Putnam Investment Grade Municipal Trust III
ANNUAL REPORT
October 31, 1994
[LOGO]
BOSTON * LONDON * TOKYO
<PAGE>
Performance highlights
"Investors who buy closed-end fund shares at discounts to their
net asset values (NAV) both reduce the risk of holding the
funds and increase their potential profits should the discounts
narrow or even turn into premiums to NAV."
- -- Kiplinger's, "Great buys in beaten-down bond funds,"
November 1994
Performance should always be considered in light of a fund's
investment strategy. Putnam Investment Grade Municipal Trust
III seeks as high a level of current income exempt from federal
income tax as Putnam Management believes is consistent with
preservation of capital.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE><CAPTION>
<S> <C> <C>
Total return (common shares) NAV Market price
- ---------------------------------------------------------------
- --
Period ended 10/31/94(1)
(change in value during period
plus reinvested distributions) -6.75% -28.60%
- ---------------------------------------------------------------
- --
Share value (common shares) NAV Market price
- ---------------------------------------------------------------
- --
11/29/93 $14.02 $15.000
10/31/94 12.36 10.125
- ---------------------------------------------------------------
- --
<S> <C> <C> <C> <C>
Capital gains
Long- Short-
Distributions(2) No. Income term term Total
- ---------------------------------------------------------------
- --
Period ended 10/31/94
Common shares 10 $0.667 $0.667
Number Series
Preferred shares 200 A $1,132.99
- ---------------------------------------------------------------
- --
Taxable equivalent(3)
Current return Market Market
(common shares) NAV price NAV price
- ---------------------------------------------------------------
- --
Period ended 10/31/94
Current dividend rate(4) 6.48% 7.91% 10.73% 13.10%
- ---------------------------------------------------------------
- --
<FN>
Performance data represent past results. For performance over
other periods, see page 8. (1)Commencement of operations,
11/29/93. (2)Capital gains, if any, are taxable for federal
and, in most cases, state tax purposes. For some investors,
investment income may also be subject to the federal
Alternative Minimum Tax. Investment income may be subject to
state and local taxes. (3)Assumes maximum 39.6% federal tax
rate . Results for investors subject to lower tax rates would
not be as advantageous. (4)Income portion of most recent
distribution, annualized and divided by NAV or market price at
end of period.
</TABLE>
<PAGE>
From the Chairman
[PHOTO]
(c) Karsh, Ottawa
Dear Shareholder:
When markets turn down, investors with vision look beyond the
unfolding negatives for opportunities farther down the road.
Throughout Putnam Investment Grade Municipal Trust III's fiscal
year that ended on October 31, 1994, there was plenty to
obstruct the view.
The period had hardly begun when signs appeared that the
sustained bond market rise was about to end. Fund Manager
Michael Bouscaren began taking defensive action. Had he not
done so, the toll on the fund's results would likely have been
greater. Even so, the fund joined most other fixed-income
investments in the decline.
But Mike sees emerging strengths for tax-exempt securities.
Supplies may become tighter as fewer issues come to market and
more investors seek tax relief. Many sectors of the tax- exempt
market, including health care, education, and resource
recovery, are poised for growth. Mike will focus on these
positive factors as he seeks out the most promising
opportunities for your fund. His report on fiscal '94
performance and what he sees in store for fiscal '95 follows.
Respectfully yours,
[SIGNATURE]
George Putnam
Chairman of the Trustees
December 14, 1994
<PAGE>
Report from the fund manager
Michael F. Bouscaren
Putnam Investment Grade Municipal Trust III made its debut
during one of the most challenging 12-month periods for fixed-
income investments in recent history. The factors affecting the
fund's performance during the fiscal year ranged from
historically low interest rates, record new issuance of
refinanced bonds, and high investor demand for tax-free
securities in calendar 1993 to rising interest rates, increased
investor uncertainty, a 40% decrease in new issuance supply,
and higher taxes in calendar 1994. This dramatic about-face has
had both positive and negative ramifications for your fund as
well as most municipal bond funds.
We encourage you to keep in mind that a mutual fund investment,
particularly one that emphasizes long-term bonds in its
portfolio, requires a long-term view. Our hands-on management
style is founded on the premise that time, not timing, produces
investment success.
PRODUCING A STEADY STREAM OF TAX-FREE INCOME
Despite the market's turbulence, your fund achieved its primary
objective of providing shareholders with a high level of tax-
free income. While the prices of virtually all fixed-income
investments were down this year, the prices of municipal bonds
have fallen less than those of Treasuries, keeping the yield
spread between the two relatively narrow.
In today's low-inflation, high-tax environment, this can mean
attractive real rates of return for higher-bracket municipal
bond fund investors. An investment taxed at the maximum federal
rate of 39.6% would have had to provide a current return of
10.73% to equal the fund's 6.48% current dividend rate at net
asset value on October 31, 1994.
As you may know, we made a decision to issue preferred shares
to short-term, institutional investors when the fund began
operations on November 29, 1993. We believed this strategy, a
form of leveraging, would bolster the fund's income potential.
We've been able to reinvest the proceeds generated from the
issuance of short-term preferred shares in longer-term, higher-
paying bonds. A portion of the income that continues to be
generated from these higher-paying bonds is distributed to the
fund's common shareholders, enhancing their monthly dividend.
