PUTNAM
INVESTMENT
GRADE
MUNICIPAL
TRUST III
[GRAPHIC OMITTED:
art work]
SEMIANNUAL REPORT
April 30, 1995
[LOGO: BOSTON - LONDON - TOKYO]
<PAGE>
PERFORMANCE HIGHLIGHTS
o "Some investment advisers say municipal bonds may look more attractive in
coming months because of a relative scarcity of issues. New issue volume has
fallen sharply this year, and a huge volume of issues is scheduled for
redemption or maturity in June and July."
-- The Wall Street Journal, May 8, 1995.
o Performance should always be considered in light of a fund's investment
strategy. Putnam Investment Grade Municipal Trust III is designed for
investors seeking high current income free from federal income tax,
consistent with preservation of capital.
---------------------------------------------------------------
SEMIANNUAL RESULTS AT A GLANCE
---------------------------------------------------------------
TOTAL RETURN (COMMON SHARES) NAV MARKET PRICE
---------------------------------------------------------------
6 months ended 4/30/95
(change in value during
period plus reinvested
distributions) 8.32% 12.59%
SHARE VALUE (COMMON SHARES) NAV MARKET PRICE
---------------------------------------------------------------
10/31/94 $12.36 $10.125
4/30/95 12.92 11.000
DISTRIBUTIONS NO. INCOME TOTAL
---------------------------------------------------------------
Common shares 6 $0.4002 $0.4002
Preferred shares
Series A(200) $740.93
CURRENT RETURN (COMMON SHARES): NAV MARKET PRICE
---------------------------------------------------------------
End of period
Current dividend rate(1) 6.20% 7.28%
Taxable equivalent(2) 10.26 12.05
---------------------------------------------------------------
Performance data represent past results. For performance over longer periods,
see page 8. Capital gains 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. (1)Income portion of most recent distribution,
annualized and divided by NAV or market price at end of period. (2)Assumes
maximum 39.6% federal tax rate. Results for investors subject to lower tax
rates would not be as advantageous.
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
Many of the gathering signs of hope that sustained municipal bond investors
during the darkest days of the 1994 market decline began manifesting themselves
in earnest in the early months of 1995. Although the market exhibited volatility
toward the end of Putnam Investment Grade Municipal Trust III's semiannual
period (the six months ended April 30, 1995), the market's mood was appreciably
more upbeat than it had been when the fiscal year began.
The economy continued to march at a brisk stride, though the pace since January
has slowed considerably from calendar 1994 levels. Investors took this
moderation as a sign that the economy was responding favorably to the Federal
Reserve Board's strategy of raising short-term rates to rein in growth and
thereby hold inflation in check. The consensus in the markets seems to be that
the Fed's series of interest-rate increases may be near an end.
The sharp decline in new issues that market watchers foresaw as a spur to higher
prices added fuel to the recent rally. So did the attractiveness of tax-free
yields relative to taxable Treasuries. In the following report, Fund Manager
Michael F. Bouscaren discusses the fund's performance so far in fiscal 1995 and
prospects for the second half.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
June 21, 1995
<PAGE>
REPORT FROM THE FUND MANAGER
MICHAEL F. BOUSCAREN
Since the beginning of 1995, the municipal bond market has shifted out of
neutral and into overdrive. But when the rally lost some momentum in late
April, investors may have wondered if the market was running out of gas. We
believe, however, that shareholders of Putnam Investment Grade Municipal
Trust III should have no doubts as to the strength and potential of the
current market.
Your fund has certainly shared in the solid performance of municipal bonds
in the first few months of 1995. For the semiannual period ended April 30,
1995, the fund's common shares provided a total return of 8.32% at net asset
value (12.59% at market price). This can certainly be considered a dramatic
turnaround in comparison with the fund's -6.75% total return at NAV (-28.60%
at market price) at the close of the last fiscal year on October 31, 1994.
o MARKET FALTERS BUT RETAINS STRONG FUNDAMENTALS
In late April, investors' fears of the effects of the flat-tax proposal being
considered by Congress jolted the $1.2 trillion municipal bond market out of
a dramatic recovery. A flat tax in its purest form would deprive municipal
bonds of their tax-exempt status. However, the current offering is only one
of many proposals that will be offered up as Washington tackles tax reform in
the months ahead.
