PUTNAM HIGH YIELD ADVANTAGE FUND
ONE POST OFFICE SQUARE, BOSTON, MA 02109
CLASS A SHARES
INVESTMENT STRATEGY: INCOME
PROSPECTUS - APRIL 1, 1994, AS REVISED AUGUST 1, 1994
This Prospectus explains concisely what you should know before
investing in Class A shares of the Fund offered
without a sales charge through eligible employer-sponsored
defined contribution plans ("defined contribution plans") .
Please read it carefully and keep it for future reference. You
can find more detailed information about the Fund in the April 1,
1994 Statement of Additional Information, as amended from time to
time. For a free copy of the Statement or for other
information, including Prospectuses regarding another class of
Fund shares or Class A shares for other investors , call
Putnam Investor Services at 1- 800- 752-9894 . The
Statement has been filed with the Securities and Exchange
Commission and is incorporated into this Prospectus by reference.
Putnam High Yield Advantage Fund (the "Fund") seeks high current
income. Capital growth is a secondary objective when consistent
with seeking high current income. THE FUND INVESTS PRIMARILY IN
LOWER-RATED BONDS, COMMONLY KNOWN AS JUNK BONDS. INVESTMENTS OF
THIS TYPE ARE SUBJECT TO A GREATER RISK OF LOSS OF PRINCIPAL AND
NON-PAYMENT OF INTEREST. INVESTORS SHOULD CAREFULLY ASSESS THE
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. The Fund is a
diversified portfolio designed for investors willing to assume
additional risk in return for above-average income. See "Risk
factors" on page 7 . The Fund may engage in short-term
trading. See page 7 .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
PUTNAMINVESTMENTS
PUTNAM DEFINED
CONTRIBUTION PLANS<PAGE>
ABOUT THE
FUND ........................................2
Expenses
summary. ....................................2
Financial
highlights ..................................3
Objectives. ...........................................5
How objectives are
pursued. ...........................5 How
performance is shown ............................11
How the Fund is
managed. .............................12
Organization and history. ..........................12
ABOUT YOUR INVESTMENT
............................14
How to buy
shares....................................14
Distribution
Plan....................................14
How to sell
shares...................................15
How to exchange
shares...............................16 How the
Fund values its shares. ......................16
How distributions are made; tax information.
.......17
ABOUT PUTNAM INVESTMENTS,
INC. .......................17
APPENDIX
Fixed-Income Security Ratings.
.....................18<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes expenses
incurred by the Fund based on its most recent fiscal year. The
Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in Class A shares of the
Fund over specified periods.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.68%
12b -1 Fees 0.25%
Other Expenses 0.17%
Total Fund Operating Expenses 1.10%
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the
end of each period:
1 3 5 10
YEAR YEARS YEARS YEARS
$11 $35 $61 $134
The table is provided to help you understand your share
of the operating expenses which the Fund incurs. The
management fees shown in the table reflect a management
fee increase effective May 9, 1994. Actual management
fees and total Fund operating expenses for the most
recent fiscal year were 0.54% and 0.96%, respectively. The
Example does not represent past or future expense levels, and
actual expenses may be greater or less than those shown.
Federal regulations require the Example to assume a 5% annual
return, but actual annual return has varied. The Example does
not reflect any charges or expenses related to your employer's
plan.
The Fund also offers another class of shares. See
"Organization and history" for additional information.
FINANCIAL HIGHLIGHTS
The table on the following page presents per share financial
information for the life of the Fund. This information
has been derived from the Fund's financial statements, which
have been audited and reported on by the Fund's independent
accountants. The Report of Independent Accountants and financial
statements included in the Fund's Annual Report to shareholders
for the 1993 fiscal year are incorporated by reference into this
Prospectus. The Fund's Annual Report, which contains additional
unaudited performance information, will be made available without
charge upon request.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<PAGE>
(The table appears on page 4a.)