At period's end, 16.8% of the fund's net assets were leveraged.
BARBELL STRATEGY HELPS FUND SEEK APPRECIATION AND RELATIVE
STABILITY
Since the fiscal midyear, we've taken what's known as a barbell
approach in restructuring the portfolio's credit quality and
average coupon. This represents our effort to tap the price
appreciation potential of certain issues while, at the same
time, taking advantage of the volatility-dampening effects of
others.
Portfolio holdings are currently anchored at the highest level,
AAA, and the lowest, BBB, of the investment-grade spectrum --
resulting in an average quality rating of AA. The fund
continues to own BBB bonds because, historically, lower-grade
issues tend to experience less price volatility in a declining
market. They can also provide an attractive yield. However,
because the yield spread between AAA and BBB issues remains
narrow, we've been increasing the fund's weighting in AAA and
insured issues in anticipation of a market turnaround.
TOP INDUSTRY SECTORS*
[BAR CHART]
Plot Points
- ---------------------------------------------------------------
- --
Utilities 33.5%
Hospitals/health care 24.1%
Transportation 11.5%
Education 4.3%
Housing 1.3%
*Based on net assets on 10/31/94.
Our coupon strategy involves holding both discount bonds, those
selling at prices below their par values, and premium- coupon
bonds, those selling at prices above their par values. Premium-
coupon bonds typically offer coupons higher than current rates
and tend to be less seriously affected when prices decline.
Recent acquisitions should help reduce the fund's overall price
volatility. We've also purchased discount bonds because of
their price appreciation potential. Should the market recover,
we believe these issues are likely to increase in value.
WELL DIVERSIFIED BY REGION, INDUSTRY
Your fund's investments are spread across the country with
greater emphasis on certain regions. California, Massachusetts,
and New York are significantly represented in the portfolio,
with additional exposure given to high-demand states like Texas
and Florida. Primarily, high taxes, strong investor demand, the
outlook for an improving economy with possible credit upgrades,
and the availability of some attractively yielding issues drew
our attention to these states. Health care, utilities,
transportation, housing, and education continued to be the
fund's top five industry sectors.
Issues of particular interest to us, and ones we anticipate
will do very well, are the Denver City and County Airport
revenue bonds currently held in the fund's portfolio. Although
the project incurred cost overruns, technological problems, and
contractual disagreements between the city and certain
airlines, these concerns now seem to have been ironed out to
the satisfaction of all parties involved.
The airport is scheduled to open in February 1995, when it will
become the only airport servicing greater Denver. Because of
its distance from downtown Denver, we anticipate there'll be
more than the usual amount of revenue-generating sources from
airport operations and associated facilities. Restaurants,
parking, hotels, and retail outlets are all expected to be
sources of fees and cash flow. With such an optimistic long-
term outlook, we took the opportunity to increase the fund's
position in these bonds in late summer. We look forward to the
anticipated progress of these issues.
DIVERSIFICATION BY STATE, TOP FIVE
as a percentage of net assets on 10/31/94
[BAR CHART]
Plot Points
- ---------------------------------------------------------------
- --
California 20.5%
Massachusetts 12.5%
Texas 11.6%
New York 10.0%
South Carolina 9.6%
FAVORABLE DYNAMICS ON THE HORIZON
While investing in a down market can be psychologically
difficult, doing so can lead to profitability over the long
term. Today's post-correction prices may actually represent a
buying opportunity for many closed-end municipal bond fund
shareholders. For the long-term investor, acquiring shares at
reduced prices, either through direct purchase or reinvestment
of dividends, creates a larger income-generating share base for
the future.
Our outlook for municipal bonds remains positive for the long
term, although in the near term we anticipate continued
turmoil. After record new issuance of municipal bonds in 1993,
year-to-date new issuance has dropped by more than 40% from
earlier levels a year ago. We believe the decreased supply,
combined with growing investor demand for tax relief, bode well
for the appreciation potential of tax-free bonds -- an event we
believe may well develop quite suddenly and be sustained when
investors come to recognize the positive effects of these two
factors. We have endeavored to position the fund accordingly.
The views expressed throughout the report are exclusively those
of Putnam Management. They are not meant as investment advice.
Although the described holdings were viewed favorably as of
October 31, 1994, there is no guarantee the fund will continue
to hold these securities in the future.
<PAGE>
Performance summary
This section provides, at a glance, information about your
fund's performance. 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 back
into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might
have performed over varying periods. For comparative purposes,
we show how the fund performed relative to appropriate indexes
and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 10/31/94
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
Lehman Bros.
Market Municipal
NAV Price Bond Index CPI
- ---------------------------------------------------------------
- --
Life of fund
(11/29/93) -6.75% -28.60% -3.51% 2.54%
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- --
TOTAL RETURN FOR PERIODS ENDED 9/30/94
Lehman Bros.
Market Municipal
NAV Price Bond Index CPI
- ---------------------------------------------------------------
- --
Life of fund
(11/29/93) -4.51% -25.57% -1.76% 2.47%
- ---------------------------------------------------------------
- --
<FN>
Performance data represent past results. Investment returns and
net asset value will fluctuate so an investor's shares, when
sold, may be worth more or less than their original cost. Fund
performance data do not take into account any adjustment for
taxes payable on reinvested distributions.
