PROSPECTUS
March 30, 1997 , as revised October 30, 1997
Putnam High Yield Advantage Fund
Class A, B and M shares
INVESTMENT STRATEGY: INCOME
This prospectus explains concisely what you should know before
investing in shares of Putnam High Yield Advantage Fund (the
"fund"). Please read it carefully and keep it for future
reference. You can find more detailed information in the March
30, 1997 statement of additional information (the "SAI"), as
amended from time to time. For a free copy of the SAI or other
information, call Putnam Investor Services at 1-800-225-1581.
The SAI has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated into this
prospectus by reference. The Commission maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated
by reference into this prospectus and the SAI, and other
information regarding registrants that file electronically with
the Commission.
The fund invests primarily in lower-rated bonds, commonly known
as "junk bonds." These investments are subject to a
greater risk of loss of principal and nonpayment 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 potential. See "Risk factors" on
page .
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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
BOSTON * LONDON * TOKYO
<PAGE>
ABOUT THE FUND
Expenses summary
...............................................................
This section describes the sales charges, management fees, and
annual operating expenses that apply to various classes of the
fund's shares. Use it to help you estimate the impact of
transaction costs and recurring expenses on your investment over
time.
Financial highlights
...............................................................
Study this table to see, among other things, how the fund
performed each year for the past 10 years or since it began
investment operations if it has been in operation for less than
10 years.
Objectives
...............................................................
Read this section to make sure the fund's objectives are
consistent with your own.
How the fund pursues its objectives
...............................................................
This section explains in detail how the fund seeks its investment
objectives.
How performance is shown
...............................................................
This section describes and defines the measures used to assess
fund performance. All data are based on past investment results
and do not predict future performance.
How the fund is managed
...............................................................
Consult this section for information about the fund's management,
allocation of its expenses, and how it purchases and
sells securities .
Organization and history
...............................................................
In this section, you will learn when the fund was introduced, how
it is organized, how it may offer shares, and who its Trustees
are.
<PAGE>
ABOUT YOUR INVESTMENT
Alternative sales arrangements
...............................................................
Read this section for descriptions of the classes of shares this
prospectus offers and for points you should consider when making
your choice.
How to buy shares
...............................................................
This section describes the ways you may purchase shares and tells
you the minimum amounts required to open various types of
accounts. It explains how sales charges are determined and how
you may become eligible for reduced sales charges .
Distribution plans
...............................................................
This section tells you what distribution fees are charged against
each class of shares.
How to sell shares
...............................................................
In this section you can learn how to sell fund shares, either
directly to the fund or through an investment dealer.
How to exchange shares
...............................................................
Find out in this section how you may exchange fund shares for
shares of other Putnam funds. The section also explains how
exchanges can be made without sales charges and the conditions
under which sales charges may be required.
How the fund values its shares
...............................................................
This section explains how the fund determines the value of its
shares.
How the fund makes distributions to shareholders; tax
information
...............................................................
This section describes the various options you have in choosing
how to receive fund dividends. It also discusses the tax status
of the payments and counsels you to seek specific advice about
your own situation.
<PAGE>
ABOUT PUTNAM INVESTMENTS, INC.
...............................................................
Read this section to learn more about the companies that provide
marketing, investment management, and shareholder account
services to Putnam funds and their shareholders.
APPENDIX
Securities ratings
<PAGE>
About the fund
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing.
The following table summarizes your maximum transaction costs
from investing in the fund and expenses based on the most recent
fiscal year. The examples show the cumulative expenses
attributable to a hypothetical $1,000 investment over specified
periods.
Class A Class B Class M
shares shares shares
Shareholder transaction
expenses
Maximum sales charge
imposed on purchases
(as a percentage of
offering price) 4.75% NONE* 3.25%*
Deferred sales charge 5.0% in the first
(as a percentage year, declining
of the lower of to 1.0% in the
original purchase sixth year, and
price or redemption eliminated
proceeds) NONE** thereafter NONE
Annual fund operating expenses
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees fees expenses expenses
- ---------- ----- -------------------
Class A 0.61% 0.25% 0.23% 1.09%
Class B 0.61% 1.00% 0.23% 1.84%
Class M 0.61% 0.50% 0.25% 1.36%
The table is provided to help you understand the expenses of
investing and your share of fund operating expenses. The
expenses shown in the table do not reflect the application of
credits that reduce fund expenses. <PAGE>
Examples
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and, except as indicated, redemption at
the end of each period:
1 3 5 10
year years years years
Class A $58 $80 $104 $173
Class B $69 $88 $120 $196***
Class B (no redemption)$19 $58 $100 $196***
Class M $46 $74 $105 $191
The examples do not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the examples to assume a 5% annual return,
but actual annual return varies.
* The higher 12b-1 fees borne by class B and class M shares
may cause long-term shareholders to pay more than the
economic equivalent of the maximum permitted front-end sales
charge on class A shares.
** A deferred sales charge of up to 1.00% is assessed on
certain redemptions of class A shares that were purchased
without an initial sales charge. See "How to buy shares -
Class A shares."
*** Reflects conversion of class B shares to class A shares
(which pay lower ongoing expenses) approximately eight years
after purchase. See "Alternative sales arrangements."
