UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21287
John Hancock Preferred Income Fund III
(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip code)
Susan S. Newton, Secretary
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-375-1702
Date of fiscal year end: May 31
Date of reporting period: November 30, 2004
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Preferred Income Fund III
11.30.2004
Semiannual Report
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of James A. Shepherdson, Chief Executive Officer, flush left next
to first paragraph.]
CEO CORNER
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 13
For more information
page 29
Dear Fellow Shareholders,
The stock market made little, if any, headway for much of 2004, before
finally rallying in November. After a strong start in January, the market
faded and remained dull as it wrestled with a variety of uncertainties.
Questions about the continuing strength of the economy, the effects of
rising interest rates, and expectations for corporate earnings growth kept
investors jittery. In addition, record high crude oil prices, terrorism and
the uncertainty of a closely contested U.S. presidential race all weighed
on the market. The picture brightened in early November with the election
behind us and oil prices moderating somewhat. With one month left to go,
the market seems poised to produce single-digit returns for 2004, barring
some major negative occurrence.
Year-to-date through November 30, 2004, the Standard & Poor's 500 Index was
up 7.23%, while the Dow Jones Industrial Average advanced 1.67% and the
Nasdaq Composite Index rallied from its negative stance in October to
return 4.66% through November 30. Despite the Federal Reserve's four hikes
in short-term interest rates, bonds still produced positive results, with
the Lehman Brothers Aggregate Bond Index up 3.39%.
The way this year has played out in the financial markets serves as a good
reminder of why keeping a long-term perspective is such a critical element
of successful investing. Getting caught up in the day-to-day twists and
turns of the market and trying to act on them can wreak havoc with your
portfolio and derail progress toward meeting your overall financial
objectives.
Since no one can predict the market's moves, the best way to reach your
goals is to stay invested and stick to your plan. Investing should be a
marathon, not a sprint. Do not try to time the market, and make sure you
work with your investment professional to ensure that your portfolio
remains properly diversified to meet your long-term objectives. For
example, after several years of dominance, small-cap stocks and value
stocks could now represent higher percentages of your portfolio than you
may want. If you are comfortable with your financial plan, it becomes
easier to ride out the market's daily ups and downs. It could also provide
you with a greater chance of success over time.
Sincerely,
/S/ JAMES A. SHEPHERDSON
James A. Shepherdson
Chief Executive Officer
This commentary reflects the CEO's views as of November 30, 2004. They are
subject to change at any time.
YOUR FUND
AT A GLANCE
The Fund seeks to
provide a high level
of current income,
consistent with
preservation of capi-
tal. The Fund's
secondary objective
is to provide growth
of capital to the
extent consistent
with its primary
objective. The Fund
seeks to achieve its
objective by invest
ing in a diversified
portfolio of securi-
ties that, in the
opinion of the
Adviser, may be
undervalued relative
to similar securities
in the marketplace.
Under normal
market conditions,
the Fund invests at
least 80% of its
assets in preferred
stocks and other
preferred securities.
Over the last six months
* Despite rising interest rates, preferred stocks posted good gains in
response to strong demand, weak supply and hopes that dividend tax cuts
would be made permanent.
* The Fund outpaced its peer group due to solid security selection.
* High-quality, tax-advantaged preferred and convertible securities aided
performance.
[Bar chart with heading "John Hancock Preferred Income Fund III." Under the
heading is a note that reads "Fund performance for the six months ended
November 30, 2004." The chart is scaled in increments of 5% with 0% at the
bottom and 15% at the top. The first bar represents the 12.37% net asset
value of the fund. The second bar represents the 12.72% market value of the
fund. A note below the chart reads "The total returns for the Fund include
the reinvestment of all dividends. The performance data contained within
this material represents past performance, which does not guarantee future
results."]
Top 10 issuers
3.0% ING Groep N.V.
2.9% Nexen, Inc.
2.4% Lloyds TSB Bank Plc
2.3% J.P. Morgan Chase Capital XI
2.3% TXU Corp.
2.1% Royal Bank of Scotland Group Plc
2.0% DTE Energy Co.
2.0% Ford Motor Co.
2.0% Duke Realty Corp.
2.0% Public Storage, Inc.