In our opinion, the market has reacted to the perceived effects of the
flat-tax rhetoric and not to any hard facts. As this report was being
written, analysts were already beginning to look beyond the flat tax to a
more broad-based revision of the current income-tax system. In its May 5,
1995, edition, The Wall Street Journal reported that analysts believe any tax
law changes are far off in the
<PAGE>
future -- 1997 at the earliest -- "and that overhauling the current tax
system is a far more difficult task than many investors now believe. As a
result, they argue, there's a buying opportunity in municipals."
One reason we agree with this analysis is the current supply and demand
imbalance. Issuance of new municipal bonds is expected to shrink this year to
$125 billion from $150 billion last year and $300 billion in 1993 (see
chart). Independent analysts expect the trend to continue. Additionally, with
$80 billion in bonds due to mature or to be called in by their issuers in
July, the resulting demand should support the prices of existing municipal
bonds.
o PROTECTIVE PORTFOLIO CONFIGURATION
Over the past six months, we have adjusted your fund's portfolio to lock in
gains from this year's upturn in the market. We have done this by
incrementally shortening the portfolio's duration. Duration is a measure of a
bond or bond fund's sensitivity to interest rates.
We realize, however, that it is impossible to predict the exact direction of
the economy. Therefore, we are also preparing the fund for any unexpected
economic downturn by taking profits on some of the fund's health-care issues
and acquiring BBB-rated utilities bonds. These bonds, which carry the lowest
rating in the invest-
[GRAPHIC OMITTED: vertical bar chart "A DECLINE IN SUPPLY*" showing:
Monthly number of new municipal bond issues.
Y-axis reads 400, 800 and 1200.
Month-end plot points from January 1994 through April 1995 are:
1/94: 977; 2/94: 961; 3/94: 1056; 4/94: 782; 5/94: 986; 6/94: 1008;
7/94: 751; 8/94: 865; 9/94: 774; 10/94: 867; 11/94: 870; 12/94: 868;
1/95: 584; 2/95: 573; 3/95: 687; 4/95: 609.
Footnote reads: *Chart shows monthly volume of new municipal bond issues.
Source: Securities Data Co. Used by permission.]
<PAGE>
ment grade spectrum, offer relatively low interest-rate sensitivity along
with the potential for solid gains in a rising market.
Our effort to protect the portfolio from any sudden changes is also evident
in the overall credit-quality makeup of the portfolio. Holdings are
positioned with high-quality AAA-bonds representing one side of the
investment-grade spectrum and, on the opposite side, higher-yielding
higher-risk BBB-bonds. In the event of an unexpected market selloff, the
AAA-bonds will be sold more rapidly than lower-rated bonds. This occurs
because their greater likelihood of timely payment of principal and interest
makes them more desirable in a period of uncertainty.
The fund also continues to employ leverage. In order to take advantage of
yield differentials between short- and long-term interest rates, a leveraged
closed-end fund will issue preferred shares with dividends based on
short-term interest rates and invest the proceeds in longer-term bonds paying
higher rates. During the fund's semiannual period, this had a positive effect
on the portfolio's yield. Our stress tests indicate that leverage will
continue to be desirable even if municipal short-term rates rise
unexpectedly. For a long-term investor, leverage may offer added upside
potential and can potentially outperform unleveraged funds. At the end of the
period, approximately 16% of the portfolio was leveraged.
o TAKING ADVANTAGE OF OPPORTUNITIES
The fund also benefited from some opportunities involving specific holdings.
One example was the fund's investment in Denver Inter national Airport bonds.