FINANCIAL HIGHLIGHTS
The following table presents per share financial information for
class A, B and M shares. This information has been audited and
reported on by the independent accountants. The "Report of
independent accountants" and financial statements included in the
fund's annual report to shareholders for the 1996 fiscal year are
incorporated by reference into this prospectus. The fund's
annual report, which contains additional unaudited performance
information, is available without charge upon request.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE><CAPTION>
For the period For the period
December 1, 1994 May 16, 1994
(commencement (commencement of
of operations to operations) to
November 30 November 30 Year ended November 30
1996 1995 1996 1995 1994 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class M Class B Class A
Net asset value, beginning
of period $9.51 $9.05 $9.49 $9.05 $9.83 $9.52 $9.07 $10.41 $9.74
Investment operations
Net investment income
.87 .99 .82 .92 .48 .89 1.00 .98 1.13
Net realized and unrealized gain
(loss) on investments
.14 .45 .13 .45 (.77) .14 .45 (1.30) .70
Total from investment operations
1.01 1.44 .95 1.37 (.29) 1.03 1.45 (.32) 1.83
Distributions to shareholders:
From net investment income
(.88) (.98) (.83) (.93) (.49) (.90) (1.00) (1.02) (1.15)
In excess of net investment income
--(c) -- --(c) -- -- --(c) -- -- (.01)
Total distributions
(.88) (.98) (.83)(.93)(.49) (.90) (1.00) (1.02) (1.16)
Net asset value, end of period
$9.64 $9.51 $9.61 $9.49 $9.05 $9.65 $9.52 $9.07 $10.41
Total investment return at
net asset value (%) (a)
11.15 16.72 10.52 15.94 (3.12)* 11.38 16.81 (3.43) 19.88
Net assets, end of period
(in thousands)
$464,506 $20,077 $623,097$287,877 $37,017$1,071,702$870,810$653,094$742,472
Ratio of expenses to average
net assets (%)1.02(b)
1.36 1.35 1.84 1.85 1.02 1.09 1.12 .96 1.14
Ratio of net investment income
to average net assets (%)
8.86 10.06 8.50 9.61 7.47* 9.24 10.35 10.87 11.04
Portfolio turnover (%)
74.47 89.96 74.47 89.96 69.61* 74.47 89.96 68.61 50.89
* Not annualized
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended
November 30, 1995 and thereafter, includes amounts paid through expense
offset arrangements. Prior period ratios exclude these amounts.
(c) Distributions in excess of net investment income were less than $0.01 per
share.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
(For a share outstanding throughout the period)
For the period
March 26, 1986
(commencement of
operations) to
Year ended November 30 November 30
1992 1991 1990 1989 1988 1987 1986
Class A
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $9.30 $7.38 $9.69 $11.35 $10.94 $11.61 $12.00
Investment operations
Net investment income 1.23 .14 1.18 1.37 1.35 1.36 .69
Net realized and unrealized gain
(loss) on investments .42 1.98 (2.09) (1.60) .38 (.71) (.31)
Total from investment operations 1.65 3.12 (.91) (.23) 1.73 .65 .38
Distributions to shareholders:
From net investment income (1.21) (1.15) (1.33) (1.32) (1.32) (1.32) (.77)
In excess of net investment income -- -- -- -- -- -- --
Total distributions (1.21) (1.20) (1.40) (1.43) (1.32) (1.32) (.77)
Net asset value, end of period $9.74 $9.30 $7.38 $9.69 $11.35 $10.94 $11.61
Total investment return at
net asset value (%) (a) 18.44 45.46 (10.26) (2.61) 16.67 5.64 3.26(c)
Net assets, end of period
(in thousands) $484,520 $369,150 $248,111 $346,188 $398,221 $309,912 $196,934
Ratio of expenses to average
net assets (%) (b) 1.14 1.33 1.37 1.23 1.07 1.12 .85(c)
Ratio of net investment income
to average net assets (%) 12.40 13.38 13.92 12.55 12.04 11.65 6.86(c)
Portfolio turnover (%) 68.29 74.45 63.29 76.88 97.36 121.08 133.70(c)
<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 THE FUND PURSUES ITS OBJECTIVES
Basic investment strategy
The 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 that Putnam Management expects to
appreciate in value as a result of declines in long-term interest
rates or 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. Although these
smaller companies may present greater opportunities for capital
appreciation, they may also include greater risks than larger,
more established issuers.
Differing yields on fixed-income securities of the same maturity
are a function of several factors, including the relative
financial strength of the issuers of such securities. Higher
yields are generally available from lower-rated fixed income
securities. Lower-rated fixed income securities are generally
regarded as those rated below Baa or BBB by nationally
recognized securities rating agencies such as Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's ("S&P"), or
unrated securities of comparable quality. 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, by each of the rating agencies rating
the security, below Caa or CCC, including securities in the
lowest rating category of each rating agency, or in unrated
securities determined by Putnam Management to be 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 securities 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.
The fund may invest in participations and assignments of fixed
and floating rate loans made by financial institutions to
governmental or corporate borrowers. In addition to other risks
associated with investments in debt securities, participations
and assignments involve the additional risk that the
institution's insolvency could delay or prevent the flow of
payments on the underlying loan to the fund. The fund may have
limited rights to enforce the terms of the underlying loan, and
the liquidity of loan participations and assignments may be
limited. See the SAI.
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 that are primarily designed to reduce
fluctuations in the value of fund 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 any
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,
these alternative strategies will be used.
Foreign investments
The fund may invest in securities of foreign issuers that are not
actively traded in U.S. markets. These foreign investments
involve certain special risks described below.
Foreign securities are normally denominated and traded in foreign
currencies. As a result, the value of the fund's foreign
investments and the value of its shares may be affected favorably
or unfavorably by changes in currency exchange rates relative to
the U.S. dollar. The fund may engage in a variety of foreign
currency exchange transactions in connection with its foreign
investments, including transactions involving futures contracts,
forward contracts and options.
Investments in foreign securities may subject the fund to other
risks as well. For example, there may be less information
publicly available about a foreign issuer than about a U.S.
issuer, and foreign issuers 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 issuers are less liquid and at times
more volatile than securities of comparable U.S. issuers.
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 investments in U.S. markets.
In addition, the fund's investments in foreign securities may be
subject to the risk of nationalization or expropriation of
assets, imposition of currency exchange controls or restrictions
on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and diplomatic developments
which could affect the value of the fund's investments in certain
foreign countries. Dividends or interest on, or proceeds from
the sale of, foreign securities may be subject to foreign
withholding taxes, and special U.S. tax considerations may apply.
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
organized under the laws of those foreign countries.
The risks described above are typically increased in connection
with investments in less developed and developing nations, which
are sometimes referred to as "emerging markets." For example,
political and economic structures in these countries may be in
their infancy and developing rapidly, causing instability. High
rates of inflation or currency devaluations may adversely affect
the economies and securities markets of such countries.
Investments in emerging markets may be considered speculative.
The fund expects that its investments in foreign securities
generally will not exceed 20% of its total assets,
although the fund's investments in foreign securities may exceed
this amount from time to time. Certain of the foregoing risks
may also apply to some extent to securities of U.S. issuers that
are denominated in foreign currencies or that are traded in
foreign markets, or securities of U.S. issuers having significant
foreign operations.