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS*
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
FOR THE PERIOD
MARCH 25, 1986
(COMMENCEMENT
OF OPERATIONS) TO
YEAR ENDED NOVEMBER 30 NOVEMBER 30
1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $9.74 $9.30 $7.38 $9.69 $11.35 $10.94 $11.61 $12.00
INVESTMENT OPERATIONS
NET INVESTMENT INCOME 1.13 1.23 1.14 1.18 1.37 1.35 1.36 .69
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS .70 .42 1.98 (2.09) (1.60) .38 (.71) (.31)
TOTAL FROM INVESTMENT
OPERATIONS 1.83 1.65 3.12 (.91) (.23) 1.73 .65 .38
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME (1.15) (1.21) (1.15) (1.33) (1.32) (1.32) (1.32) (.77)
IN EXCESS OF NET
INVESTMENT INCOME (A) (.01) -- -- -- -- -- -- --
NET REALIZED GAIN ON
INVESTMENTS -- -- -- (.07) (.11) -- -- --
PAID IN CAPITAL (A) -- -- (.05) -- -- -- -- --
TOTAL DISTRIBUTIONS (1.16) (1.21) (1.20) (1.40) (1.43) (1.32) (1.32) (.77)
NET ASSET VALUE,
END OF PERIOD $10.41 $9.74 $9.30 $7.38 $9.69 $11.35 $10.94 $11.61
TOTAL INVESTMENT RETURN,
AT NET ASSET VALUE (%) (B) 19.88 18.44 45.46 (10.26) (2.61) 16.67 5.64 4.79(C)
NET ASSETS,
END OF PERIOD
(IN THOUSANDS) $742,472 $484,520 $369,150 $248,111 $346,188 $398,221 $309,912 $196,934
RATIO OF EXPENSES TO
AVERAGE NET ASSETS (%) .96 1.14 1.33 1.37 1.23 1.07 1.12 1.24(C)
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS (%) 11.04 12.40 13.38 13.92 12.55 12.04 11.65 10.06(C)
PORTFOLIO TURNOVER (%) 50.89 68.29 74.45 63.29 76.88 97.36 121.08 133.40(D)
*FINANCIAL HIGHLIGHTS FOR PERIODS ENDED THROUGH NOVEMBER 30, 1992 HAVE BEEN RESTATED TO CONFORM WITH REQUIREMENTS ISSUED
BY THE SEC IN APRIL 1993.
(A)SEE NOTE 1 TO FINANCIAL STATEMENTS.
(B)TOTAL INVESTMENT RETURN ASSUMES DIVIDEND REINVESTMENT AND DOES NOT REFLECT THE EFFECT OF SALES CHARGES.
(C)ANNUALIZED.
(D)NOT ANNUALIZED.
</TABLE>
<PAGE>
OBJECTIVES
PUTNAM HIGH YIELD ADVANTAGE FUND SEEKS HIGH CURRENT INCOME.
CAPITAL GROWTH IS A SECONDARY OBJECTIVE WHEN CONSISTENT WITH THE
OBJECTIVE OF HIGH CURRENT INCOME. The Fund is not intended to be
a complete investment program, and there is no assurance it will
achieve its objectives.
HOW OBJECTIVES ARE PURSUED
BASIC INVESTMENT STRATEGY
PUTNAM HIGH YIELD ADVANTAGE FUND SEEKS HIGH CURRENT INCOME BY
INVESTING PRIMARILY IN HIGH-YIELDING, LOWER-RATED FIXED-INCOME
SECURITIES, CONSTITUTING A DIVERSIFIED PORTFOLIO WHICH PUTNAM
INVESTMENT MANAGEMENT, INC., THE FUND'S INVESTMENT MANAGER
("PUTNAM MANAGEMENT"), BELIEVES DOES NOT INVOLVE UNDUE RISK TO
INCOME OR PRINCIPAL. Normally, at least 80% of the Fund's assets
will be invested in debt securities, convertible securities or
preferred stocks that are consistent with its primary investment
objective of high current income. The Fund's remaining assets
may be held in cash or money market instruments, or invested in
common stocks and other equity securities when these types of
investments are consistent with the objective of high current
income.
The Fund seeks its secondary objective of capital growth, when
consistent with its primary objective of high current income, by
investing in securities which may be expected to appreciate in
value as a result of declines in long-term interest rates or to
favorable developments affecting the business or prospects of the
issuer which may improve the issuer's financial condition and
credit rating. Putnam Management believes that such
opportunities for capital appreciation often exist in the
securities of smaller capitalization companies which have the
potential for significant growth.
Differing yields on fixed-income securities of the same maturity
are a function of several factors, including the relative
financial strength of the issuers. Higher yields are generally
available from securities in the lower categories of recognized
rating agencies: Baa or lower by Moody's Investors Service, Inc.
or BBB or lower by Standard & Poor's Corporation. Securities
rated below Baa or BBB are considered to be of poor standing and
predominantly speculative. The Fund may invest up to 15% of its
assets in securities rated below Caa by Moody's or CCC by
Standard & Poor's, including securities in the lowest rating
category of each rating agency, or in unrated securities that
Putnam Management determines are of comparable quality. Such
securities may be in default and are generally regarded by the
rating agencies as having extremely poor prospects of ever
attaining any real investment standing. The rating services'
descriptions of securities in the lower rating categories,
including their speculative characteristics, are set forth in the
Appendix to this Prospectus.
Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' investment analysis
at the time of rating. Consequently, the rating assigned to any
particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or
worse than the rating would indicate. ALTHOUGH PUTNAM MANAGEMENT
CONSIDERS SECURITY RATINGS WHEN MAKING INVESTMENT DECISIONS, IT
PERFORMS ITS OWN INVESTMENT ANALYSIS AND DOES NOT RELY
PRINCIPALLY ON THE RATINGS ASSIGNED BY THE RATING SERVICES.
Putnam Management's analysis may include consideration of the
issuer's experience and managerial strength, changing financial
condition, borrowing requirements or debt maturity schedules, and
its responsiveness to changes in business conditions and interest
rates. It also considers relative values based on anticipated
cash flow, interest or dividend coverage, asset coverage and
earnings prospects. Because of the greater number of investment
considerations involved in investing in lower-rated securities,
the achievement of the Fund's objectives depends more on Putnam
Management's analytical abilities than would be the case if the
Fund were investing primarily in securities in the higher rating
categories.
At times Putnam Management may judge that conditions in the
securities markets make pursuing the Fund's basic investment
strategy inconsistent with the best interests of its
shareholders. At such times Putnam Management may temporarily
use alternative strategies, primarily designed to reduce
fluctuations in the value of the Fund's assets. In implementing
these "defensive" strategies, the Fund may increase the portion
of its assets invested in money market instruments and may invest
in higher-rated fixed-income securities, or other securities
Putnam Management considers consistent with such defensive
strategies. The yield on these securities would generally be
lower than the yield on lower-rated fixed-income securities. It
is impossible to predict when, or for how long, the Fund will use
such alternative strategies.
<PAGE>
FOREIGN INVESTMENTS
THE FUND MAY INVEST UP TO 20% OF ITS ASSETS IN SECURITIES
PRINCIPALLY TRADED IN FOREIGN MARKETS. The Fund may also
purchase Eurodollar certificates of deposit without regard to the
20% limit. Since foreign securities are normally denominated and
traded in foreign currencies, the values of the Fund's assets may
be affected favorably or unfavorably by currency exchange rates
and exchange control regulations. There may be less information
publicly available about a foreign company than about a U.S.
company, and foreign companies are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The
securities of some foreign companies are less liquid and at times
more volatile than securities of comparable U.S. companies.
Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability and diplomatic developments which could affect the
value of the Fund's investments in certain foreign countries.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located
in those foreign countries. Special tax considerations apply to
foreign securities.
The Fund may buy or sell foreign currencies, foreign currency
forward contracts and call options on foreign currencies for
hedging purposes in connection with its foreign investments.
A MORE DETAILED EXPLANATION OF FOREIGN INVESTMENTS, AND THE RISKS
AND SPECIAL TAX CONSIDERATIONS ASSOCIATED WITH THEM, IS INCLUDED
IN THE STATEMENT OF ADDITIONAL INFORMATION.
SHORT-TERM TRADING
UNDER CERTAIN MARKET CONDITIONS THE FUND MAY SEEK PROFITS BY
SHORT-TERM TRADING. The length of time the Fund has held a
particular security is not generally a consideration in
investment decisions. A change in the securities owned by the
Fund is known as "portfolio turnover." To the extent short-term
trading strategies are used, the Fund's portfolio turnover rate
may be higher than that of other mutual funds. Portfolio
turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestment in other
securities. Such transactions may result in realization of
taxable capital gains. Portfolio turnover rates for the life of
the Fund are shown in the section "Financial highlights ."
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE
RISKS OF OWNING SHARES OF A MUTUAL FUND WHICH INVESTS IN LOWER-
RATED SECURITIES BEFORE MAKING AN INVESTMENT IN THE FUND. The
lower ratings of certain securities held by the Fund reflect a
greater possibility that adverse changes in the financial
condition of the issuer, or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal.
The inability (or perceived inability) of issuers to make timely
payments of interest and principal would likely make the values
of securities held by the Fund more volatile and could limit the
Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of
a liquid trading market for securities held by it, the Fund may
be unable at times to establish the fair value of such
securities. The rating assigned to a security by Moody's or
Standard & Poor's does not reflect an assessment of the
volatility of the security's market value or of the liquidity of
an investment in the security. For more information about the
rating services' descriptions of lower-rated securities, see the
Appendix to this Prospectus.
Like those of other fixed-income securities, the values of lower-
rated securities fluctuate in response to changes in
interest rates. Thus, a decrease in interest rates will
generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the
value of the Fund's assets will generally decline. In addition,
the values of such securities are affected by changes in general
economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized
rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments.
