PUTNAM
INVESTMENT
GRADE
MUNICIPAL
TRUST III
[GRAPHIC OMITTED:
art work]
ANNUAL REPORT
October 31, 1995
[LOGO:
BOSTON - LONDON - TOKYO]
<PAGE>
FUND HIGHLIGHTS
o "ONE INVESTOR'S WORRY IS ANOTHER'S OPPORTUNITY. THAT'S THE MORAL OF THE
STORY OF THE MUNICIPAL BOND MARKET NOW, WHERE FEARS OF A FLAT TAX HAVE MADE
MUNIS EXTREMELY ATTRACTIVE."
-- "FEAR MAKES MUNIS CHEAP," FORTUNE,
SEPTEMBER 4, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
15 Financial statements
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
The period encompassing Putnam Investment Grade Municipal Trust III's fiscal
year began near the end of one of the most severe bond market downturns on
record and ended in the midst of one of the market's strongest rallies.
The benefits of the market's upturn during the 12 months ended October 31, 1995,
were dampened somewhat for tax-exempt bond investors. Talk of a flat tax ignited
concern that the tax advantage long enjoyed by municipal securities would be
lost. As is so often the case, however, the market overreacted, and by fiscal
year's end it had recognized that fact.
Fund Manager Michael Bouscaren believes that prospects of a flat tax being
enacted any time soon are slim.
Furthermore, the Federal Reserve Board's success in slowing the pace of the
economy has contributed to a favorable environment for bonds. Michael believes
low inflation and relatively stable bond yields point to a continuation of these
positive conditions through the near term.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
December 20, 1995
<PAGE>
REPORT FROM THE FUND MANAGER
MICHAEL F. BOUSCAREN
The complexion of the municipal-bond market has certainly changed from the
difficult times we reported a year ago at the end of fiscal 1994. The bond
market rally has been surprisingly strong, particularly when you take into
account the psychological and conditions that existed just one year ago.
Shareholders of Putnam Investment Grade Municipal Trust III have benefited
from the rally and from Putnam's ability to seize market opportunities.
For the fiscal year ended October 31, 1995, the fund's common shares provided
a total return of 14.70% at net asset value (NAV) or (25.77% 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) from the
fund's inception on November 29, 1993, to the close of the last fiscal year
on October 31, 1994.
o FLAT-TAX CONCERNS CREATE OPPORTUNITIES
After an eye-popping rally in the first quarter of calendar 1995,
municipal-bond performance began to diverge sharply from the performance of
other fixed-income securities. Investors' fears of the effects of the
flat-tax proposal being considered by Congress jarred the municipal-bond
market out of its dramatic recovery. A flat tax in its purest form would
deprive municipal bonds of their advantage as tax-exempt investments.
In our opinion, the market reacted to the perceived effects of the flat-tax
rhetoric and not to hard facts. By May, investors were starting to look
beyond the flat tax to the likelihood of a more broad-based income tax
revision in the distant future. In fact, we believe the short-term downturn
in the market was not grounded in reality and it actually created more
possibilities than it quashed.
We believe, moving into the presidential election of 1996, the flat-tax
proposals cannot garner enough popular appeal to become a crucial issue in
the election.
<PAGE>
Flat-tax rhetoric may continue to hinder the market's progress over the near
term. Looking further ahead, however, we believe investors will recognize the
relative value of municipal bonds, especially as alternative investments
become regarded as overvalued and if the economic environment remains
favorable for bonds.
o STRUCTURED FOR THE FUTURE
During the first half of your fund's fiscal year, long-term municipal bonds
underperformed taxable U.S. Treasury bonds with similar maturities. However,
in July, municipal-bond yields as a percentage of comparable U.S. Treasury
bond yields held fairly steady. Municipal bonds outperformed Treasuries
mainly because of an easing in flat-tax concerns. Nevertheless, we are
maintaining a cautious view.