For more information about foreign securities and the risks
associated with investment in such securities, see the SAI.
Risk factors
The values of fixed-income securities fluctuate in response to
changes in interest rates. A decrease in interest rates will
generally result in an increase in the value of fund assets.
Conversely, during periods of rising interest rates, the value of
fund assets will generally decline. The magnitude of these
fluctuations generally is greater for securities with longer
maturities. However, the yields on such securities are also
generally higher. In addition, the values of fixed-income
securities are affected by changes in general economic and
business conditions affecting the specific industries of their
issuers.
Changes by recognized rating services in their ratings of a
fixed-income security and changes 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 these
securities, but will affect the fund's net asset value.
Investors should carefully consider their ability to assume the
risks of owning shares of a mutual fund that invests in lower-
rated securities before making an investment.
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 placed on such securities. In the absence of a liquid
trading market for its portfolio securities, the fund at times
may be unable to establish the fair value of such securities.
The rating assigned to a security by a rating agency does not
reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security.
The table below shows the percentages of fund assets invested
during fiscal 1996 in securities assigned to the various rating
categories by S&P, or, if unrated by S&P, assigned to comparable
rating categories by another rating agency, and in unrated
securities determined by Putnam Management to be of comparable
quality:
Rated securities, Unrated securities of
as percentage of comparable quality, as
Rating net assets percentage of net assets
"AAA" -- --
"AA" -- --
"A" -- 0.41%
"BBB" 1.86% --
"BB" 23.38% 2.15%
"B" 53.91% 1.15%
"CCC" 8.27% --
----- -----
Total 87.42% 3.71%
===== =====
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through careful investment analysis. When
the fund invests in securities in the lower rating categories,
the achievement of the fund's goals is more dependent on Putnam
Management's ability than would be the case if the fund were
investing in securities in the higher rating categories.
The fund will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase.
However, Putnam Management will monitor the investment to
determine whether continued investment in the security will
assist in meeting the fund's investment objectives.
At times, a substantial portion of fund assets may be invested in
securities of which the fund, by itself or together with
other funds and accounts managed by Putnam Management or
its affiliates, holds all or a major portion. 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 these securities when Putnam Management
believes it advisable to do so or may be able to sell the
securities only at prices lower than if they were more widely
held. Under these 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 of these
securities, the fund may be required to participate in various
legal proceedings or take possession of and manage assets
securing the issuer's obligations on the securities. This could
increase fund operating expenses and adversely affect the
fund's net asset value.
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 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.
The fund at times may 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. Both zero-coupon bonds 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 in cash
currently. The values of zero-coupon bonds and payment-in-kind
bonds are also subject to greater fluctuation in response to
changes in market interest rates than bonds that pay interest in
cash currently.
Even though such bonds do not pay current interest in cash, the
fund nonetheless is required to accrue interest income on these
investments and to distribute the interest income on a current
basis. Thus, the fund could be required at times to liquidate
other investments in order to satisfy its distribution
requirements.
Certain investment grade securities in which the fund may invest
share some of the risk factors discussed above with respect to
lower-rated securities.
Investments in premium securities
At times, the fund may 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 these securities
in calculating its net investment income. As a result, the
purchase of premium securities provides a higher level of
investment income distributable to shareholders on a current
basis than if the fund 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 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 that are
higher than the current market rates, regardless of whether the
securities were originally purchased at a premium. These
securities would generally carry premium market values that would
be reflected in the net asset value of fund shares. As a result,
an investor who purchases fund shares 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 the investor 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
its "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."
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 which
are illiquid and which may be considered speculative. The sale
of these securities is usually restricted under federal
securities laws. As a result of illiquidity, 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.
Portfolio turnover
The length of time the fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by the fund is known as "portfolio turnover."
As a result of the fund's investment policies, under certain
market conditions its portfolio turnover rate may be higher than
that of other mutual funds.
Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction
costs in connection with the sale of securities and
reinvestment in other securities. These transactions may
result in realization of taxable capital gains. Portfolio
turnover rates are shown in the section "Financial highlights."
Options and futures portfolio strategies
The fund may engage in a variety of transactions involving the
use of options and futures contracts. The fund may purchase and
sell futures contracts in order to hedge against changes in the
values of securities the fund owns or expects to purchase or to
hedge against interest rate changes. For example, if Putnam
Management expected interest rates to increase, the fund might
sell futures contracts on U.S. government securities. If rates
were to increase, the value of the fund's fixed-income securities
would decline, but this decline might be offset in whole or in
part by an increase in the value of the futures contracts. The
fund may purchase and sell call and put options on
futures contracts or on securities the fund is permitted to
purchase directly in addition to or as an alternative to
purchasing and selling futures contracts. The fund will not
purchase put and call options with respect to such securities if
as a result more than 5% of its assets would at the time be
invested in such options. The fund may also buy and sell
combinations of put and call options on the same underlying
security. The fund may also engage in futures and options
transactions for nonhedging purposes, such as to substitute for
direct investment or to manage its effective duration. Duration
is a commonly used measure of the longevity of the fund's debt
instruments.
Options and futures transactions involve costs and may result in
losses. The effective use of options and futures strategies
depends on the fund's ability to terminate options and futures
positions at times when Putnam Management deems it desirable to
do so. Options on certain U.S. government securities are traded
in significant volume on securities exchanges. However, other
options which the fund may purchase or sell may be traded
in the "over-the-counter" market rather than on an exchange.
This means that the fund would enter into such option
contracts with particular securities dealers who make markets in
these options. The fund's ability to terminate options positions
in the over-the-counter market may be more limited than for
exchange-traded options and may also involve the risk that
securities dealers participating in such transactions might fail
to meet their obligations to the fund.
The use of options and futures strategies also involves the risk
of imperfect correlation among movements in the prices of the
securities underlying the futures and options purchased and sold
by the fund, of the options and futures contracts themselves,
and, in the case of hedging transactions, of the securities which
are the subject of a hedge.
The fund's ability to engage in options and futures transactions
and to sell related securities may be limited by tax
considerations and by certain regulatory requirements. See the
SAI.
