ThZeal - The Zeal

425 1 hyt.txt PUTNAM HIGH YIELD TRUST II Putnam 811-7513 High Yield Trust II SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK 2-28-02 [SCALE LOGO OMITTED] FROM THE TRUSTEES [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III] Dear Fellow Shareholder: After a semiannual period marked by negative economic and market news, beginning with the traumatic events of September 11 and climaxing with the Enron collapse, Putnam High Yield Trust II closed its books with a loss. The management team will explain in the following pages the reasons for the loss and discuss expectations for the future. The management team's discussion will provide you with a good understanding of what has been driving your fund's performance. As you read, you may notice that the team is listed, rather than individual managers. This more accurately reflects the manner in which your fund is managed, as well as Putnam's belief that mutual funds are more effectively overseen by teams. In addition, after lengthy discussions and working sessions between Management and the Board of Trustees, your Trustees have agreed to recommend the mergers of several funds in order to provide shareholders with more focused products. Your fund has been proposed for merger into Putnam High Yield Trust, which has a similar investment objective and strategy. For more details, see page 6. We know that Putnam Investments values its relationship with you and its other shareholders, and appreciates your loyalty through the restructuring of its staff and products to pursue superior investment performance in the future. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds April 11, 2002 REPORT FROM FUND MANAGEMENT This fund is managed by the Putnam Core Fixed-Income High-Yield Team High-yield bonds endured a volatile six months ended February 28, 2002 -- the first half of the 2002 fiscal year for Putnam High Yield Trust II -- largely due to the severe downdraft caused by the terrorist attacks of September 11, 2001. The high-yield market recovered from that point, but not enough to finish the six-month period on the positive side of the ledger. While your fund's returns show a modest loss for the period, its results were ahead of the average for its Lipper category -- which indicates to us that our strategies have been effective in limiting losses throughout this turbulent period. See page 7 for more details. Total return for 6 months ended 2/28/02 Class A Class B Class C Class M NAV POP NAV CDSC NAV CDSC NAV POP ----------------------------------------------------------------------- -0.82% -5.52% -1.19% -5.86% -1.19% -2.12% -0.95% -4.23% ----------------------------------------------------------------------- Past performance does not indicate future results. Performance information for longer periods and explanation of performance calculation methods begin on page 7. * STRATEGY SHIFT HELPED PERFORMANCE AFTER SEPTEMBER 11 The events of September 11 further challenged a high-yield market that was already enduring a difficult stretch. Even though the Federal Reserve Board aggressively cut short-term interest rates in order to support growth, corporate earnings remained weak, negatively affecting both stocks and the equity-sensitive high-yield market. Nevertheless, high-yield bond prices steadied in October and enjoyed a significant rally in November. Since that time, the environment has been mixed. Signs suggest that the economy is recovering and defaults may be poised to decline. However, corporate securities have recently felt the impact of the Enron bankruptcy, as investors looked even more closely at corporate accounting policies and the transparency of each firm's operations. Any irregularities in these areas have been met by punishing declines in stock and bond prices. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Basic materials 10.3% Communication services 8.4% Broadcasting 8.2% Capital goods 7.7% Gaming and lottery 6.9% Footnote reads: *Based on net assets as of 2/28/02. Holdings will vary over time. Our targeting of two types of bonds helped drive the portfolio's performance during the period. The first were bonds unduly punished by the market after September 11. These beaten-down securities gave us the opportunity to add solid investments at attractive price levels. Our investment in Young Broadcasting bonds was a good example of this kind of opportunity. This firm owns television stations across the United States, and its bonds declined markedly after the September 11 attacks due to concerns that a weak economy would hurt the advertising market. We purchased some of the bonds at these low price levels and have since seen them recover sharply, the result of both the company's sale of some stations to bolster its balance sheet and renewed optimism about the future direction of the economy. We also focused attention on "fallen angels," bonds issued by companies that were previously investment grade but had been downgraded to high yield, as well as companies still rated investment grade whose bonds started to trade at high-yield levels. Because of the discrepancies in value between the investment-grade and high-yield bond markets, fallen angels often present attractive opportunities to investors who react quickly. We believe we are in a position to take advantage of these situations because of the strong lines of communication between Putnam's research professionals who cover the investment-grade, high-yield, and equity markets. Examples of fallen angels purchased at lower prices that have since rebounded include Millennium Chemical and Equistar Chemicals; the holding companies of Northwest and Continental Airlines; paper and forest products company Bowater; and conglomerate Tyco International. While