Putnam
Investment Grade
Municipal Trust III
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
All the ingredients for positive municipal bond performance have been
available for some time now: robust economic growth, negligible inflation,
and strong municipal balance sheets. The only drawback has been a slight
rise in long-term interest rates. Nevertheless, thanks to careful security
selection and well-placed sector bets, Putnam Investment Grade Municipal
Trust III was able to deliver solid returns for the six months ended April
30, 1999.
Total return for 6 months ended 4/30/99
Net asset value Market price
- ----------------------------------------------------------------
1.50% 0.64%
- ----------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* CALL PROTECTION A TOP PRIORITY
In a financial world where market highs and lows seem to be making
headlines daily, the municipal market has unquestionably been one of the
calmest. Municipal bond yields -- which rise as bond prices fall -- have
moved up less than 20 basis points since the beginning of the year, while
Treasury yields rose more in February than in any other single month in 10
years. While this means that municipal yields are heading back to more
traditional ratios, municipal yields are still quite attractive at 90% of
comparable Treasuries.
In this environment, one of fund manager Rick Wyke's key challenges was to
deliver an attractive level of income while maintaining high credit
quality. Although yields on municipal securities have risen slightly over
the past several months, they had fallen considerably over the past
several years. That means currently available yields are much lower than
the yields provided by many of the portfolio's older bond holdings. As
these older bonds reach their call dates, Rick continues to seek new
holdings with distant call dates to maximize the length of time these
bonds will generate income for the fund.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Transportation 19.7%
Health care 19.6%
Utilities 12.5%
Water and
sewer 12.0%
Housing 4.9%
Footnote reads:
*Based on net assets as of 4/30/99. Holdings will vary over time.
* EMPHASIS ON SECURITY AND SECTOR SELECTION
While in-depth research and careful individual security selection is the
foundation of your fund's strategy, Rick also focuses on states and
sectors that he believes offer a combination of attractive income and
performance potential. The fund's New York City general obligation bonds
continue to fall into this category, as sustained economic growth, strong
financial operations, and a sustained record of accurate revenue forecasts
buoyed their credit worthiness.
Rick has also identified two industry sectors where taking on a little
more credit risk can have rewarding results: transportation and utilities.
The economy's strength continues to provide solid underpinnings for the
transportation industry -- especially airlines and air freight. As an
example, Denver International Airport revenue bonds continue to provide
solid income for the fund. A record 36.8 million passengers traveled
through this airport in 1998, while net income and revenues increased as
well.
In the utility sector, Rick believes that while deregulation and
restructuring are still in the early stages, the prices of many municipal
electric utility bonds have already been fully discounted and now
represent significant value. For example, the fund's Consolidated Edison
holdings received a boost in creditworthiness as ConEd completed a
profitable sale of its final bundle of power generation facilities. Two
Nevada revenue bond issues, Southwest Gas Company and Nevada Power
Company, contributed to the fund's positive performance. Nevada Power has
a strong service territory with a concentration of non-nuclear power
assets. The proposed merger of Southwest Gas with ONEOK would create the
largest independent gas distributor in the United States. While these
holdings, along with others discussed in this report, were viewed
favorably at the end of the period, all are subject to review and
adjustment in accordance with the fund's investment strategy and may vary
in the future.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
A/A -- 15.0%
BBB/Baa -- 26.9%
BB/Ba -- 2.4%
AAA/Aaa -- 47.3%
AA/Aa -- 8.4%
Footnote reads:
*As a percentage of market value as of 4/30/99. A bond rated Baa or higher
is considered investment grade. All ratings reflect Standard & Poor's and
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.
* LOW INTEREST RATES INCREASED VALUE OF LEVERAGING
Low interest rates were advantageous for the fund's leveraging strategy,
which historically has been useful in enhancing current 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 for the common shareholders. With the Federal Reserve Board
lowering short-term interest rates three times last fall and long-term
interest rates edging up over the past several months, the spread between
short- and long-term rates widened, making leveraging an even more
successful income-generating strategy over the annual period.
With indications that inflation may be starting to rise, the consumer
price index is moving towards an annualized core inflation rate of
approximately 2%. Since inflation in 1998 was practically nonexistent, a
move to 2% may seem tremendous, but is actually still well below what has
been generally considered average (4%). And despite some signs of
inflation, we still live predominately in a deflationary world where many
prices are falling. Just look at online stock trading prices and the
discounts available from online bookstores for evidence of deflation.