Other investment practices
The fund may also engage in the following investment practices,
each of which involves certain special risks. The SAI 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 if the other party should default
on its obligation and the fund is delayed or prevented from
recovering the collateral or completing the transaction.
Diversification
The fund is a "diversified" investment company under the
Investment Company Act of 1940. This means that with respect to
75% of its total assets, the fund may not invest more than 5% of
its total assets in the securities of any one issuer (except U.S.
government securities). The remaining 25% of its total assets is
not subject to this restriction. To the extent the fund invests
a significant portion of its assets in the securities of a
particular issuer, it will be subject to an increased risk of
loss if the market value of such issuer's securities declines
<PAGE>
Derivatives
Certain of the instruments in which the fund may invest, such as
options, futures contracts and forward contracts are considered
to be "derivatives." Derivatives are financial instruments whose
value depends upon, or is derived from, the value of an
underlying asset, such as a security or an index. Further
information about these instruments and the risks involved in
their use is included elsewhere in this prospectus and in the
SAI.
Limiting investment risk
Specific investment restrictions help to limit investment risks
for the fund's shareholders. These restrictions prohibit the
fund, with respect to 75% of its total assets, from acquiring
more than 10% of the voting securities of any one issuer*.
They also prohibit the fund from investing more than:
(a) (with respect to 75% of its total assets) 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) 25% of its total assets in any one industry
(securities of the U.S. government, its agencies or
instrumentalities are not considered to represent any industry);*
or
(c) 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 Trustees (or the
person designated by the Trustees to make such
determinations) to be readily marketable), and repurchase
agreements maturing in more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental investment policies. See the SAI for the full text
of these policies and the fund's other fundamental investment
policies. Except as otherwise noted, all percentage limitations
described in this prospectus and the SAI will apply at the time
an investment is made, and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as
a result of such investment. Except for investment policies
designated as fundamental in this prospectus or the SAI, the
investment policies described in this prospectus and in the SAI
are not fundamental policies. The Trustees may change any non-
fundamental investment policy without shareholder approval. As a
matter of policy, the Trustees would not materially change the
fund's investment objectives without shareholder approval.
<PAGE>
HOW PERFORMANCE IS SHOWN
Fund advertisements may, from time to time, include performance
information. "Yield" for each class of shares is calculated by
dividing the annualized net investment income per share during a
recent 30-day period by the maximum public offering price per
share of the class on the last day of that period.
For purposes of calculating yield, net investment income is
calculated in accordance with SEC regulations and may differ from
net investment income as determined for tax 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 current dividend rate is based on net investment
income as determined for tax purposes, which may not reflect
amortization in the same manner. See "How the fund pursues its
objectives -- Investments in premium securities."
Yield is based on the price of the shares, including the maximum
initial sales charge in the case of class A and class M shares,
but does not reflect any contingent deferred sales charge in the
case of class B shares.
"Total return" for the one-, five- and ten-year periods (or for
the life 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 (in the case of class A and class M shares) or
reflecting the deduction of any applicable contingent deferred
sales charge (in the case of class B shares). Total return may
also be presented for other periods or based on investment at
reduced sales charge levels. Any quotation of investment
performance not reflecting the maximum initial sales charge or
contingent deferred sales charge would be reduced if the sales
charge were used.
All data are based on past investment results and do not predict
future performance. Investment performance, which will vary, is
based on many factors, including market conditions, portfolio
composition, fund operating expenses and the class of
shares the investor purchases. 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 with those of other
mutual funds and other investment vehicles.
Quotations of investment performance for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. Fund performance may be
compared to that of various indexes. See the SAI.
HOW THE FUND IS MANAGED
The Trustees are responsible for generally overseeing the conduct
of fund 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.
The fund pays Putnam Management a quarterly fee for these
services based on average net assets. See "Expenses summary" and
the SAI.
The following officer of Putnam Management has had primary
responsibility for the day-to-day management of the fund's
portfolio since the year stated below:
Business experience
Year (at least 5 years)
------ -------------------
Rosemary H. Thomsen 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since 1986.
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 certain
fund officers and their staff who provide administrative
services. The total reimbursement is determined annually by the
Trustees.
Putnam Management places all orders for purchases and sales of
fund 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 fund
shares (and, if permitted by law, shares 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. The Trustees may, without shareholder
approval, create two or more series of shares representing
separate investment portfolios. Any such series of shares may be
divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and
privileges as the Trustees determine. The fund's shares are not
currently divided into series. Only class A, B and M shares are
offered by this prospectus. The fund may also offer other
classes of shares with different sales charges and expenses.
Because of these different sales charges and expenses, the
investment performance of the classes will vary. For more
information, including your eligibility to purchase any other
class of shares, contact your investment dealer or Putnam Mutual
Funds (at 1-800-225-1581).
Each share has one vote, with fractional shares voting
proportionally. Shares of all classes will vote together as a
single class except when otherwise required 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
Agreement and Declaration of Trust.
If you own fewer shares than the minimum set by the Trustees
(presently 20 shares), the fund may choose to redeem your shares.
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 , at
any time, establish one 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, Massachusetts Institute of Technology; Jameson Adkins
Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice
Chairman, North American Management Corp.; John A. Hill, Chairman
and Managing Director, First Reserve Corporation; Ronald J.
Jackson, Former Chairman, President and Chief Executive Officer
of Fisher-Price, Inc. , Trustee of Salem Hospital and the
Peabody Essex Museum; Elizabeth T. Kennan, President Emeritus and
Professor, 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 and Director of
Acquisitions, Cabot Partners Limited Partnership; Donald S.
Perkins,* Director of various corporations, including Cummins
Engine Company, Lucent Technologies, Inc., Springs Industries,
Inc. and Time Warner Inc.; George Putnam, III,* President, New
Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief
Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas
Stephens, President and Chief Executive Officer of MacMillan
Bloedel Ltd., Director of Mail-Well Inc., Qwest Communications,
The Eagle Picher Trust and New Century Energies; and W. Nicholas
Thorndike, Director of various corporations and charitable
organizations, including Data General Corporation, Bradley Real
Estate, Inc. and Providence Journal Co. Also, Trustee of
Massachusetts General Hospital and Eastern Utilities Associates.
