Putnam
High
Quality
Bond Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
As you know from the proxy statement recently sent to you, the Trustees
have approved Putnam Management's proposal to merge Putnam High Quality
Bond Fund (formerly Putnam Federal Income Trust) into Putnam American
Government Income Fund.
Both the management company and Trustees agree that merging your
relatively small fund into a larger fund with a similar strategy and
objective will be more cost efficient and in the best interests of
shareholders.
Assuming the merger is approved by shareholders on July 1, 1999, it will
be effective immediately thereafter. Shares of your fund will be exchanged
for shares of Putnam American Government Income Fund to create new
accounts of equal value. Since both funds pay distributions monthly, there
should be no significant change in the income stream of shareholders who
receive their distributions in cash. The merger is not intended to be a
taxable event for shareholders.
If you have not completed and returned your proxy vote on this matter,
I urge you to do so now.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 16, 1999
Report from the Fund Managers
Kevin M. Cronin
Krishna K. Memani
James M. Prusko
During the first six months of Putnam High Quality Bond Fund's fiscal year
1999, the historic and pronounced global flight to quality that took place
in the summer and early fall of 1998 reversed itself quite dramatically.
Investors' fears over worldwide recession dissolved as they once again
embraced those bond sectors that offered higher potential yields with
greater risk. Your fund's ability to invest in several different types of
fixed-income securities provided the flexibility to take advantage of some
market opportunities but could not insulate it completely from declines in
other sectors.
Total return for 6 months ended 4/30/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------
-0.23% -4.97% -0.49% -5.32% -0.28% -3.49%
- --------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 7.
* U.S. FIXED-INCOME SECTORS DIVERGE
During your fund's semiannual period, the U.S. economy continued to
exhibit excellent performance with moderate growth, stable prices, rising
incomes, and low unemployment. The pace of economic growth exceeded
economists' estimates and was fueled by the purchasing behavior of U.S.
consumers. Personal income and consumer spending increased, fueled by
nonfarm payroll and wage gains as well as by the lowest unemployment rate
since 1970. In addition, automobile manufacturers reported increases in
U.S. sales, while existing-home sales rose to record highs. Concerns about
unfettered growth were mitigated by continued low inflation.
The steady economy generally helped bonds, but sectors of the fixed-income
market diverged sharply during the semiannual period. Treasuries
registered some of their sharpest losses in years. Although they faced no
fundamental problems -- in fact, the federal budget surplus continues to
reduce the supply of outstanding debt -- prices fell from their peaks in
the fourth quarter of 1998. Similarly investment-grade corporate bonds
struggled a bit, though high-yield corporates made gains, continuing their
rebound from late 1998. Rising issuance of new corporate bonds signaled
healthy conditions for business. Mortgage-backed securities held firm and
corporate earnings were generally better than expected.
[GRAPHIC OMITTED: horizontal bar chart BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/98-4/30/99
Lehman Brothers
Mortgage-Backed Securities Index 2.4%
Lehman Brothers
Corporate Bond Index 1.8%
Salomon Brothers
World Government Bond Index -3.4%
Lehman Brothers
Long Term Treasury Bond Index -3.6%
Footnote reads:
*Past performance is not indicative of future results. These indexes
reflect the general performance of market sectors in which the fund
invests. The fund's performance will differ. The indexes may include bonds
different from those in the fund. It is not possible to invest directly in
an index.
* FLIGHT-TO-QUALITY REVERSAL AFFECTS INVESTMENT-GRADE BONDS
During your fund's semiannual period, fixed-income investors pushed
interest rates higher and bond prices lower, responding to signs of robust
U.S. economic growth and speculation that the Federal Reserve Board would
be forced to raise interest rates. In this environment, fixed-income
spread sectors (mortgage-backed securities, corporates, and asset-backed
securities) significantly outperformed U.S. Treasuries of comparable
duration, as investors showed a willingness to trade the high-quality
bonds they had favored in late 1998 for bonds with lower credit quality.
As investor demand for higher-yielding, lower-quality bonds increased,
prices across all U.S. investment-grade sectors declined.