It is important to keep inflation in mind when investors determine what
constitutes a good rate of return. Simply put, a yield of 6% with 2%
inflation is still a solid return, especially once the psychology of an
advancing stock market begins to shift. When that happens, a steady 4%
after-inflation yield looks very good in addition to the benefit of
substantially less volatility.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 16, 1999
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 4/30/99, 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 4/30/99
Lehman Brothers
Market Municipal Bond Consumer
(common shares) NAV price Index price index
- -----------------------------------------------------------------------
6 months 1.50% 0.64% 1.75% 1.47%
- -----------------------------------------------------------------------
1 year 6.24 11.89 6.95 2.28
- -----------------------------------------------------------------------
5 years 42.33 57.59 43.57 12.75
Annual average 7.31 9.52 7.50 2.43
- -----------------------------------------------------------------------
Life of fund (11/29/93) 34.27 26.08 39.73 13.99
Annual average 5.59 4.37 6.38 2.45
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 3/31/99 (most recent calendar quarter)
Market
(common shares) NAV price
- -----------------------------------------------------------------------
6 months 0.83% 2.99%
- -----------------------------------------------------------------------
1 year 5.39 10.22
- -----------------------------------------------------------------------
5 years 41.42 56.56
Annual average 7.18 9.38
- -----------------------------------------------------------------------
Life of fund (since 11/29/93) 33.91 27.22
Annual average 5.63 4.62
- -----------------------------------------------------------------------
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 6 MONTHS ENDED 4/30/99
- -----------------------------------------------------------------------
Distributions (common shares)
- -----------------------------------------------------------------------
Number 6
- -----------------------------------------------------------------------
Income $0.4002
- -----------------------------------------------------------------------
Capital gains1 --
- -----------------------------------------------------------------------
Total $0.4002
- -----------------------------------------------------------------------
Preferred shares Series A (200 shares)
- -----------------------------------------------------------------------
Income $856.25
- -----------------------------------------------------------------------
Total $856.25
- -----------------------------------------------------------------------
Share value (common shares) NAV Market price
- -----------------------------------------------------------------------
10/31/98 $13.51 $13.687
- -----------------------------------------------------------------------
4/30/99 13.31 13.375
- -----------------------------------------------------------------------
Current return (common shares/end of period)
- -----------------------------------------------------------------------
Current dividend rate2 6.01% 5.98%
- -----------------------------------------------------------------------
Taxable equivalent3 9.95 9.90
- -----------------------------------------------------------------------
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.
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 no 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 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 is determined. All investment and non-investment 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
amounts 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-ended funds, a separate table is
provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
April 30, 1999 (Unaudited)
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 (98.3%) (a)
PRINCIPAL AMOUNT RATING (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+ $ 1,098,750
California (11.1%)
- --------------------------------------------------------------------------------------------------------------------------
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, 8.443s, 11/1/21
(acquired 6/6/95, cost $1,339,094) (RES) Aaa 1,434,375
500,000 CA Statewide Cmnty. Dev. Auth. COP
(The Internext Group), 5 3/8s, 4/1/30 BBB 490,625
1,500,000 Foothill/Eastern Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, Sr. lien, Ser. A, stepped coupon
zero % (7s, 1/1/05) 1/1/08 (STP) Baa3 1,222,500
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
8.498s, 4/23/08 (SEG) Aaa 1,228,750
--------------
7,032,500
Colorado (9.9%)
- --------------------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
2,205,000 Ser. A, 8 3/4s, 11/15/23 Baa1 2,455,816
795,000 Ser. A, 8 3/4s, 11/15/23, Prerefunded Aaa 905,306
1,370,000 Ser. A, 8 1/2s, 11/15/23 Baa1 1,477,888
130,000 Ser. A, 8 1/2s, 11/15/23, Prerefunded Aaa 142,025
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,258,750
--------------
6,239,785
Florida (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
880,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A3 925,294
1,795,000 (Waste-Energy LP North), 7.95s, 12/1/08 A3 1,887,389
--------------
2,812,683
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 589,375
Illinois (7.5%)
- --------------------------------------------------------------------------------------------------------------------------
IL Hlth. Fac. Auth. Rev. Bonds
1,690,000 (Glenoaks Med. Ctr.), Ser. D, 9 1/2s, 11/15/15 Baa1 1,854,775
2,000,000 (Highland Pk. Hosp.), Ser. A, MBIA, 5 3/4s,
10/1/17 Aaa 2,140,000
750,000 IL Dev. Fin. Auth. Hosp. Rev. Bonds
(Adventist Hlth. Syst./Sunbelt Obligation),
5.65s, 11/15/24 A- 738,750
--------------
4,733,525
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 2,150,000
Kansas (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Burlington, Poll. Ctrl. Rev. Bonds
(Kansas Gas & Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,592,000
Kentucky (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Boone Cnty. Poll., Ctrl. Rev. Bonds
(Coll-Dayton Pwr. & Lt. Co.), Ser. A, 6 1/2s,
11/15/22 Aa3 1,097,500
Louisiana (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,420,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 1,526,500
Massachusetts (5.4%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. IFB
(Med. Ctr. of Central MA), Ser. B,
AMBAC, 9.92s, 6/23/22 Aaa 981,563
1,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53,
MBIA, 6.15s, 12/1/29 Aaa 1,051,250
830,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 1,381,950
--------------
3,414,763
Minnesota (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 1,024,438
Nevada (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
1,000,000 (Southwest Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa2 1,096,250