these holdings, along with others discussed in this report, were viewed favorably at the end of the period, all portfolio holdings are subject to review and adjustment in accordance with the fund's strategy and may vary in the future. Fund Profile Putnam High Yield Trust II seeks high current income through a portfolio of high-yielding, lower-rated corporate bonds that are carefully researched and broadly diversified across different industry sectors. It has a secondary objective of capital growth when consistent with high current income. This fund is suitable for investors who can accept a higher level of risk in exchange for a potentially higher level of income than that available from higher-quality bonds. During a difficult six months, the fund suffered from the poor performance of some of its investments, including American Tower, which owns cellular and digital communications towers. These bonds weakened along with the stocks and bonds of wireless companies because of investor concerns that growth in this area was slowing. We took the opportunity to add to these securities because we believed that the industry has strong growth prospects, especially when comparing the under- penetration of cellular and digital service in the United States with the market development of the industry in a number of industrialized countries. * FUND'S POSITIONING EXPLAINED COMPETITIVE PERFORMANCE RESULTS While your fund's returns were ahead of other funds in its Lipper category, its performance lagged that of its benchmark, the Credit Suisse First Boston High Yield Index, over the period. We believe there are two primary reasons for the fund's underperformance. Over this period, bonds in the upper tiers of the high-yield market had posted the best performance, reflecting investors' widespread craving for quality in a period of economic weakness. Most mutual funds diversify their holdings across the different levels of credit quality available in the high-yield market in order to provide attractive yields, using their in-house research to identify lower-quality bonds whose yield advantages provide appropriate compensation for their added risk. Consequently, a high-yield mutual fund will typically have a lower overall credit quality than the CSFB High Yield Index and will lag the index during periods when higher-quality bonds are favored. However, in a stronger high-yield market, which we expect to develop in the coming year, lower-quality tiers should outperform. [GRAPHIC OMITTED: TOP 10 HOLDINGS] TOP 10 HOLDINGS Allied Waste Industries, Inc. company guaranty Ser. B, 10s, 2009 Capital goods Echostar Broadband Corp. sr. notes 10 3/8s, 2007 Broadcasting Adelphia Communications Corp. sr. notes 10 1/4s, 2011 Cable television Charter Communications Holdings, LLC sr. notes 11 1/8s, 2011 Cable television Paxson Communications Corp. 13.25% cum. pfd. Broadcasting HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 Lodging/tourism ISP Chemco, Inc. company guaranty Ser. B, 10 1/4s, 2011 Basic materials CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. Cable television Young Broadcasting, Inc. company guaranty 10s, 2011 Broadcasting Trump Castle Funding, Inc. sub. notes 1014s, 2003 Gaming & lottery Footnote reads: These holdings represent 7.7% of the fund's net assets as of 2/28/02. Portfolio holdings will vary over time. In addition, bonds issued by companies with a market capitalization of $300 million or smaller outperformed larger-cap companies during the six-month period. While your fund does invest in some of these smaller-cap bonds, it does not do so heavily because they are not very easily traded. The index, on the other hand, includes a higher percentage of smaller issues. Looking to the fund's strong performance against its peers, we would highlight a number of factors. First, the fund carried an underweighted position in the telecommunications sector relative to other funds and this approach worked well as telecom bonds continued to struggle. In addition, after September 11, we increased the fund's weightings in cyclical industries such as chemicals, forest products, and aerospace. These industries have since rebounded sharply. * TEAM HOLDS POSITIVE OUTLOOK A number of factors spark our optimism regarding the prospects for the high-yield market. First, we appear to be reaching a peak in defaults and signs of an improvement in the economy have appeared. High-yield bonds should benefit as the economy recovers. Secondly, the yield curve -- a representation of the difference between short- and long-term interest rates -- is currently steep, with short-term yields at very low levels. This environment should help stimulate cash flows into the high-yield market, because it encourages bond investors to invest in higher-yielding securities. In addition, the overall credit quality of new issues coming to market is better than what we witnessed in the late 1990s, when many companies of questionable credit quality were able to issue high-yield debt. These were the firms that went out of business and contributed to the high default rate during the past two years. Finally, high-yield bonds remain attractively valued, especially when compared to alternative investments. In our opinion, all these factors should help bring about a more favorable environment for the fund in the second half of fiscal 2002. 