Putnam
Investment Grade
Municipal Trust III
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-00
[SCALE LOGO OMITTED]
FROM THE CHAIRMAN
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[COPYRIGHT] Karsh, Ottawa
Dear Shareholder:
Although it is still wavering from a year of steady interest-rate
increases, the municipal bond market may slowly be approaching the point
at which the news gets better. It may not seem like good news, but a
responsible Federal Reserve Board, like the one we have, is positive for
bond investors. True, Fed policy and rising interest rates have had a
negative effect on bond prices as evidenced by the performance of Putnam
Investment Grade Municipal Trust III for the 6 months ended April 30,
2000. However, in the longer run, short-term interest rate increases
should keep inflation, the bond market's worst enemy, under control.
Total return for 6 months ended 4/30/00
NAV Market price
-------------------------------
2.24% -1.25%
-------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 7.
* HIGH LEVEL OF INCOME SHOULD COMFORT INVESTORS
While long-term insured municipal bonds have historically yielded about
85% of comparable 30-year U.S. Treasury bonds, that ratio is now over
95%. That close relationship translates into a high level of tax-free
income for most municipal bond funds, including your fund.
There is a reason for the close relationship between Treasury bonds and
municipal bonds. The Treasury's highly publicized debt buyback program
has reduced the supply of outstanding long-term bonds at the same time
that investors are demanding the relative safety of government bonds.
Consequently, because of the relationship of supply and demand, Treasury
bond prices have risen while yields have moved down so they are now
closer to municipal bond yields.
* LOWER TIER OF INVESTMENT GRADE SECTOR OFFERS OPPORTUNITY
Your fund's management team is working hard to maintain the fund's
relatively high level of tax-free income. One way the managers seek to
do this is by looking for securities at the lower end of the
investment-grade spectrum, primarily BBB/Baa-rated credits. This is the
point at which they rely heavily on the expertise of the analytical team
because there is intense competition for an extremely limited supply of
lower-level investment-grade bonds.
Through in-depth research by the credit analysts, the managers have been
able to uncover several bonds that fell into the lower investment-grade
category and carry attractive coupons. Both bond issues came from the
transportation sector, the portfolio's third largest sector. One bond,
issued by the Connector 2000 Association, Inc., is to build an eastern
loop highway around the City of Greenville, South Carolina, and allow
better access to the airport. This project is ahead of its schedule and
should be open to traffic in early 2001. These bonds are rated BBB- by
Standard & Poor's, Inc.
The E470 Public Highway Authority in Colorado brought the other
appealing revenue bond issue to market. The bonds were issued to extend
an existing toll road that will loop around the eastern side of Denver,
bringing better access to the Denver Airport from the north. The bonds
are rated BBB- by Standard & Poors and Baa3 by Moody's. Because the
revenues pledged to pay the principal and interest on both of these
projects appeared stable, the managers purchased both securities for the
portfolio.
Another attractive purchase, Mountain States Health Alliance revenue
bonds (Tennessee), came from a sector that has been under considerable
scrutiny: the hospital/health-care sector. The scrutiny began with the
Balanced Budget Act of 1997 and has negatively affected hospital
revenues ever since. The situation grew worse with the excess capacity
of hospitals and beds, the growth of managed care, and the many
unsuccessful acquisitions that took place in the past few years.
Putnam's analysts now believe that there is justification for a more
optimistic outlook in the health-care sector because of rumblings of
further relief from Congress as well as signs of better management
within the sector.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 20.4%
Transportation 18.0%
Water and sewer 15.8%
Hospitals/health care 12.5%
Housing 5.1%
Footnote reads:
*Based on net assets as of 4/30/00. Holdings will vary over time.
Because the health-care sector offers many lower-tier investment grade
bonds with relatively high yields, it currently represents one of the
portfolio's largest industry sectors. Higher risk, if selectively taken,
can mean opportunity. During this fiscal year and after Putnam's
customary careful analysis, the managers purchased the Mountain States
bonds with an exceptional 7.50% coupon and maturities of 2023 and 2025.
