Putnam
Investment
Grade
Municipal
Trust III
SEMIANNUAL REPORT
April 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Based on taxable equivalent yields alone, muni funds easily
outshine most taxable-bond funds."
-- Morningstar Mutual Funds, March 1997
* "Depending on your tax bracket, municipal bonds may offer juicier
after-tax yields than Treasuries of comparable maturities. . . . One
tip: Stick to bonds rated double A or higher by two rating agencies,
such as Moody's or Standard & Poor's."
-- Money, May 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
15 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
In few places is the power of suggestion more aptly demonstrated than
the securities markets. For months, the market has translated conjecture over
the prospect of an increase in short-term interest rates by the Federal Reserve
Board into volatility. Instead of settling down after the Fed finally raised
rates by a quarter point in late March, the market immediately began
responding to the suggestion that the Fed was about to raise rates again, if
not in May, then at some point.
Uncertainty heightens the intensity of volatility, as we have seen throughout
Putnam Investment Grade Municipal Trust III's semiannual period. Over the long
term, however, rational research and analysis, backed by expertise and
experience, play a larger role in investment success -- and thus generally
work to the advantage of those who maintain a long-term investment
perspective.
Since Fund Manager Richard Wyke believes the current volatility may continue
for a while, this seems an appropriate time to counsel patience. In the
following report, Rick explains how he has been dealing with the current
market environment and what he sees in prospect for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 18, 1997
Report from the Fund Manager
Richard P. Wyke
The market gave fixed-income investors quite a ride during the six months
ended April 30, 1997. A mixed bag of economic data along with hair-trigger
investor reactions caused the market to seesaw between bouts of strength and
spells of weakness. February and March witnessed the most dramatic turbulence,
with the yield on the 30-year Treasury bond rising above 7% for the first time
in six months. The market's volatility culminated with the Federal Reserve
Board's quarter of a percentage point interest rate increase on March 25,
1997.
By the end of Putnam Investment Grade Municipal Trust III's semiannual period,
investors seemed to have regained some confidence in the economy's ability to
grow without causing undue inflation, enabling municipal bonds to rebound
nicely. The recent handshake agreement between congressional Republicans and
President Clinton over a balanced budget lent further support to the market's
comeback. The fund completed the first half of its 1997 fiscal year with total
returns of 2.37% at net asset value and 4.41% at market price. For more
performance information, please turn to pages 8 and 9.
* FOCUS ON INCOME POSITIONS DEFENSIVELY
Because your fund takes an income-oriented approach toward total return, its
strategies and target investments create a defensive orientation as a natural
byproduct. During periods of market volatility, particularly in February and
March of this year, this orientation made a valuable contribution to
performance.
Our primary focus has been premium bonds -- those selling at prices above par
value -- because they typically carry coupons higher than the current market
rates and tend to be less seriously affected when prices decline. Furthermore,
they give the fund a shorter duration profile than many of its competitors
because their higher income stream represents a greater portion of their
return, thus providing a temporary floor for their prices.
Throughout the period, the bulk of the fund's assets -- nearly one third --
remained invested in bonds with stated maturities in the 20- to 25-year range.
These bonds offer attractive yield levels and as they grow closer to maturity,
they will naturally shift toward the shorter end of the yield curve, a
phenomenon known as coupon roll. Capitalizing on this appreciation potential,
which operates independently of interest-rate changes, helps enable us to
build the overall value of the portfolio over time.
Our selective use of financial leverage also contributed to your fund's income
stream and performance over the period. With this approach, the fund issues
preferred shares that pay dividends at prevailing short-term rates. These
shares are sold to corporate and institutional investors; the resulting assets
are then invested in long-term bonds with higher yields. The difference
between the rates paid to holders of preferred shares and the rates earned by
the fund augmented the flow of income to holders of common shares.
* PORTFOLIO IS WELL DIVERSIFIED BY REGION AND INDUSTRY
Throughout the period, your fund held bonds issued by 16 states, with the
heaviest concentration in New York, California, and Colorado. New York state
and New York City general obligation and revenue securities have benefited
from improving financial and economic conditions and consistent levels of
demand. We believe California municipal bonds are currently undervalued,
offering high yields close to those from low-tax states. Not only is
California in the midst of an economic turnaround, but its municipalities are
also exhibiting greater fiscal responsibility. With this positive backdrop, we
believe California municipal debt is in an attractive position to rise in
value. Three of the fund's Colorado revenue bonds are issued by Denver City
and County Airport, positions that we have discussed many times in previous
reports. A perennial favorite, Denver airport bonds continue to offer an
attractive, steady yield and solid financial performance.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 24.6%
Waste management 15.7%
Utilities 14.0%
Transportation 13.5%
Education 2.4%
Footnote reads:
*Based on net assets as of 4/30/97. Holdings will vary over time.