As a percentage of net assets plus the value of preferred shares on
November 30, 2004.
1
BY GREGORY K. PHELPS AND MARK T. MALONEY FOR THE PORTFOLIO
MANAGEMENT TEAM
MANAGERS' REPORT
JOHN HANCOCK
Preferred Income Fund III
Preferred stocks -- which are the primary emphasis of John Hancock
Preferred Income Fund III -- posted strong gains during the six-month
period that ended November 30, 2004. The period began on somewhat of a sour
note following a spring Treasury market sell-off triggered by robust
economic reports that fanned fears of higher inflation and interest rates.
Because preferreds make fixed-income payments in the form of dividends,
their prices, like bond prices, tend to move in the opposite direction of
interest rates. The Federal Reserve Board did raise rates a quarter of a
percentage point on four separate occasions during the period, but the bond
and preferred markets staged a rebound that lasted until virtually the end
of the period. That rally in the face of rising interest rates was based on
investors' confidence that even though the Fed might continue to raise
rates, those rate hikes would be small and measured, given the potential
for record high oil prices and higher interest rates themselves to dampen
economic growth and inflationary pressures. Investors also viewed the
reelection of President George Bush as a positive for tax-advantaged
preferred stocks. The president vowed to make permanent the tax cut
provisions he and Congress enacted in 2003, including the provision that
reduced the tax rate most individuals pay on many stock dividends. Finally,
preferreds benefited from favorable supply and demand conditions. Supply
dwindled as companies redeemed their higher-coupon preferred stock as a way
of reducing their financing costs, and there wasn't much in the way of new
issuance of preferred stocks. Meanwhile, demand for preferred stocks
remained strong as investors continued to seek out the relatively high
dividends and quality of many preferred stocks.
"Preferred stocks ... posted
strong gains during the
six-month period..."
2
[Photos of Greg Phelps and Mark Maloney, flush right next to first
paragraph.]
Performance
For the six months ended November 30, 2004, John Hancock Preferred Income
Fund III returned 12.37% at net asset value and 12.72% at market value. The
difference in the Fund's net asset value (NAV) performance and its market
performance stems from the fact that the market share price is subject to
the dynamics of secondary market trading, which could cause it to trade at
a discount or premium to the Fund's NAV share price at any time. By
comparison, the average income and preferred stock closed-end fund returned
10.67% at net asset value, according to Lipper, Inc. In the same six-month
period, the Dow Jones Utility Average -- which tracks the performance of 15
electric and natural gas utilities -- returned 20.17%, and the broader
stock market as measured by the Standard & Poor's 500 Index, returned
5.68%.
"...a number of our tax-advantaged
preferred holdings were in heavy
demand and turned in good gains
during the period."
Tax-advantaged holdings top performers
Given expectations that the 2003 tax reform bill would be made permanent
because of the reelection of President Bush and the larger Republican
majority in both the House and Senate, a number of our tax-advantaged
preferred holdings were in heavy demand and turned in good gains during the
period. Two examples were our holdings ABN AMRO and Royal Bank of Scotland.
Likewise, Southern Union was boosted by the strong demand for
tax-advantaged preferred stocks, as well as by investors' expectations that
the company would receive a credit-rating upgrade. On the flip side, our
holdings in the bonds and preferred stock of Ford Motor Company and General
Motors proved disappointing during the period. Despite the rebound in the
economy, overall U.S. car and light-truck sales are up less than 1% for the
year through the end of November. At the same time, more brands and models
are crowding in, causing intense competitive pressures and pressure on car
prices.
Convertible securities post good gains
We also enjoyed solid gains from some of our convertible preferred stock
and bond holdings, which are securities that can be converted into common
stocks or corporate bonds at the option of the holder. One standout was
ONEOK, a diversified energy company
3
[Table at top left-hand side of page entitled "Top five industry groups1."
The first listing is Electric utilities 21%, the second is Multi-utilities
& unregulated power 12%, the third is Diversified banks 11%, the fourth is
Investment banking & brokerage 10% and the fifth is Other diversified
financial services 10%.]
involved in oil and gas production, natural gas processing, gathering,
storage and transmission in the mid-continent areas of the United States.
