Putnam
Investment Grade
Municipal Trust III
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Perhaps the best way to look at fiscal 1999's performance of Putnam
Investment Grade Municipal Trust III -- and the rest of the bond market,
for that matter -- is to focus on the opportunities that should lie in the
wake of the market's second worst year on record. Rising interest rates
have pulled bond yields higher, but in so doing they have driven prices
lower. The result has been subdued total returns across the board.
Municipal bonds are now yielding almost 97% as much as taxable bonds. This
has attractive tax implications, especially for higher-income investors.
Richard Wyke, your fund's manager, took advantage of this situation during
the fiscal year. However, Rick was not looking only at the current income
stream. He was also focusing on the attractive prices of some issues with
solid credentials -- and the potential positive effect on the portfolio
that an upswing in the bond market would have.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 15, 1999
Report from the Fund Manager
Richard P. Wyke
If history tells us anything about bond investing, it is this: Buying a
bond fund after a bad year is often a smart thing to do. The bond market
has endured its toughest year since 1994 and the second-worst year on
record, the result of three moves by the Federal Reserve Board to raise
interest rates. Within this challenging market environment, Putnam
Investment Grade Municipal Trust III met its goals of seeking high current
tax-exempt income by investing primarily in investment grade municipal
bonds. Not surprisingly though, along with higher interest rates came
falling bond prices and the fund's total return performance reflects this
unavoidable relationship.
Total return for 12 months ended 10/31/99
NAV Market price
- ------------------------------------------------------------------------
-3.76% -16.97%
- ------------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 5.
* MANAGEMENT MAINTAINS CONFIDENCE IN MUNICIPAL BONDS
After the bond bear markets of 1989 and 1994, considerable buying
opportunities were available to investors. We believe that similar
opportunities are present now for several reasons. The first is that a
municipal bond currently offers a 6% yield, an extremely high level for
the tax-free sector, registering almost 97% of the yield on a 30-year
taxable Treasury bond. With inflation still remarkably low at 3% or less,
after-tax, after-inflation income levels are the highest investors have
seen in years.
In addition, after three interest-rate increases by the Fed and several
inflation scares, it seems that most of the potentially negative
developments have already been priced into the market. We do not expect
that substantial inflation will materialize over the next several months.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 20.9%
Transportation 18.2%
Health care 16.0%
Water and sewerage 12.3%
Waste management 6.4%
Footnote reads:
*Based on net assets as of 10/31/99. Holdings will vary over time.
Transportation remains one of the portfolio's largest sectors with
holdings including both airline and toll road bonds. The Denver City and
County Airport revenue bonds continue to provide the fund with an
unusually high coupon of 8.75% even though some of the bonds have been
prerefunded and subsequently earned Aaa ratings. The Foothill/Eastern
Transit Corridor Agency Toll Road revenue bonds in California performed
well, especially in light of a prerefunding which took place in the
spring. As a result of the prerefunding, the bonds were upgraded to carry
the highest credit rating (AAA), which was good news for investors. After
the prerefunding and during the period, Rick believed that these bonds had
reached their peak potential and subsequently sold them.
The health-care industry remained an important contributor to your fund's
performance. Selectivity is crucial because hospitals are going through
some difficult times as a result of legislation enacted several years ago.
For this reason, many of the fund's health-care holdings are insured and
carry the highest AAA/Aaa ratings. The health-care bonds from the lower
end of the investment-grade spectrum (BBB/Baa) are important too because
they offer a healthy injection of higher yields into the portfolio.
One other important strategy we have used involves investing in
intermediate to long/intermediate maturities. As interest rates have
fallen and the yield curve has steepened, longer intermediate bonds have
outperformed other maturity ranges. Additionally, within each maturity
range, we rely heavily on credit analysis as an additional tool to
evaluate investments for the fund.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
A -- 17.7%
Baa/BBB -- 27.9%
Ba/BB -- 3.7%
Aaa/AAA -- 42.1%
Aa/AA -- 8.6%
Footnote reads:
*As a percentage of market value as of 10/31/99. A bond rated Baa/BBB or
higher is considered investment grade. All ratings reflect Moody's and
Standard & Poor's descriptions unless noted otherwise; percentages may
include unrated bonds considered by Putnam Management to be of comparable
quality. Ratings will vary over time.