In addition to broad countrywide diversification, the fund held securities in
more than 15 industry sectors. Worth mentioning are two pockets of emphasis:
prerefunded bonds and hospitals, both yield-enhancing sectors. We continue to
favor prerefunded bonds -- those secured by an escrow fund of U.S. government
obligations that is sufficient to pay off the entire issue at maturity --
because they tend to boost the fund's yield potential while contributing to
overall consistency of performance throughout an interest-rate cycle. Stronger
bottom lines, consolidation, and heavy prerefunding activity in the
health-care sector have resulted in credit rating upgrades for many issuers,
helping to lift performance across the sector.
* TAXABLE-EQUIVALENT YIELDS AND AVERAGE PORTFOLIO QUALITY REMAIN HIGH
Because your fund focuses its investments on long-term bonds, it is able to
produce a relatively high level of tax-free income. A taxable investment at
the maximum federal income tax rate of 39.6% would have had to provide a
current return of 10.26% to equal the fund's 6.20% current dividend rate at
net asset value. In today's low-inflation and high-tax environment, we believe
these figures represent attractive real rates of return.
In addition to the potential for high current income, your fund also offers
you a portfolio that remains heavily exposed to the highest-rated bonds in the
investment-grade spectrum, those bonds rated Baa or above. As of period's end,
nearly half of your fund's bond holdings were rated Aaa.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
Aaa -- 46.6%
Aa -- 5.2%
A -- 16.9%
Baa -- 31.3%
Footnote reads:
*As a percentage of portfolio market value as of 4/30/97. A bond rated BBB/Baa
or higher is considered investment grade. All ratings reflect Standard &
Poor's and Moody's terminologies, unless noted otherwise and may include bonds
considered by Putnam Management to be of comparable quality. Portfolio quality
will vary over time.
* MUNICIPAL BONDS AND YOUR FUND SHOULD BE ABLE TO HOLD THEIR OWN
Although the Fed opted to leave interest rates unchanged at its May 20
meeting, the fixed-income market is likely to remain unsettled in the months
ahead in anticipation of another increase at some point. Municipal bonds,
however, should be able to hold their own. For the most part, municipal bonds
have performed as we have expected -- outperforming their taxable counter-
parts when bond prices fell and keeping pace with Treasuries when the market
rebounded and yields declined. We have no reason to believe this will change
going forward.
Furthermore, we believe the supply/demand relationship for the municipal
market remains positive. The strong economy has expanded the capacity of
municipal bond borrowers to meet infrastructure needs by issuing new debt,
while demand from insurance companies and other institutional investors should
remain strong, helping to sustain market values.
From a total return standpoint, your fund's defensive nature and relatively
short duration should continue to lend support and cushion its net asset value
in the event additional rate hikes come to pass. Once the interest-rate cycle
peaks, we will look for opportunities to extend duration without sacrificing
income potential.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 4/30/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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.
TOTAL RETURN FOR PERIODS ENDED 4/30/97
Lehman Bros.
Market Municipal Consumer
(common shares) NAV price Bond Ind Price Index
- ------------------------------------------------------------------------------
6 months 2.37% 4.41% 2.02% 1.20%
- ------------------------------------------------------------------------------
1 year 6.82 10.26 6.65 2.50
- ------------------------------------------------------------------------------
3 years 22.18 25.26 22.82 8.68
Annual average 6.91 7.80 7.09 2.82
- ------------------------------------------------------------------------------
Life (11/29/93) 15.27 0.22 19.53 12.82
Annual average 4.24 0.06 5.37 2.77
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/97
(most recent calendar quarter)
Market
(common shares) NAV price
- ------------------------------------------------------------------------------
6 months 2.61% 1.20%
- ------------------------------------------------------------------------------
1 year 5.54 7.99
- ------------------------------------------------------------------------------
3 years 20.69 21.38
Annual average 6.47 6.67
- ------------------------------------------------------------------------------
Life (11/29/93) 14.28 -1.37
Annual average 4.08 -0.41
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/97
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 6
- ------------------------------------------------------------------------------
Income $0.4002
- ------------------------------------------------------------------------------
Capital gains1 --
- ------------------------------------------------------------------------------
Total $0.4002
- ------------------------------------------------------------------------------
Preferred shares Series A (200 shares)
- ------------------------------------------------------------------------------
Income $790.14
- ------------------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------------------
Total $790.14
- ------------------------------------------------------------------------------
Share value:
- ------------------------------------------------------------------------------
(common shares): NAV Market price
- ------------------------------------------------------------------------------
10/31/96 $13.02 $11.875
- ------------------------------------------------------------------------------
4/30/97 12.90 12.000
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
(common shares): NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate2 6.20% 6.67%
- ------------------------------------------------------------------------------
Taxable equivalent3 10.26% 11.04%
- ------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
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
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and the net assets allocated to remarketed preferred shares,
divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
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. The index
assumes reinvestment of all distributions and interest payments and does not
take into account brokerage fees or taxes. Securities in the fund do not match
those in the index and performance of the fund will differ. It is not possible
to invest directly in an index.