It benefited from a well-executed business strategy and its ability to pass
on price increases in the wake of higher commodities prices. KeySpan Corp.,
the largest natural gas distributor in the Northeast United States, already
had a lot going for it because if offered an attractive yield. But our
holdings in the company got an added boost from the success of the
company's growing customer base. DTE Energy also performed well, partly
because of its attractive dividend and partly due to the favorable
resolution of a major utility rate case in its home state of Michigan.
[Pie chart in middle of page with heading "Portfolio diversification1" The
chart is divided into five sections (from top to right): Preferred stocks
82%, Capital preferred securities 8%, Corporate bonds 7%, Common stocks 2%
and Short-term investments & other 1%.]
A word about dividends
Issuers exercising their call provisions to benefit from falling interest
rates last year caused the supply of preferred stocks to shrink, and
virtually every week other issuers continue to announce additional calls of
preferred stocks. From a technical standpoint, calls largely have been
beneficial for the preferred stock market because they have reduced
available supply. By the same token, however, the Fund has been forced to
surrender to calls some of its higher-yielding preferred stock holdings and
reinvest the proceeds in securities that carried lower dividend yields or
hold on to cash or equivalents. At the same time, rising interest rates
forced the cost of leverage higher. The resulting downward pressure on the
Fund's dividend income, coupled with the rising cost of leverage, caused us
to reduce our monthly dividend on December 1, 2004. The new dividend amount
of $0.159 per share equates to an annualized
4
[Table at top of page entitled "Scorecard." The header for the left column
is "Investment" and the header for the right column is "Period's
performance...and what's behind the numbers." The first listing is ONOEK,
followed by an up arrow with the phrase "Well-executed business strategy,
plus price hikes." The second listing is KeySpan Corp., followed by an up
arrow with the phrase "Attractive dividend, growing customer base draw
investor interest." The third listing is Ford Motor Corp., followed by a
down arrow with the phrase "Sluggish sales and intense competition erode
profitability."]
yield of 7.90%, based on the Fund's closing market price as of November 30,
2004.
Outlook
In our view, the late November decline in oil prices and reports of better
economic data suggest that the Fed will continue on a measured path to
raise short-term interest rates. Although the rate hikes that were enacted
throughout the period didn't affect the prices of preferred stocks, it's
possible that potentially higher long-term interest rates could dampen
their performance. Over the longer term, however, there are a couple of
factors we believe will continue to work in favor of preferred stocks.
Making permanent the recently reduced dividend tax rate and strong demand
from an aging American population potentially more intent on shifting
assets to high-quality income-producing securities should provide some
support for the group even if long-term bond yields rise.
"...the late November decline in oil
prices and reports of better economic
data suggest that the Fed will
continue on a measured path to raise
short-term interest rates."
This commentary reflects the views of the portfolio management team through
the end of the Fund's period discussed in this report. The team's
statements reflect their own opinions. As such, they are in no way
guarantees of future events, and are not intended to be used as investment
advice or a recommendation regarding any specific security. They are also
subject to change at any time as market and other conditions warrant.
The Fund normally will invest at least 25% of its managed assets in
securities of companies in the utilities industry. Such an investment
concentration makes the Fund more susceptible than a more broadly
diversified fund to factors adversely affecting the utilities industry.
Sector investing is subject to greater risks than the market as a whole.
1 As a percentage of the Fund's portfolio on November 30, 2004.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
November 30, 2004
(unaudited)
This schedule is divided into five main categories: bonds, capital
preferred securities, common stocks, preferred stocks and short-term
investments. Bonds, capital preferred securities, common stocks and
preferred stocks are further broken down by industry group. Short-term
investments, which represent the Fund's cash position, are listed last.
