Putnam
Investment
Grade
Municipal
Trust III
SEMIANNUAL REPORT
April 30, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "In today's low interest-rate environment, maintaining the fund's
competitive yield is our number one priority. We've developed tools to
more precisely manage the current and future income stream. However, in a
market with downside risk, we're also balancing the need for sustainable
income with the need for total return in order to build net asset value."
-- Richard P. Wyke, fund manager
Putnam Investment Grade Municipal Trust III
* "Surging tax revenues in most states help bolster municipal credit
bond ratings. Standard & Poor's says the number of rating upgrades in this
year's first quarter was more than nine times the number of downgrades."
-- The Wall Street Journal, April 8, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
10 Portfolio holdings
14 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The fragility of market rallies was clearly demonstrated once again as Putnam
Investment Grade Municipal Trust III approached the first half of fiscal 1998.
The suggestion that the Federal Reserve Board might be assuming a more
cautious stance on inflation was enough to stop the bond market's most recent
advance in its tracks.
One consequence of this turnabout was a slight erosion in total return for the
period. Fund Manager Richard Wyke considers the development merely a minor
setback; he remains confident that the fundamentals -- strong demand,
attractive value -- remain in place.
In this volatile environment, Rick continues to focus on maintaining a high
level of current tax-free income, consistent with capital preservation. In the
following report, he discusses his strategy during the six months ended April
30, 1998, and looks at prospects for the fiscal year's second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 17, 1998
Report from the Fund Manager
Richard P. Wyke
Without the drama played out almost every day in the stock market, the $1.3
trillion municipal bond market has become very attractively priced relative to
the Treasury market -- a state of affairs that hasn't occurred since the
flat-tax scare of 1996. Municipal bonds (as represented by 30-year insured
municipals) are now offering almost 90% of the yield of long-term Treasury
bonds. Since the typical level is 84%, the current percentage makes municipal
prices remarkably low.
During the year, the Federal Reserve Board has remained on the sidelines in
deference to the noninflationary economic environment and fears of the
eventual impact of Asia's troubles on the United States. Within this
relatively tranquil, yet cautious environment, Putnam Investment Grade
Municipal Trust III has delivered what it has promised to shareholders: a
steady stream of income exempt from federal taxes along with relatively low
share price volatility. Your fund produced returns of 2.70% at net asset value
and 1.58% at market price for the 6 months ended April 30, 1998. By
comparison, the Lehman Brothers Municipal Bond Index posted a return of 2.77%
for the same period. Please see pages 8 and 9 for additional performance
information.
* FUNDAMENTALS KEEP BALANCE IN MARKET
The first quarter of 1998 has been most notable for its huge incremental
supply -- an increase of approximately 70% over the supply brought to market
one year ago. Demand for municipal bonds has also risen, keeping balance in
this market and being fueled primarily by the bargain prices.
As we ended the fiscal year however, there was anxiety brewing over the sale
of the largest bond offering in history. However, The Long Island Power
Authority came to market with $3.4 billion of utility bonds and the market
seemed to absorb this enormous issue quite well.
* TRANSPORTATION AND UTILITY SECTORS OUTPERFORM
Your fund's significant position in the transportation industry has been
bolstered by positive earnings that stem from strong passenger demand and low
fuel prices, particularly in the airline sector. Standard & Poor's has raised
the credit outlook for both Delta Airlines and American Airlines to positive
from stable, reflecting the industry's and each company's good health.
As you probably know, deregulation has hit the utility industry, the last
legal monopoly in the United States. The demand for cheaper electricity,
combined with new power plant technology and federal legislation, set the
stage for the deregulation of utilities several years ago. The same type of
restructuring has already occurred in the telephone, natural gas, airline, and
trucking industries. With the ensuing increased competition, we are beginning
to see lower electricity rates for both homeowners and businesses.
The restructuring of the utility industry has created some dynamic investment
opportunities for the fund. For example, one of the fund's utility holdings,
Nevada Power, has proposed a merger with Sierra Pacific Resources, which holds
a higher credit rating from Moody's and Standard & Poor's. Sierra Pacific has
experienced a rapid service territory growth rate and one of the highest
growth rates in the United States. This merger should help the lower-rated
Nevada Power reduce costs and improve cash flow with the overall impact of
enhancing investor security in its bonds.