Your fund employed a modestly long duration (a measure of interest-rate
sensitivity) early in the fiscal year. Essentially the longer a fund's
duration, the more likely its net asset value will be positively affected
by a reduction in rates. The tradeoff for this opportunity is that a long
duration makes the fund more vulnerable to a decline in net asset value if
rates should increase.
We began the semiannual period with the expectation that market
volatility, created by the delicate economic situation in Brazil, would
drive U.S. interest rates lower and considered the long duration an
appropriate stance for such an environment. Instead, emerging markets
stabilized and signs of economic growth in the United States pushed
domestic interest rates up. Although we moved quickly to shorten the
duration, we could not prevent some negative impact on performance.
* CORPORATES CONTRIBUTE TO PERFORMANCE
Your fund's strategy is designed to add value by seeking incremental
excess return from multiple sources, including sector rotation, security
selection, duration management, and yield curve positioning. In addition,
we employ prudent risk control. The process emphasizes those sources of
return believed to be most reliable in today's markets: namely sector
rotation and security selection.
Indeed, sector rotation played a key role in our portfolio positioning
over the period as we shifted assets to U.S. spread sectors. Modest
overweight positions in mortgage-backed securities, corporates, and
asset-backed securities contributed to your fund's performance during the
period. Among corporate bond positions, our strategy of emphasizing large
liquid credits and issues, avoiding commodity-sensitive sectors such as
the energy sector, and focusing on the favorable climate for mergers and
acquisitions in the finance and telecommunications sectors contributed to
relative returns.
Merger and acquisition activity, in fact, was unusually active throughout
the period. Megamerger announcements included Fleet Financial
Group/BankBoston, MediaOne/Comcast, Airtouch/Vodaphone, and BP
Amoco/Atlantic Richfield. Cross-border mergers were also significant with
a record $260 billion of announced deals in the first quarter of 1999,
further demonstrating the impact of globalization.
[GRAPHIC OMITTED: horizontal bar chart CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/98 4/30/99
Mortgage-backed
securities 43.6% 38.3%
U.S. Treasury
securities 25.0% 49.7%
Foreign
bonds and notes 2.1% 0.0%
Corporate bonds 13.8% 0.0%
Collateralized
mortgage obligations 12.9% 4.5%
Short-term
investments 6.0% 4.2%
Other 0.0% 0.3%
Footnote reads:
* Based on total net assets as of indicated date. Holdings will vary over
time.
In this generally challenging period for U.S. investment-grade bonds, the
high-yield sector sported notably positive returns in the domestic
fixed-income universe. Investors were drawn to the sector's attractive
yields, as the investment climate grew increasingly amenable to risk.
Robust economic growth, a near absence of inflationary pressures, low
interest rates, and continued minimal defaults set a positive backdrop for
the high-yield sector. Spreads against Treasuries tightened in the upper-
and middle-quality tiers and in unrated issues. It is important to note
that while we successfully positioned the fund to benefit from gains in
the higher-quality sectors, the fund's emphasis on quality bonds prevented
us from pursuing the opportunities available in the high-yield market.
* MORTGAGE-BACKED SECURITIES PROVIDE STEADY INCOME
Mortgage-backed securities generally offer higher yields than Treasuries
in order to compensate investors for prepayment risk -- the risk that
their principal may be returned in full at some point prior to the
securities' stated maturity and may need to be reinvested at lower rates.
Within the mortgage-backed sector, our emphasis on securities with lower
prepayment sensitivity, primarily lower-coupon, 15-year-maturity
mortgage-backed securities, and on sectors with structural prepayment
protection such as commercial mortgage-backed security (CMBS) issues
proved rewarding. CMBS issues represent mortgages of office buildings,
hotels, multifamily housing, and industrial real estate. Unlike
residential mortgages, CMBS issues have the advantage of a measure of
prepayment protection. For example, under the terms of some loans,
commercial mortgage owners are not allowed to prepay for the first five
years.
"Putnam High Quality Bond Fund's strategy is designed to add value by
seeking incremental excess return from multiple sources, including sector
rotation, security selection, duration management, and yield curve
positioning."