The Trustees are also Trustees of the other Putnam funds. Those
marked with an asterisk (*) are or may be deemed to be
"interested persons" of the fund, Putnam Management or Putnam
Mutual Funds.
About Your Investment
ALTERNATIVE SALES ARRANGEMENTS
Class A shares. If you purchase class A shares ,
you will generally pay a sales charge at the time of
purchase and, as a result, will not have
to pay any charges when you redeem the shares. If you
purchase class A shares at net asset value , you may have
to pay a contingent deferred sales charge ("CDSC") when you
redeem the shares. Certain purchases of class A shares qualify
for reduced sales charges. Class A shares pay lower 12b-
1 fees than class B and class M shares. See "How to buy
shares -Class A shares" and "Distribution plans."
Class B shares. If you purchase class B shares, you will
not pay an initial sales charge, but you may have to pay a CDSC
if you redeem the shares within six years. Class B shares also
pay a higher 12b-1 fee than class A and class M shares.
Class B shares automatically convert into class A shares, based
on relative net asset value, approximately eight years after
purchase. For more information about the conversion of class B
shares, including information about how shares acquired
through reinvestment of distributions are treated and
certain circumstances under which class B shares may not
convert into class A shares, see the SAI. Class B shares provide
an investor the benefit of putting all of the investor's dollars
to work from the time the investment is made. Until conversion,
class B shares will have a higher expense ratio and pay lower
dividends than class A and class M shares because of the higher
12b-1 fee. See "How to buy shares -- Class B shares" and
"Distribution plans."
Class M shares. If you purchase class M shares ,
you will generally pay a sales charge at the time of purchase
that is lower than the sales charge you would pay for
class A shares. Certain purchases of class M shares qualify for
reduced sales charges. Class M shares pay 12b-1
fees that are lower than class B shares but higher than
class A shares. You will not have to pay any charges
when you redeem class M shares, but class M shares will not
convert into any other class of shares. See "How to buy shares -
- - Class M shares" and "Distribution plans."
Which class is best for you? Which class of
shares provides the most suitable investment for
you depends on a number of factors, including the amount
you intend to invest and how long you intend to hold the shares.
If your intended purchase qualifies for reduced sales charges,
you might consider class A or class M shares. If you
prefer not to pay a sales charge at the time of purchase,
you might consider class B shares. Orders for class B shares for
$250,000 or more will be treated as orders for class A shares or
declined. For more information about these sales arrangements,
consult your investment dealer or Putnam Investor Services.
Shares may only be exchanged for shares of the same class of
another Putnam fund. See "How to exchange shares."
HOW TO BUY SHARES
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50. You
can buy fund shares three ways - through most investment dealers,
through Putnam Mutual Funds (at 1-800-225-1581), or through a
systematic investment plan. If you do not have a dealer, Putnam
Mutual Funds can refer you to one.
Buying shares through Putnam Mutual Funds. Complete an order
form and write a check for the amount you wish to invest, payable
to the fund. Return the completed form and check to Putnam
Mutual Funds, which will act as your agent in purchasing shares
.
Buying shares through systematic investing. You can make regular
investments of $25 or more per month through automatic deductions
from your bank checking or savings account. Application forms
are available from your investment dealer or through Putnam
Investor Services.
Shares are sold at the public offering price based on the net
asset value next determined after Putnam Investor Services
receives your order. In most cases, in order to receive that
day's public offering price, Putnam Investor Services must
receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment
dealer, the dealer must receive your order before the close of
regular trading on the New York Stock Exchange to receive that
day's public offering price.
Class A shares
The public offering price of class A shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, in its discretion, allocates the entire amount to
your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 50,000 4.99% 4.75% 4.25%
50,000 but under 100,000 4.71 4.50 4.00
100,000 but under 250,000 3.63 3.50 3.00
250,000 but under 500,000 2.56 2.50 2.25
500,000 but under 1,000,000 2.04 2.00 1.75
- -----------------------------------------------------------------
No initial sales charge applies to purchases of
class A shares of $1 million or more or to purchases by
employer-sponsored retirement plans that have at least
200 eligible employees. However, a CDSC of 1.00% or 0.50% is
imposed on redemptions of these shares within the first or second
year, respectively, after purchase, unless the dealer of
record waived its commission with Putnam Mutual Funds'
approval, or unless the purchaser is a class A qualified benefit
plan (a retirement plan for which Putnam Fiduciary Trust Company
or its affiliates provide recordkeeping or other services in
connection with the purchase of class A shares).
Class A qualified benefit plans may also purchase class A shares
with no initial sales charge. However, except as stated below, a
CDSC of 0.75% of the total amount redeemed (1.00% in the case of
plans for which Putnam Mutual Funds and its affiliates do not act
as trustee or recordkeeper) is imposed on redemptions of these
shares if, within two years of a plan's initial purchase of class
A shares, it redeems 90% or more of its cumulative purchases.
Thereafter, such a plan is no longer liable for any CDSC. The
two-year CDSC applicable to class A qualified benefit plans for
which Putnam Mutual Funds or its affiliates serve as
trustee or recordkeeper ("full service plans") is 0.50% of the
total amount redeemed for full service plans that initially
invest at least $5 million but less than $10 million in
Putnam funds and other investments managed by Putnam Management
or its affiliates ("Putnam Assets"), and is 0.25% of the
total amount redeemed for full service plans that initially
invest at least $10 million but less than $20 million in Putnam
Assets. Class A qualified benefit plans that initially invest at
least $20 million in Putnam Assets, or whose dealer of record
has, with Putnam Mutual Funds' approval, waived its commission or
agreed to refund its commission to Putnam Mutual Funds in
the event a CDSC would otherwise be applicable, are not subject
to any CDSC.
A class A qualified benefit plan participating in
a "multi-fund" program approved by Putnam Mutual Funds may
include amounts invested in other mutual funds participating in
such program for purposes of determining whether the plan may
purchase class A shares at net asset value. These investments
will also be included for purposes of the discount privileges and
programs described elsewhere in this prospectus and in the SAI.