The fund also relies on a leveraging strategy to enhance income. In
leveraging, the fund issues and sells preferred shares to institutional
short-term investors at low rates and reinvests the proceeds in
longer-term higher-paying bonds. After earnings from the bonds are used to
pay dividends to the preferred shareholders, the surplus is used to
enhance income.
* STRONGER POTENTIAL FOR BONDS SEEN IN NEAR FUTURE
The threat of inflation remains the primary force driving volatility in
both the bond and stock markets. The historical connection between
prolonged growth and inflation haunts the markets, even as actual reported
inflation remains low. Fortunately the most recent interest-rate increase
had already been priced into the bond market's adverse behavior, clearing
the way for better performance.
Furthermore, with equities beginning to look vulnerable and with concern
over Y2K issues likely to grow in the coming months, bonds may gain appeal
as a safe haven asset in the fourth quarter.
With this sentiment and the belief that bonds are fairly valued as of this
writing, we are inclined to take slightly more risk in the fund now,
extending maturities as opportunities arise. It has always been our belief
that choppy markets provide the opportunity to add yield, find exceptional
credits, and improve call protection -- strategies that can be extremely
rewarding for shareholders over time.
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 10/31/99, 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 10/31/99
Lehman Brothers
Market Municipal Consumer
(common shares) NAV price Bond Index price index
- ---------------------------------------------------------------------------
1 year -3.76% -16.97% -1.78% 2.69%
- ---------------------------------------------------------------------------
5 years 36.54 45.69 39.77 12.51
Annual average 6.43 7.82 6.93 2.39
- ---------------------------------------------------------------------------
Life of fund (11/29/93) 27.31 4.02 34.90 15.36
Annual average 4.16 0.67 5.19 2.44
- ---------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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 12 MONTHS ENDED 10/31/99
- ---------------------------------------------------------------------------
Distributions (common shares)
- ---------------------------------------------------------------------------
Number 12
- ---------------------------------------------------------------------------
Income $0.790
- ---------------------------------------------------------------------------
Capital gains1 --
- ---------------------------------------------------------------------------
Total $0.790
- ---------------------------------------------------------------------------
Preferred shares Series A (200 shares)
- ---------------------------------------------------------------------------
Income $1,615.70
- ---------------------------------------------------------------------------
Capital gains1 --
- ---------------------------------------------------------------------------
Total $1,615.70
- ---------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ---------------------------------------------------------------------------
10/31/98 $13.51 $13.688
- ---------------------------------------------------------------------------
10/31/99 12.24 10.688
- ---------------------------------------------------------------------------
Current return (common shares)
- ---------------------------------------------------------------------------
Current dividend rate2 6.03% 6.91%
- ---------------------------------------------------------------------------
Taxable equivalent3 9.98 11.44
- ---------------------------------------------------------------------------
1Capital 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.
2Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 9/30/99 (most recent calendar quarter)
Market
(common shares) NAV price
- --------------------------------------------------------------------------
1 year -2.67% -14.81%
- --------------------------------------------------------------------------
5 years 35.38 41.37
Annual average 6.25 7.17
- --------------------------------------------------------------------------
Life of fund (11/29/93) 29.26 5.23
Annual average 4.50 0.88
- --------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value 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 into 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.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-end funds, a separate
table is provided for each share class.