-- Kevin Cronin, portfolio manager
Looking ahead, we believe that favorable security selection opportunities
exist primarily in the higher coupon and seasoned pass-through sectors of
the mortgaged-backed market. Favorable economic activity continues to
support real estate fundamentals. Therefore, we plan to maintain our
emphasis on the commercial mortgage-backed securities sector.
* ENVIRONMENT CALLS FOR SLIGHTLY DEFENSIVE APPROACH
Although the U.S. economy is likely to slow from its torrid late 1998
growth rate, Putnam's analysis indicates that the United States is still
on track for above-trend economic growth overall in 1999. If global
capital markets remain stable, we believe that U.S. interest rates are
likely to move higher, reflecting the strong underlying economy. Given
this expectation, our duration and yield curve strategy is currently
neutral to slightly defensive.
Believing that much of the reversal of the flight to quality has run its
course, we have modestly reduced the fund's exposure to mortgage-backed
securities. The fund's holdings in the corporate and international sectors
were eliminated in preparation for the fund's anticipated merger with
Putnam American Government Income Fund.
We will continue to monitor the strength of the U.S. economy and its
impact on the Treasury and credit sectors. We remain confident that
careful sector rotation, security selection, and prudent risk control can
help produce solid performance for your fund in the second half of its
fiscal year.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 4/30/99, there is no guarantee the fund will
continue to hold these securities in the future. While the U.S. government
backing of individual securities does not insure your principal, which
will fluctuate, it does guarantee that the fund's government-backed
holdings will make timely payments of interest and principal.
Mortgage-backed securities in the portfolio may be subject to prepayment
risk.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam High
Quality Bond Fund is designed for investors seeking high current income with
preservation of capital and long-term total return as secondary objectives,
primarily through U.S. government securities.
TOTAL RETURN FOR PERIODS ENDED 4/30/99
Class A Class B Class M
(inception dates) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ----------------------------------------------------------------------------
6 months -0.23% -4.97% -0.49% -5.32% -0.28% -3.49%
- ----------------------------------------------------------------------------
1 year 3.96 -0.94 3.15 -1.72 3.70 0.33
- ----------------------------------------------------------------------------
5 years 39.24 32.66 34.09 32.09 37.79 33.25
Annual average 6.84 5.82 6.04 5.72 6.62 5.91
- ----------------------------------------------------------------------------
10 years 106.45 96.73 90.66 90.66 100.84 94.38
Annual average 7.52 7.00 6.67 6.67 7.22 6.87
- ----------------------------------------------------------------------------
Life of fund 134.90 123.78 110.71 110.71 125.17 117.81
Annual average 6.84 6.44 5.94 5.94 6.49 6.22
- ----------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/99
Lehman Brothers Government Consumer
Bond Index price index
- ----------------------------------------------------------------------------
6 months -0.95% 1.47%
- ----------------------------------------------------------------------------
1 year 6.43 2.28
- ----------------------------------------------------------------------------
5 years 45.24 12.75
Annual average 7.75 2.43
- ----------------------------------------------------------------------------
10 years 130.05 35.01
Annual average 8.69 3.05
- ----------------------------------------------------------------------------
Life of fund 164.36 46.95
Annual average 8.50 3.28
- ----------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 5-, and 10-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 4/30/99
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.318 $0.282 $0.303
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.318 $0.282 $0.303
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/98 $10.21 $10.72 $10.16 $10.21 $10.55
- ------------------------------------------------------------------------------
4/30/99 9.87 10.36 9.83 9.88 10.21
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.44% 6.14% 5.74% 6.19% 5.99%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.19 4.94 4.43 4.94 4.77
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 3/31/99 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
6 months -1.76% -6.44% -2.21% -6.96% -1.91% -5.11%
- --------------------------------------------------------------------------------
1 year 4.06 -0.93 3.24 -1.64 3.79 0.42
- --------------------------------------------------------------------------------
5 years 37.56 31.03 32.42 30.42 35.88 31.48
Annual average 6.59 5.55 5.78 5.46 6.32 5.63
- --------------------------------------------------------------------------------
10 years 110.02 100.00 93.77 93.77 104.09 97.42
Annual average 7.70 7.18 6.84 6.84 7.39 7.04
- --------------------------------------------------------------------------------
Life of fund 134.36 123.28 110.14 110.14 124.48 117.14
Annual average 6.86 6.46 5.96 5.96 6.51 6.23
- --------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. See first
page of performance summary for method of calculation.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B or C shares and assumes redemption at the end of
the period. Your funds' class B CDSC declines from a 5% maximum during the
first year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
Comparative benchmarks
Lehman Brothers Government Bond Index* is composed of all publicly issued,
non-convertible, domestic debt of the U.S. government or any agency
thereof, quasi-federal corporations, or corporate debt guaranteed by the
U.S. government. Flower bonds and pass-through issues are excluded. Total
return comprises price appreciation/depreciation and income as a
percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
Lehman Brothers Corporate Bond Index* is an index of publicly issued,
fixed-rate, non-convertible investment-grade domestic corporate debt
securities frequently used as a general measure of the performance of
fixed-income securities.
