PUTNAM HIGH YIELD ADVANTAGE FUND
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
APRIL 1, 1996 , AS REVISED OCTOBER 1, 1996
This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the prospectus of
the fund dated April 1, 1996, as revised from time to time. This
SAI contains information which may be useful to investors but
which is not included in the prospectus. If the fund has more
than one form of current prospectus, each reference to the
prospectus in this SAI shall include all of the fund's
prospectuses, unless otherwise noted. The SAI should be read
together with the applicable prospectus. Investors may obtain a
free copy of the applicable prospectus from Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI
02940-1203.
Part I of this SAI contains specific information about the fund.
Part II includes information about the fund and the other Putnam
funds.
<PAGE>
TABLE OF CONTENTS
PART I
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . .I-3
CHARGES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . I- 9
INVESTMENT PERFORMANCE . . . . . . . . . . . . . . . . . . . . .I- 13
ADDITIONAL OFFICERS . . . . . . . . . . . . . . . . . . . . . .I- 14
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . . . .I- 14
PART II
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . II-1
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . II- 29
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . II- 35
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . II- 44
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . II- 46
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . II- 59
INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . . II- 60
SIGNATURE GUARANTEES . . . . . . . . . . . . . . . . . . . . . II- 66
SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . . II- 66
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . II- 66
STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . II- 67
COMPARISON OF PORTFOLIO PERFORMANCE. . . . . . . . . . . . . . II- 68
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . II- 73
<PAGE>
SAI
PART I
INVESTMENT RESTRICTIONS
AS FUNDAMENTAL INVESTMENT RESTRICTIONS, WHICH MAY NOT BE CHANGED
WITHOUT A VOTE OF A MAJORITY OF THE OUTSTANDING VOTING
SECURITIES, THE FUND MAY NOT AND WILL NOT:
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 15% of its total assets (taken at current
value) and then only to secure borrowings permitted by
restriction 1 above. Collateral arrangements with respect to
margin for futures contracts and options are not deemed to be
pledges or other encumbrances for purposes of this restriction.
(3) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and
sales of securities, and except that it may make margin payments
in connection with transactions in futures contracts and options.
(4) Make short sales of securities or maintain a short position
for the account of the fund unless at all times when a short
position is open it owns an equal amount of such securities or
owns securities which, without payment of any further
consideration, are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short.
(5) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(6) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which
are secured by interests in real estate and securities
representing interests in real estate.
(7) Purchase or sell commodities or commodity contracts, except
that it may purchase and sell financial futures contracts and
related options.
(8) Make loans, except by purchase of debt obligations in which
the fund may invest consistent with its investment policies, by
entering into repurchase agreements with respect to not more than
25% of its total assets (taken at current value), or through the
lending of its portfolio securities with respect to not more than
25% of its total assets.
(9) Invest in securities of any issuer if, to the knowledge of
the fund, officers and Trustees of the fund and officers and
directors of Putnam Management who beneficially own more than
0.5% of the securities of that issuer together own more than 5%.
(10) Invest in securities of any issuer if, immediately after
such investment, more than 5% of the total assets of the fund
(taken at current value) would be invested in the securities of
such issuer, provided that this limitation does not apply to
obligations issued or guaranteed as to interest and principal by
the U.S. government or its agencies or instrumentalities.
(11) Acquire more than 10% of the voting securities of any
issuer.
(12) Invest more than 25% of the value of its total assets in any
one industry.
(13) Purchase securities restricted as to resale if, as a result,
such investments would exceed 15% of the value of the fund's net
assets, 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.
(14) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(15) Make investments for the purpose of gaining control of a
company's management.
(16) Issue any class of securities which is senior to the fund's
shares of beneficial interest.
IT IS CONTRARY TO THE FUND'S PRESENT POLICY, WHICH MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL, TO:
(1) Invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities restricted
as to resale (excluding securities determined by the Trustees of
the fund (or the person designated by the Trustees of the fund to
make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a
result, more than 15% of the fund's net assets (taken at current
value) would then be invested in securities described in (a), (b)
and (c) above.
