Putnam
Investment Grade
Municipal Trust III
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "With municipal bond yields about equal to Treasury yields, municipal
bonds have become an exceptional investment choice for U.S. fixed-income
investors."
-- Richard P. Wyke, manager
Putnam Investment Grade Municipal Trust III
* "There is one type of staid, secure bond fund that has been overlooked
amid the global scramble for safety and that is now emerging as the best
bargain in the bond market: municipal bond funds."
-- The Wall Street Journal, October 5, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
16 Financial statements
25 Results of October 1, 1998 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Thanks in part to the rush of foreign investors to the safety of the U.S.
bond market, yields on long-term municipal bonds have moved remarkably
close to yields on taxable 30-year Treasury bonds. Except for a recent
flurry of new tax-exempt bond issuance in the face of declining interest
rates, the increased demand for tax-exempt bonds is not likely to be
matched by new supply; most issuers have already refinanced outstanding
bonds at lower rates and the flow of refunding has fallen off markedly.
One of the greatest challenges for Fund Manager Richard Wyke may continue
to be that of finding securities that meet Putnam Investment Grade
Municipal Trust III's strict selection criteria. Rick has also adjusted
the fund's credit and sector strategies in response to the changing
environment and emerging trends he sees developing.
You will find details of these developments and other aspects of the
fund's performance during the fiscal year that closed on October 31, 1998,
in the following report from Rick. He also offers his views on prospects
for the fiscal year that just began.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
Report from the Fund Manager
Richard P. Wyke
Throughout the dramatic market shifts of 1998, the municipal bond market
has continued to stand its ground. As of the end of October, yields on
long-term municipal bond yields were approximately the same as those on
the 30-year Treasury bond -- an unprecedented level of near parity. It is
within this environment that Putnam Investment Grade Municipal Trust III
continued to produce high current income exempt from federal taxes as well
as a solid total return. For the 12 months ended October 31, 1998, the
fund earned total returns of 7.49% at net asset value and 12.92% at market
price. For complete performance information, please see pages 8 and 9.
* FLIGHT TO QUALITY DRIVES TREASURY YIELDS DOWN
A steady stream of international events set off the stock market
volatility that sparked the bond market rallies: the unabated financial
chaos in the Pacific Rim, currency devaluations and defaults in Russia,
and plunging stock markets in Latin America. As foreign investors and
hedge fund investors panicked about plummeting stock markets, they began a
flight to quality -- selling hedge funds and emerging-markets funds in
favor of the safety of U.S. Treasury bonds. This buying drove up the
prices of Treasuries, and consequently, because yields and prices move in
an inverse relationship, pulled down their yields. Since foreign investors
do not benefit from the tax advantages of municipal bonds, prices in this
market did not rise as much as those of Treasuries. As a result, with
municipal bond yields about equal to Treasury yields, municipals have
become an exceptional investment choice for U.S. investors.
* REFUNDINGS SLOW; MUNICIPAL SUPPLY BEGINS TO MODERATE
Normally, when interest rates fall, refundings boost the pace of bond
supply. But rates have been low for some time. Most issuers have already
completed their refundings and we now expect that new issues will slow
down, leading to a continuing decline in the municipal bond supply. This
decline is likely to have a positive influence on municipal bond prices if
demand remains strong. However, as the equity market begins to recover,
demand for municipals may taper off.
The relationship of Treasury yields to municipal yields is also
contributing to the decline in supply. Since Treasury yields fell so
dramatically relative to municipal yields, the Treasury escrows used in
prerefundings are not adequate to pay off the municipal issues.
* SEARCHING FOR INCOME OPPORTUNITIES
Since last spring, one of our challenges has been to deliver an attractive
level of income in a market in which yields have fallen. We have tried to
meet this challenge by using the lower tiers of the investment-grade
sector to increase the fund's yield. However, the yield spreads between
higher-quality and lower-quality investment-grade paper have narrowed, and
it is hard to justify shifting the fund's focus from the higher-quality
investments without a significant yield advantage. During the reporting
period, we were able to purchase Clark County, Nevada, Southwest Gas
revenue bonds (rated Baa2), while selling lower-yielding paper. While
these holdings and others described in this report were viewed favorably
as of October 31, 1998, all holdings are subject to review in accordance
with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 19.5%
Transportation 18.2%
Utilities 16.9%
Water and sewer 12.0%
Housing 4.9%
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aa -- 8.4%
A -- 18.3%
Baa -- 22.8%
Ba -- 2.5%
Aaa -- 48.0%
Footnote reads:
*As a percentage of market value as of 10/31/98. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions unless noted otherwise; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings will
vary over time.