A portion of this project was insured by Municipal Bond Insurance
Association (MBIA) and given a AAA-rating.
* BOND MARKETS CONTINUE TO FACE PRESSURE NEAR TERM
Since the Fed's monetary policy acts with a lag, management continues to
believe that inflation pressures remain tame and that the Fed's
interest-rate increases will eventually take hold and slow economic
growth. But achieving the right balance of slower growth seems to be
proving quite a challenge for the Fed.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
AAA/Aaa -- 38.6%
AA/Aa -- 6.7%
A -- 17.3%
BBB/Baa -- 35.2%
BB/Ba -- 0.7%
B -- 1.5%
Footnote reads:
*As a percentage of market value as of 4/30/00. 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.
Shortly after the close of your fund's reporting period, the Fed
increased short-term interest rates for the sixth time in the past year
-- by half a percentage point. This was the first time the central bank
raised rates by that much in more than five years. Surprisingly,
throughout all of the Fed's rate increases, the historically long
economic boom has continued.
However, with more interest rate increases to come if economic activity
does not slow down, the markets are likely to remain unstable near term.
Once economic data such as retail sales and housing sales reports reveal
that economic growth is finally slowing, bond markets, including the
municipal bond market, should begin to perform better.
* UPCOMING TRANSITION
This is my last letter to you and other Putnam Investment Grade
Municipal Trust III shareholders. After more than 30 years as Chairman
of the Trustees and President of the Putnam Funds, the time has come for
me to step aside. As of July 1, 2000, John Hill will become Chairman.
John is currently an independent Trustee and has served on the Board for
the past 14 years. In addition, my son, George Putnam, III, will take on
the role of President. I am confident that the leadership of the funds
will be in exceptionally strong hands. I will become Chairman Emeritus,
remain a shareholder, and stay in close touch with the funds.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 21, 2000
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 4/30/00, 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 4/30/00
Lehman Brothers
Market Municipal Consumer
(common shares) NAV price Bond Index price index
------------------------------------------------------------------
6 months 2.24% -1.25% 2.63% 1.84%
------------------------------------------------------------------
1 year -2.85 -18.47 -0.92 3.01
------------------------------------------------------------------
5 years 29.09 27.87 33.34 12.71
Annual average 5.24 5.04 5.92 2.42
------------------------------------------------------------------
Life of fund
(since 11/29/93) 30.39 2.78 38.45 17.42
Annual average 4.22 0.43 5.20 2.54
------------------------------------------------------------------
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 4/30/00
-------------------------------------------------------------------
Distributions (common shares)
-------------------------------------------------------------------
Number 6
-------------------------------------------------------------------
Income $0.3690
-------------------------------------------------------------------
Capital gains1 --
-------------------------------------------------------------------
Total $0.3690
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Preferred shares Series A (200 shares)
-------------------------------------------------------------------
Income $1,019.90
-------------------------------------------------------------------
Capital gains1 --
-------------------------------------------------------------------
Total $1,019.90
-------------------------------------------------------------------
Share value (common shares) NAV Market price
-------------------------------------------------------------------
10/31/99 $12.24 $10.688
-------------------------------------------------------------------
4/30/00 12.08 10.188
-------------------------------------------------------------------
Current return (common shares/end of period)
-------------------------------------------------------------------
Current dividend rate2 6.11% 7.24%
-------------------------------------------------------------------
Taxable equivalent3 10.12 11.99
-------------------------------------------------------------------
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 market price at end of period.
3Assumes 39.6% federal tax rate. Results for investors subject to lower
tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 3/31/00 (most recent calendar quarter)
Market
(common shares) NAV price
-------------------------------------------------------------------
6 months 1.58% -0.60%
-------------------------------------------------------------------
1 year -1.80 -17.71
-------------------------------------------------------------------
5 years 30.40 25.32
Annual average 5.45 4.62
-------------------------------------------------------------------
Life of fund (since 11/29/93) 31.44 4.68
Annual average 4.41 0.72
-------------------------------------------------------------------
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. See first
page of performance section for performance calculation method.