<PAGE>
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets,
minus any liabilities, the liquidation preference and
cumulative undeclared dividends paid on the remarketed
preferred shares, divided by the number of outstanding common
shares.
Market price is the current trading price of one share of the
fund. Market prices are set by transactions between buyers and
sellers on the New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of
long- term fixed-rate investment-grade tax-exempt bonds
representative of the municipal bond market. The index does not
take into account brokerage commissions or other costs, may
include bonds different from those in the fund, and may pose
different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of
inflation; it does not represent an investment return.
<PAGE>
Report of Independent Accountants
Fiscal Period Ended October 31, 1994
To the Trustees and Shareholders of
Putnam Investment Grade Municipal Trust III
We have audited the accompanying statement of assets and
liabilities of Putnam Investment Grade Municipal Trust III,
including the portfolio of investments owned as of October 31,
1994, the related statement of operations, the statement of
changes in net assets and the "Financial Highlights" for the
period November 29, 1993 (commencement of operations) to
October 31, 1994. These financial statements and "Financial
Highlights" are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial
statements and "Financial Highlights" based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and "Financial Highlights" are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of October 31, 1994 by correspondence with
the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and "Financial
Highlights" referred to above present fairly, in all material
respects, the financial position of Putnam Investment Grade
Municipal Trust III as of October 31, 1994, the results of its
operations, the changes in its net assets and the "Financial
Highlights" for the period November 29, 1993 (commencement of
operations) to October 31, 1994 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 15, 1994
Portfolio of investments owned
October 31, 1994
MUNICIPAL BONDS AND NOTES (105.3%)(a)
PRINCIPAL AMOUNT RATINGS(b) VALUE
- ---------------------------------------------------------------
- --
California (20.5%)
- ---------------------------------------------------------------
- --
$1,000,000 Berkeley, Hlth. Fac. Rev.
Bonds (Alta Bates Med. Ctr.),
Ser. A, 6.55s, 12/1/22 Baa $ 891,250
5,000,000 Beverly Hills, Pub. Fing.
Auth. Inverse Floating Bond
(IFB), Ser. A, Municipal Bond
Insurance Assn. (MBIA),
8.22s, 6/1/15 AAA 3,887,500
2,500,000 CA State Univ. Rev. Bonds,
American Municipal Bond
Assurance Corp. (AMBAC),
6.797s, 11/1/21 AAA 2,578,125
3,000,000 Los Angeles, Dept. Wtr. & Pwr.
Elec. Plant Rev. Bonds, MBIA,
5 1/4s, 11/15/26 AAA 2,362,500
1,725,000 Palmdale, Civic Auth. Rev. Bonds
(Merged Redev. Areas Project),
Ser. A, 6.6s, 9/1/34 A 1,589,156
1,000,000 San Diego Cnty., Wtr. Auth.
Certif. of Participation (COP),
IFB, Financial Guaranty Insurance
Co. (FGIC), 8.061s, 4/23/08 AAA 882,500
-----------
12,191,031
Colorado (9.4%)
- ---------------------------------------------------------------
- --
Denver, City & Cnty. Arpt. Rev. Bonds
3,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 3,108,750
1,500,000 Ser. A, 8 1/2s, 11/15/23 Baa 1,528,125
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 967,500
-----------
5,604,375
Florida (3.6%)
- ---------------------------------------------------------------
- --
2,000,000 Broward Cnty., Resource Recvy.
Rev. Bonds (SES Broward Co.
LP South Project), 7.95s, 12/1/08 A 2,152,500
Illinois (5.2%)
- ---------------------------------------------------------------
- --
750,000 Chicago, Gas Supply Rev. Bonds
(Peoples Gas & Lt.), Ser. C,
7 1/2s, 3/1/15 AA 796,875
2,000,000 IL Hlth. Facs. Auth. Rev. Bonds
(Glenoaks Med. Ctr.), Ser. D,
9 1/2s, 11/15/15 BBB 2,302,500
-----------
3,099,375
Louisiana (4.0%)
- ---------------------------------------------------------------
- --
200,000 LA State Recvy. Dist. Sales
Tax Variable Rate Demand Note
(VRDN), MBIA, 3.6s, 7/1/98 VMIG1 200,000
2,000,000 St. Charles Parish, Poll.
Control Rev. Bonds
(LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa 2,165,000
-----------
2,365,000
Massachusetts (12.5%)
- ---------------------------------------------------------------
- --
2,800,000 MA State General Obligation
(G.O.) VRDN, Ser. B, 3.55s,
12/1/97 VMIG1 2,800,000
2,500,000 MA State Hlth. & Edl. Facs.
Auth. Rev. Bonds, AMBAC,
6.55s, 6/23/22 AAA $2,428,125
1,000,000 MA State Indl. Fin. Agcy. Rev.