As a precautionary step, we have restructured the fund slightly to help
reduce interest rate volatility, should municipal bonds continue to
underperform U.S. Treasuries. In doing so, we have adjusted your fund's
portfolio to lock in gains from the upturn in the market. We have done this
by incrementally shortening the portfolio's duration. Duration is a measure
of a bond price's sensitivity to interest rates.
o SHREWD SECTOR SELECTION: AIR TRANSPORT SOARS
Many of the sectors that suffered most during the poor market conditions of
1994 recovered dramatically during calendar 1995.
[GRAPHIC OMITTED: pie chart "CREDIT QUALITY OVERVIEW" showing:
Baa/BBB 21.4%; A 7.7%; AA 11.9%; AAA 59.0%; with a caption of:
As a percentage of market value as of 10/31/95. A bond rated BBB or higher
is considered investment grade. All ratings reflect Standard & Poor's(R)
descriptions, unless noted otherwise. Holdings will vary over time.]
<PAGE>
Through Putnam's intensive credit research, your fund was able to benefit
from a sharp rebound in the airline and airport sectors. Contrary to popular
opinion at the time, our analysis indicated that by late 1994, years of cost
cutting and industry consolidation had sown the seeds for improved stability
and healthier financial conditions among airline companies. Consequently,
despite a less-than-favorable market perception of the sector, we selectively
added to the fund's holdings of municipal bonds issued on behalf of airlines.
The strategy proved worthwhile. As investors recognized the improving
fundamentals of the airline business, demand for these high-yielding,
relatively liquid issues soared. Prices on airline-backed bonds have
appreciated dramatically since the beginning of calendar 1995, producing
double-digit returns for the fund.
The generous income and favorable call protection offered by the bonds of
Denver International Airport explain why it remains a core holding of your
fund. After the facility opened last February, these bonds continued their
price appreciation. As an added bonus, Denver International Airport bonds
were recently upgraded by Standard & Poor's, a nationally recognized rating
agency.
We also expect to make gradual shifts in emphasis to bonds in states that
show more robust economic activity. We are looking for opportunities to
increase exposure to general obligation bonds in California, where the
economy is recovering faster than nearly anywhere else, as well as in Texas
and Florida.
o OUTLOOK FOR MUNICIPALS CONSTRUCTIVE
Moderate but stable economic growth and relatively low inflation bode well
for fixed-income investing. Careful bond selection and credit analysis will
remain of supreme importance in providing shareholders with attractive
tax-free income and favorable total returns.
The views expressed throughout this report are exclusively those of Putnam
Management. They are not meant as investment advice. Although the described
holdings were viewed favorably as of 10/31/95, there is no guarantee the fund
will continue to hold these securities in the future.
<PAGE>
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS* showing
Utilities/Water & Sewage 45.3%
Hospitals/Health Care 19.3%
Airline Transportation 11.0%
Education 9.5%
Resource Recovery Solid Waste 3.7%
Footnote reads:
*Based on net assets as of 10/31/95. Holdings may vary in the future.]
<PAGE>
PERFORMANCE SUMMARY
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.
This section provides, at a glance, information about the performance of your
fund's common shares. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares throughout 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
grown each year over varying periods.
TOTAL RETURN FOR PERIODS ENDED 10/31/95
NAV MARKET PRICE
- --------------------------------------------------------------------------------
1 year 14.70% 25.77%
- --------------------------------------------------------------------------------
Life of fund
(since 11/29/93) 6.95 -10.21
Annual average 3.56 -5.45
- --------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/95
LEHMAN BROS.
MUNICIPAL CONSUMER
BOND INDEX PRICE INDEX
- --------------------------------------------------------------------------------
1 year 14.84% 2.81%
- --------------------------------------------------------------------------------
Life of fund
(since 11/29/93) 10.81 5.42
Annual average 5.49 2.79
- --------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/95
(most recent calendar quarter)
NAV MARKET PRICE
- --------------------------------------------------------------------------------
1 year 10.20% 18.70%
- --------------------------------------------------------------------------------
Life of fund
(since 11/29/93) 5.23 -11.65
Annual average 2.81 -6.51
- --------------------------------------------------------------------------------
Performance data represent past results for common shares, do not reflect future
performance. Investment returns, net asset value and market price will fluctuate
so that an investor's shares, when sold, may be worth more or less than their
original cost.