Transportation issues have also fared well over the past year, since
passenger demand has remained steady and fuel costs have been low. This
combination of factors has enabled airlines to profit and has helped
support airport revenues. For example, Denver (Colorado) City and County
Airport revenue bonds with a Baa rating have generated steady income for
some time. As the economy slows, however, this sector may need closer
scrutiny.
Another strategy we have used has been to extend call protection as we
make new investments. This is done by purchasing noncallable bonds or
bonds with distant call dates. Callable bonds carry the option of being
redeemed, or called away, by the issuer at a certain future date. Bonds
are normally called away if interest rates are lower than they were when
the bonds were originally issued. By avoiding callable bonds, the
portfolio has a better chance of maintaining a consistent level of income.
The potential for declining income may be offset in part by leveraging, a
strategy that has been useful in enhancing the trust's income. The trust
issues preferred shares to institutional short-term investors at low rates
and reinvests the proceeds in higher-paying longer-term bonds. The effect
is a more positive cash flow for the trust.
* INTEREST-RATE CUTS HELP BOND MARKET FOCUS
The bond markets are beginning to move away from their obsession with the
international markets. The Federal Reserve Board cut interest rates twice
in three weeks in the fall, (and again in mid November after the close of
this reporting period), signaling that it is ready to provide the
liquidity to reassure the markets. The drop in interest rates has helped
the U.S. bond markets focus on underlying economic fundamentals and become
more balanced. The flight to quality, which shaped the bond market in the
third quarter, should begin to stabilize and then reverse course, but very
slowly.
The intermediate maturity range of the yield curve (8 to 15 years), where
many of the fund's holdings have been positioned, has outperformed other
maturities and we expect this trend to continue over the near term.
However, there will come a time when a shift to longer maturities will
offer better performance. As opportunities appear in the longer-term
market, we will adjust the portfolio accordingly.
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 10/31/98, 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 10/31/98
Lehman Bros. Consumer
Market Municipal Price
(common shares) NAV price Bond Index Index
- ------------------------------------------------------------------------------
1 year 7.49% 12.92% 8.02% 1.36%
- ------------------------------------------------------------------------------
Life of fund (11/29/93) 32.29 25.28 37.33 12.35
Annual average 5.85 4.69 6.66 2.40
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Market
(common shares) NAV price
- ------------------------------------------------------------------------------
1 year 8.96% 10.85%
- ------------------------------------------------------------------------------
Life of fund (11/29/93) 32.81 23.53
Annual average 6.04 4.46
- ------------------------------------------------------------------------------
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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/98
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 12
- ------------------------------------------------------------------------------
Income $0.8004
- ------------------------------------------------------------------------------
Capital gains1 --
- ------------------------------------------------------------------------------
Total $0.8004
- ------------------------------------------------------------------------------
Preferred shares Series A (200 shares)
- ------------------------------------------------------------------------------
Income $1,797.58
- ------------------------------------------------------------------------------
Capital gains1 --
- ------------------------------------------------------------------------------
Total $1,797.58
- ------------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ------------------------------------------------------------------------------
10/31/97 $13.35 $12.875
- ------------------------------------------------------------------------------
10/31/98 13.51 13.687
- ------------------------------------------------------------------------------
Current return (common shares)
- ------------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------------
Current dividend rate2 5.92% 5.85%
- ------------------------------------------------------------------------------
Taxable equivalent3 9.80 9.69
- ------------------------------------------------------------------------------
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 POP 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
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.