Bonds (1st Mtge. Brookhaven),
Ser. A, 7s, 1/1/09 BBB/P 980,000
755,000 MA State Port Auth. Rev. Bonds,
13s, 7/1/13 AAA 1,219,325
-----------
7,427,450
Michigan (4.3%)
- ---------------------------------------------------------------
- --
3,000,000 MI State Bldg. Auth. Rev. Bonds,
Ser. I, AMBAC, 5 1/4s, 10/1/11 AAA 2,576,250
Minnesota (1.8%)
- ---------------------------------------------------------------
- --
1,000,000 St. Paul, Hsg. & Redev. Auth.
Hosp. Rev. Bonds (Healtheast
Project), Ser. B, 9 3/4s,
11/1/17 Baa 1,100,000
Missouri (3.0%)
- ---------------------------------------------------------------
- --
1,825,000 MO State Hlth. & Edl. Facs.
Auth. Rev. Bonds (BJC Hlth.
Sys.), Ser. A, 6 1/2s, 5/15/20 AA 1,756,563
New York (10.0%)
- ---------------------------------------------------------------
- --
2,000,000 NY City, Mun. Wtr. Fin. Auth.
VRDN, Ser. G, FGIC, 3.6s,
6/15/24 VMIG1 2,000,000
1,000,000 NY State Hsg. Corp. Rev. Bonds,
5s, 11/1/18 AA 787,500
NY State Loc. Govt. Assistance
Corp. Rev. Bonds
1,000,000 Ser. A, 5 1/2s, 4/1/23 A 818,750
1,000,000 Ser. C, 5 1/2s, 4/1/18 A 836,250
2,000,000 Ser. C, 5s, 4/1/21 A 1,527,500
-----------
5,970,000
Ohio (4.5%)
- ---------------------------------------------------------------
- --
2,500,000 OH State Wtr. Dev. Auth. Poll.
Control Facs. Rev. Bonds
(OH Edison Co. Project),
10 5/8s, 7/1/15 Baa 2,653,125
Pennsylvania (1.7%)
- ---------------------------------------------------------------
- --
1,000,000 Lawrence Cnty., Indl. Dev. Auth.
Poll. Control Rev. Bonds (PA
Pwr. Co. New Castle Project),
Ser. A, 7.15s, 3/1/17 Baa 1,011,250
South Carolina (9.6%)
- ---------------------------------------------------------------
- --
2,500,000 Grand Strand Wtr. & Swr. Auth.
Rev. Bonds, MBIA, 6s, 6/1/19 AAA 2,268,750
5,000,000 SC State Pub. Svc. Auth. IFB,
MBIA, 7.79s, 7/1/21 (acquired
11/30/93, cost $4,839,200)(c) AAA 3,456,250
-----------
5,725,000
Texas (11.6%)
- ---------------------------------------------------------------
- --
2,400,000 Bexar Cnty., Hlth. Facs. Dev.
Corp. Rev. Bonds (St. Luke's
Lutheran Hosp. Project), 7.9s,
5/1/18 Baa 2,466,000
1,785,000 Brazos River Auth. Poll. Control
Rev. Bonds (Texas Utils. Elec.
Co. Project), Ser. A, FGIC,
9 7/8s, 10/1/17 AAA 1,996,969
2,500,000 North Cent. TX Hlth. Fac. Dev.
Corp. Rev. Bonds
(Presbyterian Hlth. Sys.),
MBIA, 6.685s, 6/22/21 AAA $2,421,875
-----------
6,884,844
Washington (3.6%)
- ---------------------------------------------------------------
- --
2,500,000 WA State Pub. Pwr. Supply Sys.
Rev. Bonds (Nuclear Project No. 1),
Ser. B, MBIA, 5.6s, 7/1/15
AAA 2,131,250
- ---------------------------------------------------------------
- --
Total Investments
(cost $67,430,292)(d) $62,648,013
- ---------------------------------------------------------------
- --
<FN>
NOTES
(a) Percentages indicated are based on total net assets of
$59,518,125. Net assets available to common shareholders
are $49,518,125, which correspond to a net asset value per
common share of $12.36.
(b) The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at
October 31, 1994 for the securities listed. Ratings are
generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the
ratings do not necessarily represent what the agencies
would ascribe to these securities at October 31, 1994.
Securities rated by Putnam are indicated by "/P" and are
not publicly rated. Ratings are not covered by the Report
of Independent Accountants.
(c) Restricted as to public resale. At the date of
acquisition, this security was valued at cost. There were
no outstanding unrestricted securities of the same class
as that held. Total market value of the restricted
security owned at October 31, 1994 was $3,456,250 or 5.8%
of net assets.
(d) The aggregate identified cost on a tax basis is
$67,430,292, resulting in gross unrealized depreciation of
$4,782,279.
The rates shown on Variable Rate Demand Notes (VRDN) and
Inverse Floating Bonds (IFB), which are securities paying
variable interest rates that vary inversely to changes in
market interest rates, are the current interest rates at
October 31, 1994, which are subject to change based on the
terms of the security.
The Fund had the following industry group concentrations
greater than 10% on October 31, 1994 (as a percentage of
net assets):
Utilities 33.5% Transportation 11.5%
Hospital/Health Care 24.1
The fund had the following insurance concentrations
greater than 10% on October 31, 1994 (as a percentage of
net assets):
MBIA 28.1%
AMBAC 12.7
The table below shows the percentages of the fund's
investments on October 31, 1994 in securities assigned to
various rating categories by Moody's and Standard & Poor's
and in unrated securities determined by Putnam Investment
Management, Inc. to be of comparable quality.