<PAGE>
PRICE AND DISTRIBUTIONS, PERIOD ENDED 10/31/95
- --------------------------------------------------------------------------------
Distributions (number) 12
- --------------------------------------------------------------------------------
(Common shares)
Income $0.8004
- --------------------------------------------------------------------------------
Capital gains(1) --
- --------------------------------------------------------------------------------
TOTAL $0.8004
- --------------------------------------------------------------------------------
(Preferred shares) Series A (200 shares)
- --------------------------------------------------------------------------------
Income $1,811.02
- --------------------------------------------------------------------------------
Capital gains(1) --
- --------------------------------------------------------------------------------
Total $1,811.02
- --------------------------------------------------------------------------------
SHARE VALUE: NAV MARKET PRICE
- --------------------------------------------------------------------------------
(Common shares)
- --------------------------------------------------------------------------------
10/31/94 $12.36 $10.125
- --------------------------------------------------------------------------------
10/31/95 13.22 11.875
- --------------------------------------------------------------------------------
CURRENT RETURN:
- --------------------------------------------------------------------------------
End of period
Current dividend rate(2) 6.05% 6.74%
- --------------------------------------------------------------------------------
Taxable equivalent(3) 10.02 11.16
- --------------------------------------------------------------------------------
(1)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. (2)Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period. (3)Assumes maximum 39.6% federal tax rate.
Results for investors subject to lower tax rates would not be as advantageous.
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 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 American 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
For the fiscal year ended October 31, 1995
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, 1995, and the related statement of operations for the
year then ended, the statement of changes in net assets for the year then ended
and for the period November 29, 1993 (commencement of operations) to October 31,
1994, and the financial highlights for each of the periods indicated therein.
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 audits.
We conducted our audits 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, 1995, 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 audits provide 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, 1995, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended and for the period November 29, 1993 (commencement of operations) to
October 31, 1994, and the financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 13, 1995
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
October 31, 1995
KEY TO ABBREVIATIONS
COP -- Certificate of Participation
IFB -- Inverse Floating Rate Bonds
G.O. Bonds -- General Obligation Bonds
VRDN -- Variable Rate Demand Notes
AMBAC -- American Indemnity Corporation
FGIC -- Federal Guaranty Insurance Corporation
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance Corporation
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (108.1%)*
PRINCIPAL AMOUNT RATINGS** VALUE
ARKANSAS (3.3%)
- -------------------------------------------------------------------------------------------
<C> <C> <C> <C>
$2,000,000 Pope Cnty., Poll. Control Rev. Bonds
(Arkansas Pwr. & Lt. Co. Project), 11s, 12/1/15 Baa $ 2,048,440
CALIFORNIA (11.4%)
- -------------------------------------------------------------------------------------------
2,500,000 Beverly Hills Pub. Fing. Auth. Lease Rev. Bonds
Ser. A, MBIA, 5.65s, 6/1/15 AAA 2,493,750
2,140,000 CA State G.O. Bonds
5.1s, 10/1/08 A 2,105,225
1,250,000 CA State U. IFB, AMBAC, 9.575s, 11/1/21
(acquired 9/2/94, cost $1,339,094)++ AAA 1,525,000
1,000,000 San Diego Cnty., Wtr. Auth. IF, COP
FGIC, 7.281s, 4/23/08 AAA 1,066,250
-----------
7,190,225
COLORADO (10.1%)
- -------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
3,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 3,498,750
1,500,000 Ser. A, 8 1/2s, 11/15/23 Baa 1,700,625
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 1,180,000
-----------
6,379,375
CONNECTICUT (3.3%)
- -------------------------------------------------------------------------------------------
2,000,000 CT State Hlth. & Edl. Facs. Auth. IFB
(Yale U.), 7.742s, 6/10/30 AAA 2,047,500
ILLINOIS (3.5%)
- -------------------------------------------------------------------------------------------
1,895,000 IL Hlth. Facs. Auth. Rev. Bonds
(Glenoaks Med. Ctr.), Ser. D, 9 1/2s, 11/15/15 Baa 2,207,675
INDIANA (3.5%)
- -------------------------------------------------------------------------------------------
2,000,000 Marion Cnty. Ind. Convention & Rectl. Facs. Auth. Rev.