Report of independent accountants
For the fiscal year ended October 31, 1998
To the Trustees and Shareholders of
Putnam Investment Grade Municipal Trust III
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, except for bond ratings, and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Putnam Investment Grade Municipal Trust III (the
"fund") at October 31, 1998, and the results of its operations, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of investments owned at
October 31, 1998 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 8, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998
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
MUNICIPAL BONDS AND NOTES (97.0%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C>
Alaska (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
$1,000,000 Valdez, Marine Term. Rev. Bonds
(Sohio Pipeline), 7 1/8s, 12/1/25 AA $ 1,105,000
California (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Beverly Hills, Pub. Fin. Auth. Lease Rev. Bonds,
MBIA, 5.65s, 6/1/15 AAA 2,656,250
1,250,000 CA State U. IFB, AMBAC, 9.959s, 11/1/21
(acquired 9/2/94, cost $1,339,094) (RES) AAA 1,457,813
1,500,000 Foothill/Eastern Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, Sr. Lien, Ser. A, zero %, 1/1/08 Baa 1,192,500
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
7.636s, 4/23/08 (SEG) Aaa 1,231,250
--------------
6,537,813
Colorado (9.9%)
- --------------------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
2,205,000 Ser. A, 8 3/4s, 11/15/23 Baa1 2,508,188
795,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 Aaa 922,200
1,370,000 Ser. A, 8 1/2s, 11/15/23 Baa1 1,500,150
130,000 Prerefunded, Ser. A, 8 1/2s, 11/15/23 Aaa 144,625
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,291,250
--------------
6,366,413
Florida (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
880,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A 938,564
1,795,000 (Waste-Energy LP North), 7.95s, 12/1/08 A 1,914,457
--------------
2,853,021
Georgia (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 GA Med. Ctr. Hosp. Auth. IFB (Columbus Regl. Hlth.
Care Syst.), Ser. B, MBIA, 8.901s, 8/1/10 AAA 595,000
Illinois (6.4%)
- --------------------------------------------------------------------------------------------------------------------------
IL Hlth. Fac. Auth. Rev. Bonds
1,690,000 (Glenoaks Med. Ctr.), Ser. D, 9 1/2s, 11/15/15 Baa1 1,899,138
2,000,000 (Highland Pk. Hosp.), Ser. A, MBIA,
5 3/4s, 10/1/17 Aaa 2,185,000
--------------
4,084,138
Indiana (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Marion Cnty., Ind. Convention & Recreation Fac. Auth.
Rev. Bonds
(Excise Tax Rev. Lease Rental), Ser. A,
AMBAC, 7s, 6/1/21 AAA 2,177,500
Kansas (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Burlington, Poll. Ctrl. Rev. Bonds (Kansas Gas &
Electric Co.), MBIA, 7s, 6/1/31 AAA 2,628,000
Kentucky (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Boone Cnty., Poll. Ctrl. Rev. Bonds (Coll-Dayton
Pwr. & Lt. Co.), 6 1/2s, 11/15/22 AA- 1,092,500
Louisiana (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,420,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 1,547,800
Massachusetts (5.4%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of
Central MA), Ser. B, AMBAC, 9.19s, 6/23/22 Aaa 989,063
1,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53,
MBIA, 6.15s, 12/1/29 Aaa 1,061,250
830,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 1,425,525
--------------
3,475,838
Michigan (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Pontiac Osteopathic Hosp.), Ser. A, 6s, 2/1/24 Baa1 1,042,500
Minnesota (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 1,033,688
Nevada (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
1,000,000 (NV Pwr. Co.), Ser. A, 5.9s, 11/1/32 BBB- 1,023,750
1,000,000 (Southwest Gas Corp.) Ser. B, 7 1/2s, 9/1/32 Baa2 1,110,000
--------------
2,133,750
New Jersey (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,455,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Newcomb Med. Ctr.), Ser. A, 7 7/8s, 7/1/03 Ba3 1,538,663
New York (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Metropolitan Trans. Auth. Commuter Fac. Rev.
Bonds, Ser. A, MBIA, 5 5/8s, 7/1/27 Aaa 1,080,000
725,000 NY City, G.O. Bonds, Ser. B, 7 1/2s, 2/1/06 A3 810,188
275,000 NY City, G.O. Bonds, Prerefunded, Ser. B,
7 1/2s, 2/1/06 A3 310,405
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds,
2,000,000 Ser. C, 7 3/4s, 6/15/20 Aaa 2,235,000
1,000,000 Ser. B, 5 3/4s, 6/15/26 A1 1,073,750
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 1,045,000
--------------
6,554,343
Pennsylvania (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
(Environmental Impt.), 6.7s, 12/1/20 Baa2 1,100,000
Puerto Rico (4.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Cmnwlth. of PR, Hwy. Trans. Auth. Rev.