</TABLE>
<TABLE><CAPTION>
<S> <C> <C>
Unrated securities
Rated securities, of comparable quality,
as a percentage of as a percentage of
fund's net assets fund's net assets
- ---------------------------------------------------------------
- --
"AAA"/"Aaa" 47.5% --
"AA"/"Aa" 5.6 --
"A"/"A" 11.6 --
"BBB"/"Baa" 30.6 1.6%
"VMIGI" 8.4 --
- ---------------------------------------------------------------
- --
103.7% 1.6%
- ---------------------------------------------------------------
- --
</TABLE>
<PAGE>
Statement of assets and liabilities October 31, 1994
<TABLE><CAPTION>
<S> <C>
Assets
- ---------------------------------------------------------------
- --
Investments in securities, at value
(identified cost $67,430,292) (Note 1) $62,648,013
- ---------------------------------------------------------------
- --
Cash 111,899
- ---------------------------------------------------------------
- --
Interest receivable 1,513,982
- ---------------------------------------------------------------
- --
Receivable for securities sold 2,636,656
- ---------------------------------------------------------------
- --
Unamortized organization expenses (Note 1) 22,142
- ---------------------------------------------------------------
- --
Total assets 66,932,692
- ---------------------------------------------------------------
- --
Liabilities
- ---------------------------------------------------------------
- --
Distributions payable to shareholders 301,587
- ---------------------------------------------------------------
- --
Payable for securities purchased 6,625,578
- ---------------------------------------------------------------
- --
Payable for compensation of Manager (Note 4) 110,390
- ---------------------------------------------------------------
- --
Payable for compensation of Trustees (Note 4) 1,362
- ---------------------------------------------------------------
- --
Payable for administrative services (Note 4) 3,649
- ---------------------------------------------------------------
- --
Payable for offering and organization costs (Notes 1 and 2)345,
333
- ---------------------------------------------------------------
- --
Other accrued expenses 26,668
- ---------------------------------------------------------------
- --
Total liabilities 7,414,567
- ---------------------------------------------------------------
- --
Net assets $59,518,125
- ---------------------------------------------------------------
- --
Represented by
- ---------------------------------------------------------------
- --
Series A remarketed preferred shares,
without par value; 200 shares authorized
(200 shares issued at $50,000 per share
liquidation preference) (Note 3) $10,000,000
- ---------------------------------------------------------------
- --
Common shares, without par value; unlimited
shares authorized; 4,007,092 shares outstanding 55,817,217
- ---------------------------------------------------------------
- --
Undistributed net investment income 477,179
- ---------------------------------------------------------------
- --
Accumulated net realized loss on investments
and futures contracts (1,993,992)
- ---------------------------------------------------------------
- --
Net unrealized depreciation of investments (4,782,279)
- ---------------------------------------------------------------
- --
Net assets $59,518,125
- ---------------------------------------------------------------
- --
Remarketed preferred shares at liquidation
preference $10,000,000
- ---------------------------------------------------------------
- --
Net assets available to common shares:
- ---------------------------------------------------------------
- --
Net asset value per share $12.36
($49,518,125 divided by 4,007,092 shares) 49,518,125
- ---------------------------------------------------------------
- --
Net assets $59,518,125
- ---------------------------------------------------------------
- --
</TABLE>
<PAGE>
Statement of operations
For the period November 29, 1993 (commencement of operations)
to October 31, 1994*
<TABLE><CAPTION>
<S> <C>
Tax exempt interest income $3,833,494
- ---------------------------------------------------------------
- --
Expenses:
- ---------------------------------------------------------------
- --
Compensation of Manager (Note 4) 392,105
- ---------------------------------------------------------------
- --
Investor servicing and custodian fees (Note 4) 37,011
- ---------------------------------------------------------------
- --
Compensation of Trustees (Note 4) 7,234
- ---------------------------------------------------------------
- --
Reports to shareholders 20,987
- ---------------------------------------------------------------
- --
Registration fees 450
- ---------------------------------------------------------------
- --
Auditing 44,218
- ---------------------------------------------------------------
- --
Legal 7,387
- ---------------------------------------------------------------
- --
Postage 2,501
- ---------------------------------------------------------------
- --
Administrative services (Note 4) 6,464
- ---------------------------------------------------------------
- --
Exchange listing fees 12,183
- ---------------------------------------------------------------
- --
Amortization of organization expenses (Note 1) 5,015
- ---------------------------------------------------------------
- --
Preferred share remarketing agent fees 18,894
- ---------------------------------------------------------------
- --
Other 1,153
- ---------------------------------------------------------------
- --
Fees waived by Manager (Note 4) (98,708)
- ---------------------------------------------------------------
- --
Total expenses 456,894
- ---------------------------------------------------------------
- --
Net investment income 3,376,600
- ---------------------------------------------------------------
- --
Net realized loss on investments (Notes 1 and 5) (2,667,731)
- ---------------------------------------------------------------
- --
Net realized gain on futures contracts (Notes 1 and 5) 673,739
- ---------------------------------------------------------------
- --
Net unrealized depreciation of investments
during the period (4,782,279)
- ---------------------------------------------------------------
- --
Net loss on investments (6,776,271)
- ---------------------------------------------------------------
- --
Net decrease in net assets resulting
from operations $(3,399,671)
- ---------------------------------------------------------------
- --
<FN>
* See Note 2.