Problems with the facility's automated baggage system and various other
delays caused many investors to ignore what we believe to be a valuable
project for a major Western air-traffic hub. The fund's investment in these
bonds enabled it to realize some profits following their rally in February,
just prior to the long-awaited opening of the airport.
The fund's investments in California and New York also proved rewarding.
The California municipal bond market bounced back from a dismal 1994 as
institutional investors took advantage of buying opportunities following
the Orange County bankruptcy filing. In New York, your fund's holdings
in state-appropriated
<PAGE>
[GRAPHIC OMITTED: horizontal bar chart "CREDIT QUALITY PROFILE*"
showing: AAA 49.7%; AA 4.3%; A 13.9% and BBB 24.2%.
Footnote reads: *As of 4/30/95. Based on total net assets.
Caption reads: A bond rated BBB or higher is considered investment grade. All
ratings reflect Standard & Poor's(R) descriptions, unless noted otherwise.]
debt have also benefited with the possibility of more cost-effective
municipal services -- a development that could improve the value of existing
bonds.
o LOOKING AHEAD
The complexion of the municipal bond market has certainly changed from the
difficult times we reported at the end of fiscal 1994. Trends we began to
spot a year ago are now being backed up by hard data and, so far, the market
has responded accordingly.
As it appears that the Federal Reserve Board may be near the end of its
short-term interest-rate-tightening cycle, we continue to have a positive
outlook on the municipal bond market through the end of calendar 1995. We
will, however, monitor the economic and political landscape for anything that
may affect your fund. And, of course, we will continue to rely on our
extensive in-house research capabilities to identify the bonds that we
believe hold the most long-term potential.
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 4/30/95, 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.
TOTAL RETURN FOR PERIODS ENDED 4/30/95 (common shares)
LEHMAN BROS.
MUNICIPAL
NAV MARKET PRICE BOND INDEX CPI
- -----------------------------------------------------------------------
6 months 8.32% 12.59% 7.57% 1.61%
- -----------------------------------------------------------------------
1 year 7.07 0.47 6.65 3.05
- -----------------------------------------------------------------------
Life of fund
(since 11/29/93) 1.01 -19.62 3.80 4.18
- -----------------------------------------------------------------------
Annual Average 0.71 -14.26 2.66 2.93
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/95 (common shares)
(most current calendar quarter)
LEHMAN BROS.
MUNICIPAL
NAV MARKET PRICE BOND INDEX CPI
- -----------------------------------------------------------------------
6 months 5.55% 12.22% 5.54% 1.34%
- -----------------------------------------------------------------------
1 year 6.45 2.80 7.43 2.85
- -----------------------------------------------------------------------
Life of fund
(since 11/29/93) 0.79 -16.47 3.68 3.84
- -----------------------------------------------------------------------
Annual Average 0.59 -12.57 2.73 2.85
- -----------------------------------------------------------------------
Performance data represent past results and are no indication of future results.
Investment returns, net asset value and market price 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.
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.