Bonds, Ser. A, 5s, 7/1/38 A 1,952,500
500,000 PR Elec. Pwr. Auth. IFB, FSA, 8.179s, 7/1/23 Aaa 588,125
--------------
2,540,625
Tennessee (6.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Maury Cnty. Indl. Dev. Board Poll. Control Rev.
Bonds (Saturn Corp.), 6 1/2s, 9/1/24 A 1,111,250
2,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.368s, 1/1/22 Aaa 3,165,750
--------------
4,277,000
Texas (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18 AAA/P 2,793,000
1,250,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C,
MBIA, 9.407s, 6/15/21 Aaa 1,475,000
2,000,000 Titus Cnty., Fresh Wtr. Supply Dist. No. 1 Poll.
Rev. Bonds (Southwestern Elec. Pwr. Co.),
Ser. A, 8.2s, 8/1/11 A1 2,237,500
--------------
6,505,500
Virginia (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 VA State Hsg. Dev. Auth. Rev. Bonds,
Ser. A, 7.1s, 1/1/17 Aa1 1,058,750
Washington (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,750,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 1,949,060
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $59,160,656) (b) $ 62,196,902
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $64,148,599.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
October 31, 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 October 31, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of
independent accountants.
(b) The aggregate identified cost on a tax basis is $59,231,920, resulting in gross unrealized appreciation and
depreciation of $3,169,834 and $204,852, respectively, or net unrealized appreciation of $2,964,982.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
October 31, 1998 was $1,457,813 or 2.3% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at October 31, 1998.
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 October 31, 1998.
The fund had the following industry group concentrations greater than 10% at October 31, 1998 (as a percentage
of net assets):
Hospitals/health care 19.5%
Transportation 18.2
Utilities 16.9
Water & sewerage 12.0
The fund had the following insurance concentrations greater than 10% at October 31, 1998 (as a percentage of
net assets):
MBIA 18.2%
AMBAC 12.1
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1998
Total Aggregate Face Expiration Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
Municipal Index Future
(long) $6,524,375 $6,534,463 Dec-98 $(10,088)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $59,160,656) (Note 1) $62,196,902
- -----------------------------------------------------------------------------------------------
Cash 865,678
- -----------------------------------------------------------------------------------------------
Interest receivable 1,372,163
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 205,000
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 417
- -----------------------------------------------------------------------------------------------
Total assets 64,640,160
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 39,000
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 267,254
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 113,731
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 4,850
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,983
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,028
- -----------------------------------------------------------------------------------------------
Other accrued expenses 57,715
- -----------------------------------------------------------------------------------------------
Total liabilities 491,561
- -----------------------------------------------------------------------------------------------
Net assets $64,148,599
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) (212,149)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,483,280)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,026,158
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $64,148,599
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed
preferred shares -- liquidation preference $10,000,000
- -----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares $14,904
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed
preferred shares -- liquidation preference $10,014,904
- -----------------------------------------------------------------------------------------------
Net assets available to common shares $54,133,695
- -----------------------------------------------------------------------------------------------
Net asset value per common share
($54,133,695 divided by 4,007,092 shares) $13.51
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1998
<S> <C>
Tax exempt interest income: $3,813,223
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 447,030
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 69,984
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 9,687
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 4,815
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 5,868
- -----------------------------------------------------------------------------------------------
Reports to shareholders 11,757
- -----------------------------------------------------------------------------------------------
Auditing 15,140
- -----------------------------------------------------------------------------------------------
Legal 11,364
- -----------------------------------------------------------------------------------------------
Postage 3,497
- -----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 55,159
- -----------------------------------------------------------------------------------------------
Other 16,406
- -----------------------------------------------------------------------------------------------
Total expenses 650,707
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (31,706)
- -----------------------------------------------------------------------------------------------
Net expenses 619,001
- -----------------------------------------------------------------------------------------------
Net investment income 3,194,222
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 92,349
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 489,374
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 440,582
- -----------------------------------------------------------------------------------------------
Net gain on investments 1,022,305
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $4,216,527
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $3,194,222 $3,458,269
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 581,723 (110,758)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 440,582 1,548,774
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,216,527 4,896,285
- ---------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (359,515) (356,863)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations applicable to common shareholders
(excluding cumulative undeclared dividends on
remarketed preferred shares of $14,904 and
$14,795, respectively) 3,857,012 4,539,422
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (3,206,786) (3,207,038)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 650,226 1,332,384
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 63,498,373 62,165,989
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess
of net investment income and undistributed
net investment income of $212,149 and
$159,930, respectively) $64,148,599 $63,498,373
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and end of year 4,007,092 4,007,092
- ---------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of year 200 200
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Nov. 29, 1993+
operating performance 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(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .80 .86 .82 .90 .85(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .25 .36 (.13) .85 (1.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.05 1.22 .69 1.75 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.09) (.09) (.09) (.09) (.06)(f)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.80) (.80) (.80) (.80) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions: (.89) (.89) (.89) (.89) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred share
offering costs -- -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period
(common shares) $13.51 $13.35 $13.02 $13.22 $12.36
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period
(common shares) $13.687 $12.875 $11.875 $11.875 $10.125
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value
(common shares) (%)(a) 12.92 15.54 6.89 25.77 (28.60)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $64,149 $63,498 $62,166 $62,985 $59,518
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.21 1.30 1.30 1.23 .85(e)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 5.25 5.90 5.59 6.30 5.89(e)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 28.13 37.75 123.89 165.21 148.90*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment.