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 index 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 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.
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
April 30, 2000 (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 (99.2%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C>
Alaska (1.8%)
-------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 Aa1 $ 1,053,750
Arkansas (0.5%)
-------------------------------------------------------------------------------------------------------------------
400,000 Baxter Cnty., Hosp. Rev. Bonds, Ser. B, 5 5/8s, 9/1/28 Baa2 311,500
California (2.6%)
-------------------------------------------------------------------------------------------------------------------
500,000 CA Statewide Cmnty. Dev. Auth. COP
(The Internext Group), 5 3/8s, 4/1/30 BBB 402,500
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
8.498s, 4/23/08 (SEG) Aaa 1,090,000
----------------
1,492,500
Colorado (11.1%)
-------------------------------------------------------------------------------------------------------------------
8,700,000 CO Pub. Hwy. Auth. Rev. Bonds (E-470 Pub. Hwy.),
Ser. B, zero %, 9/1/35 Baa3 587,250
Denver, City & Cnty. Arpt. Rev. Bonds
2,205,000 Ser. A, 8 3/4s, 11/15/23 Baa1 2,348,325
1,370,000 Ser. A, 8 1/2s, 11/15/23 Baa 1,417,882
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,147,500
Denver, City & Cnty. Arpt. Rev. Bonds,
Prerefunded, Ser. A
795,000 8 3/4s, 11/15/23 Aaa 855,619
130,000 8 1/2s, 11/15/23 Aaa 135,281
----------------
6,491,857
District of Columbia (0.9%)
-------------------------------------------------------------------------------------------------------------------
600,000 DC G.O. Bonds, Ser. B, FSA, 5 1/4s, 6/1/26 AAA 530,250
Florida (6.6%)
-------------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
830,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A3 856,560
1,695,000 (Waste-Energy LP North), 7.95s, 12/1/08 A3 1,749,054
1,000,000 Escambia Cnty., Hlth. Facs. Auth. Rev. Bonds
(Baptist Hosp. & Baptist Manor), 5 1/8s, 10/1/19 A3 776,250
500,000 Orange Cnty., Hlth. Facs. Auth. Rev. Bonds
(Regl. Hlth. Care Syst.), Ser. E, 6s, 10/1/26 A2 458,750
----------------
3,840,614
Georgia (0.9%)
-------------------------------------------------------------------------------------------------------------------
GA Med. Ctr. Hosp. Auth. IFB
200,000 MBIA, 6.367s, 8/1/10 Aaa 216,500
300,000 MBIA, 6.367s, 8/1/10, Prerefunded Aaa 330,375
----------------
546,875
Illinois (6.7%)
-------------------------------------------------------------------------------------------------------------------
1,500,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(American Airlines, Inc.), 8.2s, 12/1/24 Baa1 1,631,250
1,605,000 IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks Med. Ctr.),
Ser. D, 9 1/2s, 11/15/15 Baa1 1,675,411
750,000 IL, Dev. Fin. Auth. Hosp. Rev. Bonds (Adventist Hlth.
Syst./Sunbelt Obligation), 5.65s, 11/15/24 Baa1 615,938
----------------
3,922,599
Indiana (3.6%)
-------------------------------------------------------------------------------------------------------------------
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 2,078,420
Kansas (4.3%)
-------------------------------------------------------------------------------------------------------------------
2,400,000 Burlington, Poll. Control Rev. Bonds (Kansas Gas
& Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,498,496
Kentucky (1.7%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Boone Cnty., Poll. Control Rev. Bonds (Dayton Pwr.