Portfolio of investments owned
April 30, 1997 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (97.2%) *
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
California (14.5%)
- ------------------------------------------------------------------------------------------------------------
$2,500,000 Beverly Hills, Pub. Fin. Auth. Lease Rev. Bonds,
MBIA, 5.65s, 6/1/15 AAA $ 2,443,750
2,000,000 CA Poll. Ctrl. Fin. Auth. Rev. Bonds (San Diego
Gas & Elec.), Ser. A, 5.9s, 6/1/14 A 2,042,500
1,250,000 CA State U. IFB, AMBAC, 9.861s, 11/1/21
(acquired 9/2/94, cost $1,339,094) [DBL. DAGGER] AAA 1,468,750
1,000,000 Central Coast Wtr. Auth. Rev. Bonds (State Wtr.),
Ser. A, AMBAC, 5s, 10/1/13 AAA 938,750
1,500,000 Foothill/Eastern Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, Sr. Lien, Ser. A, zero %, 1/1/08 Baa 982,500
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
7.484s, 4/23/08 AAA 1,080,000
------------
8,956,250
Colorado (10.4%)
- ------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
3,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 3,506,250
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 1,203,750
------------
6,410,625
Florida (5.2%)
- ------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
965,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A 1,049,438
1,965,000 (Waste-Energy LP North), 7.95s, 12/1/08 A 2,136,938
------------
3,186,376
Georgia (2.2%)
- ------------------------------------------------------------------------------------------------------------
1,250,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds
(Crossover Ser. Project One), AMBAC, 6.4s, 1/1/13 AAA 1,370,313
Illinois (6.6%)
- ------------------------------------------------------------------------------------------------------------
1,830,000 IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks Med. Ctr.),
Ser. D, 9 1/2s, 11/15/15 BBB 2,093,063
2,000,000 IL Hlth. Fac. Auth. Rev. Bonds Rev. Bonds (Highland
Pk. Hosp.), Ser. A, MBIA, 5 3/4s, 10/1/17 AAA 1,967,500
------------
4,060,563
Indiana (3.5%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Marion Cnty., Ind. Convention & Rectl. Fac. Auth.
Rev. Bonds (Excise Tax Rev. Lease Rental),
Ser. A, AMBAC, 7s, 6/1/21 AAA 2,162,500
Kansas (4.2%)
- ------------------------------------------------------------------------------------------------------------
2,400,000 Burlington, Poll. Control Poll. Control Rev. Bonds
(Kansas Gas & Electric Co.), MBIA, 7s, 6/1/31 AAA 2,616,000
Louisiana (2.5%)
- ------------------------------------------------------------------------------------------------------------
1,420,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa 1,540,700
Maryland (3.4%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 MD State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds
(Johns Hopkins U.), 7 1/2s, 7/1/20 Aa 2,100,000
Massachusetts (3.6%)
- ------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of
Central MA), Ser. B, AMBAC, 9.12s, 6/23/22 AAA 832,500
830,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 AAA 1,379,875
------------
2,212,375
Michigan (1.6%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Pontiac Osteopathic Hosp.), Ser. A, 6s, 2/1/24 Baa 962,500
Minnesota (5.7%)
- ------------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 AAA 1,001,313
St. Paul, Hsg. & Hosp. Redev. Auth. Hosp. Rev. Bonds,
(Healtheast), Ser. B
1,000,000 9 3/4s, 11/1/17 Baa 1,043,410
1,440,000 9 5/8s, 11/1/08 Baa 1,501,646
------------
3,546,369
New Jersey (3.5%)
- ------------------------------------------------------------------------------------------------------------
2,035,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Newcomb Med. Ctr.), Ser. A, 7 7/8s, 7/1/03 Baa 2,174,906
New York (16.6%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds, Ser. A, MBIA, 5 5/8s, 7/1/27 AAA $ 966,250
NY City, G.O. Bonds
1,000,000 Ser. B, 7 1/2s, 2/1/06 BBB/P 1,103,750
1,000,000 Ser. G, 6s, 10/15/26 Baa 968,750
NY City, Muni. Wtr. & Swr. Fin. Auth. Syst. Rev. Bonds
2,000,000 Ser. C, 7 3/4s, 6/15/20 AAA 2,247,500
3,000,000 Ser. A, 5 1/2s, 6/15/24 A 2,827,500
NY State Energy Res. & Dev. Auth. Elec. Fac.