Report of independent accountants
For the fiscal year ended October 31, 1999
To the Trustees and Shareholders of
Putnam Investment Grade Municipal Trust III
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, 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, 1999, 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, 1999 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 9, 1999
<TABLE>
<CAPTION>
The fund's portfolio
October 31, 1999
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
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 (96.9%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Alaska (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 Aa1 $ 1,067,500
Arkansas (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 Baxter Cnty., Hosp. Rev. Bonds, Ser. B, 5 5/8s, 9/1/28 Baa2 342,000
California (4.9%)
- --------------------------------------------------------------------------------------------------------------------------
1,250,000 CA State U. IFB, AMBAC, 8.443s, 11/1/21
(acquired 9/2/94, cost $1,339,094) (RES) Aaa 1,372,988
500,000 CA Statewide Cmnty. Dev. Auth. COP
(The Internext Group), 5 3/8s, 4/1/30 BBB 416,875
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
5.681s, 4/23/08 (SEG) Aaa 1,107,500
-------------
2,897,363
Colorado (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
2,205,000 Ser. A, 8 3/4s, 11/15/23 Baa1 2,386,913
795,000 Ser. A, 8 3/4s, 11/15/23, Prerefunded Aaa 876,488
1,370,000 Ser. A, 8 1/2s, 11/15/23 Baa1 1,443,706
130,000 Ser. A, 8 1/2s, 11/15/23, Prerefunded Aaa 138,289
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,166,250
-------------
6,011,646
District of Columbia (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
600,000 DC G.O. bonds, Ser. B, FSA, 5 1/4s, 6/1/26 AAA 523,500
Florida (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
880,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A+ 908,345
1,795,000 (Waste-Energy LP North), 7.95s, 12/1/08 A+ 1,852,817
500,000 Orange Cnty., Hlth. Facs. Auth. Rev. Bonds
(Regl. Hlth. Care Syst.), Ser. E, 6s, 10/1/26 A2 476,875
-------------
3,238,037
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 544,375
Illinois (6.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,500,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(American Airlines, Inc.), 8.2s, 12/1/24 Baa1 1,683,750
750,000 IL Dev. Fin. Auth. Hosp. Rev. Bonds (Adventist Hlth.
Syst./Sunbelt Obligation), 5.65s, 11/15/24 AAA 643,125
1,605,000 IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks Med. Ctr.),
Ser. D, 9 1/2s, 11/15/15 A- 1,708,490
-------------
4,035,365
Indiana (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
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 2,092,500
Kansas (4.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Burlington, Poll. Ctrl. Rev. Bonds (Kansas Gas &
Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,520,000
Kentucky (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Boone Cnty., Poll. Ctrl. Rev. Bonds (Dayton Pwr. &
Lt. Co.), Ser. A, 6 1/2s, 11/15/22 Aa3 1,037,500
Louisiana (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,420,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 1,487,450
Massachusetts (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of
Central MA), Ser. B, AMBAC, 9.92s, 6/23/22 Aaa 810,000
1,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53, MBIA,
6.15s, 12/1/29 Aaa 1,000,000
830,000 MA State Port Auth. Rev. Bonds, AMBAC,
13s, 7/1/13 Aaa 1,276,125
-------------
3,086,125
Minnesota (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 987,438
Mississippi (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Mississippi Bus. Fin. Corp. Poll. Ctrl. Rev. Bonds
(Syst. Energy Res., Inc.), 5.9s, 5/1/22 BBB- 440,000
Nevada (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
1,000,000 (NV Pwr. Co.), Ser. A, 5.9s, 11/1/32 BBB 908,750
1,000,000 (Southwest Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa2 1,058,750
-------------
1,967,500
New Jersey (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,165,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Newcomb Med. Ctr.), Ser. A, 7 7/8s, 7/1/03 Ba3 1,191,387
New York (9.6%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds, Ser. A, MBIA, 5 5/8s, 7/1/27 Aaa 473,125
725,000 NY City, G.O. Bonds, Ser. B, 7 1/2s, 2/1/06 A3 779,375
275,000 NY City, G.O. Bonds, Ser. B, 7 1/2s, 2/1/06,
Prerefunded A3 296,656
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds
2,000,000 Ser. C, 7 3/4s, 6/15/20 Aaa 2,137,500
1,000,000 Ser. B, 5 3/4s, 6/15/26 A1 950,000
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 1,015,360
-------------
5,652,016
North Carolina (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Pwr. Syst. Rev. Bonds
1,000,000 (No. 1 Catawba Elec.), Ser. B, 6 1/2s, 1/1/20 BBB+ 980,000
500,000 Ser. B, 5.65s, 1/1/16 BBB 458,125
500,000 NC Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. A,
5 3/4s, 1/1/26 BBB 443,125
-------------
1,881,250
Ohio (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
400,000 OH State Env. Impt. Rev. Bonds (USX Corp.),
5 5/8s, 5/1/29 Baa2 352,000
Oklahoma (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
200,000 OK Dev. Fin. Auth. Rev. Bonds (Hillcrest Healthcare),
Ser. A, 5 5/8s, 8/15/29 BBB+ 162,750
Pennsylvania (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds, Ser. A,
(Environmental Impt.) 6.7s, 12/1/20 Baa2 1,035,000
1,000,000 Delaware Cnty., Indl. Dev. Auth. Rev. Bonds, Ser. A,
6.2s, 7/1/19 BB- 930,000
-------------
1,965,000
Puerto Rico (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 PR Elec. Pwr. Auth. IFB, FSA, 8.018s, 7/1/23 Aaa 552,500
Tennessee (5.1%)
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2,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 9.23s, 1/1/22 Aaa 2,983,500
Texas (12.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18 AAA/P 2,655,000
1,000,000 Dallas-Fort Worth Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines), 6 3/8s, 5/1/35 Baa1 958,750
1,250,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
10.595s, 6/22/21 Aaa 1,387,500