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>
PORTFOLIO OF INVESTMENTS OWNED
April 30, 1995 (Unaudited)
KEY TO ABBREVIATION OF MUNICIPAL INSTRUMENTS
COP -- Certificate of Participation
IFB -- Inverse Floating Bonds
G.O. Bonds -- General Obligation Bonds
VRDN -- Variable Rate Demand Notes
KEY TO INSURANCE ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Federal Guaranty Insurance Company
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance Corporation
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (97.3%)<F1>
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARKANSAS (3.4%)
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$2,000,000 Pope Cnty., Poll. Control Rev. Bonds
(ARK Pwr. & Lt. Co. Project), 11s, 12/1/15 Baa $ 2,095,000
CALIFORNIA (17.5%)
- -------------------------------------------------------------------------------------------
5,000,000 Beverly Hills, Pub. Fing. Auth. IFB, Ser. A,
MBIA, 6.73s, 6/1/15 AAA 4,506,250
2,500,000 CA State U. Rev. Bonds
AMBAC, 7s, 11/1/21 AAA 2,646,875
1,725,000 Palmdale, Civic Auth. Rev. Bonds
(Merged Redev. Areas Project), Ser A, 6.6s, 9/1/34 A 1,709,906
2,000,000 San Diego Cnty., Wtr. Auth. Rev. Bonds
COP, FGIC, 5 3/4s, 4/23/08 AAA 1,985,000
-----------
10,848,031
COLORADO (9.8%)
- -------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
3,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 3,326,250
1,500,000 Ser. A, 8 1/2s, 11/15/23 Baa 1,629,375
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 1,097,500
-----------
6,053,125
ILLINOIS (5.0%)
- -------------------------------------------------------------------------------------------
750,000 Chicago, Gas Supply Rev. Bonds
(Peoples Gas & Lt.), Ser. C, 7 1/2s, 3/1/15 AA 816,563
1,950,000 IL Hlth. Facs. Auth. Rev. Bonds
(Glenoaks Med. Ctr.), Ser. D, 9 1/2s, 11/15/15 Baa 2,249,813
-----------
3,066,376
LOUISIANA (3.5%)
- -------------------------------------------------------------------------------------------
2,000,000 St. Charles Parish, Poll. Control Rev. Bonds
(LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa 2,157,500
MASSACHUSETTS (9.8%)
- -------------------------------------------------------------------------------------------
1,000,000 MA State G.O. VRDN, Ser. B, 5.15s, 12/1/97 VMIG1 1,000,000
2,500,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds,
AMBAC, 6.55s, 6/23/22 AAA 2,612,500
<PAGE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
MASSACHUSETTS (continued)
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$1,000,000 MA State Indl. Fin. Agcy. Rev. Bonds
(1st Mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB/P $ 990,000
830,000 MA State Port Auth. Rev. Bonds,
U.S. Government Securities Coll., 13s, 7/1/13 AAA 1,474,287
-----------
6,076,787
MINNESOTA (3.3%)
- -------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtg. Rev. Bonds
Ser. A-9, FSA, 7.1s, 1/1/30 AAA 949,281
1,000,000 St. Paul, Hsg. & Redev. Auth. Hosp. Rev. Bonds
(Healtheast Project), Ser. B, 9 3/4s, 11/1/17 Baa 1,090,000
-----------
2,039,281
MISSOURI (3.0%)
- -------------------------------------------------------------------------------------------
1,775,000 MO State Hlth. & Edl. Facs. Auth. Rev. Bonds
(BJC Hlth. Sys.), Ser. A, 6 1/2s, 5/15/20 AA 1,837,125
NEW YORK (10.3%)
- -------------------------------------------------------------------------------------------
2,200,000 NY City, Muni. Wtr. Fin. Auth. VRDN, Ser. G,
FGIC, 5s, 6/15/24 VMIG1 2,200,000
1,700,000 NY State Energy Research & Dev. Auth. Poll. Control
VRDN (Niagara Mohawk Power Project), Ser A,
5.3s, 7/1/15 A1 1,700,000
2,425,000 New York City, G.O. Bonds
Ser. B, 7s, 6/1/16 A 2,473,500
-----------
6,373,500
NORTH CAROLINA (4.5%)
- -------------------------------------------------------------------------------------------
3,000,000 NC Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.), 5 3/4s, 1/1/15 A 2,752,500
OHIO (4.2%)
- -------------------------------------------------------------------------------------------
2,500,000 OH State Wtr. Dev. Auth. Poll. Control Facs. Rev. Bonds
(OH Edison Co. Project), 10 5/8s, 7/1/15 Baa 2,596,875
SOUTH CAROLINA (6.8%)
- -------------------------------------------------------------------------------------------
5,000,000 SC State Pub. Svc. Auth. IFB, 6.57s, 7/1/21
(acquired 11/30/93, cost $4,839,200)<F3> AAA 4,193,750
TEXAS (12.7%)
- -------------------------------------------------------------------------------------------
500,000 Alliance Arpt. Auth. Special Facs. Rev. Bonds
(American Airlines, Inc. Project), 7 1/2s, 12/1/29 Baa 508,125
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp.