Changes in the value of portfolio securities generally will not
affect income derived from such securities, but will affect the
Fund's net asset value. The Fund will not necessarily dispose of
a security when its rating is reduced below its rating at the
time of purchase, although Putnam Management will monitor the
investment to determine whether continued investment in the
security will assist in meeting the Fund's investment objective.
The table below shows the percentages of the Fund's assets
invested during fiscal 1993 in securities assigned to the various
rating categories by Moody's and Standard & Poor's and in unrated
securities determined by Putnam Management to be of comparable
quality:
<PAGE>
UNRATED SECURITIES OF
RATED SECURITIES,
COMPARABLE QUALITY,
AS PERCENTAGE OF
AS PERCENTAGE
RATING FUND'S ASSETS OF FUND'S ASSETS
"AAA"/"Aaa" 2.08% -- %
"AA"/"Aa" -- % --%
"A"/"A" -- % --%
"BBB"/"Baa" 0.57% -- %
"BB"/"Ba" 11.03% -- %
"B"/"B" 75.50% 6.30%
"CCC"/"Caa" 4.52% -- %
"CC"/"Ca" -- % --%
"C"/"C" -- % -- %
Total 93.70% 6.30%
Many of the lower-rated securities in which the Fund invests are
issued to raise funds in connection with the acquisition of a
company in so-called "leveraged buy-out" transactions. The
highly leveraged capital structure of such issuers may make them
especially vulnerable to adverse changes in economic conditions.
At times, a substantial portion of the Fund's assets may be
invested in securities as to which the Fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds a major portion or all of
such securities. Under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such
securities when Putnam Management believes it advisable to do so
or may be able to sell such securities only at prices lower than
if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net
asset value.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The value of zero-coupon bonds is subject
to greater fluctuation in response to changes in market interest
rates than bonds which pay interest currently. Both zero-coupon
and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly,
such bonds may involve greater credit risks than bonds paying
interest currently. Even though such bonds do not pay current
interest in cash, the Fund is nonetheless required to accrue
interest income on such investments and to distribute such
amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to
satisfy its distribution requirements.
Certain securities held by the Fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the Fund during a time of declining
interest rates, the Fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
Certain investment grade securities in which the Fund may invest
share some of the risk factors discussed above with respect to
lower-rated securities.
ILLIQUID SECURITIES
THE FUND MAY INVEST UP TO 15% OF ITS ASSETS IN
ILLIQUID SECURITIES . Putnam Management believes
that opportunities to earn high yields may exist from time to
time in securities that are not publicly traded and which
may be considered speculative. The sale of these securities is
usually restricted under federal securities laws. Market
quotations may be unavailable for illiquid securities, and as
a result, the Fund may not be able to sell these securities when
Putnam Management considers it desirable to do so or may
have to sell them at less than fair market value.
INVESTMENTS IN PREMIUM SECURITIES
The Fund may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities
are typically purchased at prices greater than the principal
amounts payable on maturity. The Fund does not amortize the
premium paid for such securities in calculating its net
investment income. As a result, the purchase of such securities
provides the Fund a higher level of investment income
distributable to shareholders on a current basis than if the Fund
had purchased securities bearing current market rates of
interest. Because the value of premium securities tends to
approach the principal amount as they approach maturity (or call
price in the case of securities approaching their first call
date), the purchase of such securities may increase the Fund's
risk of capital loss if such securities are held to maturity (or
first call date).
During a period of declining interest rates, many of the Fund's
portfolio investments will likely bear coupon rates which are
higher than the current market rates, regardless of whether such
securities were originally purchased at a premium. Such
securities would generally carry premium market values which
would be reflected in the net asset value of the Fund's shares.
As a result, an investor who purchases shares of the Fund during
such periods would initially receive higher taxable monthly
distributions (derived from the higher coupon rates payable on
the Fund's investments) than might be available from alternative
investments bearing current market interest rates, but may face
an increased risk of capital loss as these higher coupon
securities approach maturity (or first call date). In evaluating
the potential performance of an investment in the Fund, investors
may find it useful to compare the Fund's current dividend rate
with the Fund's "yield," which is computed on a yield-to-maturity
basis in accordance with SEC regulations and which reflects
amortization of market premiums. See "How performance is
shown ."