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 2,157,500
300,000 Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.), 6s, 7/1/29 BBB/P 270,000
-------------
7,428,750
Virginia (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 VA State Hsg. Dev. Auth. Rev. Bonds, Ser. A,
7.1s, 1/1/17 Aa1 1,026,250
Washington (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,750,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 1,771,873
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $58,425,752) (b) $57,245,575
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $59,048,456.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
October 31, 1999 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, 1999. 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 $58,497,016, resulting in gross unrealized appreciation and
depreciation of $1,006,984 and $2,258,425, respectively, or net unrealized depreciation of $1,251,441.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
October 31, 1999 was $1,372,988 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 31,1999.
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, 1999.
The fund had the following industry group concentrations greater than 10% at October 31, 1999 (as a percentage of
net assets):
Utilities 20.9%
Transportation 18.2
Health care 16.0
Water and sewer 12.3
The fund had the following insurance concentrations greater than 10% at October 31, 1999 (as a percentage of net
assets):
AMBAC 14.5%
MBIA 10.0
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
Municipal Index Future
(long) $14,900,625 $15,220,394 Dec-99 $(319,769)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $58,425,752) (Note 1) $57,245,575
- -----------------------------------------------------------------------------------------------
Cash 1,817,074
- -----------------------------------------------------------------------------------------------
Interest receivable 1,393,456
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 85,000
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 135,000
- -----------------------------------------------------------------------------------------------
Total assets 60,676,105
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 246,437
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 976,345
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 106,671
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian services (Note 2) 241,562
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,118
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 354
- -----------------------------------------------------------------------------------------------
Other accrued expenses 46,162
- -----------------------------------------------------------------------------------------------
Total liabilities 1,627,649
- -----------------------------------------------------------------------------------------------
Net assets $59,048,456
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) 55,813,561
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (308,110)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,957,049)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (1,499,946)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $59,048,456
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Series A remarketed preferred shares $10,000,000
- -----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 16,069
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares -- liquidation preference $10,016,069
- -----------------------------------------------------------------------------------------------
Net assets available to common shares $49,032,387
- -----------------------------------------------------------------------------------------------
Net asset value per common share
($49,032,387 divided by 4,007,092 shares) $12.24
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1999
<S> <C>
Tax exempt interest income: $ 4,022,495
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 437,362
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 64,641
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 9,410
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,473
- -----------------------------------------------------------------------------------------------
Amortization of organization expense (Note 1) 417
- -----------------------------------------------------------------------------------------------
Reports to shareholders 13,489
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 59,112
- -----------------------------------------------------------------------------------------------
Legal 1,749
- -----------------------------------------------------------------------------------------------
Postage 5,853
- -----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 39,777
- -----------------------------------------------------------------------------------------------
Other 13,420
- -----------------------------------------------------------------------------------------------
Total expenses 648,778
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (18,744)
- -----------------------------------------------------------------------------------------------
Net expenses 630,034
- -----------------------------------------------------------------------------------------------
Net investment income 3,392,461
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 218,365
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (696,443)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (4,526,104)
- -----------------------------------------------------------------------------------------------
Net loss on investments (5,004,182)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(1,611,721)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 3,392,461 $ 3,194,222
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (478,078) 581,723
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (4,526,104) 440,582
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (1,611,721) 4,216,527