1,000,000 (NV Pwr. Co.), Ser. A, 5.9s, 11/1/32 BBB- 1,018,750
--------------
2,115,000
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 1,520,475
New York (10.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds, Ser. A, MBIA, 5 5/8s, 7/1/27 Aaa 1,048,750
NY City, G.O. Bonds
725,000 Ser. B, 7 1/2s, 2/1/06 A3 799,313
275,000 Ser. B, 7 1/2s, 2/1/06, Prerefunded A3 305,938
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds
2,000,000 Ser. C, 7 3/4s, 6/15/20 Aaa 2,197,500
1,000,000 Ser. B, 5 3/4s, 6/15/26 A1 1,060,000
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 1,031,300
--------------
6,442,801
Pennsylvania (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Allegheny Cnty., Indl, Dev. Rev. Bonds, 6.7s, 12/1/20 Baa2 1,087,500
1,000,000 Delaware Cnty., Indl. Dev. Auth. Rev. Bonds,
Ser. A, 6.2s, 7/1/19 A- 1,035,000
--------------
2,122,500
Puerto Rico (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,500,000 Cmnwlth. of PR, Hwy. Trans. Auth. Rev. Bonds,
Ser. A, 5s, 7/1/38 A 1,449,375
500,000 PR Elec. Pwr. Auth. IFB, FSA, 8.018s, 7/1/23 Aaa 582,500
--------------
2,031,875
Tennessee (6.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Maury Cnty. Indl. Dev. Board Poll. Control
Rev. Bonds (Saturn Corp.), 6 1/2s, 9/1/24 A2 1,102,500
2,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 9.23s, 1/1/22 Aaa 3,125,250
--------------
4,227,750
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 2,760,000
1,250,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
10.595s, 6/22/21 Aaa 1,446,875
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 2,225,000
--------------
6,431,875
Virginia (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 VA State Hsg. Dev. Auth. Rev. Bonds, Ser. A,
7.1s, 1/1/17 Aa1 1,048,750
Washington (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,750,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 1,964,375
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $59,936,996) (b) $ 62,217,220
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $63,331,000.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at April 30,
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 April 30, 1999. Securities rated by
Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $60,008,258, resulting in gross unrealized appreciation and
depreciation of $2,716,943 and $507,981, respectively, or net unrealized appreciation of $2,208,962.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
April 30, 1999 was $1,434,375 or 2.3% of net assets.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will
begin receiving interest income at this rate.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at April 30, 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 April 30, 1999.
The fund had the following industry group concentration greater than 10% at April 30, 1999 (as a percentage of net
assets):
Transportation 19.7%
Health care 19.6
Utilities 12.5
Water and sewer 12.0
The fund had the following insurance concentrations greater than 10% at April 30, 1999 (as a percentage of net assets):
MBIA 18.2%
AMBAC 12.1
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1999 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
Muni Bond Index (Long) $6,405,750 $6,395,195 June-99 $10,555
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $59,936,996) (Note 1) $62,217,220
- -----------------------------------------------------------------------------------------------
Cash 242,591
- -----------------------------------------------------------------------------------------------
Interest receivable 1,372,151
- -----------------------------------------------------------------------------------------------
Total assets 63,831,962
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 66,625
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 267,253
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 111,290
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 8,120
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,055
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,325
- -----------------------------------------------------------------------------------------------
Other accrued expenses 37,294
- -----------------------------------------------------------------------------------------------
Total liabilities 500,962
- -----------------------------------------------------------------------------------------------
Net assets $63,331,000
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) (275,800)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,501,849)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,290,779
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $63,331,000
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Series A remarketed preferred shares $10,000,000
- -----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 863
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares -- liquidation preference $10,000,863
- -----------------------------------------------------------------------------------------------
Net assets available to common shares $53,330,137
- -----------------------------------------------------------------------------------------------
Net asset value per common share
($53,330,137 divided by 4,007,092 shares) $13.31
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1999 (Unaudited)
<S> <C>
Tax exempt interest income: $2,009,762
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 221,017
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 34,540
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,805
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 1,291
- -----------------------------------------------------------------------------------------------
Amortization of organization expense (Note 1) 417
- -----------------------------------------------------------------------------------------------
Reports to shareholders 6,572
- -----------------------------------------------------------------------------------------------
Auditing 22,459
- -----------------------------------------------------------------------------------------------
Postage 3,288
- -----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 10,199
- -----------------------------------------------------------------------------------------------
Other 3,489
- -----------------------------------------------------------------------------------------------
Total expenses 308,077
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (9,397)
- -----------------------------------------------------------------------------------------------
Net expenses 298,680
- -----------------------------------------------------------------------------------------------
Net investment income 1,711,082
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 53,191
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (71,760)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (735,379)