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Bonds 9.93% $74,894,924
(Cost $73,353,926)
Automobile Manufacturers 0.36% 2,680,202
Ford Motor Co., Note 7.450% 07-16-31 BBB- $2,755 2,680,202
Consumer Finance 0.40% 3,006,261
General Motors Acceptance Corp., Bond 8.000 11-01-31 BBB- 3,000 3,006,261
Electric Utilities 5.43% 40,961,095
Black Hills Corp., Note 6.500 05-15-13 BBB- 15,000 15,238,170
DPL, Inc., Sr Note 6.875 09-01-11 B+ 7,000 7,612,499
Entergy Gulf States, Inc., 1st Mtg Bond 6.200 07-01-33 BBB 15,000 14,763,255
Kentucky Power Co., Sr Note, Ser D 5.625 12-01-32 BBB 3,565 3,347,171
Integrated Oil & Gas 0.71% 5,347,065
Amerada Hess Corp., Note 7.125 03-15-33 BBB- 5,000 5,347,065
Multi-Utilities & Unregulated Power 1.56% 11,784,037
DTE Energy Co., Sr Note 6.375 04-15-33 BBB- 7,500 7,631,137
TECO Energy, Inc., Note 7.000 05-01-12 BB 3,810 4,152,900
Oil & Gas Refining, Marketing & Transportation 1.47% 11,116,264
Valero Energy Corp., Note 7.500 04-15-32 BBB 9,500 11,116,264
Credit Par value
Issuer, description, maturity date rating (A) (000) Value
Capital preferred securities 11.69% $88,145,142
(Cost $88,534,463)
Diversified Banks 4.70% 35,476,400
Credit Agricole Preferred Funding Trust, 7.00%, 01-29-49 A $9,000 9,356,400
Lloyds TSB Bank Plc, 6.90%, 11-29-49 (United Kingdom) A+ 25,000 26,120,000
Electric Utilities 2.23% 16,795,862
Dominion Resources Capital I, 7.83%, 12-01-27 BBB- 9,097 9,777,174
DPL Capital Trust II, 8.125%, 09-01-31 B 6,225 7,018,688
See notes to
financial statements.
6
FINANCIAL STATEMENTS
Credit Par value
Issuer, description, maturity date rating (A) (000) Value
Gas Utilities 0.72% $5,430,486
KN Capital Trust III, 7.63%, 04-15-28 BB+ $4,960 5,430,486
Integrated Telecommunication Services 2.19% 16,497,611
TCI Communications Financing Trust III, 9.65%, 03-31-27 BB+ 14,210 16,497,611
Investment Banking & Brokerage 1.36% 10,275,000
HBOS Capital Funding L.P., 6.85%, 03-29-49 (United Kingdom) A 10,000 10,275,000
Other Diversified Financial Services 0.49% 3,669,783
J.P. Morgan Chase Capital Trust I, 7.54%, 01-15-27 A- 3,447 3,669,783
Issuer Shares Value
Common stocks 3.53% $26,651,373
(Cost $23,903,571)
Electric Utilities 2.17% 16,354,928
CH Energy Group, Inc. 20,600 957,282
OGE Energy Corp. 30,000 775,500
Progress Energy, Inc. 121,000 5,313,110
Scottish Power Plc, American Depositary Receipt (United Kingdom) 313,014 9,309,036
Multi-Utilities & Unregulated Power 1.36% 10,296,445
Duke Energy Corp. 182,041 4,601,996
TECO Energy, Inc. 380,645 5,694,449
Credit
Issuer, description rating (A) Shares Value
Preferred stocks 119.46% $901,273,365
(Cost $885,278,223)
Agricultural Products 1.86% 13,995,250
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) BB+ 185,000 13,995,250
Asset Management & Custody Banks 0.56% 4,214,731
BNY Capital V, 5.95%, Ser F A- 170,361 4,214,731
Automobile Manufacturers 4.85% 36,613,908
Ford Motor Co., 7.50% BBB- 771,385 19,801,453
General Motors Corp., 7.25%, Ser 7-15-41 BBB- 55,641 1,394,920
General Motors Corp., 7.375%, Ser 05-15-48 Baa2 593,194 14,859,510
General Motors Corp., 7.375%, Ser 10-01-51 Baa2 22,100 558,025
Broadcasting & Cable TV 2.29% 17,307,970
Shaw Communications, Inc., 8.45%, Ser A (Canada) B+ 526,800 13,438,668
Shaw Communications, Inc., 8.50% (Canada) B+ 150,850 3,869,302
See notes to
financial statements.