Rev. Bonds, (Cons. Edison Co.), Ser. A,
1,000,000 7 3/4s, 1/1/24 Aa 1,034,910
1,000,000 7 1/2s, 1/1/26 A 1,070,000
------------
10,218,660
Puerto Rico (0.8%)
- ------------------------------------------------------------------------------------------------------------
500,000 PR Elec. Pwr. Auth. IFB, FSA, 8.328s, 7/1/23 AAA 504,375
Tennessee (4.4%)
- ------------------------------------------------------------------------------------------------------------
2,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.124s, 1/1/22 AAA 2,743,875
Texas (8.5%)
- ------------------------------------------------------------------------------------------------------------
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18 AAA/P 2,757,000
1,250,000 North Central Hlth. Fac. Dev. Corp. IFB (Presbyterian
Hlth. Care Syst.), Ser. C, MBIA, 8.97s, 6/15/21 AAA 1,464,061
1,000,000 Texarkana Hlth. Fac. Rev. Bonds (Wadley
Regl. Med.), 8 1/2s, 10/1/12 A 1,028,120
------------
5,249,181
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $59,199,060) *** $60,015,568
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $61,716,127.
** The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at April 30, 1997 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, 1997. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
*** The aggregate identified cost on a tax basis is $59,270,325,
resulting in gross unrealized appreciation and depreciation of
$1,318,730 and $573,487, respectively, or net unrealized appreciation of
$745,243.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public
resale. The total market value of restricted securities
held at April 30, 1997 was $1,468,750 or 2.4% of net
assets.
The rates shown on IFB and IF COP, which are securities paying interest
rates that vary inversely to changes in the market interest rates, are
the current interest rates at April 30, 1997.
The fund had the following industry group concentrations greater than
10% at April 30, 1997 (as a percentage of net assets):
Healthcare 24.6%
Waste management 15.7
Utilities 14.0
Transportation 13.5
The fund had the following insurance concentrations greater than 10% at
April 30, 1997 (as a percentage of net assets):
MBIA 15.3%
AMBAC 11.9
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $59,199,060) (Note 1) $60,015,568
- ---------------------------------------------------------------------------------------------------
Cash 158,830
- ---------------------------------------------------------------------------------------------------
Interest receivable 1,437,131
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 2,448,934
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 8,554
- ---------------------------------------------------------------------------------------------------
Total assets 64,069,017
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 267,260
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 1,946,092
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 104,723
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 5,706
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 4,244
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 390
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 24,475
- ---------------------------------------------------------------------------------------------------
Total liabilities 2,352,890
- ---------------------------------------------------------------------------------------------------
Net assets $61,716,127
Represented by
- ---------------------------------------------------------------------------------------------------
Series A remarketed preferred shares, (200 shares issued and
outstanding at $50,000 per share) (Note 4) $10,000,000
- ---------------------------------------------------------------------------------------------------
Paid-in capital - common shares (Unlimited shares authorized) (Note 1) 55,817,217
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 251,657
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (5,169,254)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 816,507
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $61,716,127
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Series A remarketed preferred shares 10,000,000
- ---------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on
remarketed preferred shares 26,408
- ---------------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares
at liquidation preference 10,026,408
- ---------------------------------------------------------------------------------------------------
Net assets available to common shares 51,689,719
- ---------------------------------------------------------------------------------------------------
Net asset value per common share
($51,689,719 divided by 4,007,092 shares) $12.90
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30,1997 (Unaudited)
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Tax exempt interest income: $2,065,273
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 213,367
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 30,136
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,124
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 2,265
- --------------------------------------------------------------------------------------------------
Reports to shareholders 7,109
- --------------------------------------------------------------------------------------------------
Auditing 35,280
- --------------------------------------------------------------------------------------------------
Legal 4,390
- --------------------------------------------------------------------------------------------------
Exchange listing fees 2,000
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,715
- --------------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 13,112
- --------------------------------------------------------------------------------------------------
Other 11,543
- --------------------------------------------------------------------------------------------------
Total expenses 330,041
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (11,754)
- --------------------------------------------------------------------------------------------------
Net expenses 318,287
- --------------------------------------------------------------------------------------------------
Net investment income 1,746,986
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (204,041)
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (10,968)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (220,295)
- --------------------------------------------------------------------------------------------------
Net loss on investments (435,304)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $1,311,682
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
1997* 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 1,746,986 $ 3,297,331