Prerefunded Rev. Bonds
(St. Luke's Lutheran Hosp. Project), 7.9s, 5/1/18 AAA/P 2,802,000
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 1,994,738
2,500,000 North Cent. TX Hlth. Fac. Dev. Corp. Rev. Bonds
(Presbyterian Hlth. Sys.), MBIA, 6.685s, 6/22/21 AAA 2,562,500
-----------
7,867,363
UTAH (3.5%)
- -------------------------------------------------------------------------------------------
2,000,000 Intermountain Power Agcy. Power Supply Rev. Bonds
Ser. D, AMBAC, 8 3/8s, 7/1/12 AAA 2,172,500
-----------
TOTAL INVESTMENTS
(cost $60,994,437)<F4> $60,129,713
<PAGE>
<FN>
<F1> Percentages indicated are based on net assets of $61,780,861. Net assets available to
common shareholders are $51,753,902, which correspond to a net asset value per common
share of $12.92.
<F2> The Moody's or Standard & Poor's ratings indicated are believed to be the most recent
ratings available at April 30, 1995 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 April 30, 1995. Securities rated by Putnam are indicated by
"/P" and are not publicly rated.
<F3> Restricted as to public resale. At the date of acquisition these securities were
valued at cost. There were no outstanding securities of the same class as those held.
Total market value of restricted securities owned at April 30, 1995 was $4,193,750 or
6.8% of net assets.
<F4> The aggregate identified cost on a tax basis is $60,994,437, resulting in gross
unrealized appreciation and depreciation of $882,631 and $1,747,355, respectively, or
net unrealized depreciation of $864,724.
The fund had the following insurance concentration greater than 10% on April 30, 1995
(as a percentage of net assets):
AMBAC 12.0%
MBIA 11.4
The fund had the following industry group concentrations greater than 10% on April
30,1995 (as a percentage of net assets):
Utilities 35.2%
Hospitals/Health Care 21.3
Transportation 13.0
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 April 30, 1995,
which are subject to change based on the terms of the security.
The table below shows the percentage of the fund's investments on April 30, 1995 in
securities assigned to the various rating categories by Moody's and Standard & Poor's
and in unrated securities determined by Putnam Management to be of comparable
quality.
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" 45.2% 4.5%
"AA"/"Aa" 4.3 --
"A"/"A" 13.9 --
"BBB"/"Baa" 22.6 1.6
"VMIG1" 5.2 --
-------------------------------
91.2% 6.1%
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995 (Unaudited)
ASSETS
- --------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $60,994,437) (Note 1) $60,129,713
- --------------------------------------------------------------------------------
Cash 578,440
- --------------------------------------------------------------------------------
Interest receivable 1,462,972
- --------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 19,657
- --------------------------------------------------------------------------------
TOTAL ASSETS 62,190,782
LIABILITIES
- --------------------------------------------------------------------------------
Distributions payable to shareholders 267,268
- --------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 4) 80
- --------------------------------------------------------------------------------
Payable for compensation of Manager (Note 4) 104,329
- --------------------------------------------------------------------------------
Payable for administrative services (Note 4) 489
- --------------------------------------------------------------------------------
Other accrued expenses 37,755
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 409,921
- --------------------------------------------------------------------------------
NET ASSETS $61,780,861
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 535,193
- --------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (3,706,825)
- --------------------------------------------------------------------------------
Net unrealized depreciation of investments (864,724)
- --------------------------------------------------------------------------------
NET ASSETS $61,780,861
COMPUTATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
Remarketed preferred shares at liquidation preference $10,000,000
- --------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 26,959
- --------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares at
liquidation preference 10,026,959
- --------------------------------------------------------------------------------
Net assets available to common shares:
Net asset value per share $12.92
($51,753,902 divided by 4,007,092 shares) 51,753,902
- --------------------------------------------------------------------------------
NET ASSETS $61,780,861
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Six months ended April 30, 1995 (Unaudited)
TAX EXEMPT INTEREST INCOME $2,098,048
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------
Compensation of Manager (Note 4) 206,053
- --------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 4) 26,938
- --------------------------------------------------------------------------------
Compensation of Trustees (Note 4) 2,392
- --------------------------------------------------------------------------------
Reports to shareholders 5,549
- --------------------------------------------------------------------------------
Auditing 19,241
- --------------------------------------------------------------------------------
Legal 7,448
- --------------------------------------------------------------------------------
Postage 4,475
- --------------------------------------------------------------------------------