As described in the SAI, Putnam Mutual Funds pays the dealer of
record a commission of up to 1% on sales to class A qualified
benefit plans. Putnam Mutual Funds pays dealers of record
commissions on sales of class A shares of $1 million or more and
sales of class A shares to employer-sponsored retirement plans
that have at least 200 eligible employees and that are not class
A qualified benefit plans based on an investor's cumulative
purchases during the one-year period beginning with the date of
the initial purchase at net asset value. Each subsequent one-
year measuring period for these purposes will begin with the
first net asset value purchase following the end of the prior
period. Such commissions are paid at the rate of 1.00% of the
first $3 million of shares purchased, 0.50% of the next $47
million and 0.25% thereafter.
Class B shares
Class B shares are sold without an initial sales charge, although
a CDSC will be imposed if you redeem shares within a specified
period after purchase, as shown in the table below.
Year 1 2 3 4 5 6 7+
- ------------------------------------------------------------
Charge 5% 4% 3% 3% 2% 1% 0%
Putnam Mutual Funds pays a sales commission equal to
4.00% of the amount invested to dealers who sell class B shares.
These commissions are not paid on exchanges from other Putnam
funds or on sales to investors exempt from the CDSC.
<PAGE>
Class M shares
The public offering price of class M shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, at its discretion, allocates the entire amount to
your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 50,000 3.36% 3.25% 3.00%
50,000 but under 100,000 2.30 2.25 2.00
100,000 but under 250,000 1.52 1.50 1.25
250,000 but under 500,000 1.01 1.00 1.00
500,000 and above NONE NONE NONE
Class M qualified benefit plans (retirement plans for
which Putnam Fiduciary Trust Company or its affiliates provide
recordkeeping or other services in connection with the purchase
of class M shares) and members of qualified groups may
purchase class M shares without a sales charge.
General
You may be eligible to buy fund shares at reduced sales charges
or to sell fund shares without a CDSC.
Consult your investment dealer or Putnam Mutual Funds for details
about Putnam's combined purchase privilege, cumulative quantity
discount, statement of intention, group sales plan,
employer-sponsored retirement plans and other plans.
Descriptions are also included in the order form and in the SAI.
The fund may sell class A, class B and class M shares at net
asset value without an initial sales charge or a CDSC to the
fund's current and retired Trustees (and their families), current
and retired employees (and their families) of Putnam Management
and affiliates, registered representatives and other employees
(and their families) of broker-dealers having sales agreements
with Putnam Mutual Funds, employees (and their families) of
financial institutions having sales agreements with Putnam Mutual
Funds (or otherwise having an arrangement with a broker-dealer or
financial institution with respect to sales of fund shares),
financial institution trust departments investing an aggregate of
$1 million or more in Putnam funds, clients of certain
administrators of tax-qualified plans, tax-qualified plans when
proceeds from repayments of loans to participants are invested
(or reinvested) in Putnam funds, "wrap accounts" for the benefit
of clients of broker-dealers, financial institutions or financial
planners adhering to certain standards established by Putnam
Mutual Funds, and investors meeting certain requirements who sold
shares of certain Putnam closed-end funds pursuant to a tender
offer by the closed-end fund.
In addition, the fund may sell shares at net asset value without
an initial sales charge or a CDSC in connection with the
acquisition by the fund of assets of an investment company or
personal holding company. The CDSC will be waived on redemptions
of shares arising out of the death or post-purchase disability of
a shareholder or settlor of a living trust account, and on
redemptions in connection with certain withdrawals from IRA or
other retirement plans. Up to 12% of the value of shares subject
to a systematic withdrawal plan may also be redeemed each year
without a CDSC. The SAI contains additional information about
purchasing shares at reduced sales charges.
In determining whether a CDSC is payable on any redemption,
shares not subject to any charge will be redeemed first, followed
by shares held longest during the CDSC period. Any CDSC will be
based on the lower of the shares' cost and net asset value. For
this purpose, the amount of any increase in a share's value above
its initial purchase price is not regarded as a share exempt from
the CDSC. Thus, when you redeem a share that has appreciated in
value during the CDSC period, a CDSC is assessed on its initial
purchase price. Shares acquired by reinvestment of distributions
may be redeemed without a CDSC at any time. For information on
how sales charges are calculated if you exchange your shares, see
"How to exchange shares." Putnam Mutual Funds receives the
entire amount of any CDSC you pay. See the SAI for more
information about the CDSC.
Shareholders of other Putnam funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in,
fund shares at net asset value.
If you are considering redeeming shares or transferring shares to
another person shortly after purchase, you should pay for those
shares with a certified check to avoid any delay in redemption or
transfer. Otherwise, payment may be delayed until the purchase
price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date. To
eliminate the need for safekeeping, certificates will not be
issued for your shares unless you request them.
Putnam Mutual Funds will from time to time, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. These incentives or
payments may include payments for travel expenses, including
lodging, incurred in connection with trips taken by invited
registered representatives and their guests to locations within
and outside the United States for meetings or seminars of a
business nature. In some instances, these incentives or payments
may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
DISTRIBUTION PLANS
The fund has adopted distribution plans to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it as principal underwriter of fund shares, including the
payments to dealers mentioned below. The plans provide for
payments by the fund to Putnam Mutual Funds at the annual
rates (expressed as a percentage of average net assets) of up to
0.35% on class A shares and 1.00% on class B and class M shares.
The Trustees currently limit payments on class A and
class M shares to 0.25% and 0.50% of average net assets,
respectively.
Putnam Mutual Funds compensates qualifying dealers
(including, for this purpose, certain financial institutions)
for sales of shares and the maintenance
of shareholder accounts.
Putnam Mutual Funds makes quarterly payments to dealers
at the annual rate of up to 0.25% of the average net assets of
class A shares for which such dealers are designated as the
dealer of record, except that payments to dealers for shares held
by class A qualified benefit plans are made at reduced rates, as
described in the SAI. No payments are made during the
first year after purchase on shares purchased at net asset
value by shareholders investing $1 million or more or by
employer-sponsored retirement plans that have at least 200
eligible employees or that are class A qualified benefit
plans, unless the shareholder has made arrangements with Putnam
Mutual Funds and the dealer of record has waived the sales
commission.