Lehman Brothers Long-Term Treasury Bond Index* is composed of all bonds
covered by the Lehman Brothers U.S. Treasury Index with maturities of 10
or more years.
Lehman Brothers Mortgage-Backed Securities Index* includes 15- and 30-year
fixed rate securities backed by mortgage pools of the Government National
Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal
National Mortgage Association.
Salomon Brothers World Government Bond Index* is an index that tracks the
performance of the 14 government bond markets of Australia, Austria,
Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands,
Spain, Sweden, United Kingdom and the United States. County eligibility is
determined by market capitalization and investability criteria.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A guide to the financial statements
These sections of the report constitute the fund's financial
statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type
and industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the
amounts listed in the Statement of Operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
April 30, 1999 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (88.0%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (38.3%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 7,586,013 Federal Home Loan Mortgage Corp. 5 1/2s, with
due dates from March 1, 2011 to April 1, 2011 $ 7,367,915
Federal National Mortgage Association Pass-through Certificates
860,592 7s, Dwarf, with due dates from January 1, 2011 to
May 1, 2011 879,147
12,786,754 6 1/2s, with due dates from January 1, 2027 to
November 1, 2028 12,703,583
20,808,280 6 1/2s, Dwarf, with due dates from December 1, 2008 to
October 1, 2013 20,977,240
2,718,980 6s, Dwarf, July 1, 2013 2,693,476
Government National Mortgage Association
Pass-through Certificates
2,191,758 9 1/2s, November 15, 2028 2,391,071
22,528,426 8s, with due dates from January 15, 2001 to
February 15, 2028 23,544,824
58,383,346 7s, with due dates from May 15, 2023 to
December 15, 2028 59,256,734
10,062,355 6 1/2s, with due dates from March 15, 2028 to
March 15, 2029 9,996,246
--------------
139,810,236
U.S. Treasury Obligations (49.7%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
12,040,000 11 7/8s, November 15, 2003 (SEG) 15,164,741
11,900,000 11 5/8s, November 15, 2004 15,404,907
3,935,000 8 1/8s, August 15, 2019 4,947,043
7,988,000 7 1/2s, November 15, 2024 9,650,463
9,150,000 6 1/8s, November 15, 2027 9,471,714
36,971,000 5 1/2s, August 15, 2028 35,232,254
9,670,000 5 1/4s, November 15, 2028 8,947,748
2,945,000 5 1/4s, August 15, 2003 2,943,616
U.S. Treasury Notes
2,225,000 6 1/4s, June 30, 2002 2,290,348
2,830,000 5 7/8s, September 30, 2002 2,888,355
200,000 5 3/4s, August 15, 2003 203,656
9,025,000 5 5/8s, May 15, 2008 9,160,375
6,170,000 4 7/8s, March 31, 2001 6,146,863
16,810,000 4 3/4s, November 15, 2008 16,056,072
7,130,000 4 3/4s, February 15, 2004 6,989,610
7,275,000 4 5/8s, December 31, 2000 7,222,693
6,745,000 4 5/8s, November 30, 2000 6,700,753
23,320,000 4 1/4s, November 15, 2003 22,398,160
--------------
181,819,371
--------------
Total U.S. Government and Agency Obligations
(cost $326,553,440) $ 321,629,607
COLLATERALIZED MORTGAGE OBLIGATIONS (4.5%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp.