(2) Invest in warrants (other than warrants acquired by the fund
as part of a unit or attached to securities at the time of
purchase).
(3) Invest in securities of an issuer which, together with any
predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous
business operation or relevant business experience, if, as a
result, the aggregate of such investments would exceed 5% of the
value of the fund's net assets; provided, however, that this
restriction shall not apply to any obligation of the U.S.
government or its instrumentalities or agencies.
(4) Invest in the securities of other registered open-end
investment companies, except as they may be acquired as part of a
merger, consolidation or acquisition of assets.
At a meeting to be held on October 31, 1996, shareholders of
the fund are being asked to approve a number of changes to the
fund's fundamental investment restrictions, including the
elimination of certain of these restrictions. If these proposals
are approved at that meeting, the fund's fundamental and non-
fundamental investment restrictions will be as follows after that
date:
FUNDAMENTAL RESTRICTIONS
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(2) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which
are secured by interests in real estate, and securities which
represent interests in real estate, and it may acquire and
dispose of real estate or interests in real estate acquired
through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.
(4) Purchase or sell commodities or commodity contracts, except
that the fund may purchase and sell financial futures contracts
and options and may enter into foreign exchange contracts and
other financial transactions not involving physical commodities.
(5) Make loans, except by purchase of debt obligations in which
the fund may invest consistent with its investment policies, by
entering into repurchase agreements, or by lending its portfolio
securities.
(6) With respect to 75% of its total assets, invest in the
securities of any issuer if, immediately after such investment,
more than 5% of the total assets of the fund (taken at current
value) would be invested in the securities of such issuer;
provided that this limitation does not apply to obligations
issued or guaranteed as to interest or principal by the U.S.
government or its agencies or instrumentalities.
(7) With respect to 75% of its total assets, acquire more than
10% of the outstanding voting securities of any issuer.
(8) Purchase securities (other than securities of the U.S.
government, its agencies or instrumentalities) if, as a result of
such purchase, more than 25% of the fund's total assets would be
invested in any one industry.
(9) Issue any class of securities which is senior to the fund's
shares of beneficial interest, except for permitted borrowings.
NON-FUNDAMENTAL RESTRICTIONS
The fund may not and will not:
(1) Invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities restricted
as to resale (excluding securities determined by the Trustees of
the fund (or the person designated by the Trustees of the fund to
make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a
result, more than 15% of the fund's net assets (taken at current
value) would then be invested in securities described in (a), (b)
and (c) above.
(2) Invest in warrants (other than warrants acquired by the fund
as part of a unit or attached to securities at the time of
purchase).
(3) Invest in securities of an issuer which, together with any
predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous
business operation or relevant business experience, if, as a
result, the aggregate of such investments would exceed 5% of the
value of the fund's net assets; provided, however, that this
restriction shall not apply to any obligation of the U.S.
government or its instrumentalities or agencies.
(4) Invest in the securities of other registered open-end
investment companies, except as they may be acquired as part of a
merger, consolidation or acquisition of assets.
(5) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 33 1/3% of its total assets (taken at cost)
in connection with permitted borrowings.
(6) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and
sales of securities, and except that it may make margin payments
in connection with financial futures contracts or options.
(7) Make short sales of securities or maintain a short position
for the account of the fund unless at all times when a short
position is open it owns an equal amount of such securities or
owns securities which, without payment of any further
consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the
securities sold short.
(8) Invest in securities of any issuer, if, to the knowledge of
the fund, officers and Trustees of the fund and officers and
directors of Putnam Management who beneficially own more than
0.5% of the securities of that issuer together own more than 5%
of such securities.
(9) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, although it may purchase securities which
represent interests in, are secured by interests in, or which are
issued by issuers which deal in, such leases, rights or
contracts, and it may acquire and dispose of such leases, rights
or contracts acquired through the exercise of its rights as a
holder of debt obligations secured thereby.