</TABLE>
<PAGE>
Statement of changes in net assets
<TABLE><CAPTION>
<S> <C>
For the period
November 29, 1993
(commencement of
operations) to
October 31, 1994
- ---------------------------------------------------------------
- --
Increase in net assets
- ---------------------------------------------------------------
- --
Operations:
- ---------------------------------------------------------------
- --
Net investment income $3,376,600
- ---------------------------------------------------------------
- --
Net realized loss on investments (2,667,731)
- ---------------------------------------------------------------
- --
Net realized gain on futures contracts 673,739
- ---------------------------------------------------------------
- --
Net unrealized depreciation of investments (4,782,279)
- ---------------------------------------------------------------
- --
Net decrease in net assets resulting from operations(3,399,671)
- ---------------------------------------------------------------
- --
Distributions to remarketed preferred shareholders from:
Net investment income (226,598)
- ---------------------------------------------------------------
- --
Net decrease in net assets resulting from operations
applicable to common shareholders (3,626,269)
- ---------------------------------------------------------------
- --
Distributions to common shareholders from:
Net investment income (2,672,823)
- ---------------------------------------------------------------
- --
Issuance of remarketed preferred shares (Note 3) 10,000,000
- ---------------------------------------------------------------
- --
Issuance of common shares (Note 2) 56,081,824
- ---------------------------------------------------------------
- --
Underwriting commissions and offering costs
on remarketed preferred shares (Note 3) (364,607)
- ---------------------------------------------------------------
- --
Total increase in net assets 59,418,125
- ---------------------------------------------------------------
- --
Net assets
- ---------------------------------------------------------------
- --
Beginning of period 100,000
- ---------------------------------------------------------------
- --
End of period (including undistributed net investment
income of $477,179) $59,518,125
- ---------------------------------------------------------------
- --
Number of fund shares
- ---------------------------------------------------------------
- --
Common shares outstanding at beginning of period (Note 2)7,092
- ---------------------------------------------------------------
- --
Common shares issued in public offering (Note 2) 4,000,000
- ---------------------------------------------------------------
- --
Common shares outstanding at end of period 4,007,092
- ---------------------------------------------------------------
- --
Remarketed preferred shares at beginning of period --
- ---------------------------------------------------------------
- --
Remarketed preferred shares issued in public offering (Note 3)2
00
- ---------------------------------------------------------------
- --
Remarketed preferred shares outstanding at end of period 200
- ---------------------------------------------------------------
- --
</TABLE>
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE><CAPTION>
<S> <C>
For the period
November 29, 1993
(commencement of
operations) to
October 31, 1994
- ---------------------------------------------------------------
- --
Net asset value, beginning of period (common shares) $14.02*
- ---------------------------------------------------------------
- --
Investment operations:
- ---------------------------------------------------------------
- --
Net investment income .85(a)
- ---------------------------------------------------------------
- --
Net realized and unrealized loss on investments (1.69)
- ---------------------------------------------------------------
- --
Total from investment operations (.84)
- ---------------------------------------------------------------
- --
Less distributions from:
- ---------------------------------------------------------------
- --
Net investment income:
- ---------------------------------------------------------------
- --
to preferred shareholders (.06)**
- ---------------------------------------------------------------
- --
to common shareholders (.67)
- ---------------------------------------------------------------
- --
Total distributions (.73)
- ---------------------------------------------------------------
- --
Preferred share offering costs (.09)
- ---------------------------------------------------------------
- --
Net asset value, end of period (common shares) $12.36
- ---------------------------------------------------------------
- --
Market value, end of period (common shares) $10.125
- ---------------------------------------------------------------
- --
Total investment return at market value
(common shares) (%)(b) (28.60)
- ---------------------------------------------------------------
- --
Net assets, end of period (in thousands) 59,518
- ---------------------------------------------------------------
- --
Ratio of expenses to average net assets (%)(c) .85(a)(d)
- ---------------------------------------------------------------
- --
Ratio of net investment income to
average net assets (%)(c) 5.89(a)(d)
- ---------------------------------------------------------------
- --
Portfolio turnover rate (%) 148.9
- ---------------------------------------------------------------
- --
<FN>
* Represents initial net asset value of $14.10 less offering
expenses of $0.08. $0.02 of these expenses are due to a
revision of offering expenses on 8/31/94.
** Preferred shares were issued on February 10, 1994 (Note
3).
(a) Reflects an expense limitation in effect during the
period. As a result of such limitation, expenses of the
fund for the period reflect a reduction of $0.02 per
share.
(b) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
(c) Ratios reflect net assets available to common shares only;
net investment income ratio also reflects reduction for
dividend payments to preferred shareholders.
(d) Not annualized.