Administrative services (Note 4) 624
- --------------------------------------------------------------------------------
Exchange listing fees 8,628
- --------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,485
- --------------------------------------------------------------------------------
Preferred share remarketing agent fees 12,399
- --------------------------------------------------------------------------------
Other 1,352
- --------------------------------------------------------------------------------
TOTAL EXPENSES 297,584
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,800,464
- --------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 5) (1,246,185)
- --------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 5) (66,831)
- --------------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 5) (399,817)
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 3,917,555
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 2,204,722
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,005,186
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
NOVEMBER 29, 1993
SIX MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
APRIL 30 OCTOBER 31
1995* 1994
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS
- --------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------
Net investment income $ 1,800,464 $ 3,376,600
- --------------------------------------------------------------------------------
Net realized loss on investments, written
options and futures (1,712,833) (1,993,992)
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 3,917,555 (4,782,279)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 4,005,186 (3,399,671)
- --------------------------------------------------------------------------------
Distributions to remarketed preferred
shareholders from:
- --------------------------------------------------------------------------------
Net investment income (148,186) (226,598)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 3,857,000 (3,626,269)
- --------------------------------------------------------------------------------
Distributions to common shareholders from:
- --------------------------------------------------------------------------------
Net investment income (1,594,264) (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 2,262,736 59,418,125
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 59,518,125 100,000
- --------------------------------------------------------------------------------
END OF PERIOD (including undistributed net
investment income of $535,193 and $477,179,
respectively) $61,780,861 $59,518,125
NUMBER OF FUND SHARES
- --------------------------------------------------------------------------------
Common shares outstanding at beginning of period
(Note 2) 4,007,092 7,092
- --------------------------------------------------------------------------------
Common shares issued in public offering (Note 2) -- 4,000,000
- --------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING AT END OF PERIOD 4,007,092 4,007,092
- --------------------------------------------------------------------------------
Remarketed preferred shares at beginning
of period 200 --
- --------------------------------------------------------------------------------
Remarketed preferred shares issued in public
offering (Note 3) -- 200
- --------------------------------------------------------------------------------
REMARKETED PREFERRED SHARES OUTSTANDING
AT END OF PERIOD 200 200
- --------------------------------------------------------------------------------
*Unaudited
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD
NOVEMBER 29, 1993
SIX MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
APRIL 30 OCTOBER 31
1995+ 1994
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
(common shares) $12.36 $14.02*
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS:
- --------------------------------------------------------------------------------
Net investment income .45 .85(a)
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments .55 (1.69)
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.00 (.84)
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- --------------------------------------------------------------------------------
Net investment income:
- --------------------------------------------------------------------------------
To preferred shareholders (.04) (.06)**
- --------------------------------------------------------------------------------
To common shareholders (.40) (.67)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.44) (.73)
- --------------------------------------------------------------------------------
Preferred share offering costs -- (.09)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
(common shares) $12.92 $12.36
- --------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD
(common shares) $11.000 $10.125
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT MARKET VALUE
(common shares) (%)(b) 12.59(d) (28.60)(d)
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $61,781 $59,518
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c)(d) .49 .85(a)
- --------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%)(c)(d) 2.70 5.89(a)
- --------------------------------------------------------------------------------
Portfolio turnover rate (%)(d) 33.4 148.9
- --------------------------------------------------------------------------------
* 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)
+ Unaudited
(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; the net
investment income ratio also reflects reduction for dividend payments to
preferred shareholders.