$ 75,000 Ser. 97-ML1, Class A2, 6.53s, 2007 $ 75,938
1,550,000 Ser. 98-C2, Class A2, 6.03s, 2008 1,521,180
Criimi Mae Commercial Mortgage Trust
3,280,000 Ser. 98-C1, Class A2, 7s, 2011 2,995,050
1,310,000 Ser. 98-C1, Class B, 7s, 2011 1,066,013
5,306,085 Fannie Mae Strip Ser. 299, Class 2, Interest Only (IO),
6.5s, 2028 1,508,918
First Union-Lehman Brothers Commercial Mortgage Co.
1,160,000 Ser. 97-C2, Class D, 7.12s, 2012 1,109,975
795,000 Ser. 97-C2, Class A3, 6.65s, 2007 805,745
29,896,255 Ser. 98-C2, IO, 0.816s, 2028 1,178,333
Freddie Mac Strip
1,986,087 Ser. 188, IO, 7.5s, 2027 427,940
1,648,130 Ser. 192, IO, 6.5s, 2028 454,266
1,635,230 Ser. 177, Principle Only (PO), zero %, 2026 1,265,515
325,838 Ser. 194, PO, zero %, 2026 252,168
1,278,000 GMAC Commercial Mortgage Securities Inc. Ser. 98-C1,
Class E, 7.154s, 2011 1,245,351
565,000 GS Mortgage Securities Corp. II Ser. 98-GLII, Class D,
7.191s, 2031 540,458
464,746 Housing Securities Inc. Ser. 1993-J, Class J2, 6.66s, 2009 452,982
Morgan Stanley Capital I
610,000 Ser. 96-WF1, Class A2, 7.228s, 2006 631,922
315,000 Ser. 98-XL1, Class E, 6.989s, 2030 307,716
748,534 Sears Mortgage Securities Ser. 93-7, Class T7, 7s, 2007 757,748
--------------
Total Collateralized Mortgage Obligations
(cost $17,024,380) $ 16,597,218
ASSET-BACKED SECURITIES (0.3%) (a) (cost $1,022,597)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 1,022,597 Green Tree Recreational Equipment & Cons. Ser. 98-A,
Class A1C, 6.18s, 2019 $ 1,024,860
SHORT-TERM INVESTMENTS (4.2%) (a) (cost $15,364,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 15,364,000 Interest in $292,698,000 joint repurchase agreement
dated April 30, 1999 with Warburg Securities, Inc.,
due May 3, 1999 with respect to various U.S. Treasury
obligations -- maturity value of $15,370,235 for an
effective yield of 4.87% $ 15,364,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $359,964,417) (b) $ 354,615,685
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $365,479,046.
(b) The aggregate identified cost on a tax basis is $359,593,718, resulting in gross unrealized appreciation and
depreciation of $3,773,993 and $8,752,026, respectively, or net unrealized depreciation of $4,978,033.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at April 30, 1999.