& Lt. Co.), Ser. A, 6 1/2s, 11/15/22 A2 1,016,250
Louisiana (2.5%)
-------------------------------------------------------------------------------------------------------------------
1,420,000 Beauregard, Parish Rev. Bonds (Boise Cascade
Corp.), 7 3/4s, 6/1/21 Baa3 1,464,886
Massachusetts (5.3%)
-------------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of
Central MA), Ser. B, AMBAC, 8.62s, 6/23/22 Aaa 814,685
1,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53, MBIA,
6.15s, 12/1/29 Aaa 986,250
830,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 1,276,125
----------------
3,077,060
Minnesota (1.7%)
-------------------------------------------------------------------------------------------------------------------
925,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 980,500
Mississippi (0.7%)
-------------------------------------------------------------------------------------------------------------------
500,000 Mississippi Bus. Fin. Corp. Poll. Control Rev. Bonds
(Syst. Energy Res., Inc.), 5.9s, 5/1/22 Ba1 432,500
Nevada (3.3%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (Southwest
Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa2 1,043,750
1,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.),
Ser. A, 5.9s, 11/1/32 BBB 865,000
----------------
1,908,750
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 Baa3 1,182,825
New York (9.6%)
-------------------------------------------------------------------------------------------------------------------
500,000 Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds, Ser. A, MBIA, 5 5/8s, 7/1/27 Aaa 476,250
725,000 NY City, G.O. Bonds, Ser. B, 7 1/2s, 2/1/06 A3 767,594
275,000 NY City, G.O. Bonds, Ser. B, 7 1/2s,
2/1/06, Prerefunded A3 291,155
NY City, Muni. Wtr. & Swr. Fin. Auth.
Rev. Bonds, Ser. C
2,000,000 7 3/4s, 6/15/20 Aaa 2,097,500
1,000,000 5 3/4s, 6/15/26 A2 970,000
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 1,014,340
----------------
5,616,839
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+ 997,500
500,000 Ser. B, 5.65s, 1/1/16 BBB 450,000
500,000 NC Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. A,
5 3/4s, 1/1/26 Baa 434,375
----------------
1,881,875
North Dakota (0.9%)
-------------------------------------------------------------------------------------------------------------------
500,000 Grand Forks, Hlth. Care Syst. Rev. Bonds
(Altru Hlth. Syst. Oblig. Group), 7 1/8s, 8/15/24 Baa1 498,125
Ohio (0.6%)
-------------------------------------------------------------------------------------------------------------------
400,000 OH State Env. Impt. Rev. Bonds (USX Corp.),
5 5/8s, 5/1/29 Baa2 341,500
Oklahoma (0.3%)
-------------------------------------------------------------------------------------------------------------------
200,000 OK Dev. Fin. Auth. Rev. Bonds (Hillcrest Healthcare),
Ser. A, 5 5/8s, 8/15/29 Baa2 155,250
Pennsylvania (3.2%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds, Ser. A,
6.7s, 12/1/20 Baa2 1,000,000
1,000,000 Delaware Cnty., Indl. Dev. Auth. Rev. Bonds, Ser. A,
6.2s, 7/1/19 B2 885,000
----------------
1,885,000
Puerto Rico (0.9%)
-------------------------------------------------------------------------------------------------------------------
500,000 PR Elec. Pwr. Auth. IFB, FSA, 7.678s, 7/1/23 Aaa 536,875
South Carolina (1.1%)
-------------------------------------------------------------------------------------------------------------------
500,000 SC Toll Road Rev. Bonds (Southern Connector
Project), Ser. A, 5 3/8s, 1/1/38 BBB- 361,250
300,000 SC State Jobs Econ. Dev. Auth. Hosp. Fac.