[GRAPHIC OMITTED: HORIZONTAL BAR CHAET OF TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/Health care 23.3%
Transportation 18.4%
Utilities 15.2%
Water and sewerage 11.9%
Housing 5.0%
Footnote reads:
* Based on net assets as of 4/30/98. Holdings will vary over time.
* NEW YORK CITY G.O. BONDS RECEIVE CREDIT UPGRADE
In the last report, we discussed how New York City had been making dramatic
progress on its well-publicized fiscal problems. Wall Street's boom, surging
employment, and a falling crime rate have contributed to its thriving economy.
Although your fund has only a small position in NYC general obligation bonds,
the city was recently rewarded for its sound fiscal management with the news
of a credit rating increase this spring from Baa1 to A3 by Moody's Investors
Service, Inc. -- always good news for bondholders.
* SUSTAINING DIVIDEND WITHIN FLAT YIELD CURVE
Fund management remains focused on sustaining the fund's dividend level in a
market in which higher-yielding bonds are steadily called away. As we replace
the called bonds, our goal is to acquire bonds with at least four years of
call protection to enable us to provide the highest and most durable level of
income. This strategy should give the fund some protection even if interest
rates continue to stay low or decline further.
Also noteworthy is the unusually flat tax-exempt yield curve. Simply put, the
difference between short-term and long-term interest rates is known as the
yield curve. Right now the difference between the two is remarkably small,
turning the yield curve into a nearly flat line. With the 30-year bond paying
only a modest 30 to 40 basis points more than a 10-year bond, investors are
not compensated for taking on higher risk. For this reason, we have found the
best value (attractive yield with minimal volatility) in the intermediate
range of the yield curve -- anywhere from 8 to 15 years.
[GRAPHIC OMITTED: PIE CHART OF PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
Baa -- 19.4%
Aa -- 11.6%
A -- 11.9%
Aaa -- 54.1%
Ba -- 3.0%
Footnote reads:
* As a percentage of portfolio market value on 4/30/98. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
terminologies and may include unrated bonds considered by Putnam Management to
be of comparable quality. Portfolio quality will vary over time.
* INFLATION RATE KEY VARIABLE IN OUTLOOK
While interest rates may remain low, we believe that the inflation rate is the
key economic variable to watch in 1998. Because we expect continued U.S.
economic growth to be supported by consumer demand, low interest rates, and
the wealth effect of a strong equity market, there is the potential for a rise
in inflation in the second half of 1998. Consequently, this is not a good time
to expose the portfolio to bonds with longer maturities and higher
interest-rate risk. We believe that a cautious strategy will produce the best
returns in the months ahead.
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 4/30/98, there is no guarantee the fund will continue to hold
these securities in the future.
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.
TOTAL RETURN FOR PERIODS ENDED 4/30/98
Market Lehman Bros. Consumer
(common shares) NAV price Muni Bond Price Index
- ------------------------------------------------------------------------
6 months 2.70% 1.58% 2.77% 0.56%
- ------------------------------------------------------------------------
1 year 9.66 12.45 9.30 1.44
- ------------------------------------------------------------------------
Life of fund (11/29/93) 26.39 12.69 30.65 11.45
Annual average 5.44 2.74 6.25 2.49
- ------------------------------------------------------------------------
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 4/30/98
- ------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------
Number 6
- ------------------------------------------------------------------------
Income $0.4002
- ------------------------------------------------------------------------
Total $0.4002
- ------------------------------------------------------------------------
Preferred shares Series A (200 shares)
- ------------------------------------------------------------------------
Income $971.37
- ------------------------------------------------------------------------
Total $971.37
- ------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ------------------------------------------------------------------------
10/31/97 $13.35 $12.875
- ------------------------------------------------------------------------
4/30/98 13.30 12.687
- ------------------------------------------------------------------------
Current return (common shares) NAV Market price
- ------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------
Current dividend rate1 6.02% 6.31%
- ------------------------------------------------------------------------
Taxable equivalent2 9.96 10.45
- ------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Assumes maximum 39.6% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
(most recent calendar quarter)
Market
(common shares) NAV price
- ------------------------------------------------------------------------
6 months 4.24% 3.57%
- ------------------------------------------------------------------------
1 year 11.19 17.03
- ------------------------------------------------------------------------
Life of fund 27.06 15.42
Annual average 5.69 3.37
- ------------------------------------------------------------------------
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.