Putnam Mutual Funds makes quarterly payments to
dealers at the annual rates of 0.25% and 0.40% of
the average net asset value of class B and class M
shares, respectively, for which such dealers are
designated as the dealer of record.
Putnam Mutual Funds may suspend or modify its
payments to dealers. The payments are also subject to the
continuation of the relevant distribution plan, the terms of
service agreements between dealers and Putnam Mutual Funds, and
any applicable limits imposed by the National Association of
Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares to the fund any day the New York Stock
Exchange is open, either directly to the fund or through your
investment dealer. The fund will only redeem shares for which it
has received payment.
Selling shares directly to your fund. Send a signed letter of
instruction or stock power form to Putnam Investor Services,
along with any certificates that represent shares you want to
sell. The price you will receive is the next net asset value
calculated after the fund receives your request in proper form
less any applicable CDSC. In order to receive that day's net
asset value, Putnam Investor Services must receive your request
before the close of regular trading on the New York Stock
Exchange.
If you sell shares having a net asset value of $100,000 or more,
the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Putnam
Investor Services and many commercial banks.
If you want your redemption proceeds sent to an address other
than your address as it appears on Putnam's records, a signature
guarantee is required. Putnam Investor Services usually requires
additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner.
Contact Putnam Investor Services for details.
Your fund generally sends you payment for your shares the
business day after your request is received. Under unusual
circumstances, the fund may suspend redemptions, or postpone
payment for more than seven days, as permitted by federal
securities law.
You may use Putnam's Telephone Redemption Privilege to redeem
shares valued up to $100,000 unless you have notified
Putnam Investor Services of an address change within the
preceding 15 days. Unless you indicate otherwise on the
account application, Putnam Investor Services will be authorized
to act upon redemption and transfer instructions received by
telephone from you, or any person claiming to act as
your representative, who can provide Putnam Investor
Services with your account registration and address as it
appears on Putnam Investor Services' records.
Putnam Investor Services will employ these and other reasonable
procedures to confirm that instructions communicated by telephone
are genuine; if it fails to employ reasonable procedures, Putnam
Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions. For information,
consult Putnam Investor Services.
During periods of unusual market changes and shareholder
activity, you may experience delays in contacting Putnam Investor
Services by telephone. In this event, you may wish to submit a
written redemption request, as described above, or contact your
investment dealer, as described below. The Telephone Redemption
Privilege is not available if you were issued certificates for
shares that remain outstanding. The Telephone Redemption
Privilege may be modified or terminated without notice.
Selling shares through your investment dealer. Your dealer must
receive your request before the close of regular trading on the
New York Stock Exchange to receive that day's net asset value.
Your dealer will be responsible for furnishing all necessary
documentation to Putnam Investor Services, and may charge you for
its services.
HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of
certain other Putnam funds at net asset value. Not all Putnam
funds offer all classes of shares. If you exchange shares
subject to a CDSC, the transaction will not be subject to the
CDSC. However, when you redeem the shares acquired through the
exchange, the redemption may be subject to the CDSC, depending
upon when you originally purchased the shares. The CDSC will be
computed using the schedule of any fund into or from which you
have exchanged your shares that would result in your paying the
highest CDSC applicable to your class of shares. For purposes of
computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not
be affected by any exchange.
To exchange your shares, simply complete an Exchange
Authorization Form and send it to Putnam Investor Services. The
form is available from Putnam Investor Services. For federal
income tax purposes, an exchange is treated as a sale of shares
and generally results in a capital gain or loss. A Telephone
Exchange Privilege is currently available for amounts up to
$500,000. Putnam Investor Services' procedures for telephonic
transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued
certificates for shares that remain outstanding. Ask your
investment dealer or Putnam Investor Services for prospectuses of
other Putnam funds. 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 Putnam Management or the Trustees
believe doing so would be in the best interest of your fund, the
fund reserves the right to revise or terminate the exchange
privilege, limit the amount or numbers of exchanges or reject any
exchange. Consult Putnam Investor Services before requesting an
exchange. See the SAI to find out more about the exchange
privilege.
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 valued at market value. Long-term corporate bonds
and notes for which market quotations are not considered readily
available are valued 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 valued 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 THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
The fund distributes any net investment income at least monthly
and any net capital gains at least annually.
Distributions from net capital gains are made after applying any
available capital loss carryovers. A capital loss carryover is
currently available. Distributions paid on class A shares will
generally be greater than those paid on class B and class M
shares because expenses attributable to class B and class M
shares will generally be higher.
You can choose from three distribution options:
- - Reinvest all distributions in additional shares without a
sales charge;
- - Receive distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares without a sales charge; or
- - Receive all distributions in cash.
You can change your distribution option by notifying Putnam
Investor Services in writing. If you do not select an option
when you open your account, all distributions will be reinvested.
All distributions not paid in cash will be reinvested in shares
of the class on which the distributions are paid. You will
receive a statement confirming reinvestment of distributions in
additional fund shares (or in shares of other Putnam funds for
Dividends Plus accounts) promptly following the quarter in which
the reinvestment occurs.
If a check representing a fund distribution is not cashed within
a specified period, Putnam Investor Services will notify you that
you have the option of requesting another check or reinvesting
the distribution . If Putnam Investor Services does not
receive your election, the distribution will be reinvested in the
fund. Similarly, if correspondence sent by the fund or Putnam
Investor Services is returned as "undeliverable," fund
distributions will automatically be reinvested in the fund or in
another Putnam fund.
The fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on
income and gains it distributes to shareholders. The fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis.
Fund distributions will be taxable to you as ordinary
income to the extent derived from the fund's investment
income and net short-term gains (that is, net gains from
securities held for not more than a year). Distributions
designated by the fund as deriving from net gains on securities
held for more than one year but not more than 18 months and from
net gains on securities held for more than 18 months will be
taxable to you as such, regardless of how long you have held the
shares. Distributions will be taxable as described above whether
received in cash or in shares through the reinvestment of
distributions.
Early in each calendar year Putnam Investor Services will notify
you of the amount and tax status of distributions paid to you for
the preceding year.
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).