Rev. Bonds (Palmetto Hlth. Alliance), Ser. A,
7 3/8s, 12/15/21 Baa1 297,000
----------------
658,250
Tennessee (8.3%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Johnson City, Hlth. & Edl. Facs. Rev. Bonds
(Mtn. States Hlth.), Ser. A, 7 1/2s, 7/1/33 AAA 987,500
1,000,000 Johnson City, Hlth. & Edl. Facs. Board 144A
Rev. Bonds, Ser. A2, MBIA, 8.2s, 7/1/21
(acquired 2/08/00, cost $941,900) (RES) Aaa 990,000
2,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 7.628s, 1/1/22 Aaa 2,899,125
----------------
4,876,625
Texas (10.1%)
-------------------------------------------------------------------------------------------------------------------
2,400,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18 AAA/P 2,589,000
1,000,000 Dallas-Fort Worth Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines), 6 3/8s, 5/1/35 Baa1 940,000
2,000,000 Titus Cnty., Fresh Wtr. Supply Dist. No. 1 Poll.
Rev. Bonds (Southwestern Elec. Pwr. Co.), Ser. A,
8.2s, 8/1/11 A1 2,120,000
300,000 Tomball, Hosp. Auth. Rev. Bonds (Tomball Regl.
Hosp.), 6s, 7/1/29 Baa2 248,250
----------------
5,897,250
Virginia (1.8%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 VA State Hsg. Dev. Auth. Rev. Bonds, Ser. A,
7.1s, 1/1/17 Aa1 1,027,500
Washington (3.0%)
-------------------------------------------------------------------------------------------------------------------
1,750,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 1,778,439
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $59,927,545) (b) $57,983,160
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $58,424,717.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at April 30, 2000 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, 2000. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $59,998,809,
resulting in gross unrealized appreciation and depreciation of
$1,183,834 and $3,199,483, respectively, or net unrealized depreciation
of $2,015,649.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at April 30, 2000 was
$990,000 or 1.69% of net assets.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at April
30, 2000.
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, 2000.
The fund had the following industry group concentrations greater
than 10% at April 30, 2000 (as a percentage of net assets):
Utilities 20.4%
Transportation 18.0
Water and sewer 15.8
Hospital/health care 12.5
The fund had the following insurance concentrations greater than
10% at April 30, 2000 (as a percentage of net assets):
MBIA 10.7%
AMBAC 9.9
--------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 2000 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
--------------------------------------------------------------------------
Municipal Index
Future (Long) $13,330,281 $13,223,644 Jun 2000 $106,637
--------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2000 (Unaudited)
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $59,927,545) (Note 1) $57,983,160
-------------------------------------------------------------------------------------------
Interest receivable 1,439,767
-------------------------------------------------------------------------------------------
Receivable for variation margin 17,875
-------------------------------------------------------------------------------------------
Total assets 59,440,802
Liabilities
-------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 39,310
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 246,436
-------------------------------------------------------------------------------------------
Payable for securities purchased 593,688
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 100,785
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian services (Note 2) 2,037
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,074
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 325
-------------------------------------------------------------------------------------------
Other accrued expenses 22,430
-------------------------------------------------------------------------------------------
Total liabilities 1,016,085
-------------------------------------------------------------------------------------------
Net assets $58,424,717
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) (254,331)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,296,765)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (1,837,748)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $58,424,717
Computation of net asset value
-------------------------------------------------------------------------------------------
Series A remarketed preferred shares $10,000,000
-------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 3,411
-------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares --
liquidation preference $10,003,411
-------------------------------------------------------------------------------------------
Net assets available to common shares $48,421,306
-------------------------------------------------------------------------------------------
Net asset value per common share
($48,421,306 divided by 4,007,092 shares) $12.08
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six months ended April 30, 2000 (Unaudited)
<S> <C>
Tax exempt interest income: $1,962,876
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 203,020
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 26,850
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,919
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 1,923
-------------------------------------------------------------------------------------------
Reports to shareholders 4,593
-------------------------------------------------------------------------------------------
Auditing 2,155
-------------------------------------------------------------------------------------------
Legal 1,777
-------------------------------------------------------------------------------------------
Postage 1,213
-------------------------------------------------------------------------------------------
Other 2,332
-------------------------------------------------------------------------------------------
Total expenses 248,782
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (22,122)
-------------------------------------------------------------------------------------------
Net expenses 226,660
-------------------------------------------------------------------------------------------
Net investment income 1,736,216