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
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 assumes reinvestment of all distributions and
interest payments and does not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and performance
of the fund will differ. It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
Portfolio of investments owned
April 30, 1998 (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 (97.9%)(a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Alaska (1.8%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 1,000,000 Valdez, Marine Term. Rev. Bonds
(Sohio Pipeline), 7 1/8s, 12/1/25 AA $ 1,107,500
California (10.0%)
- -------------------------------------------------------------------------------------------------------------
2,500,000 Beverly Hills, Pub. Fin. Auth. Lease Rev. Bonds,
MBIA, 5.65s, 6/1/15 Aaa 2,612,500
1,250,000 CA State U. IFB, AMBAC, 8.443s, 11/1/21
(acquired 9/2/94, cost $1,339,094) (RES) Aaa 1,456,250
1,500,000 Foothill/Eastern, Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, sr. lien, Ser. A, 7s, 1/1/08 Baa 1,111,875
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
8.498s, 4/23/08 (SEG) Aaa 1,173,750
--------------
6,354,375
Colorado (13.2%)
- -------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
2,205,000 Ser. A, 8 3/4s, 11/15/23 Baa1 2,532,994
795,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 AAA 920,213
1,370,000 Ser. A, 8 1/2s, 11/15/23 Baa1 1,517,275
130,000 Prerefunded, Ser. A, 8 1/2s, 11/15/23 AAA 145,275
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,250,000
2,000,000 Ser. A, MBIA, 5 1/2s, 11/15/25 Aaa 2,020,000
--------------
8,385,757
Florida (4.8%)
- -------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
925,000 (SES Broward Cnty., LP South), 7.95s, 12/1/08 A 999,000
1,885,000 (Waste-Energy LP North), 7.95s, 12/1/08 A 2,035,800
--------------
3,034,800
Georgia (0.9%)
- -------------------------------------------------------------------------------------------------------------
500,000 GA Med. Ctr. Hosp. Auth. IFB (Columbus Regl.
Hlth. Care Syst.), Ser. B, MBIA, 9.307s, 8/1/10 Aaa 583,750
Illinois (6.5%)
- -------------------------------------------------------------------------------------------------------------
1,760,000 IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks,
Med. Ctr.), Ser. D, 9 1/2s, 11/15/15 Baa1 2,006,400
2,000,000 Il. Hlth. Fac. Auth. Rev. Bonds (Highland
Pk., Hosp.), Ser. A, MBIA, 5 3/4s, 10/1/17 Aaa 2,087,500
--------------
4,093,900
Indiana (3.4%)
- -------------------------------------------------------------------------------------------------------------
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 2,167,500
Kansas (4.2%)
- -------------------------------------------------------------------------------------------------------------
2,400,000 Burlington, Poll. Control Rev. Bonds (Kansas
Gas & Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,622,000
Kentucky (1.7%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Boone Cnty., Poll. Control Rev. Bonds (Dayton,
Pwr. & Lt. Co.), Ser. A, 6 1/2s, 11/15/22 Aa3 1,088,750
Louisiana (2.5%)
- -------------------------------------------------------------------------------------------------------------
1,420,000 Beauregard, Parish Rev. Bonds (Boise
Cascade Corp.), 7 3/4s, 6/1/21 Baa3 1,567,325
Maryland (3.2%)
- -------------------------------------------------------------------------------------------------------------
2,000,000 MD State Hlth. & Higher Edl. Fac. Auth. Rev.