Bonds (Excise Tax Rev. Lease Rental),
Ser. A, AMBAC, 7s, 6/1/21 AAA 2,192,500
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
KANSAS (4.2%)
- -------------------------------------------------------------------------------------------
$2,400,000 Burlington Poll. Control Rev. Bonds
(Kansas Gas & Electric Co. Project), MBIA, 7s, 6/1/31 AAA $ 2,682,000
LOUISIANA (4.8%)
- -------------------------------------------------------------------------------------------
3,000,000 LA State Recvy. Dist. Sales Tax VRDN,
FGIC, 3.9s, 7/1/97 VMIG1 3,000,000
MASSACHUSETTS (11.2%)
- -------------------------------------------------------------------------------------------
2,500,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
AMBAC, 6.55s, 6/23/22 AAA 2,665,625
830,000 MA State Port Auth. Rev. Bonds
13s, 7/1/13 AAA 1,384,025
3,000,000 MA State VRDN
Ser. B, 3.7s, 12/1/97 (National Westminster LOC) VMIG1 3,000,000
-----------
7,049,650
MICHIGAN (7.7%)
- -------------------------------------------------------------------------------------------
2,250,000 Greater Detroit Resource Recvy. Auth. Rev. Bonds
Ser. G, 9 1/4s, 12/13/08 BBB 2,326,545
2,400,000 MI State Stragetic Fund Ltd. Obligation Rev. Bonds
(Detroit Edison Co. Coll- AA), MBIA, 6.4s, 9/1/25 AAA 2,520,000
-----------
4,846,545
MINNESOTA (6.6%)
- -------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtg. Rev. Bonds
(Nicollet Ridge Project), Ser. A-9, FSA, 7.1s, 1/1/30 AAA 1,007,094
1,000,000 St. Paul, Hsg. & Redev. Auth. Hosp. Rev. Bonds
(Healtheast Project), Ser. B, 9 3/4s, 11/1/17 Baa 1,083,750
2,000,000 Western MN Muni. Pwr. Agcy. Supply Rev. Bonds
Ser. A, 7s, 1/1/13 A 2,092,500
-----------
4,183,344
NEW YORK (4.1%)
- -------------------------------------------------------------------------------------------
1,500,000 NY City, Muni. Wtr. Fin. Auth. VRDN,
Ser. G, FGIC, 3.9s, 6/15/24 VMIG1 1,500,000
1,000,000 NY State Energy Research. & Dev. Auth. Elec.