-------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 70,938
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (410,654)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the period (337,802)
-------------------------------------------------------------------------------------------
Net loss on investments (677,518)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $1,058,698
-------------------------------------------------------------------------------------------
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
2000* 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 1,736,216 $ 3,392,461
--------------------------------------------------------------------------------------------------
Net realized loss on investments (339,716) (478,078)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (337,802) (4,526,104)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,058,698 (1,611,721)
Distributions to remarketed preferred shareholders:
--------------------------------------------------------------------------------------------------
From net investment income (203,980) (323,140)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations applicable to common shareholders
(excluding cumulative undeclared dividends on remarketed
preferred shares of $3,411 and $16,069, respectively) 854,718 (1,934,861)
Distributions to common shareholders:
--------------------------------------------------------------------------------------------------
From net investment income (1,478,457) (3,123,262)
--------------------------------------------------------------------------------------------------
In excess of net investment income -- (42,020)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (623,739) (5,100,143)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of period 59,048,456 64,148,599
--------------------------------------------------------------------------------------------------
End of period (including distributions in excess
of net investment income of $254,331 and
$308,110, respectively) $58,424,717 $59,048,456
--------------------------------------------------------------------------------------------------
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
Per-share April 30
operating performance (Unaudited) Year ended October 31
-------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $12.24 $13.51 $13.35 $13.02 $13.22 $12.36
-------------------------------------------------------------------------------------------------------------
Investment operations
-------------------------------------------------------------------------------------------------------------
Net investment income .43 .85 .80 .86 .82 .90
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) (1.25) .25 .36 (.13) .85
-------------------------------------------------------------------------------------------------------------
Total from
investment operations .26 (.40) 1.05 1.22 .69 1.75
-------------------------------------------------------------------------------------------------------------
Less distributions:
-------------------------------------------------------------------------------------------------------------
From net
investment income
-------------------------------------------------------------------------------------------------------------
To preferred shareholders (.05) (.08) (.09) (.09) (.09) (.09)
-------------------------------------------------------------------------------------------------------------
To common shareholders (.37) (.78) (.80) (.80) (.80) (.80)
-------------------------------------------------------------------------------------------------------------
In excess of net investment income
-------------------------------------------------------------------------------------------------------------
To common shareholders -- (.01) -- -- -- --
-------------------------------------------------------------------------------------------------------------
Total distributions: (.42) (.87) (.89) (.89) (.89) (.89)
-------------------------------------------------------------------------------------------------------------
Net asset value,
end of period
(common shares) $12.08 $12.24 $13.51 $13.35 $13.02 $13.22
-------------------------------------------------------------------------------------------------------------
Market value,
end of period
(common shares) $10.188 $10.688 $13.688 $12.875 $11.875 $11.875
-------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------
Total return at
market value
(common shares)(%)(a) (1.25)* (16.97) 12.92 15.54 6.89 25.77
-------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund)(in thousands) $58,425 $59,048 $64,149 $63,498 $62,166 $62,985
-------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) .51* 1.24 1.21 1.30 1.30 1.23
-------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 3.18* 5.86 5.25 5.90 5.59 6.30
-------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 4.99* 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
April 30, 2000 (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 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 April 30, 2000 was 4.15%. 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.
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 are accreted according to the yield-to-maturity basis.
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.
Under the subcustodian contract between the subcustodian bank and PFTC
the subcustodian bank has a lien on the securities of the fund to the
extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At April 30, 2000, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
For the six months ended April 30, 2000, fund expenses were reduced by
$22,122 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 $423
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 six months ended April 30, 2000, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $4,358,335 and $2,842,800, respectively. There
were no purchases and 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 April 30, 2000, no such
restrictions have been placed on the fund.
FUND INFORMATION
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
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
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
Richard G. Leibovitch
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
---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
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