Bonds (Johns Hopkins U.), 7 1/2s, 7/1/20 Aa2 2,051,220
Massachusetts (5.4%)
- -------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr.
of Central MA), Ser. B, AMBAC, 9.92s, 6/23/22 Aaa 939,375
1,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53,
MBIA, 6.15s, 12/1/29 Aaa 1,057,500
830,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 1,403,735
--------------
3,400,610
Michigan (1.6%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Pontiac
Osteopathic Hosp.), Ser. A, 6s, 2/1/24 Baa 1,023,750
Minnesota (1.6%)
- -------------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 1,030,219
Nevada (1.6%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.),
Ser. A, 5.9s, 11/1/32 BBB- 1,010,000
New Jersey (2.9%)
- -------------------------------------------------------------------------------------------------------------
1,745,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Newcomb Med. Ctr.), Ser. A, 7 7/8s, 7/1/03 Ba3 1,854,063
New York (10.2%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds, Ser. A, MBIA, 5 5/8s, 7/1/27 Aaa 1,030,000
725,000 NY City, G.O. Bonds, Ser. B, 7 1/2s, 2/1/06 A3 802,938
275,000 Prerefunded, NY City, G.O. Bonds, Ser. B,
7 1/2s, 2/1/06 A3 307,656
NY City, Muni. Wtr.& Swr. Syst. Fin. Auth.
Rev. Bonds
2,000,000 Ser. C, 7 3/4s, 6/15/20 AAA 2,227,500
1,000,000 Ser. B, 5 3/4s, 6/15/26 A2 1,042,500
1,000,000 NY State Energy Res. & Dev. Auth. Elec. Fac.
Rev. Bonds (Cons. Edison Co. of NY, Inc.),
Ser. A, 7 1/2s, 1/1/26 A1 1,060,000
--------------
6,470,594
Pennsylvania (3.4%)
- -------------------------------------------------------------------------------------------------------------
2,000,000 Montgomery Cnty., Indl. Dev. Auth. Rev. Bonds,
Ser. B, MBIA, 6.7s, 12/1/21 AAA 2,167,500
Puerto Rico (0.9%)
- -------------------------------------------------------------------------------------------------------------
500,000 PR Elec. Pwr. Auth. IFB, FSA, 8.018s, 7/1/23 Aaa 574,375
Tennessee (6.7%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Maury Cnty., Indl. Dev. Board Poll. Control
Rev. Bonds (Saturn Corp.), 6 1/2s, 9/1/24 A 1,096,250
2,700,000 Metropolitan Govt. Nashville & Davidson
Cnty., Tenn. Wtr. & Swr. IFB, AMBAC,
9.23s, 1/1/22 Aaa 3,111,750
--------------
4,208,000
Texas (6.7%)
- -------------------------------------------------------------------------------------------------------------
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18 AAA/P 2,760,000
1,250,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
10.595s, 6/22/21 Aaa 1,462,500
--------------
4,222,500
Virginia (1.7%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 VA State Hsg. Dev. Auth. Rev. Bonds, Ser. A,
7.1s, 1/1/17 Aa1 1,053,750
Washington (3.0%)
- -------------------------------------------------------------------------------------------------------------
1,750,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 1,900,938
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $59,700,219) (b) $ 61,973,176
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $63,310,004.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at April 30, 1998 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, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $59,700,219, resulting in gross unrealized appreciation
and depreciation of $37,002,383 and $34,729,426, respectively, or net unrealized appreciation of
$2,272,957.
(SEG) A portion of these securities was pledged and segregated with the custodian to cover margin requirements
for future contracts at April 30, 1998.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at April 30, 1998 was $1,456,250 or 2.3% 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, 1998.