</TABLE>
<PAGE>
Notes to financial statements
October 31, 1994
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of
1940, as amended, as a diversified, closed-end management
investment company. The fund's investment objective is to
provide as high a level of current income exempt from federal
income tax as is believed to be consistent with preservation of
capital. The fund intends to achieve its objective by investing
in a diversified portfolio of investment grade municipal
securities that the fund's Manager believes does not involve
undue risk to income or principal.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its
financial statements. The policies are in conformity with
generally accepted accounting principles.
A Security valuation
Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the
Trustees, which uses information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between
securities in determining value. The fair market value of
restricted securities is determined by the fund's Manager
following procedures approved by the Trustees, and such
valuations and procedures are reviewed periodically by the
Trustees.
B Determination of net asset value
Net asset value of the common shares is determined by dividing
the value of all assets of the fund (including accrued interest
and dividends), less all liabilities (including accrued
expenses, unpaid dividends on remarketed preferred shares and
cumulative undeclared dividends on remarketed preferred shares)
by the total number of common shares outstanding.
C 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.
D Futures
A futures contract is an agreement between two parties to buy
and sell a security at a set price on a future date. Upon
entering into such a contract, the fund is required to pledge
to the broker an amount of cash or U.S. government securities
equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the fund agrees to receive
from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments
are known as "variation margin" and are recorded by the fund as
unrealized gains or losses. 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 potential risk to the
fund is that the change in value of the underlying securities
may not correspond to the change in value of the futures
contracts.
E Federal taxes
It is the policy of the fund to distribute all of its 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. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation of
securities held and excise tax on income and capital gains.
At October 31, 1994, the fund had a capital loss carryover of
approximately $1,994,000 which will expire October 31, 2002. In
order to provide more level daily distributions, the fund may
at times pay taxable distributions from net realized short-term
gains that could have been retained by the fund and offset by
the capital loss carryover. In such circumstances, the fund
would lose the benefit of the carryover.
F Distributions to shareholders
Distributions to common and preferred shareholders are recorded
by the fund on the ex-dividend date. Dividends on each share of
remarketed preferred shares will accumulate from its Date of
Original Issue and will be payable, when, as and if declared by
the Trustees, on the applicable Dividend Payment Dates. During
the Initial Dividend Period from commencement of operations
through February 9, 1995, the applicable dividend rate is 3.09%
on the remarketed preferred shares per annum. After the initial
dividend period, each subsequent dividend period will generally
be a 28-day period and the applicable dividend rate will be the
dividend rate determined by the remarketing agent.
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. For the period ended October 31, 1994 there were
no current reclassifications as a result of the AICPA Statement
of Position (SOP) 93-2 "Determination, Disclosure and Financial
Statement Presentation of Income, Capital Gain and Return of
Capital Distributions, by Investment Companies."
G Amortization of bond premium and discount
Any premium resulting from the purchase of securities in excess
of maturity value is amortized on a yield-to-maturity basis.
Discount on zero-coupon bonds, stepped-coupon bonds and
original issue discount bonds is accreted according to the
effective yield method.
H Unamortized organization expenses
Expenses incurred by the fund in connection with its
organization aggregated $27,157. These expenses are being
amortized on a straight-line basis over a five-year period.
Note 2
Initial capitalization and offering of shares
The Fund was established as a Massachusetts business trust
under the laws of Massachusetts on September 23, 1993.
During the period September 23, 1993 to November 26, 1993 the
fund had no operations other than those related to
organizational matters, including the initial capital
contribution of $100,000, and the issuance of 7,092 shares to
Putnam Mutual Funds Corp. on November 12, 1993.
On November 29, 1993, the fund completed the initial offering
of 4,000,000 of its shares for which it received net proceeds
of $56,400,000 before deducting $318,176 of initial offering
expenses (such offering expenses and the fund's organizational
expenditures were paid initially by Putnam Investment
Management, Inc., the fund's Manager, a wholly owned subsidiary
of Putnam Investments, Inc., and the fund will reimburse the
Manager for such costs). Regular investment operations
commenced on November 29, 1993.
Note 3
Remarketed preferred shares
On February 10, 1994, the fund issued 200 shares of Series A
Remarketed Preferred Shares. Proceeds to the fund, before
deducting underwriting expenses of $150,000 and offering
expenses of $214,607, amounted to $10,000,000. These expenses
were charged against net assets of the fund available to common
shareholders. The Series A remarketed preferred shares are
redeemable at the option of the fund on any dividend payment
date at a redemption price of $50,000 per share, plus an amount
equal to any dividends accumulated on a daily basis but unpaid
through the redemption date (whether or not such dividends have
been declared) and, in certain circumstances, a call premium.
Under the Investment Company Act of 1940, the fund is required
to maintain asset coverage of at least 200% with respect to the
remarketed preferred shares as of the last business day of each
month in which any such shares are outstanding. Additionally,
the fund is required to meet more stringent asset coverage
requirements under the terms of the remarketed preferred shares
and the shares' rating agencies. Should these requirements not
be met, or should dividends accrued on the remarketed preferred
shares not be paid, the fund may be restricted in its ability
to declare dividends to common shareholders or may be required
to redeem certain of the remarketed preferred shares. At
October 31, 1994, there were no such restrictions on the fund.