- ------------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1999 (Unaudited)
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- ------------------------------------------------------------------------------------
U.S. Treasury Bonds (short) $3,124,875 $3,119,287 June 99 $(5,588)
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $359,964,417) (Note 1) $354,615,685
- -----------------------------------------------------------------------------------------------
Interest and other receivables 5,226,734
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 125,196
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 9,961,563
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 40,625
- -----------------------------------------------------------------------------------------------
Total assets 369,969,803
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 19,319
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 2,964,021
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 657,096
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 595,261
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 52,534
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,061
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,143
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 102,118
- -----------------------------------------------------------------------------------------------
Other accrued expenses 85,204
- -----------------------------------------------------------------------------------------------
Total liabilities 4,490,757
- -----------------------------------------------------------------------------------------------
Net assets $365,479,046
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $424,211,197
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (705,694)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (52,608,858)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (5,417,599)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $365,479,046
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($323,113,552 divided by 32,722,199 shares) $9.87
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.87)* $10.36
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($39,366,382 divided by 4,004,948 shares)** $9.83
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,999,112 divided by 303,625 shares) $9.88
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.88)* $10.21
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1999 (Unaudited)
<S> <C>
Interest income: $ 12,175,909
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,218,724
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 293,193
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 657
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,188
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 414,858
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 200,456
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,407
- -----------------------------------------------------------------------------------------------
Reports to shareholders 25,931
- -----------------------------------------------------------------------------------------------
Auditing 549
- -----------------------------------------------------------------------------------------------
Legal 12,712
- -----------------------------------------------------------------------------------------------
Postage 53,445
- -----------------------------------------------------------------------------------------------
Other 42,054
- -----------------------------------------------------------------------------------------------
Total expenses 2,273,174
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (78,240)
- -----------------------------------------------------------------------------------------------
Net expenses 2,194,934
- -----------------------------------------------------------------------------------------------
Net investment income 9,980,975
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,785,553
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (150,569)
- -----------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 24,176
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the period 145,343
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures and
TBA sale commitments during the period (12,524,693)
- -----------------------------------------------------------------------------------------------
Net loss on investments (10,720,190)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (739,215)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1999* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 9,980,975 $ 20,500,288
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 1,659,160 6,100,050
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (12,379,350) (4,128,056)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (739,215) 22,472,282
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (10,597,430) (21,024,224)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,125,619) (965,458)
- ---------------------------------------------------------------------------------------------------------------
Class M (87,836) (102,689)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (1,127,567) 19,314,068
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (13,677,667) 19,693,979
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 379,156,713 359,462,734
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess
net investment income and undistributed net investment
income of $705,694 and $1,124,216, respectively) $365,479,046 $379,156,713
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.21 $10.19 $10.01 $10.17 $9.32 $10.47
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .27(c) .59(c) .61(c) .61(c) .60 .61
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.29) .07 .20 (.18) .84 (1.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.02) .66 .81 .43 1.44 (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.32) (.64) (.63) (.59) (.59) (.66)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.32) (.64) (.63) (.59) (.59) (.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.87 $10.21 $10.19 $10.01 $10.17 $9.32
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.23)* 6.66 8.41 4.45 15.97 (4.54)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $323,114 $339,682 $347,223 $379,929 $426,252 $449,480
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .56* 1.18 1.15 1.16 1.12 1.06
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.68* 5.79 6.15 6.12 6.22 6.91
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 87.26* 174.76 218.97 297.30 234.95 317.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended October 31, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2).
(c) Per share net investment income has been determined on the basis the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 June 6, 1994+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.16 $10.15 $9.98 $10.14 $9.30 $9.68
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .23(c) .51(c) .52 .54(c) .52 .18
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.28) .07 .21 (.18) .84 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.05) .58 .73 .36 1.36 (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.57) (.56) (.52) (.52) (.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.28) (.57) (.56) (.52) (.52) (.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.83 $10.16 $10.15 $9.98 $10.14 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (0.49)* 5.84 7.55 3.74 15.09 (1.42)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $39,366 $34,679 $11,311 $7,535 $1,835 $498
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .94* 1.93 1.90 1.93 1.85 .72*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.30* 5.06 5.30 5.44 5.42 2.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 87.26* 174.76 218.97 297.30 234.95 317.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended October 31, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2).
(c) Per share net investment income has been determined on the basis the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 April 12, 1995+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.21 $10.19 $10.01 $10.17 $9.57
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .26(c) .57(c) .57 .59(c) .29(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.29) .06 .22 (.18) .60
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.03) .63 .79 .41 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.61) (.61) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.30) (.61) (.61) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.88 $10.21 $10.19 $10.01 $10.17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.28)* 6.42 8.16 4.20 9.35*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,999 $4,796 $929 $539 $186
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .69* 1.43 1.40 1.43 .71*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.55* 5.54 5.81 5.90 3.15*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 87.26* 174.76 218.97 297.30 234.95
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended October 31, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2).
(c) Per share net investment income has been determined on the basis the weighted average number of shares outstanding
during the period.