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 2/28/02, there is no guarantee the fund will continue to hold these securities in the future. Lower-rated bonds may offer higher yields in return for more risk. PUTNAM HIGH YIELD TRUST II TO MERGE INTO PUTNAM HIGH YIELD TRUST After careful study and lengthy working sessions with Putnam Investment Management, your fund's Trustees have agreed to recommend the merger of Putnam High Yield Trust II into Putnam High Yield Trust, which is reopening to new investors. Because the two funds have the same objectives and are run by the same management team, the Trustees have determined that the merger does not require shareholder approval. Furthermore, combining the funds should enable shareholders to benefit from reduced expenses and greater economies of scale. Because of the pending merger, Putnam High Yield Trust II is closing to new investors as of April 15, 2002. Current shareholders who wish to make additional investments or who are reinvesting their distributions may continue to do so. We expect the merger to take place before the end of June. Additional information will be sent to you separately. Putnam High Yield Trust follows the same fiscal year schedule as Putnam High Yield Trust II, so you can expect to receive your next shareholder report after the close of the fiscal year on August 31, 2002. A NOTE ABOUT DUPLICATE MAILINGS In response to investors' requests, the SEC has modified mailing regulations for proxy statements, semiannual and annual reports, and prospectuses. Putnam is now able to send a single copy of these materials to customers who share the same address. This change will automatically apply to all shareholders except those who notify us. If you would prefer to receive your own copy, please call Putnam at 1-800-225-1581. PERFORMANCE SUMMARY This section provides information about your fund's performance, which should always be considered in light of its investment strategy. TOTAL RETURN FOR PERIODS ENDED 2/28/02 Class A Class B Class C Class M (inception dates) (12/31/97) (12/31/97) (7/26/99) (12/31/97) NAV POP NAV CDSC NAV CDSC NAV POP ------------------------------------------------------------------------------ 6 months -0.82% -5.52% -1.19% -5.86% -1.19% -2.12% -0.95% -4.23% ------------------------------------------------------------------------------ 1 year -1.57 -6.23 -2.46 -6.82 -2.46 -3.33 -1.83 -5.02 ------------------------------------------------------------------------------ Life of fund -0.12 -4.82 -2.96 -4.25 -3.85 -3.85 -0.99 -4.26 Annual average -0.03 -1.18 -0.72 -1.04 -0.94 -0.94 -0.24 -1.04 ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 2/28/02 Credit Suisse First Boston High Yield Consumer Index price index ------------------------------------------------------------------------------ 6 months -0.81% 0.28% ------------------------------------------------------------------------------ 1 year -0.98 1.02 ------------------------------------------------------------------------------ Life of fund 4.39 10.01 Annual average 1.04 2.32 ------------------------------------------------------------------------------ Past performance does not indicate future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for classes A and M shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Performance for class B, C, and M shares before their inception are derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and higher operating expenses for such shares. LIPPER INFORMATION: The average cumulative return for the 414 funds in the Lipper High Yield category over the 6 months ended 2/28/02 was -2.39%. Over the 1-year and the life-of-fund periods ended 2/28/02, annualized returns for the category were -5.40% and -1.46%, respectively. Lipper Inc. ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 2/28/02 Class A Class B Class C Class M ------------------------------------------------------------------------------ Distributions (number) 6 6 6 6 ------------------------------------------------------------------------------ Income $0.337822 $0.316758 $0.317309 $0.330173 ------------------------------------------------------------------------------ Capital gains -- -- -- -- ------------------------------------------------------------------------------ Total $0.337822 $0.316758 $0.317309 $0.330173 ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV NAV POP ------------------------------------------------------------------------------ 8/31/01 $5.83 $6.12 $5.84 $5.83 $5.84 $6.04 ------------------------------------------------------------------------------ 2/28/02 5.44 5.71 5.45 5.44 5.45 5.63 ------------------------------------------------------------------------------ Current return (end of period) ------------------------------------------------------------------------------ Current dividend rate 1 12.70% 12.10% 11.92% 11.94% 12.42% 12.03% ------------------------------------------------------------------------------ Current 30-day SEC yield 2 9.53 9.07 8.75 8.73 9.27 8.97 ------------------------------------------------------------------------------ 1 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period. 2 Based only on investment income, calculated using SEC guidelines. TOTAL RETURN FOR PERIODS ENDED 3/31/02 (most recent calendar quarter) Class A Class B Class C Class M (inception dates) (12/31/97) (12/31/97) (7/26/99) (12/31/97) NAV POP NAV CDSC NAV CDSC NAV POP ------------------------------------------------------------------------------ 6 months 7.45% 2.37% 7.03% 2.03% 7.23% 6.23% 7.30% 3.87% ------------------------------------------------------------------------------ 1 year 2.27 -2.55 1.51 -3.03 1.53 0.62 2.00 -1.25 ------------------------------------------------------------------------------ Life of fund 2.11 -2.70 -0.87 -2.17 -1.59 -1.59 1.19 -2.15 Annual average 0.49 -0.64 -0.20 -0.51 -0.38 -0.38 0.28 -0.51 ------------------------------------------------------------------------------ Past performance does not indicate future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. 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. Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. The NAV is calculated by dividing the net value of all the fund's assets by the number of outstanding shares. 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 fund's 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. The CDSC for class C shares is 1% for one year after purchase. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class C shares are not subject to an initial sales charge and are subject to a contingent deferred sales charge only if the shares are redeemed during the first year. 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 (except on certain redemptions of shares bought without an initial sales charge). COMPARATIVE BENCHMARKS The Credit Suisse First Boston (CSFB) High Yield Index is an unmanaged index of high-yield debt securities. Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index. Consumer price index (CPI) is a commonly used measure of inflation; it does not represent an investment return. Lipper Inc. is a third-party industry ranking entity that ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. A GUIDE TO THE FINANCIAL STATEMENTS These sections of the report, as well as the accompanying Notes, 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 are determined. All investment and noninvestment 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. This is done by first adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings -- as well as any unrealized gains or losses over the period -- is added to or subtracted from the net investment result to determine the fund's net gain or loss for the fiscal 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 sources 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-end funds, a separate table is provided for each share class.

NOTES TO FINANCIAL STATEMENTS February 28, 2002 (Unaudited) Note 1 Significant accounting policies Putnam High Yield Trust II ("the fund") is a series of Putnam Funds Trust (the "Trust") which 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 by investing primarily in high-yielding, lower-rated fixed-income securities constituting a portfolio that Putnam Investment Management, LLC ("Putnam Management"), the fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC believes does not involve undue risk to income or principal. Capital growth is a secondary goal when consistent with achieving high current income. The fund offers class A, class B, class C, class M and class Y 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 C shares are subject to the same fees and expenses as class B shares, except that class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is higher than class A shares but lower than class B and class C shares. Class Y shares, which are sold at net asset value, are generally subject to the same expenses as class A, class B, class C and class M shares, but do not bear a distribution fee. Class Y shares are sold to defined contribution plans that invest at least $150 million in a combination of Putnam funds and other accounts managed by affiliates of Putnam Management. 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 that 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 accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. 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 sales price on its principal exchange, or if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Market quotations are not considered to be readily available for certain debt obligations; such investments are stated at fair value on the basis of valuations furnished by an independent pricing service or dealers, approved by the Trustees, which determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and variable relationships, generally recognized by institutional traders, between securities. 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. Other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. B) Joint trading account The fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management. 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). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. All premiums/discounts are amortized /accreted on a yield-to-maturity basis. The premium in excess of the call price, if any, is amortized to the call date; thereafter, the remaining excess premium is amortized to maturity. Securities purchased or sold on a when-issued basis may be settled a month or more after the trade date; interest income is accrued based on the terms of the security. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. 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. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments. F) 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. The fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as "variation margin". 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. G) Interest rate swap contracts The fund may engage in interest rate swap agreements, which are arrangements between two parties to exchange cash flows based on a notional principal amount. The fund may enter into interest rate swap agreements, to manage the fund's exposure to interest rates. Interest rate swaps are marked-to-market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss. Payments made or received are included as part of interest income. Payments received or made upon early termination are recorded as realized gain or loss. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or that the counterparty may default on its obligation to perform. H) Security lending The fund may lend securities, through its agent Citibank N.A., to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by Citibank N.A., the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. At February 28, 2002, the value of securities loaned amounted to $519,146. The fund received cash collateral of $564,245 which is pooled with collateral of other Putnam funds into 31 issuers of high-grade short-term investments. I) Line of credit The fund has entered into a committed line of credit with certain banks. This line of credit agreement includes restrictions that the fund maintains an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the six months ended February 28, 2002, the fund had no borrowings against the line of credit. J) 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 August 31, 2001, the fund had a capital loss carryover of approximately $143,178,000 available to the extent allowed by tax law to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration ---------------- -------------------- $ 3,691,000 August 31, 2005 4,909,000 August 31, 2006 14,567,000 August 31, 2007 24,799,000 August 31, 2008 95,212,000 August 31, 2009 K) Distributions to shareholders The fund declares a distribution each day based upon the projected net investment income, for a specified period, calculated as if earned pro rata throughout the period on a daily basis. Such distributions are recorded daily and paid monthly. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. 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. L) Expenses of the trust Expenses directly charged or attributable to any fund will be paid from the assets of that fund. Generally, expenses of the trust will be allocated among and charged to the assets of each fund on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each fund or the nature of the services performed and relative applicability to each fund. 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: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion and 0.43% 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 wholly-owned subsidiary of Putnam, LLC. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. Under the subcustodian contract between the subcustodian bank and PFTC, the subcustodian bank has a lien on the securities of the fund to the extent permitted by the fund's investment restrictions to cover any advances made by the subcustodian bank for the settlement of securities purchased by the fund. At February 28, 2002, the payable to the subcustodian bank represents the amount due for cash advance for the settlement of a security purchased. The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's expenses. For the six months ended February 28, 2002, the fund's expenses were reduced by $49,228 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $1,777 has been allocated to the fund, and an additional fee for each Trustees meeting attended. 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 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 a 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, class C 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 Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, 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 Retail Management at an annual rate up to 0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to class A, class B, class C and class M shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00% and 0.50% of the average net assets attributable to class A, class B, class C and class M shares, respectively. For the six months ended February 28, 2002, Putnam Retail Management, acting as underwriter received net commissions of $149,108 and $4,120 from the sale of class A and class M shares, respectively, and received $759,839 and $10,935 in contingent deferred sales charges from redemptions of class B and class C shares, respectively. A deferred sales charge of up to 1.00% and 0.40% is assessed on certain redemptions of class A and class M shares, respectively. For the six months ended February 28, 2002, Putnam Retail Management, acting as underwriter received $824 and no monies on class A and class M redemptions, respectively. Note 3 Purchases and sales of securities During the six months ended February 28, 2002, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $546,314,254 and $447,828,839, respectively. There were no purchases and sales of U.S. government obligations. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received ---------------------------------------------------------- Written options outstanding at beginning of year $ -- $ -- ---------------------------------------------------------- Options opened 11,500,000 2,028,865 ---------------------------------------------------------- Options expired -- -- ---------------------------------------------------------- Options closed (3,085,000) (554,128) ---------------------------------------------------------- Written options outstanding at end of year $ 8,415,000 $1,474,737 ---------------------------------------------------------- Note 4 Capital shares At February 28, 2002, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Six months February 28, 2002 ---------------------------------------------------------- Class A Shares Amount ---------------------------------------------------------- Shares sold 33,632,895 $ 186,637,377 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 4,419,674 24,358,409 ---------------------------------------------------------- 38,052,569 210,995,786 Shares repurchased (27,707,801) (153,904,181) ---------------------------------------------------------- Net increase 10,344,768 $ 57,091,605 ---------------------------------------------------------- Year ended August 31, 2001 ---------------------------------------------------------- Class A Shares Amount ---------------------------------------------------------- Shares sold 62,282,987 $ 381,280,454 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 