(b) Ratios reflect net assets available to common shares only; net investment income ratio also reflects
reduction for dividend payments to preferred shareholders.
(c) 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)
(d) 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.
(e) 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.
(f) Preferred shares were issued on February 10, 1994. (Note 4)
</TABLE>
Notes to financial statements
October 31, 1998
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, 1998, the fund had a capital loss carryover of
approximately $4,063,000 available to offset future capital gains, if any.
The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
---------------- -----------------
$1,504,000 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 October 31, 1998 was 3.70%. The amount and character
of income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution ( or available capital
loss carryovers) under income tax regulations. For the year ended October
31, 1998, the fund required no such reclassifications.
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 year ended October 31, 1998, fund expenses were reduced by $31,706
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 Trustee fee, of which $410 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 year ended October 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $17,908,604 and
$17,390,960, 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 October 31, 1998, no such restrictions have been
placed on the fund.
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Results of October 1, 1998 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 1, 1998.
At the meeting, each of the nominees for Trustees was elected, as follows:
Common Shares Preferred Shares
Votes Votes
Votes for withheld Votes for withheld
Jameson Adkins Baxter 2,753,245 60,379 189 0
Hans H. Estin 2,731,479 82,145 189 0
J.A. Hill not applicable 189 0
Ronald J. Jackson 2,750,086 63,538 189 0
Paul L. Joskow 2,744,650 68,974 189 0
Elizabeth T. Kennan 2,740,369 73,255 189 0
Lawrence J. Lasser 2,753,550 60,074 189 0
John H. Mullin III 2,739,925 73,699 189 0
Robert E. Patterson not applicable 189 0
Donald S. Perkins 2,738,498 75,126 189 0
William F. Pounds 2,747,623 66,001 189 0
George Putnam 2,750,623 63,001 189 0
George Putnam, III 2,749,790 63,834 189 0
A.J.C. Smith 2,751,519 62,105 189 0
W. Thomas Stephens 2,743,650 69,974 189 0
W. Nicholas Thorndike 2,736,345 77,279 189 0
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows:
Common Shares -- 2,749,597 votes for, and 13,862 votes against, with
50,165 abstentions and broker non-votes.
Preferred Shares -- 189 votes for, and 0 votes against, with 0 abstentions
and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to making loans was approved as follows:
Common Shares -- 2,025,901 votes for, and 233,809 votes against, with
553,914 abstentions and broker non-votes.
Preferred Shares -- 189 votes for, and 0 votes against, with 0 abstentions
and broker non-votes.
A proposal to approve an amendment to the fund's fundamental policy
concerning the purchase of bonds paying interest subject to the federal
Alternative Minimum Tax was approved as follows:
Common Shares -- 2,118,417 votes for, and 167,282 votes against, with
527,925 abstentions and broker non-votes.
Preferred Shares -- 189 votes for, and 0 votes against, with 0 abstentions
and broker non-votes.
All tabulations are rounded to nearest whole number.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Brett C. Browchuk
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN47858 215 12/98