Note 4
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc., for
management, investment advisory and administrative services is
paid quarterly based on the average weekly net asset value of
the fund. Such fee is based on the annual rate of 0.70% of the
first $500 million of average net assets, 0.60% of the next
$500 million, 0.55% of the next $500 million, and 0.50% of any
excess over 1.5 billion of such average net asset value.
In connection with the initial offering of shares of the fund,
Putnam Management agreed to waive its management fee for the
three-month period commencing November 26, 1993. During this
period management fees waived amounted to $98,708.
If dividends payable on remarketed preferred shares during any
dividend payment period plus any expenses attributable to
remarketed preferred shares for the period exceed the fund's
net income attributable to the proceeds of the remarketed
preferred shares during that period, then the fee payable to
Putnam Management for that period will be reduced by an agreed-
upon formula. See "Administrative Services Contract."
The fund also reimburses the Manager 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. For the period ended October 31,
1994, the fund paid $6,464 for these services.
Trustees of the fund receive an annual Trustee's fee of $520
and an additional fee for each Trustees' meeting attended.
Trustees who are not interested persons of the Manager and who
serve on committees of the Trustees receive additional fees for
attendance at certain committee meetings.
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. Fees
paid for these investor servicing and custodial functions for
the period ended October 31, 1994 amounted to $37,011.
Investor servicing and custodian fees reported in the Statement
of operations for the period ended October 31, 1994 have been
reduced by credits allowed by PFTC. Such credits amounted to
$27,835.
Note 5
Purchases and sales of securities
During the period ended October 31, 1994, purchases and sales
of investment securities other than short-term investments
aggregated $152,359,602 and $87,171,703 respectively. Purchases
and sales of short-term municipal obligations aggregated
$68,730,000 and $63,730,000, respectively. In determining the
net gain or loss on securities sold, the cost of securities has
been determined on the identified cost basis.
The following is a summary of futures contracts activity during
the year:
<TABLE><CAPTION>
<S> <C> <C>
Purchases of Futures Contracts
- ---------------------------------------------------------------
- --
Number of Aggregate
Contracts Face Value
- ---------------------------------------------------------------
- --
Contracts opened 80 $7,906,250
Contracts closed (80) (7,906,250)
Open at end of year -- --
- ---------------------------------------------------------------
- --
Sales of Futures Contracts
- ---------------------------------------------------------------
- --
Number of Aggregate
Contracts Face Value
- ---------------------------------------------------------------
- --
Contracts opened 1,695 $171,427,120
Contracts closed (1,695) (171,427,120)
Open at end of year -- --
- ---------------------------------------------------------------
- --
</TABLE>
<PAGE>
Selected quarterly data (Unaudited)
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
For the period
November 29, 1993
(commencement of
Three months ended operations) to
October 31 July 31 April 30 January 31
1994 1994 1994++ 1994*
- ----------------------------------------------------------------------
- --
Total investment income
Total $1,104,044 $1,102,391 $1,032,439 $594,620
Per share+ $.28 $.27 $.26 $.15
- ----------------------------------------------------------------------
- --
Net investment income
available to common
shareholders
Total $851,511 $871,255 $853,691 $573,545
Per share+ $.21 $.22 $.22 $.14
- ----------------------------------------------------------------------
- --
Net realized and
unrealized gain (loss)
on investments
Total $(2,907,540) $534,393 $(5,869,325) $1,466,201
Per share+ $(.72) $.13 $(1.47) $.37
- ----------------------------------------------------------------------
- --
Net increase (decrease)
in net assets available
to common shareholders
resulting from operations
Total $(2,056,029) $1,405,648 $(5,015,634) $2,039,746
Per share+ $(.51) $.35 $(1.25) $.51
- ----------------------------------------------------------------------
- --
Net assets available to
common shareholders
at end of period
Total $49,518,125$52,497,920 $51,894,325 $58,029,010
Per share+ $12.36 $13.10 $12.95 $14.48
- ----------------------------------------------------------------------
- --
<FN>
* Reflects an expense limitation in effect during the
period. As a result of such limitation, expenses of the
fund for the period reflect a reduction of $.02 per share.
+ Per common share.
++ Preferred shares were issued on February 10, 1994.
</TABLE>
<PAGE>
Federal tax information
The fund has designated all distributions paid from net
investment income during the period as exempt-interest
dividends. Thus, 100% of these distributions are exempt from
federal income tax. The Form 1099 you will receive in January
1995 will tell you the tax status of any distributions paid to
your account in calendar 1994. The income distributions from
each state will also be reported to you at this time.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Blake Anderson
Vice President
Michael F. Bouscaren
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time
for up-to-date information about the fund's NAV or to request
Putnam's quarterly Closed-End Fund Commentary.
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
215-15425
<PAGE>
APPENDIX TO FORM N30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN
PRINTED AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Boldface and italic typefaces are displayed in normal
type.
(3) Headers (e.g. the names of the fund) and footers (e.g.
page numbers and OThe accompanying notes are an integral
part of these financial statementsO) are omitted.
(4) Because the printed page breaks are not reflected, certain
tabular and columnar headings and symbols are displayed
differently in this filing.
(5) Bullet points and similar graphic symbols are omitted.
(6) Page Numbering is different.