7,512,371 45,478,995 ---------------------------------------------------------- 69,795,358 426,759,449 Shares repurchased (51,396,089) (315,420,241) ---------------------------------------------------------- Net increase 18,399,269 $ 111,339,208 ---------------------------------------------------------- Six months February 28, 2002 ---------------------------------------------------------- Class B Shares Amount ---------------------------------------------------------- Shares sold 16,476,309 $ 91,609,519 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 3,705,359 20,455,221 ---------------------------------------------------------- 20,181,668 112,064,740 Shares repurchased (20,699,539) (114,880,177) ---------------------------------------------------------- Net decrease (517,871)$ (2,815,437) ---------------------------------------------------------- Year ended August 31, 2001 ---------------------------------------------------------- Class B Shares Amount ---------------------------------------------------------- Shares sold 46,403,607 $ 284,506,937 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 6,903,440 41,922,154 ---------------------------------------------------------- 53,307,047 326,429,091 Shares repurchased (42,121,770) (257,266,536) ---------------------------------------------------------- Net increase 11,185,277 $ 69,162,555 ---------------------------------------------------------- Six months February 28, 2002 ---------------------------------------------------------- Class C Shares Amount ---------------------------------------------------------- Shares sold 3,626,319 $ 20,168,898 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 210,838 1,162,756 ---------------------------------------------------------- 3,837,157 21,331,654 Shares repurchased (1,969,117) (10,945,149) ---------------------------------------------------------- Net increase 1,868,040 $ 10,386,505 ---------------------------------------------------------- Year ended August 31, 2001 ---------------------------------------------------------- Class C Shares Amount ---------------------------------------------------------- Shares sold 7,127,821 $ 43,425,338 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 305,173 1,844,284 ---------------------------------------------------------- 7,432,994 45,269,622 Shares repurchased (3,928,597) (23,814,315) ---------------------------------------------------------- Net increase 3,504,397 $ 21,455,307 ---------------------------------------------------------- Six months February 28, 2002 ---------------------------------------------------------- Class M Shares Amount ---------------------------------------------------------- Shares sold 1,319,101 $ 7,323,551 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 250,319 1,381,832 ---------------------------------------------------------- 1,569,420 8,705,383 Shares repurchased (1,007,586) (5,586,736) ---------------------------------------------------------- Net increase 561,834 $ 3,118,647 ---------------------------------------------------------- Year ended August 31, 2001 ---------------------------------------------------------- Class M Shares Amount ---------------------------------------------------------- Shares sold 2,595,150 $ 15,900,004 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 428,912 2,602,256 ---------------------------------------------------------- 3,024,062 18,502,260 Shares repurchased (2,263,678) (13,786,876) ---------------------------------------------------------- Net increase 760,384 $ 4,715,384 ---------------------------------------------------------- Six months ended February 28, 2002 ---------------------------------------------------------- Class Y Shares Amount ---------------------------------------------------------- Shares sold 15,554,294 $ 86,087,812 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 976,710 5,375,763 ---------------------------------------------------------- 16,531,004 91,463,575 Shares repurchased (3,766,296) (20,686,264) ---------------------------------------------------------- Net increase 12,764,708 $ 70,777,311 ---------------------------------------------------------- For the period October 2, 2000 (commencement of operations) to August 31, 2001 ---------------------------------------------------------- Class Y Shares Amount ---------------------------------------------------------- Shares sold 14,298,350 $ 86,127,188 ---------------------------------------------------------- Shares issued in connection with the reinvestment of distributions 605,395 3,588,630 ---------------------------------------------------------- 14,903,745 89,715,818 Shares repurchased (3,287,132) (19,657,431) ---------------------------------------------------------- Net increase 11,616,613 $ 70,058,387 ---------------------------------------------------------- Note 5 New accounting pronouncement As required, effective January 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies. This Guide requires that the fund amortize premium and accrete discount on all fixed-income securities, and classify as interest income gains and losses realized on paydowns on mortgage-backed securities. Prior to January 1, 2001, the fund did not amortize premium and accrete discounts for certain fixed income securities and characterized as realized gains and losses paydowns on mortgage backed securities. Adopting these accounting principles will not affect the fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of operations. The adoption of this principle is not material to the financial statements. Note 6 Actions by trustees On March 15, 2002, the Trustees approved, in principle, the merger of Putnam High Yield Trust II into Putnam High Yield