Although certain of the fund's fundamental investment
restrictions permit the fund to borrow money to a limited extent,
the fund does not currently intend to do so and did not do so
last year. The fund has undertaken to a state securities
authority (i) that it will engage in futures contracts or options
transactions only to the extent that the aggregate premiums paid
for all uncovered options written by others do not exceed 2.0% of
the net assets of the fund and (ii) that it will not accept
payment for shares in securities in which it does not already
maintain a position if to accept such securities would be for the
purpose of resale.
The fund has also undertaken to a state securities authority that
the fund will not purchase or sell real property (including
limited partnership interests), except that the fund may (a)
purchase or sell readily marketable interests in real estate
investment trusts or readily marketable securities of companies
which invest in real estate (b) purchase or sell securities that
are secured by interests in real estate or interests therein, or
(c) acquire real estate through exercise of its rights as a
holder of obligations secured by real estate or interests therein
or sell real estate so acquired.
In connection with the offering of its shares in Japan, the
fund has undertaken to the Japanese Securities Dealers
Association: (1) that the fund will not invest more than 10% of
the fund's net assets in securities that are not traded on a
recognized exchange; (2) that the fund may not acquire more than
10% of the voting securities of any issuer; (3) that the fund
will not invest more that 5% of its total assets in the
securities of any one issuer (other than the U.S. government) and
(4) that the fund will not acquire more than 15% of the voting
securities of any issuer together with other registered
investment companies managed by Putnam Investment Management,
Inc.
If the undertakings are violated, the fund will, promptly after
discovery, take such action as may be necessary to cause the
violation to cease, which shall be the only obligation of the
fund and the only remedy in respect of the violation. These
undertakings will remain in effect as long as required by the
Japanese Securities Dealers Association.
--------------
Although certain of the fund's fundamental investment
restrictions permit the fund to borrow money to a limited extent,
the fund does not currently intend to do so and did not do so
last year.
The Investment Company Act of 1940 provides that a "vote of a
majority of the outstanding voting securities" of the fund means
the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the fund, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy.
All percentage limitations on investments will apply at the time
of the making of an investment and shall not be considered
violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The Investment Company Act of 1940 provides that a "vote of a
majority of the outstanding voting securities" of the fund means
the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the fund, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy. The fund
may invest without limitation in "premium securities as defined
in the prospectus.
CHARGES AND EXPENSES
MANAGEMENT FEES
Under a Management Contract dated May 6, 1994, the fund pays a
quarterly fee to Putnam Management based on the average net
assets of the fund, as determined at the close of each business
day during the quarter at an annual rate of 0.70% of the first
$500 million of average net assets, 0.60% of the next $500
million, 0.55% of the next $500 million and 0.50% of any amount
over $1.5 billion. For the past three fiscal years, pursuant to
the Management Contract (and a management contract in effect
prior to May 6, 1994, under which the management fee payable to
Putnam Management was paid at the rate of 0.70% of the first $100
million of average net assets, 0.60% of the next $100 million,
0.50% of the next $300 million, 0.45% of the next $500 million
and 0.425% of any amount over $1.0 billion) the fund incurred the
following fees:
FISCAL MANAGEMENT
YEAR FEE PAID
- ------ ----------
1995 $6,014,802
1994 $4,397,110
1993 $3,283,747
BROKERAGE COMMISSIONS
The following table shows brokerage commissions paid during the
fiscal periods indicated.
FISCAL BROKERAGE
YEAR COMMISSIONS
- ------ ------------
1995 $57,488
1994 $34,030
1993 $122,114
<PAGE>
The following table shows transactions placed with brokers and
dealers during the most recent fiscal year to recognize research,
statistical and quotation services Putnam Management considered
to be particularly useful to it and its affiliates.