Distributions to remarketed preferred shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (323,140) (359,515)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on remarketed preferred shares of
$16,069 and $14,904, respectively) (1,934,861) 3,857,012
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (3,123,262) (3,206,786)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income (42,020) --
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (5,100,143) 650,226
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 64,148,599 63,498,373
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess
of net investment income of $308,110 and
$212,149, respectively) $59,048,456 $64,148,599
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)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $13.51 $13.35 $13.02 $13.22 $12.36
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .85 .80 .86 .82 .90
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.25) .25 .36 (.13) .85
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.40) 1.05 1.22 .69 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.08) (.09) (.09) (.09) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.78) (.80) (.80) (.80) (.80)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.01) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions: (.87) (.89) (.89) (.89) (.89)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period
(common shares) $12.24 $13.51 $13.35 $13.02 $13.22
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period
(common shares) $10.688 $13.688 $12.875 $11.875 $11.875
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
market value
(common shares) (%)(a) (16.97) 12.92 15.54 6.89 25.77
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $59,048 $64,149 $63,498 $62,166 $62,985
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.24 1.21 1.30 1.30 1.23
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 5.86 5.25 5.90 5.59 6.30
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 17.20 28.13 37.75 123.89 165.21
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total 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) Includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
</TABLE>
Notes to financial statements
October 31, 1999
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
of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
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. Restricted
securities are stated at fair value following procedures approved by the
Trustees. 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). Gains or losses on securities sold are determined on
the identified cost basis. 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, 1999, the fund had a capital loss carryover of
approximately $4,873,000 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
810,000 October 31, 2007
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, 1999 was 3.40%. The amount and character
of income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences include temporary and permanent differences
of losses on wash sales, dividends payable, unrealized gains and losses on
certain futures contracts and prior year straddle loss deferrals.
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,
1999, the fund reclassified $4,309 to decrease paid-in-capital and
accumulated net realized losses on investments.
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 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 have been fully
amortized on a straight-line basis over a five-year period.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.70% of the first $500
million of the average net asset value of the fund, 0.60% of the next $500
million, 0.55% of the next $500 million, and 0.50% of any amount over $1.5
billion.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred
shares for that period exceed the fund's 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, 1999, fund expenses were reduced by $18,744
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $411 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. 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
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 a 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
Purchases and sales of securities
During the year ended October 31, 1999, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $10,377,086 and $11,330,356, respectively. There were no
purchases or sales of U.S. government obligations.
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, 1999, 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 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Results of October 7, 1999 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 7, 1999.
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 3,681,871 43,437 137 0
Hans H. Estin 3,685,096 40,212 137 0
J.A. Hill not applicable 137 0
Ronald J. Jackson 3,683,008 42,300 137 0
Paul L. Joskow 3,684,106 41,202 137 0
Elizabeth T. Kennan 3,682,796 42,512 137 0
Lawrence J. Lasser 3,683,571 41,737 137 0
John H. Mullin III 3,684,106 41,202 137 0
Robert E. Patterson not applicable 137 0
William F. Pounds 3,682,996 42,312 137 0
George Putnam 3,685,096 40,212 137 0
George Putnam, III 3,683,971 41,337 137 0
A.J.C. Smith 3,682,796 42,512 137 0
W. Thomas Stephens 3,681,806 43,502 137 0
W. Nicholas Thorndike 3,685,096 40,212 137 0
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows: Common Shares
- -- 3,680,569 votes for, and 12,398 votes against, with 32,341 abstentions
and broker non-votes. Preferred Shares -- 137 votes for, and 0 votes
against, with 0 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
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Fund information
WEB SITE
www.putnaminv.com
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
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
Stephen Oristaglio
Vice President
Richard P. Wyke
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our Web site (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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INVESTMENTS
- ---------------------
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