Facs. Rev. Bonds (Cons. Edison Co. Project),
Ser. A, 7 3/4s, 1/1/24 A 1,078,750
-----------
2,578,750
NORTH CAROLINA (3.9%)
- -------------------------------------------------------------------------------------------
2,235,000 NC Edl. Facs. Fin. Agcy. Rev. Bonds
(Duke U. Project), Ser. C, 6 3/4s, 10/1/21 AA 2,438,944
OHIO (3.9%)
- -------------------------------------------------------------------------------------------
2,500,000 Ohio Muni Elec. Generation Agcy. COP,
AMBAC, 5 3/8s, 2/15/13 AAA 2,462,500
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
OKLAHOMA (3.4%)
- -------------------------------------------------------------------------------------------
Grand River Dam Oklahoma Auth. Rev. Bonds
$ 515,000 AMBAC, 6 1/4s, 6/1/11 AAA $ 568,431
500,000 AMBAC, 5 1/2s, 6/1/13 AAA 505,000
1,000,000 Muskogee Indl. Tr. Poll. Control Rev. Bonds
(Oklahoma Gas & Electric Co. Proj.), Ser. A,
7s, 3/1/17 AA 1,043,750
-----------
2,117,181
PUERTO RICO (0.8%)
- -------------------------------------------------------------------------------------------
500,000 Puerto Rico Elec. Pwr. Auth. IFB,
FSA, 7.988s, 7/1/23 AAA 515,625
TENNESSEE (4.4%)
- -------------------------------------------------------------------------------------------
2,700,000 Metro. Gov't Nashville & Davidson Cnty., Tenn. Wtr. &
Swr. IFB, AMBAC, 8.054s, 1/1/22 AAA 2,794,500
TEXAS (16.9%)
- -------------------------------------------------------------------------------------------
500,000 Alliance Arpt. Auth. Special. Fac. Rev. Bonds
(American Airlines, Inc. Project), 7 1/2s, 12/1/29 Baa 529,375
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp. Project), 7.9s, 5/1/18 AAA 2,865,000
2,430,000 Dallas Waterwks., & Swr. Rev. Bonds
4 1/2s, 4/1/15 AA 2,114,100
2,500,000 North Cent. TX Hlth. Fac. Dev. Corp. Rev. Bonds
(Presbyterian Hlth. Sys.), MBIA, 6.685s, 6/22/21 AAA 2,606,250
2,750,000 San Antonio Elec. & Gas. Rev. Bonds
5s, 2/1/17 AA 2,512,812
-----------
10,627,537
WASHINGTON (1.1%)
- -------------------------------------------------------------------------------------------
700,000 WA State Hlth. Care Facs. Auth. VRDN
(Sisters Providence), Ser. B, 3.9s, 10/1/05 VMIG1 700,000
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $66,757,341)*** $68,062,291
- -------------------------------------------------------------------------------------------
<PAGE>
* Percentages indicated are based on net assets of $62,984,743.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at October 31, 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 October 31, 1995. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings
are not covered by the Report of independent accountants.
++ 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 those held. Total market value of the restricted security
owned at October 31, 1995 was $1,525,000 or 2.4 % of net assets.
*** The aggregate identified cost for federal income tax purposes is
$66,828,605, resulting in gross unrealized appreciation and depreciation of
$1,551,798 and $318,112, respectively, or net unrealized appreciation of
$1,233,686.
The rates shown on IFB, which are securities paying variable interest rates
that vary inversely to changes in the market interest rates, and VRDN are
the current interest rates at October 31, 1995, which are subject to change
based on the terms of the security.