DOLLAR
VALUE PERCENT OF
OF THESE TOTAL AMOUNT OF
TRANSACTIONS TRANSACTIONS COMMISSIONS
------------ ------------ -----------
$26,832,100 14.02% $51,474
ADMINISTRATIVE EXPENSE REIMBURSEMENT
The fund reimbursed Putnam Management in the following amounts
for administrative services during fiscal 1995, including the
following amounts for the compensation of certain officers of the
fund and contributions to the Putnam Investments, Inc. Profit
Sharing Retirement Plan for their benefit:
PORTION OF TOTAL
REIMBURSEMENT FOR
COMPENSATION
TOTAL AND
REIMBURSEMENT CONTRIBUTIONS
- ------------- ----------------
$20,020 $18,474
TRUSTEE FEES
Each Trustee receives a fee for his or her services. Each
Trustee also receives fees for serving as Trustee of other Putnam
funds. The Trustees periodically review their fees to assure
that such fees continue to be appropriate in light of their
responsibilities as well as in relation to fees paid to trustees
of other mutual fund complexes. The Trustees meet monthly over a
two-day period, except in August. The Compensation Committee,
which consists solely of Trustees not affiliated with Putnam
Management and is responsible for recommending Trustee
compensation, estimates that Committee and Trustee meeting time
together with the appropriate preparation requires the equivalent
of at least three business days per Trustee meeting. The
following table shows the year each Trustee was first elected a
Trustee of the Putnam funds, the fees paid to each Trustee by the
fund for fiscal 1995 and the fees paid to each Trustee by all of
the Putnam funds during calendar year 1995:
<PAGE>
COMPENSATION TABLE
Total
Aggregate compensation
compensation from all
Trustees from the fund* Putnam funds**
- -----------------------------------------------------------------
Jameson A. Baxter/1994 $1,813 $150,854
Hans H. Estin/1972 1,820 150,854
John A. Hill/1985*** 1,807 149,854
Elizabeth T. Kennan/1992 1,813 148,854
Lawrence J. Lasser/1992 1,812 150,854
Robert E. Patterson/1984 1,837 152,854
Donald S. Perkins/1982 1,812 150,854
William F. Pounds/1971 1,807 149,854
George Putnam/1957 1,820 150,854
George Putnam, III/1984 1,820 150,854
Eli Shapiro/1995**** 1,072 95,372
A.J.C. Smith/1986 1,799 149,854
W. Nicholas Thorndike/1992 1,837 152,854
* Reflects amounts paid for fiscal year 1995. Includes an
annual retainer and an attendance fee for each meeting
attended.
** Reflects total payments received from all Putnam funds in
the most recent calendar year. As of December 31, 1995,
there were 99 funds in the Putnam family.
*** Includes compensation deferred pursuant to a Trustee
Compensation Deferral Plan. The total amount of deferred
compensation payable to Mr. Hill by all Putnam funds as of
November 30, 1995 was $47,586, including income earned on
such amounts.
**** Elected as a Trustee in April 1995.
The Trustees have approved Retirement Guidelines for Trustees of
the Putnam funds. These Guidelines provide generally that a
Trustee who retires after reaching age 72 and who has at least 10
years of continuous service will be eligible to receive a
retirement benefit from each Putnam fund for which he or she
served as a Trustee. The amount and form of such benefit is
subject to determination annually by the Trustees and, unless
otherwise determined by the Trustees, will be an annual cash
benefit payable for life equal to one-half of the Trustee
retainer fees paid by each fund at the time of retirement.
Several retired Trustees are currently receiving benefits
pursuant to the Guidelines and it is anticipated that the current
Trustees will receive similar benefits upon their retirement. A
Trustee who retired in calendar 1995 and was eligible to receive
benefits under these Guidelines would have received an annual
benefit of $66,749, based upon the aggregate retainer fees paid
by the Putnam funds for such year. The Trustees reserve the
right to amend or terminate such Guidelines and the related
payments at any time, and may modify or waive the foregoing
eligibility requirements when deemed appropriate.
For additional information concerning the Trustees, see
"Management" in Part II of this SAI.
SHARE OWNERSHIP
At February 29, 1996, the officers and Trustees of the fund as a
group owned less than 1% of the outstanding shares of each class
and, except as noted below, to the knowledge of the fund no
person owned of record or beneficially 5% or more of the shares
of any class of the fund.