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE TO A LIMITED EXTENT IN THE FOLLOWING
INVESTMENT PRACTICES, EACH OF WHICH INVOLVES CERTAIN SPECIAL
RISKS. THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE
DETAILED INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THESE RISKS.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must
be fully collateralized at all times. The Fund may also purchase
securities for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date. These
transactions involve some risk to the Fund if the other party
should default on its obligation and the Fund is delayed or
prevented from recovering the collateral or completing the
transaction.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. THESE RESTRICTIONS PROHIBIT THE FUND
FROM: acquiring more than 10% of the voting securities of any one
issuer;* and investing more than: (a) 5% of its total assets in
securities of any one issuer (other than obligations issued or
guaranteed by the U.S. government or its agencies or
instrumentalities);* (b) 5% of its net assets in securities
(other than obligations of the U.S. government or its agencies or
instrumentalities) of issuers that, together with any
predecessors, controlling persons, general partners and
guarantors, have been in operation less than three years; (c)
15% of its net assets in securities restricted as to
resale , excluding restricted securities that have been
determined by the Trustees of the Fund (or the person designated
by them to make such determinations) to be readily
marketable;* (d) 25% of its total assets in any one
industry;* or (e) 15% of its net assets in any combination of
securities that are not readily marketable, in securities
restricted as to resale (excluding securities determined by the
Fund's Trustees (or the person designated by the Fund's Trustees
to make such determinations) to be readily marketable), and in
repurchase agreements maturing in more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental policies. Except for investment policies
designated as fundamental in this Prospectus or the Statement,
the investment policies described in this Prospectus and in the
Statement are not fundamental policies. The Trustees may change
any non-fundamental investment policies without shareholder
approval. As a matter of policy, the Trustees would not
materially change the Fund's investment objectives without
shareholder approval.
HOW PERFORMANCE IS SHOWN
YIELD AND TOTAL RETURN DATA MAY FROM TIME TO TIME BE INCLUDED IN
ADVERTISEMENTS ABOUT THE FUND. "Yield" is calculated by
dividing the Fund's annualized net investment income per share
during a recent 30-day period by the maximum public
offering price per share on the last day of that period. For
this purpose, net investment income is calculated in accordance
with SEC regulations and may differ from the Fund's net
investment income as determined for financial reporting purposes.
SEC regulations require that net investment income be calculated
on a "yield-to-maturity" basis, which has the effect of
amortizing any premiums or discounts in the current market value
of fixed-income securities. The Fund's current dividend rate is
based on the Fund's net investment income as determined for
financial reporting purposes, which reflects amortization only as
to the amount of any discount in the price paid by the Fund for
securities. See "How objectives are pursued- Investments
in premium securities." The Fund's yield reflects the deduction
of the maximum initial sales charge . "Total return" for
the one-and five-year periods and the life of the Fund (or since
the commencement of the public offering of a class, if shorter)
through the most recent calendar quarter represents the average
annual compounded rate of return on an investment of $1,000 in
the Fund at the maximum public offering price. Total return may
also be presented for other periods or based on investment at
reduced sales charge levels or net asset value. Any quotation of
total return or yield not reflecting the maximum initial sales
charge would be reduced if such sales charge were
used. Quotations of yield or total return for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. The Fund's performance may be
compared to various indices. See the Statement of Additional
Information. Because shares sold through eligible defined
contribution plans are sold without a sales charge, quotations of
yield and total return reflecting the deduction of a sales charge
will be lower than the actual yield and total return on shares
purchased through such plans.
ALL DATA IS BASED ON THE FUND'S PAST INVESTMENT RESULTS AND DOES
NOT PREDICT FUTURE PERFORMANCE. Investment performance, which
will vary, is based on many factors, including market conditions,
the composition of the Fund's portfolio, and the Fund's operating
expenses and which class of shares you purchase. Investment
performance also often reflects the risks associated with the
Fund's investment objectives and policies. These factors should
be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND ARE RESPONSIBLE FOR GENERALLY OVERSEEING
THE CONDUCT OF THE FUND'S BUSINESS. Subject to such policies as
the Trustees may determine, Putnam Management furnishes a
continuing investment program for the Fund and makes investment
decisions on its behalf. Subject to the control of the Trustees,
Putnam Management also manages the Fund's other affairs and
business. Jin W. Ho , Senior Vice President of Putnam
Management and Vice President of the Fund has primary
responsibility for the day-to-day management of the Fund's
portfolio. Mr. Ho has had this responsibility since
October, 1986 . Mr. Ho has been employed by Putnam
Management from before that date .
The Fund pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses, and payments under
its Distribution Plans which are in turn allocated to the
relevant class of shares. The Fund also reimburses Putnam
Management for the compensation and related expenses of the
certain officers of the Fund and their staff who provide
administrative services to the Fund. The total reimbursement is
determined annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the Fund's securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may
consider sales of shares of the Fund (and, if permitted by law,
of the other Putnam funds) as a factor in the selection of
broker-dealers.
ORGANIZATION AND HISTORY
Putnam High Yield Advantage Fund is a Massachusetts business
trust organized on January 13, 1986. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of
Massachusetts. Prior to April 1, 1992 the Fund was known as
Putnam High Yield Trust II.