The fund had the following insurance concentrations greater than 10% at
October 31, 1995 (as a percentage of net assets):
AMBAC 17.8%
MBIA 16.4
The fund had the following industry group concentrations greater than 10% at
October 31, 1995 (as a percentage of net assets):
Utilities/Water & Sewerage 45.3%
Hospitals/Health Care 19.3
Airline Transportation 11.0
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
ASSETS
- -------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $66,757,341) (Note 1) $68,062,291
- -------------------------------------------------------------------------------
Cash 968,247
- -------------------------------------------------------------------------------
Interest and other receivables 1,363,605
- -------------------------------------------------------------------------------
Receivable for securities sold 55,000
- -------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 16,294
- -------------------------------------------------------------------------------
TOTAL ASSETS 70,465,437
LIABILITIES
- -------------------------------------------------------------------------------
Distributions payable to shareholders 267,266
- -------------------------------------------------------------------------------
Payable for securities purchased 7,113,497
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 4) 89,322
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 4) 164
- -------------------------------------------------------------------------------
Payable for administrative services (Note 4) 2,862
- -------------------------------------------------------------------------------
Other accrued expenses 7,583
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 7,480,694
- -------------------------------------------------------------------------------
NET ASSETS $62,984,743
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 (Note 1) 535,310
- -------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (Note 1) (4,672,734)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,304,950
- -------------------------------------------------------------------------------
NET ASSETS $62,984,743
COMPUTATION OF NET ASSET VALUE
- -------------------------------------------------------------------------------
Remarketed preferred shares at liquidation preference $10,000,000
- -------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 12,493
- -------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares
at liquidation preference 10,012,493
- -------------------------------------------------------------------------------
Net assets available to common shares:
Net asset value per share $13.22
($52,972,250 divided by 4,007,092 shares) 52,972,250
- -------------------------------------------------------------------------------
NET ASSETS $62,984,743
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
For the year ended October 31, 1995
TAX EXEMPT INTEREST INCOME $4,171,417
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 4) 428,403
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 4) 70,589
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 4) 6,279
- -------------------------------------------------------------------------------
Reports to shareholders 26,567
- -------------------------------------------------------------------------------
Auditing 41,335
- -------------------------------------------------------------------------------
Legal 11,393
- -------------------------------------------------------------------------------
Postage 8,490
- -------------------------------------------------------------------------------
Administrative services (Note 4) 5,781
- -------------------------------------------------------------------------------
Exchange listing fees 2,860
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 5,011
- -------------------------------------------------------------------------------
Preferred share remarketing agent fees 19,300
- -------------------------------------------------------------------------------
Other 2,890
- -------------------------------------------------------------------------------
TOTAL EXPENSES 628,898
- -------------------------------------------------------------------------------
Expense reduction (Note 4) (63,501)
- -------------------------------------------------------------------------------
NET EXPENSES 565,397
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,606,020
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 5) (1,581,343)
- -------------------------------------------------------------------------------
Net realized loss on future contracts (Notes 1 and 5) (685,453)
- -------------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 5) (399,817)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 6,087,229
- -------------------------------------------------------------------------------
Net gain on investment transactions 3,420,616
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,026,636
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
NOVEMBER 29, 1993
(COMMENCEMENT OF
OPERATIONS) TO
YEAR ENDED OCTOBER 31 OCTOBER 31
1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
- -------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------
Net investment income $ 3,606,020 $ 3,376,600
- -------------------------------------------------------------------------------------------
Net realized loss on investment transactions (2,666,613) (1,993,992)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 6,087,229 (4,782,279)
- -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 7,026,636 (3,399,671)
- -------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders from:
Net investment income (362,203) (226,598)
- -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS APPLICABLE TO COMMON
SHAREHOLDERS (EXCLUDES CUMULATIVE
UNDECLARED DIVIDENDS ON REMARKETED
PREFERRED SHARES OF $12,493 AND $0, RESPECTIVELY) 6,664,433 (3,626,269)
- -------------------------------------------------------------------------------------------
Distributions to common shareholders from:
Net investment income (3,197,815) (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 3,466,618 59,418,125
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of period 59,518,125 100,000
- -------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $535,310 and $477,179, respectively) $62,984,743 $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 outstanding 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
- -------------------------------------------------------------------------------------------
</TABLE>
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
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
OCTOBER 31 TO OCTOBER 31
1995 1994
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
(common shares) $12.36 $14.02*
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS:
- --------------------------------------------------------------------------------
Net investment income .90 .85(a)
Net realized and unrealized gain (loss) on
investments .85 (1.69)
TOTAL FROM INVESTMENT OPERATIONS 1.75 (.84)
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income
To preferred shareholders (.09) (.06)**
To common shareholders (.80) (.67)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.89) (.73)
- --------------------------------------------------------------------------------
Preferred share offering costs -- (.09)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD (common shares) $13.22 $12.36
- --------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD (common shares) $11.875 $10.125
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT MARKET VALUE
(common shares) (%)(b) 25.77 (28.60)(d)
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $62,985 $59,518
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c)(e) 1.23 .85(a)(d)
- --------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%)(c) 6.30 5.89(a)(d)
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) 165.21 148.90(d)
- --------------------------------------------------------------------------------
* 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.