7
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Consumer Finance 2.51% $18,912,389
Ford Motor Credit Co., 7.60% A3 25,000 648,750
Household Finance Corp., 6.875% A 636,118 17,137,019
SLM Corp., 6.97%, Ser A BBB+ 19,800 1,126,620
Diversified Banks 10.84% 81,793,282
BAC Capital Trust II, 7.00% A- 83,300 2,191,623
BAC Capital Trust III, 7.00% A- 22,000 583,660
BAC Capital Trust IV, 5.875% A- 406,400 10,009,632
Banco Santander, 6.41% (Spain) BBB+ 100,000 2,480,600
Fleet Capital Trust VII, 7.20% A- 61,604 1,640,515
Fleet Capital Trust IX, 6.00% A- 469,200 11,725,308
Royal Bank of Scotland Group Plc, 5.75%, Ser L (United Kingdom) A 960,000 23,203,200
USB Capital IV, 7.35% A- 59,100 1,569,105
USB Capital V, 7.25% A- 60,700 1,621,904
Wachovia Preferred Funding Corp., 7.25%, Ser A BBB+ 674,800 18,995,620
Wells Fargo Capital Trust IV, 7.00% A 187,800 4,892,190
Wells Fargo Capital Trust VII, 5.85% A 117,500 2,879,925
Electric Utilities 21.59% 162,876,927
Ameren Corp., 9.75%, Conv BBB+ 220,100 6,184,810
American Electric Power Co., Inc., 9.25%, Conv BBB 240,800 11,462,080
Cinergy Corp., 9.50%, Conv Baa2 108,600 6,863,520
Cleveland Electric Financing Trust I, 9.00% BB 27,400 756,240
Consolidated Edison, Inc., $5.00, Ser A BBB+ 30,000 2,640,000
Consolidated Edison, Inc., 7.25% A- 56,000 1,520,400
Detroit Edison Co., 7.375% BBB- 25,700 653,808
Entergy Mississippi, Inc., 7.25% A- 63,918 1,693,827
FPC Capital I, 7.10%, Ser A BB+ 569,300 14,278,044
FPL Group Capital Trust I, 5.875% BBB+ 478,254 11,788,961
FPL Group, Inc., 8.00%, Conv A- 112,000 6,395,200
Georgia Power Capital Trust V, 7.125% BBB+ 132,200 3,553,536
Georgia Power Co., 6.00%, Ser R A 737,085 18,736,701
Great Plains Energy, Inc., 8.00%, Conv Baa2 378,000 9,733,500
HECO Capital Trust III, 6.50% BBB- 130,000 3,416,400
Interstate Power & Light Co., 7.10%, Ser C BBB- 354,900 9,648,844
Interstate Power & Light Co., 8.375%, Ser B BBB- 54,500 1,771,250
Monongahela Power Co., $7.73, Ser L B- 65,557 6,270,527
Northern States Power Co., 8.00% BBB- 74,550 2,044,906
NVP Capital I, 8.20%, Ser A CCC+ 56,300 1,424,390
NVP Capital III, 7.75% CCC+ 367,605 9,289,378
See notes to
financial statements.