Trust. The transaction is scheduled to occur in later 2002. It is subject to a number of conditions and there is no guarantee it will occur. PUTNAM IS A LEADER IN GLOBAL MONEY MANAGEMENT Putnam Investments traces its heritage to the early 19th century when ship captains hired trustees to manage their money while they were away at sea. In a landmark 1830 decision that involved one such trustee, Massachusetts Supreme Judicial Court Justice Samuel Putnam established The Prudent Man Rule, a legal foundation for responsible money management. In 1937, his great-great grandson founded Putnam with The George Putnam Fund of Boston, the first fund to offer a balanced portfolio of stocks and bonds. Today, Putnam Investments is one of the largest investment management firms in the world, and this balanced approach remains the foundation of everything we do. With more than 60 years of experience, Putnam now has over $339 billion in assets under management, over 100 mutual funds, over 14 million shareholder accounts, and nearly 3,000 institutional and 401(k) clients. We're one of the largest mutual fund companies in the United States. Putnam has won the DALBAR award for service ten times in the past eleven years. Putnam offers products in every investment category, including growth, value, and blend as well as international and fixed-income. Teamwork is a cornerstone of Putnam's investment philosophy. Our funds are managed by teams in a collaborative environment that promotes an active exchange of information. Putnam's disciplined investment philosophy is based on style consistency. We aim for less volatility over the short term and strong, consistent performance over time. Our truth in labeling approach ensures that we adhere to every fund's stated objective, style, and risk positioning. We are committed to the role of the financial advisor, who continually provides sound, sensible guidance, information, and expertise to help investors reach their financial goals. FUND INFORMATION ABOUT PUTNAM INVESTMENTS One of the largest mutual fund families in the United States, Putnam Investments has a heritage of investment leadership dating back to Judge Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and practice since 1830. Founded 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We presently manage over 100 mutual funds in growth, value, blend, fixed income, and international. INVESTMENT MANAGER Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray TRUSTEES John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam, III President Charles E. Porter Executive Vice President and Treasurer Patricia C. Flaherty Senior Vice President Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President Stephen Oristaglio Vice President Kevin Cronin Vice President Stephen Peacher Vice President Richard G. Leibovitch Vice President Richard A. Monaghan Vice President Michael T. Healy Vice President John R. Verani Vice President This report is for the information of shareholders of Putnam High Yield Trust II. 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 and Putnam's Quarterly Ranking Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. The fund's Statement of Additional Information contains additional information about the fund's Trustees and is available without charge upon request by calling 1-800-225-1581. Visit www.putnaminvestments.com or call a representative at 1-800-225-1581. NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 --------------------- PRSRT STD U.S. POSTAGE PAID PUTNAM INVESTMENTS --------------------- For account balances, economic forecasts, and the latest on Putnam funds, visit www.putnaminvestments.com SA064-79267 2HB/2HD/2HE 4/02 PUTNAM INVESTMENTS [SCALE LOGO OMITTED] ----------------------------------------------------------------------------- Putnam High Yield Trust II Supplement to Semiannual Report dated 2/28/02 The following information has been prepared to provide class Y shareholders with a performance overview specific to their holdings. Class Y shares are offered exclusively to clients that meet the eligibility requirements specified in the fund's prospectus for such shares. Performance of class Y shares, which incur neither a front-end load, distribution fee, nor contingent deferred sales charge, will differ from performance of class A, B, C, and M shares, which are discussed more extensively in the annual report. SEMIANNUAL RESULTS AT A GLANCE ----------------------------------------------------------------------------- Total return for periods ended 2/28/02 NAV 6 months -0.74% 1 year -1.53 Life of fund (since class A inception, 12/31/97) -0.14 Annual average -0.03 Share value: NAV 8/31/01 $5.81 2/28/02 $5.42 ----------------------------------------------------------------------------- Distributions: No. Income Capital gains Total 6 $0.342895 -- $0.342895 ----------------------------------------------------------------------------- Please note that past performance is not indicative of future results. More recent returns may be more or less than those shown. Returns shown for class Y shares for periods prior to their inception are derived from the historical performance of class A shares, and are not adjusted to reflect the initial sales charge currently applicable to class A shares. These returns have not been adjusted to reflect differences in operating expenses which, for class Y shares, typically are lower than the operating expenses applicable to class A shares. All returns assume reinvestment of distributions at net asset value. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. See full report for information on comparative benchmarks. If you have questions, please consult your fund prospectus or call Putnam toll free at 1-800-752-9894.