- ----------------------------------------------------------------------------------------------------------------------
Net realized loss on investments (215,009) (280,731)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (220,295) (268,149)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,311,682 2,748,451
- ----------------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (158,028) (360,126)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed preferred
shares of $26,408 and $13,233, respectively) 1,153,654 2,388,325
- ----------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (1,603,516) (3,207,079)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (449,862) (818,754)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 62,165,989 62,984,743
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $251,657 and
$266,215, respectively) $61,716,127 $62,165,989
- ----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of period 4,007,092 4,007,092
- ----------------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of period 200 200
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 Nov. 29, 1993+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period
(common shares) $13.02 $13.22 $12.36 $14.02(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .82 .90 .85(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.12) (.13) .85 (1.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .32 .69 1.75 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.04) (.09) (.09) (.06)(b)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.40) (.80) (.80) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions: (.44) (.89) (.89) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred share offering costs -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $12.90 $13.02 $13.22 $12.36
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) $12.000 $11.875 $11.875 $10.125
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at market value
(common shares) (%)(d) 4.41* 6.89 25.77 (28.60)*
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Net assets, end of period
(in thousands) $61,716 $62,166 $62,985 $59,518
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Ratio of expenses to
average net assets (%)(e)(f) .63* 1.30 1.23 .85(c)*
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Ratio of net investment income
to average net assets (%)(e) 3.02* 5.59 6.30 5.89(c)*
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Portfolio turnover rate (%) 29.53* 123.89 165.21 148.90*
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+ Commencement of operations.
* Not annualized.
(a) Represents initial net asset value of $14.10 less offering expenses of $0.08. Of these expenses $0.02
are due to a revision of offering expenses on August 31, 1994.
(b) Preferred shares were issued on February 10, 1994. (Note 4)
(c) 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.
(d) Total investment return assumes dividend reinvestment.
(e) Ratios reflect net assets available to common shares only; net investment income ratio also reflects
reduction for dividend payments to preferred shareholders.
(f) The ratio of expenses to average net assets for the year ended October 31, 1995 and thereafter
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts. (Note 2)
Notes to financial statements
April 30, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Investment Grade Municipal Trust III, (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
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation 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) 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.
C) 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 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.
D) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At October 31, 1996, the fund had a capital loss carryover of approximately
$4,220,000 available to offset future net capital gains, if any. The amount of
the carryover and expiration dates are:
Loss Carryover Expiration
- --------------------------------------------------
1,912,000 10/31/2002
1,863,000 10/31/2003
445,000 10/31/2004
E) 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 preferred shares is
generally a 28 day period. The applicable dividend rate for the remarketed
preferred shares on April 30, 1997 was 3.57%. 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.
F) 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)
and the liquidation preference of any outstanding remarketed preferred shares,
by the total number of common shares outstanding.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds,
original issue discount, stepped-coupon bonds and payment in kind bonds are
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.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.70% of the first $500 million of
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.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred shares
for that 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 the amount of the excess
(but not more than .70% of the liquidation preference of the remarketed
preferred shares outstanding during the period).
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.
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 six months ended April 30, 1997, fund expenses were reduced by $11,754
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 a portion of the assets utilized in connection with the
expense offset arrangements in an income producing asset if it had not entered
into such arrangements.
Trustees of the fund receive an annual Trustees fee of $460 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended April 30, 1997, purchases and sales of investment
securities other than short-term investments aggregated $18,133,703 and
$20,175,757, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Remarketed preferred shares
The Series A shares are redeemable at the option of the fund on any dividend
payment date at a redemption price of $50,0000 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.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue Code
of 1986. To the extent that the fund earns taxable income and capital gains by
the conclusion of a fiscal year, it will be required to apportion to the
holders of the remarketed preferred shares throughout that year additional
dividends as necessary to result in an after-tax equivalent to the applicable
dividend rate for the period.
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 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, 1997, no such restrictions have been placed on the fund.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake Anderson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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33897-215 6/97
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