- -----------------------------------------------------------------------------------------------
Net loss on investments (753,948)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 957,134
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1999* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 1,711,082 $ 3,194,222
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (18,569) 581,723
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (735,379) 440,582
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 957,134 4,216,527
Distributions to remarketed preferred shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (171,250) (359,515)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed
preferred shares of $863 and $14,904, respectively) 785,884 3,857,012
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (1,603,483) (3,206,786)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (817,599) 650,226
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 64,148,599 63,498,373
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess
of net investment income of $275,800 and
$212,149, respectively) $63,331,000 $64,148,599
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning
and end of period 4,007,092 4,007,092
- ---------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding
at beginning and end of period 200 200
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 Nov. 29, 1993+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period (common shares) $13.51 $13.35 $13.02 $13.22 $12.36 $14.02(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .80 .86 .82 .90 .85(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.19) .25 .36 (.13) .85 (1.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 1.05 1.22 .69 1.75 (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.04) (.09) (.09) (.09) (.09) (.06)(f)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.40) (.80) (.80) (.80) (.80) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions: (.44) (.89) (.89) (.89) (.89) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred share
offering costs -- -- -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $13.31 $13.51 $13.35 $13.02 $13.22 $12.36
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) $13.375 $13.687 $12.875 $11.875 $11.875 $10.125
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at market value
(common shares) (%)(a) .64* 12.92 15.54 6.89 25.77 (28.60)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $63,331 $64,149 $63,498 $62,166 $62,985 $59,518
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) .57* 1.21 1.30 1.30 1.23 .85(e)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 2.89* 5.25 5.90 5.59 6.30 5.89(e)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 2.37* 28.13 37.75 123.89 165.21 148.90*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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) 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
April 30, 1999 (Unaudited)
Note 1
Significant accounting policies
Putnam Investment Grade Municipal Trust III, (the "fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company. The fund's investment objective
is to provide as high a level of current income exempt from federal income
tax as is believed to be consistent with preservation of capital. The fund
intends to achieve its objective by investing in a diversified portfolio
of investment grade municipal securities that Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc., believes does not involve undue
risk to income or principal.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The fair
market value of restricted securities is determined by Putnam Management
following procedures approved by the Trustees, and such valuations and
procedures are reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
It is also the intention of the fund to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
At October 31, 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 April 30, 1999 was 3.06%. The amount and character of
income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations.
F) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund, less all
liabilities and the liquidation preference of any outstanding remarketed
preferred shares, by the total number of common shares outstanding.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on stepped-coupon bonds,
zero coupon bonds and original issue discount 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 as of April 30,
1999.
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 0.70% of the liquidation
preference of the remarketed preferred shares outstanding during the
period).
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended April 30, 1999, fund expenses were reduced by
$9,397 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 $400 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the six months ended April 30, 1999, purchases and sales of
investment securities other than short-term investments aggregated
$2,258,055 and $1,476,125, respectively. There were no purchases and sales
of U.S. government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Remarketed preferred shares
The remarketed preferred shares are redeemable at the option of the fund
on any dividend payment date at a redemption price of $50,000 per share,
plus an amount equal to any dividends accumulated on a daily basis but
unpaid through the redemption date (whether or not such dividends have
been declared) and, in certain circumstances, a call premium.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue
Code of 1986. To the extent that the fund earns taxable income and capital
gains by the conclusion of a fiscal year, it will be required to apportion
to the holders of the remarketed preferred shares throughout that year
additional dividends as necessary to result in an after-tax equivalent to
the applicable dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred
shares as of the last business day of each month in which any such shares
are outstanding. Additionally, the fund is required to meet more stringent
asset coverage requirements under terms of the remarketed preferred shares
and the shares' rating agencies. Should these requirements not be met, or
should dividends accrued on the remarketed preferred shares not be paid,
the fund may be restricted in its ability to declare dividends to common
shareholders or may be required to redeem certain of the remarketed
preferred shares. At April 30, 1999, no such restrictions have been placed
on the fund.
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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
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
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our 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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