8
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
TXU Corp., 7.24%, Ser B BB+ 150 $15,555,000
TXU Corp., 8.125%, Conv Ba1 170,000 9,436,700
Virginia Power Capital Trust, 7.375% BBB 287,900 7,758,905
Gas Utilities 7.60% 57,372,039
El Paso Tennessee Pipeline Co., 8.25%, Ser A CCC- 297,700 14,475,662
KeySpan Corp., 8.75%, Conv A 148,200 7,728,630
Laclede Capital Trust I, 7.70% BBB+ 63,300 1,734,420
SEMCO Capital Trust I, 10.25% B- 60,500 1,573,000
Southern Union Co., 7.55% BB+ 350,000 9,572,500
Southwest Gas Capital II, 7.70% BB 810,250 21,674,187
Vectren Utility Holdings, Inc., 7.25% A- 23,200 613,640
Hotels, Resorts & Cruise Lines 0.27% 2,047,123
Hilton Hotels Corp., 8.00% BBB- 76,700 2,047,123
Integrated Oil & Gas 1.55% 11,730,628
Coastal Finance I, 8.375% CCC- 473,200 11,730,628
Integrated Telecommunication Services 1.76% 13,257,631
Telephone & Data Systems, Inc., 7.60%, Ser A A- 373,476 9,900,849
Verizon New England, Inc., 7.00%, Ser B Aa3 126,100 3,356,782
Investment Banking & Brokerage 13.22% 99,727,192
Bear Stearns Cos., Inc. (The), 5.49%, Depositary Shares, Ser G BBB 296,032 14,771,997
Lehman Brothers Holdings Capital Trust III, 6.375%, Ser K BBB+ 793,400 20,390,380
Lehman Brothers Holdings, Inc., 5.67%, Depositary Shares, Ser D BBB+ 142,500 6,897,000
Merrill Lynch Preferred Capital Trust III, 7.00% A- 387,017 10,372,056
Merrill Lynch Preferred Capital Trust IV, 7.12% A- 222,700 6,019,581
Merrill Lynch Preferred Capital Trust V, 7.28% A- 346,600 9,444,850
Morgan Stanley Capital Trust III, 6.25% A- 764,025 19,154,107
Morgan Stanley Capital Trust IV, 6.25% A- 393,925 9,966,303
Morgan Stanley Capital Trust V, 5.75% A1 113,713 2,710,918
Life & Health Insurance 2.90% 21,842,325
Lincoln National Capital VI, 6.75%, Ser F BBB 261,400 6,924,486
Phoenix Cos., Inc. (The), 7.45% BBB 387,849 9,994,869
PLC Capital Trust IV, 7.25% BBB+ 120,600 3,274,290
PLC Capital Trust V, 6.125% BBB+ 66,000 1,648,680
Multi-Line Insurance 4.37% 32,990,850
ING Groep N.V., 7.05% (Netherlands) A- 603,970 15,914,610
ING Groep N.V., 7.20% (Netherlands) A- 641,000 17,076,240
See notes to
financial statements.
9
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Multi-Utilities & Unregulated Power 14.40% $108,629,213
Aquila, Inc., 7.875% B2 218,707 5,305,832
Avista Corp., $6.95, Ser K BB- 147,176 15,159,128
BGE Capital Trust II, 6.20% BBB- 556,000 14,166,880
Consumers Energy Co. Financing II, 8.20% B 70,000 1,789,900
Consumers Energy Co. Financing III, 9.25% B 127,500 3,292,050
Consumers Energy Co. Financing IV, 9.00% Ba2 189,700 5,169,325
DTE Energy Co., 8.75%, Conv BBB 569,000 14,953,320
DTE Energy Trust I, 7.80% BBB- 80,700 2,150,655
Energy East Capital Trust I, 8.25% BBB- 169,900 4,522,738
Enterprise Capital Trust I, 7.44%, Ser A BB+ 68,200 1,726,142
Enterprise Capital Trust III, 7.25%, Ser C BB+ 104,100 2,627,484
ONEOK, Inc., 8.50%, Conv BBB+ 197,600 6,874,504
PSEG Funding Trust II, 8.75% BB+ 459,275 12,744,881
Public Service Electric & Gas Co., 5.05%, Ser D BB+ 30,000 2,535,000
Public Service Enterprise Group, Inc., 10.25%, Conv BBB- 105,600 6,156,480
Puget Sound Energy Capital Trust II, 8.40% BB 185,600 4,966,656
TECO Capital Trust I, 8.50% B 171,700 4,488,238
Oil & Gas Exploration & Production 5.29% 39,878,161
Anadarko Petroleum Corp., 5.46%, Depositary Shares, Ser B BBB- 24,600 2,468,457
Apache Corp., 5.68%, Depositary Shares, Ser B BBB 27,500 2,749,142
Devon Energy Corp., 6.49%, Ser A BB+ 25,250 2,640,203
Nexen, Inc., 7.35% (Canada) BB+ 1,216,579 32,020,359
Other Diversified Financial Services 14.05% 106,007,174
ABN AMRO Capital Funding Trust V, 5.90% A 867,400 21,051,798
ABN AMRO Capital Funding Trust VI, 6.25% A 400,000 10,200,000
Citigroup Capital VII, 7.125% A 30,042 793,109
Citigroup Capital VIII, 6.95% A 220,200 5,813,280
Citigroup Capital IX, 6.00% A 384,700 9,540,560
Citigroup Capital X, 6.10% A 720,000 18,172,800
General Electric Capital Corp., 5.875% AAA 402,930 10,105,484
General Electric Capital Corp., 6.10% AAA 114,747 2,951,293
J.P. Morgan Chase Capital XI, 5.875%, Ser K A- 1,035,000 25,222,950
J.P. Morgan Chase Capital XII, 6.25%, Ser L A- 60,000 1,529,400
J.P. Morgan Chase Capital XIV, 6.20%, Ser N A- 25,000 626,500
Real Estate Investment Trusts 7.21% 54,378,984
Duke Realty Corp., 6.50%, Depositary Shares, Ser K BBB 145,000 3,639,500
Duke Realty Corp., 6.60%, Depositary Shares, Ser L BBB 103,000 2,564,700
See notes to
financial statements.