(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.
(e) The ratio of expenses to average net assets for the year ended October 31,
1995 includes amounts paid through expense offset arrangements. Prior period
ratios exclude these amounts. See Note 4.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1995
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 Putnam Investment Management, Inc.
("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc., 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 Putnam Management 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 FUTURES AND OPTIONS CONTRACTS The fund may use futures and options contracts
to hedge against changes in the values of securities the fund owns or expects to
purchase. The fund may also write options on securities it owns or in which it
may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are
<PAGE>
valued at the last sale price, or if no sales are reported, the last bid price
for purchased options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
E FEDERAL INCOME 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, as amended. Therefore, no provision has been made for federal taxes on
income, capital gains or unrealized appreciation on securities held and for
excise tax on income and capital gains.
At October 31, 1995 the fund had a capital loss carryover of approximately
$3,775,000 which may be available to offset realized gains, if any. The amount
of the carryover and the expiration dates are:
LOSS CARRYOVER EXPIRATION
- -------------------------------------
$1,994,000 10/31/2002
$1,781,000 10/31/2003
- -------------------------------------
F DISTRIBUTIONS TO SHAREHOLDERS Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends on
remarketed preferred shares become payable when, as and if declared by the
Trustees. Each dividend period for the remarketed shares is generally a 28 day
period. The applicable dividend rate for the remarketed preferred shares on
October 31, 1995 was 3.80%. 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. These differences include
treatment of losses on wash sale transactions, realized and unrealized losses on
certain futures contracts and market discount. Reclassifications are made to
the funds' capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations.
For the year ended October 31, 1995, the fund reclassified $12,129 to increase
undistributed net investment income and $12,129 to increase accumulated net
realized loss on investments. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
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 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, its registration with the Securities and Exchange
Commission and with various states and the initial public offering of its shares
were $27,157. These expenses are being amortized on a straight-line basis over a
five-year period.
<PAGE>
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 Management, and the
fund has reimbursed Putnam Management 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,
1995, there were no such restrictions on the fund.
NOTE 4
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management, for management investment advisory and
administrative services is paid quarterly based on the average weekly net assets
of the fund. Such fee is based on the following annual rates; 0.70% of the first
$500 million of average net assets, 0.60% of the next $500 million, 0.55% of the
next $500 million, and 0.50% of any excess over $1.5 billion of such average net
asset value.
<PAGE>
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 reimburses Putnam Management 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 $520 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of Putnam Management and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings.
During the year ended October 31, 1995, the fund adopted a Trustee Fee Deferral
Plan (the "Plan") which allows the Trustees to defer the receipt of all or a
portion of Trustees fees payable on or after July 1, 1995. The deferred fees
remain in the fund and are invested in the fund or in other Putnam funds until
distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended October 31, 1995, fund expenses were reduced by $63,501 under
expense offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund could
have invested the assets utilized in connection with the offset arrangements in
an income-producing asset if it had not entered into such arrangements.
NOTE 5
PURCHASES AND SALES OF SECURITIES
During the year ended October 31, 1995, purchases and sales of investment
securities other than short-term investments aggregated $91,530,603 and
$94,846,598, respectively. Purchases and sales of short-term municipal
obligations aggregated $68,200,000 and $65,000,000, 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 year are summarized as follows:
CONTRACT PREMIUMS
AMOUNTS RECEIVED
- ---------------------------------------------------
Contracts out-
standing at the
beginning of year $ -- $ --
- ---------------------------------------------------
Options opened 50,100,030 917,472
- ---------------------------------------------------
Options expired -- --
- ---------------------------------------------------
Options closed (50,100,030) (917,472)
- ---------------------------------------------------
Written options
outstanding at the
end of the year $ -- $ --
- ---------------------------------------------------
<PAGE>
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 100% of dividends paid from net investment income during
the fiscal year as tax exempt for Federal income tax purposes. The Form 1099 you
receive in January 1996 will show the tax status of all distributions paid to
your account in calendar 1995.