SHAREHOLDER NAME PERCENTAGE
CLASS AND ADDRESS OWNED
----- --------------------- ----------
B Merrill Lynch Pierce 6.60%
Fenner & Smith
4800 Dear Lake Drive, East
Jacksonville, FL 32246
DISTRIBUTION FEES
During fiscal 1995, the fund paid the following 12b-1 fees to
Putnam Mutual Funds:
CLASS ACLASS B CLASS M
-------------- -------
$1,918,495 $1,413,289 $48,204
CLASS A SALES CHARGES AND CONTINGENT DEFERRED SALES CHARGES
Putnam Mutual Funds received sales charges with respect to class
A shares in the following amounts during the periods indicated:
SALES CHARGES
RETAINED BY PUTNAM CONTINGENT
TOTAL MUTUAL FUNDS DEFERRED
FRONT-END AFTER SALES
FISCAL YEAR SALES CHARGES DEALER CONCESSIONS CHARGES
- ----------- ------------- ------------------ --------
1995 $5,441,431 $626,712 $6,964
1994 $4,081,135 $481,458 N/A
1993 $5,752,110 $690,185 N/A
<PAGE>
CLASS B CONTINGENT DEFERRED SALES CHARGES
Putnam Mutual Funds received contingent deferred sales charges
upon redemptions of class B shares in the following amounts
during the periods indicated:
CONTINGENT DEFERRED
FISCAL YEAR SALES CHARGES
- ----------- -------------------
1995 $289,856
1994 $25,028
CLASS M SALES CHARGES
Putnam Mutual Funds received sales charges with respect to class
M shares in the following amount during the 1995 fiscal year:
SALES CHARGES
RETAINED BY PUTNAM
MUTUAL FUNDS
TOTAL AFTER
SALES CHARGES DEALER CONCESSIONS
- ------------- ------------------
$250,277 $22,260
INVESTOR SERVICING AND CUSTODY FEES AND EXPENSES
During the 1995 fiscal year, the fund incurred $1,405,209 in fees
and out-of-pocket expenses for investor servicing and custody
services provided by Putnam Fiduciary Trust Company.
INVESTMENT PERFORMANCE
STANDARD PERFORMANCE MEASURES
(for periods ended November 30, 1995)
CLASS A CLASS B CLASS M
Inception date: 3/25/86 5/16/94 12/1/94
TOTAL
RETURN NAV* POP** NAV CDSC NAV POP
- ----------------------------------------------------------------
1 year 16.81% 11.29% 15.94% 10.94% -- --
5 years 18.43% 17.27% -- -- -- --
Life of class 10.32% 9.77% 7.84% 5.42% 16.72% 12.98%
CLASS A CLASS B CLASS M
YIELD POP NAV POP
30-day
Yield 7.53% 7.15% 7.40%
* net asset value
** public offering price
Data represent past performance and are not indicative of future
results. Total return and yield at POP for class A and class M
shares reflect the deduction of the maximum sales charge of
4.75% and 3.25%, respectively. Total return at CDSC for class B
shares reflects the deduction of the applicable contingent
deferred sales charge ("CDSC"). The maximum class B CDSC is
5.0%. See "Standard performance measures" in Part II of this SAI
for information on how performance is calculated. Past
performance is no guarantee of future results.
ADDITIONAL OFFICERS
In addition to the persons listed as officers of the fund in Part
II of this SAI, each of the following persons is also a Vice
President of the fund and Vice President of certain of the Putnam
funds. Officers of Putnam Management hold the same offices in
Putnam Management's parent company, Putnam Investments, Inc.
GARY N. COBURN, Senior Managing Director of Putnam Management.
EDWARD H. D'ALELIO, Managing Director of Putnam Management.
JIN W. HO, Managing Director of Putnam Management.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA
02109 are the fund's independent accountants, providing audit
services, tax return review and other tax consulting services and
assistance and consultation in connection with the review of
various Securities and Exchange Commission filings. The Report
of Independent Accountants, financial highlights and financial
statements included in the fund's Annual Report for the fiscal
year ended November 30, 1995, filed electronically on January 31,
1996 (File No. 811-4616), are incorporated by reference into this
SAI. The financial highlights included in the prospectus and
incorporated by reference into this SAI and the financial
statements incorporated by reference into the prospectus and this
SAI have been so included and incorporated in reliance upon the
report of the independent accountants, given on their authority
as experts in auditing and accounting.