The Fund is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Fund may, without shareholder
approval, be divided into an unlimited number of series of shares
representing separate investment portfolios. Any such series
of shares may be further divided, without shareholder approval,
into two or more classes of shares having such preferences and
special or relative rights and privileges as the Trustees may
determine.
The Fund's shares are not currently divided into series , but
are divided into two classes. Only the Fund's Class A shares are
offered by this Prospectus. Class B shares are sold at net asset
value but are subject to a contingent deferred sales charge, and
bear a higher 12b-1 fee than Class A shares. Because Class B
shares generally bear greater expenses than Class A shares, the
investment return of Class B shares will be lower than that of
Class A shares . Each share has one vote, with fractional
shares voting proportionally. Shares of each class will
vote together as a single class except when required otherwise by
law or as determined by the Trustees. Shares are freely
transferable, are entitled to dividends as declared by the
Trustees, and, if the Fund were liquidated, would receive the net
assets of the Fund. The Fund may suspend the sale of shares at
any time and may refuse any order to purchase shares. Although
the Fund is not required to hold annual meetings of its
shareholders, shareholders holding at least 10% of the
outstanding shares entitled to vote have the right to call a
meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the Fund may choose to redeem your shares
and pay you for them. You will receive at least 30 days' written
notice before the Fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The Fund
may also redeem shares if you own shares above a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both
present and future shareholders.
THE FUND'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, M.I.T.; JAMESON ADKINS BAXTER, President, Baxter
Associates, Inc.; HANS H. ESTIN, Vice Chairman, North American
Management; JOHN A. HILL, Principal and Managing Director, First
Reserve Corporation; ELIZABETH T. KENNAN, President, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President, Cabot Partners Limited Partnership; DONALD S. PERKINS,
Director of various corporations, including AT&T, K mart
Corporation and Time Warner Inc.; GEORGE PUTNAM, III,* President,
New Generation Research, Inc.; A.J.C. SMITH,* Chairman, Chief
Executive Officer and Director, Marsh & McLennan Companies, Inc.;
and W. NICHOLAS THORNDIKE, Director of various corporations and
charitable organizations, including Providence Journal Co. Also,
Trustee and President, Massachusetts General Hospital and Trustee
of Eastern Utilities Associates. The Fund's Trustees are also
Trustees of the other Putnam funds. Those marked with an
asterisk (*) are "interested persons" of the Fund, Putnam
Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
HOW TO BUY SHARES
ALL ORDERS TO PURCHASE SHARES MUST BE MADE THROUGH YOUR
EMPLOYER'S DEFINED CONTRIBUTION PLAN. FOR MORE INFORMATION ABOUT
HOW TO PURCHASE SHARES OF THE FUND THROUGH YOUR EMPLOYER'S PLAN
OR LIMITATIONS ON THE AMOUNT THAT MAY BE PURCHASED, PLEASE
CONSULT YOUR EMPLOYER. Shares are sold to eligible defined
contribution plans at the net asset value per share next
determined after receipt of an order by Putnam Mutual Funds.
Orders must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to
receive that day's net asset value. In order to be eligible to
purchase shares at net asset value, defined contribution plans
must initially invest at least $1,000,000 or be sponsored by
companies with more than 750 employees. Eligible plans may make
additional investments of any amount at any time. To eliminate
the need for safekeeping, the Fund will not issue certificates
for your shares.
On sales at net asset value to a participant-directed qualified
retirement plan initially investing less than $20 million in
Putnam funds and other investments managed by Putnam Management
or its affiliates (including a plan sponsored by an employer with
more than 750 employees), Putnam Mutual Funds pays commissions on
cumulative purchases during the life of the account at the rate
of 1.00% of the amount under $3 million and 0.50% thereafter. On
sales at net asset value to all other participant-directed
qualified retirement plans, Putnam Mutual Funds pays commissions
on the initial investment and on subsequent net quarterly sales
at the rate of 0.15%. Putnam Mutual Funds may, at its
expense, provide additional promotional incentives or payments to
dealers that sell shares of the Putnam funds. In some instances,
these incentives or payments may be offered only to certain
dealers who have sold or may sell significant amounts of shares
.
DISTRIBUTION PLAN
The purpose of the Plan is to permit the Fund to
compensate Putnam Mutual Funds for services provided and expenses
incurred by it in promoting the sale of shares of the Fund,
reducing redemptions, or maintaining or improving services
provided to shareholders by Putnam Mutual Funds or dealers. The
Plan provides for payments by the Fund to Putnam Mutual
Funds at the annual rate of up to 0.35% of the Fund's average net
assets attributable to Class A shares, subject to the
authority of the Fund's Trustees to reduce the amount of payments
or to suspend the Plan for such periods as they may
determine. Subject to these limitations, the amount of such
payments and the specific purposes for which they are made shall
be determined by the Trustees . At present, the Trustees
have approved payments under the Plan at the annual rate
of 0.25% of the Fund's average net assets attributable to Class A
shares for the purpose of compensating Putnam Mutual Funds for
services provided and expenses incurred by it as principal
underwriter of the Fund's Class A shares, including payments made
by it to dealers under the Service Agreements referred to below.
