Jameson Adkins Baxter Vice President
Hans H. Estin John D. Hughes
John A. Hill Vice President and Treasurer
Elizabeth T. Kennan Beverly Marcus
Lawrence J. Lasser Clerk and Assistant Treasurer
Robert E. Patterson
Donald S. Perkins This report is for the information of
George Putnam, III shareholders of Putnam Global Governmental
A.J.C. Smith Income Trust. It may also be used as sales
W. Nicholas Thorndike literature when preceded or accompanied by
the current prospectus, which gives details
of sales charges, investment objectives, and
operating policies of the fund, and the most
recent copy of Putnam's Quarterly Performance
Summary. For more information, or to request
a prospectus, call toll free: 1-800-225-1581.
</TABLE>
31
<PAGE> 32
PUTNAM INVESTMENTS
-----------------
The Putnam Funds Bulk Rate
One Post Office Square U.S. Postage
Boston, Massachusetts 02109 PAID
PutnamInvestments
-----------------
041/220 - 15433