<PAGE>
<TABLE>
SELECTED QUARTERLY DATA
(Unaudited)
<CAPTION>
Available to common shareholders
NET REALIZED
AND UNREALIZED NET INCREASE (DECREASE)
INVESTMENT NET INVESTMENT GAIN (LOSS) ON IN NET ASSETS
INCOME INCOME INVESTMENTS FROM OPERATIONS
QUARTER PER PER PER PER
ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE*
- -----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/95 $ 956,387 $.24 $ 727,927 $.18 $ 970,760 $.24 $ 1,698,687 $.42
7/31/95 1,116,982 .28 878,078 .22 245,134 .06 1,123,212 .28
4/30/95 1,030,234 .25 780,180 .20 1,379,201 .34 2,159,381 .54
1/31/95 1,067,814 .27 845,139 .21 825,521 .21 1,670,660 .42
10/31/94 1,104,044 .28 851,511 .21 (2,907,540) (.72) (2,056,029) (.51)
7/31/94 1,102,391 .27 871,255 .22 534,393 .13 1,405,648 .35
4/30/94+ 1,032,439 .26 853,691 .22 (5,869,325) (1.47) (5,015,634) (1.25)
1/31/94** 594,620 .15 573,545 .14 1,466,201 .37 2,039,746 .51
* Per common share.
** Reflects an expense limitation in effect during the period. As a result of such limitation,
expenses of the fund for the period November 29, 1993 (commencement of operations) to
January 31, 1994 reflect a reduction of $.02 per share.
+ Preferred shares were issued on February 10, 1994.
</TABLE>
<PAGE>
RESULTS OF OCTOBER 5, 1995 SHAREHOLDER MEETING (UNAUDITED)
An annual meeting of shareholders of the fund was held on October 5, 1995. At
the meeting, each of the nominees for Trustees was elected, as follows:
VOTES FOR VOTES WITHHELD
- --------------------------------------------------------------------------------
Jameson Adkins Baxter 3,794,302 37,028
Hans H. Estin 3,795,215 36,115
Elizabeth T. Kennan 3,792,386 38,944
Lawrence J. Lasser 3,795,152 36,178
Donald S. Perkins 3,795,026 36,304
William F. Pounds 3,793,549 37,781
George Putnam 3,795,026 36,304
George Putnam, III 3,793,736 37,594
E. Shapiro 3,793,298 38,032
A.J.C. Smith 3,796,365 34,965
W. Nicholas Thorndike 3,796,765 34,565
- --------------------------------------------------------------------------------
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as auditors for
the fund was approved as follows: 3,764,739 votes for, and 7,113 votes against,
with 59,479 abstentions and broker non-votes. All tabulations have been rounded
to the nearest whole number.
<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
James E. Erickson
INDEPENDENT ACCOUNTANTS Vice President
Coopers & Lybrand L.L.P.
Blake E. Anderson
TRUSTEES Vice President
George Putnam, Chairman
Michael F. Bouscaren
William F. Pounds, Vice Chairman Vice President and Fund Manager
Jameson Adkins Baxter William N. Shiebler
Vice President
Hans H. Estin
John R. Verani
John A. Hill Vice President
Elizabeth T. Kennan Paul M. O'Neil
Vice President
Lawrence J. Lasser
John D. Hughes
Robert E. Patterson Vice President and Treasurer
Donald S. Perkins Beverly Marcus
Clerk and Assistant Treasurer
George Putnam, III
Eli Shapiro
A.J.C. Smith
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] -------------
Bulk Rate
THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
-------------
21702-215 12/95