Should the Trustees decide in the future to approve payments in
excess of this amount, shareholders will be notified and this
Prospectus will be revised.
In order to compensate investment dealers (including, for this
purpose, certain financial institutions) for services provided in
connection with sales of Class A shares and the maintenance of
shareholder accounts, Putnam Mutual Funds makes quarterly
payments to qualifying dealers based on the average net asset
value of Class A shares of the Fund which are attributable to
shareholders for whom the dealers are designated as the dealer of
record. This calculation excludes until one year after
purchase shares purchased at net asset value after March 31, 1994
by shareholders investing $1 million or more and by participant-
directed qualified retirement plans sponsored by employers with
more than 750 employees ("NAV Shares"), except for shares owned
by certain investors investing $1 million or more that have made
arrangements with Putnam Mutual Funds and whose dealer of record
waived the sales commission. Except as stated below, Putnam
Mutual Funds makes such payments at the annual rate of 0.25% of
such average net asset value of such shares , (including
shares acquired through reinvestment of distributions). For
participant-directed qualified retirement plans initially
investing less than $20 million in Putnam funds and other
investments managed by Putnam Management or its affiliates,
Putnam Mutual Funds' payments to qualifying dealers on NAV
Shares are 100% of the rate stated above if average plan assets
in Putnam funds (excluding money market funds) during the quarter
are less than $20 million, 60% of the stated rate if average plan
assets are at least $20 million but less than $30 million, and
40% of the stated rate if average plan assets are $30 million or
more. For all other participant-directed qualified retirement
plans purchasing NAV Shares, Putnam Mutual Funds makes
quarterly payments to qualifying dealers at the annual rate
of 0.10% of the average net asset value of
such shares. Putnam Mutual Funds may suspend or modify
the payments made to dealers described above, and such payments
are subject to the continuation of the relevant Plan described
above, the terms of Service Agreements between dealers and Putnam
Mutual Funds, and any applicable limits imposed by the National
Association of Securities Dealers, Inc.
<PAGE>
HOW TO SELL SHARES
SUBJECT TO ANY RESTRICTIONS IMPOSED BY YOUR EMPLOYER'S PLAN,
YOU CAN SELL YOUR SHARES THROUGH THE PLAN TO
THE FUND ANY DAY THE NEW YORK STOCK EXCHANGE IS OPEN . For
more information about how to sell shares of the Fund
through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
Your plan administrator must send a signed letter of
instruction to Putnam Investor Services . The
price you will receive is the next net asset value calculated
after the Fund receives your request in proper form . All
requests must be received by the Fund prior to the close of
regular trading on the New York Stock Exchange in order to
receive that day's net asset value . If you sell shares
having a net asset value of $100,000 or more, signatures
of registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer or certain other financial
institutions. See the Statement of Additional Information for
more information about where to obtain a signature guarantee.
THE FUND GENERALLY PROVIDES PAYMENT FOR YOUR SHARES THE
BUSINESS DAY AFTER THE REQUEST IS RECEIVED. Under
unusual circumstances, the Fund may suspend repurchases, or
postpone payment for more than seven days, as permitted by
federal securities law. The Fund will only repurchase shares
for which it has received payment.
HOW TO EXCHANGE SHARES
Subject to any restrictions contained in your plan, you can
exchange your shares for shares of other Putnam funds available
through your plan at net asset value. Contact your plan
administrator or Putnam Investor Services on how
to exchange your shares or how to obtain
prospectuses of other Putnam funds in which you may
invest . Shares of certain Putnam funds are not available to
residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where the Trustees or Putnam Management
believes doing so would be in the best interest of the Fund, the
Fund reserves the right to revise or terminate the exchange
privilege, limit the amount or numbers of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the Statement of Additional
Information to find out more about the exchange privilege.
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
BY DIVIDING THE TOTAL VALUE OF ITS ASSETS, LESS LIABILITIES, BY
THE NUMBER OF ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN. Portfolio securities for which market
quotations are readily available are stated at market value.