(d) Not annualized.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
April 30, 1995 (Unaudited)
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 pro vide 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 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) and the liquidation value of any
outstanding 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 OPTION ACCOUNTING PRINCIPLES The fund may, to the extent consistent with its
investment objective and policies, seek to increase its current returns by
writing covered call and put options on securities it owns or in which it may
invest. When a fund writes a call or put option, an amount equal to the premium
received by the fund is included in the fund's "Statement of assets and
liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market value
of an option written. The current market value of an option is the last sale
price or, in the absence of a sale, the last offering price. If an option
expires on its stipulated expiration date, or if the fund enters into a closing
purchase transaction, the fund realizes a gain (or loss if the closing purchase
transaction exceeds the premium received when the option was written) without
regard to any unrealized gain or loss on the underlying security, and the
liability related to such option is extinguished. If a written call option is
exercised, the fund realizes a gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
<PAGE>
received. If a written put option is exercised, the amount of the premium
originally received reduces the cost of the security that the fund purchases
upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the opportunity
to profit if the market price of the underlying security increases and the
option is exercised. In writing a put option, the fund assumes the risk of
incurring a loss if the market price of the underlying security decreases and
the option is exercised. In addition, there is the risk the fund may not be able
to enter into a closing transaction because of an illiquid secondary market.
The fund may also, to the extent consistent with its investment objectives and
policies, buy put options to protect its portfolio holdings in an underlying
security against a decline in market value. The fund may buy call options to
hedge against an increase in the price of the securities that the fund
ultimately wants to buy. These funds may also buy and sell combinations of put
and call options on the same underlying security to earn additional income. The
premium paid by a fund for the purchase of a put or call option is included in
the fund's "Statement of assets and liabilities" as an investment and is
subsequently "marked-to-market" to reflect the current market value of the
option. If an option the fund has purchased expires on the stipulated expiration
date, the fund realizes a loss in the amount of the cost of the option. If the
fund enters into a closing sale transaction, the fund realizes a gain or loss,
depending on whether proceeds from the closing sale transaction are greater or
less than the cost of the option. If the fund exercises a call option, the cost
of securities acquired by exercising the call is increased by the premium paid
to buy the call. If the fund exercises a put option, it realizes a gain or loss
from the sale of the underlying security and the proceeds from such sale are
decreased by the premium originally paid. The risk associated with purchasing
options is limited to the premium originally paid.
E FUTURES The fund may purchase and sell financial futures contracts to hedge
against changes in the values of tax-exempt municipal securities the fund owns
or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of a
particular index or a certain amount of a U.S. Government 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 securities equal to the minimum "initial margin"
requirements of the futures. 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 futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in value of the hedged instruments. In addition, there
is a risk that the fund may not be able to close out its futures positions due
to an illiquid secondary market.
F 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.
<PAGE>
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.
G 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. The applicable dividend rate for the
remarketed preferred shares on April 30, 1995 was 4.10%. 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.
H 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.
I 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
INITAL 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 reimbursed 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.
<PAGE>
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 April 30,
1995, there were no such restrictions on the fund.
NOTE 4
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Investment Management, Inc. ("Putnam Management"), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., for
management and investment advisory services is paid quarterly based on the
average net assets of the fund. Such fee is based on the annual rate of 0.70% of
the first $500 million of the average net asset value of the fund, 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.
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.
Trustees of the fund receive an annual Trustee's fee of $510 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.
Investor servicing and custodian fees reported in the Statement of operations
for the six months ended April 30, 1995 have been reduced by credits allowed by
PFTC.