<PAGE>
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 Fiduciary Trust Company is the
custodian of the fund. Putnam Investor Services, a division of
Putnam Fiduciary Trust Company, is the investor servicing and
transfer agent for the fund.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company 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
SECURITIES RATINGS
The following rating services describe rated securities as
follows:
Moody's Investors Service, Inc.
Bonds
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 edged." 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 risk appear somewhat larger than
the 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.
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.
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
Bonds
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 differs from the highest rated issues
only in small degree.
A -- Debt rated `A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB -- Debt rated `BBB' is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits 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 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. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to
adverse conditions.
BB -- Debt rated `BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The `BB' rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied `BBB-' rating.
B -- Debt rated `B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The `B' rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied `BB' or `BB-' rating.
CCC -- Debt rated `CCC' has a currently identifiable
vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied `B' or `B-'
rating.
CC -- The rating `CC' typically is applied to debt subordinated
to senior debt that is assigned an actual or implied `CCC'
rating.
C -- The rating `C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied `CCC-' debt
rating. The `C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are
continued.
D -- Bonds rated `D' are 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 S&P 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.
Duff & Phelps Corporation
Long-Term Debt
AAA -- Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A+, A, A- -- Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently
within this category.
B+, B, B- -- Below investment grade and possessing risk that
obligations will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a
higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can
be substantial with unfavorable economic/industry conditions,
and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
Fitch Investors Service, Inc.
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated AAA.
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB -- Bonds considered to be speculative. The obligor's ability
to pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B -- Bonds are considered highly speculative. Bonds in this class
are lightly protected as to the obligor's ability to pay interest
over the life of the issue and repay principal when due.
CCC -- Bonds have certain characteristics which, with passing of
time, could lead to the possibility of default on either
principal or interest payments.
CC -- Bonds are minimally protected. Default in payment of
interest and/or principal seems probable.
C -- Bonds are in actual or imminent default in payment of
interest or principal.
DDD -- Bonds are in default and in arrears in interest and/or
principal payments. Such bonds are extremely speculative and
should be valued only on the basis of their value in liquidation
or reorganization of the obligor.
<PAGE>
Make the most of your Putnam privileges
The following services are available to you as a Putnam mutual
fund shareholder.
SYSTEMATIC INVESTMENT PLAN Invest as much as you wish ($25 or
more) on any business day of the month except for the 29th, 30th,
or 31st. The amount you choose will be automatically transferred
each month from your checking or savings account.
SYSTEMATIC WITHDRAWAL Make regular withdrawals of $50 or more
monthly, quarterly, or semiannually from your Putnam mutual fund
account valued at $10,000 or more. Your automatic withdrawal may
be made on any business day of the month except for the 29th,
30th, or 31st.
SYSTEMATIC EXCHANGE Transfer assets automatically from one
Putnam account to another on a regular, prearranged basis. There
is no additional charge for this service.
FREE EXCHANGE PRIVILEGE Exchange money between Putnam funds in
the same class of shares without charge. The exchange privilege
allows you to adjust your investments as your objectives change.
A signature guarantee is required for exchanges of more than
$500,000 and shares of all Putnam funds may not be available to
all investors.
Investors may not maintain, within the same fund, simultaneous
plans for systematic investment or exchange (into the fund) and
systematic withdrawal or exchange (out of the fund). These
privileges are subject to change or termination.
For more information about any of these services and privileges,
call your investment advisor or a Putnam customer service
representative toll free at 1-800-225-1581.
<PAGE>
Putnam Family of Funds*
PUTNAM GROWTH FUNDS
Putnam Asia Pacific Growth Fund
Putnam Capital Appreciation Fund
Putnam Diversified Equity Trust
Putnam Emerging Markets Fund
Putnam Europe Growth Fund
Putnam Global Growth Fund
Putnam Global Natural Resources Fund
Putnam Growth Opportunities Fund
Putnam Health Sciences Trust
Putnam International Growth Fund
Putnam International New Opportunities Fund
Putnam International Voyager Fund
Putnam Investors Fund
Putnam New Opportunities Fund++
Putnam OTC & Emerging Growth Fund+
Putnam Vista Fund
Putnam Voyager Fund
Putnam Voyager Fund II
PUTNAM GROWTH AND INCOME FUNDS
Putnam Balanced Retirement Fund
Putnam Convertible Income-Growth Trust
Putnam Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Putnam Growth and Income Fund II
Putnam International Growth and Income Fund
Putnam New Value Fund
Putnam Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Putnam American Government Income Fund
Putnam Diversified Income Trust
Putnam Diversified Income Trust II
Putnam Federal Income Trust
Putnam Global Governmental Income Trust
Putnam High Yield Advantage Fund
Putnam High Yield Total Return Fund
Putnam High Yield Trust++
Putnam Income Fund
Putnam Intermediate U.S. Government Income Fund
Putnam Preferred Income Fund
Putnam U.S. Government Income Trust
<PAGE>
PUTNAM TAX-FREE INCOME FUNDS
Putnam Municipal Income Fund
Putnam Tax Exempt Income Fund
Putnam Tax-Free High Yield Fund
Putnam Tax-Free Insured Fund
Putnam State tax-free income funds+++
Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that
spread your money across a variety of stocks, bonds, and money
market investments seeking to help maximize your return and
reduce your risk.
The three portfolios:
Balanced Portfolio
Conservative Portfolio
Growth Portfolio
PUTNAM MONEY MARKET FUNDS**
Putnam Money Market Fund
Putnam California Tax Exempt Money Market Fund
Putnam New York Tax Exempt Money Market Fund
Putnam Tax Exempt Money Market Fund
*As of 9/30/97.
+Formerly Putnam OTC Emerging Growth Fund.
++New investments restricted; se your financial advisor
for details.
+++Not available in all states.
**Investments in money market funds are neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a steady net asset value of $1.00 per share, although
there is no assurance this net asset value will be maintained in
the future.
Please call your financial advisor or Putnam Mutual Funds to
obtain a prospectus for any Putnam fund. It contains more
complete information, including charges and expenses. Read it
carefully before you invest or send money.
<PAGE>
PUTNAM HIGH YIELD ADVANTAGE FUND
One Post Office Square
Boston, MA 02109
FUND INFORMATION:
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
INVESTOR SERVICING AGENT
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
CUSTODIAN
Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
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