Long-term corporate bonds and notes for which market quotations
are not considered readily available are stated at fair value on
the basis of valuations furnished by a pricing service approved
by the Trustees which determines valuations for normal,
institutional-size trading units of such securities using methods
based on market transactions for comparable securities and
various relationships between securities which are generally
recognized by institutional traders. Short-term investments that
will mature in 60 days or less are stated at amortized cost,
which approximates market value. All other securities and assets
are valued at their fair value following procedures approved by
the Trustees.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Fund distributes any net investment income monthly and any
net realized capital gains at least annually. Distributions from
capital gains are made after applying any available capital loss
carryovers. Distributions paid by the Fund with respect
to Class A shares will generally be greater than those paid with
respect to Class B shares because expenses attributable to Class
B shares will generally be higher.
The terms of your plan will govern how your plan may receive
distributions from the Fund. Generally, periodic
distributions from the Fund to your plan are reinvested
in additional Fund shares although your plan may permit
Fund distributions from net investment income to be
received in cash while reinvesting capital gains
distributions in additional shares or all
Fund distributions to be received in cash. If
another option is not selected , all distributions will
be reinvested in additional Fund shares .
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
income taxes on income and gains it distributes .
The Fund will distribute substantially all of its ordinary income
and capital gain net income on a current basis.
Generally, Fund distributions are taxable
as ordinary income, except that any distributions of net long-
term capital gains will be taxed as such . However,
distributions by the Fund to employer-sponsored
defined contribution plans that qualify for tax-exempt treatment
under federal income tax laws will not be taxable. Special tax
rules apply to investments through such plans. You should
consult your tax adviser to determine the suitability of the Fund
as an investment through such a plan and the tax treatment of
distributions (including distributions of amounts attributable to
an investment in the Fund) from such a plan.
The foregoing is a summary of certain federal income tax
consequences of investing in the Fund. You should consult your
tax adviser to determine the precise effect of an investment in
the Fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the Fund and
of other Putnam funds. Putnam Defined Contribution Plans is a
division of Putnam Mutual Funds. Putnam Fiduciary Trust
Company is the Fund's custodian. Putnam Investor Services, a
division of Putnam Fiduciary Trust Company, is the Fund's
investor servicing and transfer agent.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are located at One Post Office Square, Boston,
Massachusetts, 02109 and are subsidiaries of Putnam
Investments, Inc., which is wholly-owned by Marsh & McLennan
Companies, Inc., a publicly owned holding company whose principal
businesses are international insurance and reinsurance brokerage,
employee benefit consulting and investment management.
<PAGE>
APPENDIX
FIXED-INCOME SECURITY RATINGS
The rating services' descriptions of corporate bonds are:
MOODY'S INVESTORS SERVICE, INC.:
AAA -Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA -Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A -Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
(The Fund will invest principally in securities in the following
rating categories.)
BAA -Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA -Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during other good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small. <PAGE>
CAA -Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA -Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C -Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
STANDARD & POOR'S CORPORATION:
AAA -Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -Debt rated AA has a very strong capacity to pay
interest and repay principal and differ from the highest rated
issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
(THE FUND WILL INVEST PRINCIPALLY IN SECURITIES IN THE FOLLOWING
RATING CATEGORIES.)
BBB -Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C- Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The D rating also will be used on the
filing of a bankruptcy petition if debt service payments are
jeopardized. <PAGE>
Differences between the typeset (printed) prospectus and the
EDGAR filing version.
1. Each interior page of the prospectus includes the
word "prospectus" at the bottom of the page.
2. Pagination is different in printed prospectus.
3. Section headings and subheadings in the printed
prospectus are printed in boldface type with
colored ink.
4. The first page of the printed prospectus contains
an illustration of balanced scales, Putnam's
logo.
5. The last page of the printed prospectus contains
a graphic recyclable logo.
<PAGE>
DIFFERENCES BETWEEN THE TYPESET DEFINED CONTRIBUTION AND CLASS Y
(PRINTED)
PROSPECTUS AND THE EDGAR FILING VERSION.
1. PAGINATION IS DIFFERENT IN PRINTED PROSPECTUS
2. SECTION HEADINGS AND SUBHEADINGS IN THE PRINTED PROSPECTUS
ARE PRINTED IN BOLDFACE TYPE
3. THE FIRST FEW DESCRIPTIVE LINES OF CERTAIN PARAGRAPHS, AND
CERTAIN OTHER EMPHASIZED PHRASES, ARE PRINTED IN BOLDFACE
TYPE
4. IN THE PRINTED PROSPECTUS, THE DASHES AT THE BEGINNING OF
CERTAIN SENTENCES ARE REPLACED BY A SOLID BOX
5. THE FIRST PAGE OF THE PRINTED PROSPECTUS CONTAINS A BOX
WITH AN ILLUSTRATION OF THE BALANCE SCALES, THE PUTNAM
LOGO
<PAGE>