NOTE 5
PURCHASES AND SALES OF SECURITIES
During the six months ended April 30, 1995, purchases and sales of investment
securities other than short-term investments aggregated $18,877,420 and
$24,884,446, respectively. Purchases and sales of short-term municipal
obligations aggregated $25,500,000 and $25,600,000, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Written option transactions during the period are summarized as follows:
CONTRACT PREMIUMS
AMOUNT RECEIVED
- -------------------------------------------------------
Options written 50,100,030 $1,317,289
Options closed 50,100,030 (1,317,289)
- -------------------------------------------------------
Written options outstanding
at the end of the period -- $ --
- -------------------------------------------------------
<PAGE>
SELECTED QUARTERLY DATA
(Unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 29,
1993
(COMMENCEMENT OF
THREE MONTHS ENDED THREE MONTHS ENDED OPERATIONS) TO
- ------------------------------------------------------------------------------------------------------------------------------
APRIL 30 JANUARY 31 OCTOBER 31 JULY 31 APRIL 30 JANUARY 31
- ------------------------------------------------------------------------------------------------------------------------------
1995 1995 1994 1994 1994<F3> 1994<F1>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Investment income
Total $ 1,030,234 $ 1,067,814 $ 1,104,044 $ 1,102,391 $ 1,032,439 $ 594,620
Per Share<F2> $ .25 $ .27 $ .28 $ .27 $ .26 $ .15
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income available to
common shareholders
Total $ 780,180 $ 845,139 $ 851,511 $ 871,255 $ 853,691 $ 573,545
Per Share<F2> $ .20 $ .21 $ .21 $ .22 $ .22 $ .14
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments
Total $ 1,379,201 $ 825,521 $(2,907,540) $ 534,393 $(5,869,325) $ 1,466,201
Per Share<F2> $ .34 $ .21 $ (.72) $ .13 $ (1.47) $ .37
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
available to common shareholders
resulting from operations
Total $ 2,159,381 $ 1,670,660 $(2,056,029) $ 1,405,648 $(5,015,634) $ 2,039,746
Per Share<F2> $ .54 $ .42 $ (.51) $ .35 $ (1.25) $ .51
- ------------------------------------------------------------------------------------------------------------------------------
Net assets available to common
shareholders at end of period
Total $51,753,902 $50,396,302 $49,518,125 $52,497,920 $51,894,325 $58,029,010
Per Share<F2> $ 12.92 $ 12.58 $ 12.36 $ 13.10 $ 12.95 $ 14.48
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> 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.
<F2> Per common share.
<F3> Preferred shares were issued on February 10, 1994.
</FN>
</TABLE>
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER OFFICERS
Putnam Investment George Putnam
Management, Inc. President
One Post Office Square
Boston, MA 02109 Charles E. Porter
Executive Vice President
MARKETING SERVICES
Putnam Mutual Funds Corp. Patricia C. Flaherty
One Post Office Square Senior Vice President
Boston, MA 02109
Lawrence J. Lasser
CUSTODIAN Vice President
Putnam Fiduciary Trust Company
Gordon H. Silver
LEGAL COUNSEL Vice President
Ropes & Gray
Gary N. Coburn
TRUSTEES Vice President
George Putnam, Chairman
James E. Erickson
William F. Pounds, Vice Chairman Vice President
Jameson Adkins Baxter Blake E. Anderson
Vice President
Hans H. Estin
Michael F. Bouscaren
John A. Hill Vice President and Fund Manager
Elizabeth T. Kennan William N. Shiebler
Vice President
Lawrence J. Lasser
John R. Verani
Robert E. Patterson Vice President
Donald S. Perkins Paul M. O'Neil
Vice President
George Putnam, III
John D. Hughes
Eli Shapiro Vice President and Treasurer
A.J.C. Smith Beverly Marcus
Clerk and Assistant Treasurer
W. Nicholas Thorndike
<PAGE>
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>
[LOGO: PUTNAM INVESTMENTS] ------------
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THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
------------
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