The fund had the following industry group concentrations greater than 10% at April 30, 1998 (as a
percentage of net assets):
Hospitals/Health care 23.3%
Transportation 18.4
Utilities 15.2
Water & sewerage 11.9
The fund had the following insurance concentrations greater than 10% at April 30, 1998 (as a percentage
of net assets):
MBIA 24.7%
AMBAC 12.1
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1998 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond Index
Future (long) $6,295,250 $6,348,875 Jun 98 $(53,625)
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $59,700,219) (Note 1) $61,973,176
- ---------------------------------------------------------------------------------------------------
Cash 278,800
- ---------------------------------------------------------------------------------------------------
Interest receivable 1,429,202
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 65,000
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,569
- ---------------------------------------------------------------------------------------------------
Total assets 63,749,747
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 294,796
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 109,705
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 4,569
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,051
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 347
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 23,275
- ---------------------------------------------------------------------------------------------------
Total liabilities 439,743
- ---------------------------------------------------------------------------------------------------
Net assets $63,310,004
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) 55,817,870
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (88,214)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,638,984)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,219,332
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $63,310,004
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares -- liquidation preference $10,000,000
- ---------------------------------------------------------------------------------------------------
Net assets available to common shares $53,310,004
- ---------------------------------------------------------------------------------------------------
Net asset value per common share
($53,310,004 divided by 4,007,092 shares) $13.30
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30,1998 (Unaudited)
<S> <C>
Tax exempt interest income: $1,825,735
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 218,558
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 35,706
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,020
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 2,071
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,716
- --------------------------------------------------------------------------------------------------
Reports to shareholders 2,732
- --------------------------------------------------------------------------------------------------
Auditing 18,859
- --------------------------------------------------------------------------------------------------
Legal 2,203
- --------------------------------------------------------------------------------------------------
Postage 241
- --------------------------------------------------------------------------------------------------
Exchange listing fees 877
- --------------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 1,385
- --------------------------------------------------------------------------------------------------
Other 4,847
- --------------------------------------------------------------------------------------------------
Total expenses 295,215
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (18,664)
- --------------------------------------------------------------------------------------------------
Net expenses 276,551
- --------------------------------------------------------------------------------------------------
Net investment income 1,549,184
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 169,512
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 256,507
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (366,244)
- --------------------------------------------------------------------------------------------------
Net gain on investments 59,775
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $1,608,959
- --------------------------------------------------------------------------------------------------
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
April 30 October 31
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $1,549,184 $3,458,269
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 426,019 (110,758)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments (366,244) 1,548,774
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,608,959 4,896,285
- ----------------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (194,273) (356,863)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on remarketed preferred shares of
$-- and $14,795, respectively) 1,414,686 4,539,422
- ----------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (1,603,055) (3,207,038)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (188,369) 1,332,384
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 63,498,373 62,165,989
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income and undistributed net investment
income of $88,214 and $159,930, respectively) $63,310,004 $63,498,373
- ----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $13.35 $13.02 $13.22 $12.36 $14.02(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .39 .86 .82 .90 .85(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments -- .36 (.13) .85 (1.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .39 1.22 .69 1.75 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.04) (.09) (.09) (.09) (.06)(b)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.40) (.80) (.80) (.80) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions: (.44) (.89) (.89) (.89) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred share
offering costs -- -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period
(common shares) $13.30 $13.35 $13.02 $13.22 $12.36
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period
(common shares) $12.687 $12.875 $11.875 $11.875 $10.125
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value
(common shares) (%)(d) 1.58* 15.54 6.89 25.77 (28.60)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $63,310 $63,498 $62,166 $62,985 $59,518
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Ratio of expenses to
average net assets (%)(e)(f) .55* 1.30 1.30 1.23 .85 (c)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(e) 2.54* 5.90 5.59 6.30 5.89 (c)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 12.18* 37.75 123.89 165.21 148.90*
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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)
</TABLE>
Notes to financial statements
April 30, 1998 (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. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. 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 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, 1997, the fund had a capital loss carryover of approximately
$4,470,000 available to offset future capital gains, if any. The amount of the
carryover and the expiration dates are:
Loss Carryover Expiration
---------------- ----------------
$1,911,000 October 31, 2002
1,863,000 October 31, 2003
452,000 October 31, 2004
244,000 October 31, 2005
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, 1998 was 3.60%. 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, less all
liabilities 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 and
original issue discount bonds are accreted according to the yield to maturity
basis.
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% thereafter.
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 gross 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 an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a 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, 1998, fund expenses were reduced by $18,664
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.
Each Trustee of the fund receives an annual Trustees fee, of which $390 has
been allocated to the fund, 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 "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
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, 1998, purchases and sales of investment
securities other than short-term investments aggregated $10,821,888 and
$7,540,750, 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 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.
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, 1998, no such restrictions have been placed on the fund.
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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
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our
website (www.putnaminv.com) any 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
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