</TABLE>
Notes to financial statements
April 30, 1999 (Unaudited)
Note 1
Significant accounting policies
Putnam High Quality Bond Fund (the "fund)" is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks high current income,
consistent with preservation of capital, through investments primarily in
U.S. government securities.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments, are stated at fair value
following procedures approved by the Trustees. Market quotations are not
considered to be readily available for long-term corporate bonds and
notes; such investments are stated at fair value on the basis of
valuations furnished by a pricing service, approved by the Trustees, which
determines valuations for normal, institutional-size trading units of such
securities using methods based on market transactions for comparable
securities and various relationships between securities which are
generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Discounts on original issue discount bonds are accreted according to the
yield-to-maturity basis. Any premium resulting from the purchase of
securities is amortized on a yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized exchange gains or losses on
closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At October 31, 1998, the fund had a capital loss carryover of
approximately $54,092,000 available to offset future capital gains, if
any, which will expire on October 31, 2002.
I) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. At
certain times, the fund may pay distributions at a level rate even though,
as a result of market conditions or investment decisions, the fund may not
achieve projected investment results for a given period. The amount and
character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% of the first $500
million of average net assets, 0.55% of the next $500 million, 0.50% of
the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion, and
0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended April 30, 1999, fund expenses were reduced by
$78,240 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $590 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.25%, 1.00% and 0.50% of the average net assets attributable to
class A, class B and class M shares respectively.
For the six months ended April 30, 1999, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $41,602 and $454 from the sale
of class A and class M shares, respectively and $45,059 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the six months ended April 30, 1999, Putnam Mutual Funds
Corp., acting as underwriter received $10 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended April 30, 1999, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $4,232,628 and $98,261,764,
respectively. Purchases and sales of U.S. government obligations
aggregated $299,700,353 and $220,572,167, respectively. In determining the
net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At April 30, 1999 there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,867,603 $ 49,285,724
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 620,782 6,230,698
- -----------------------------------------------------------------------------
5,488,385 55,516,422
Shares
repurchased (6,049,530) (61,054,333)
- -----------------------------------------------------------------------------
Net decrease (561,145) $ (5,537,911)
- -----------------------------------------------------------------------------
Year ended October 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,101,109 $ 103,240,553
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,173,180 11,897,999
- -----------------------------------------------------------------------------
11,274,289 115,138,552
Shares
repurchased (12,061,669) (123,127,715)
- -----------------------------------------------------------------------------
Net decrease (787,380) $ (7,989,163)
- -----------------------------------------------------------------------------
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,021,925 $ 20,386,673
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 81,566 814,957
- -----------------------------------------------------------------------------
2,103,491 21,201,630
Shares
repurchased (1,510,516) (15,101,298)
- -----------------------------------------------------------------------------
Net increase 592,975 $ 6,100,332
- -----------------------------------------------------------------------------
Year ended October 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,718,018 $ 37,872,403
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 78,440 793,085
- -----------------------------------------------------------------------------
3,796,458 38,665,488
Shares
repurchased (1,498,741) (15,236,683)
- -----------------------------------------------------------------------------
Net increase 2,297,717 $ 23,428,805
- -----------------------------------------------------------------------------
Six months ended April 30, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 138,384 $ 1,396,968
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,141 71,751
- -----------------------------------------------------------------------------
145,525 1,468,719
Shares
repurchased (311,704) (3,158,707)
- -----------------------------------------------------------------------------
Net decrease (166,179) $(1,689,988)
- -----------------------------------------------------------------------------
Year ended October 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 444,102 $4,541,443
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,636 87,792
- -----------------------------------------------------------------------------
452,738 4,629,235
Shares
repurchased (74,041) (754,809)
- -----------------------------------------------------------------------------
Net increase 378,697 $3,874,426
- -----------------------------------------------------------------------------
Fund information
WEB SITE
www.putnaminv.com
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
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Kevin M. Cronin
Vice President and Fund Manager
Krishna K. Memani
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam High Quality
Bond Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site: http:
www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds,
visit
www.putnaminv.com
SA030-52510 039/334/878 6/99