10
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Real Estate Investment Trust (continued)
Duke Realty Corp., 6.625%, Depositary Shares, Ser J BBB 638,100 $16,271,550
Kimco Realty Co., 6.65%, Depositary Shares, Ser F BBB+ 384,750 10,115,078
Public Storage, Inc., 6.50%, Depositary Shares, Ser W BBB+ 450,000 11,398,500
Public Storage, Inc., 7.50%, Depositary Shares, Ser V BBB+ 184,530 4,956,476
Public Storage, Inc., 7.625%, Depositary Shares, Ser T BBB+ 25,500 678,045
Public Storage, Inc., 8.00%, Depositary Shares, Ser R BBB+ 177,100 4,755,135
Regional Banks 0.31% 2,357,488
National Commerce Capital Trust II, 7.70% A- 86,800 2,357,488
Reinsurance 0.24% 1,840,748
RenaissanceRe Holdings Ltd., 6.08%, Ser C (Bermuda) BBB+ 77,800 1,840,748
Thrifts & Mortgage Finance 1.79% 13,499,352
Abbey National Plc, 7.25% (United Kingdom) A- 163,265 4,295,502
Abbey National Plc, 7.375% (United Kingdom) A- 339,000 9,203,850
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Short-term investments 1.96% $14,800,000
(Cost $14,800,000)
Government U.S. Agency 1.96% 14,800,000
Federal Home Loan Bank, Disc Note 1.900% 12-01-04 AAA 14,800 14,800,000
Total investments 146.57% $1,105,764,804
Other assets and liabilities, net (46.57%) ($351,334,062)
Total net assets 100.00% $754,430,742
(A) Credit ratings are unaudited and are rated by Moody's Investors Service
where Standard & Poor's ratings are not available.
(S) This security is exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $13,995,250 or 1.86% of the Fund's net
assets as of November 30, 2004.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, security is U.S.
dollar-denominated.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to
financial statements.
11
FINANCIAL STATEMENTS
PORTFOLIO
CONCENTRATION
November 30, 2004
(unaudited)
This table shows
percentages of the
Fund's investments,
aggregated by
various industries.
Industry distribution Value as a percentage of Fund's total investments
------------------------------------------------------------------------------
Agricultural products 1.27%
Asset management & custody banks 0.38
Automobile manufacturers 3.55
Broadcasting & cable TV 1.57
Consumer finance 1.98
Diversified banks 10.61
Electric utilities 21.43
Gas utilities 5.68
Hotels, resorts & cruise lines 0.18
Integrated oil & gas 1.54
Integrated telecommunication services 2.69
Investment banking & brokerage 9.95
Life & health insurance 1.98
Multi-line insurance 2.98
Multi-utilities & unregulated power 11.82
Oil & gas exploration & production 3.61
Oil & gas refining, marketing & transportation 1.00
Other diversified financial services 9.92
Real estate investment trusts 4.92
Regional banks 0.21
Reinsurance 0.17
Thrifts & mortgage finance 1.22
Short-term investments 1.34
See notes to
financial statements.
12
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
November 30, 2004
(unaudited)
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of
what the Fund
owns, is due
and owes. You'll
also find the net
asset value for each
common share.
Assets
Investments, at value (cost $1,085,870,183) $1,105,764,804
Cash segregated for futures contracts 765,000
Receivable for investments sold 609,236
Dividends and interest receivable 4,599,751
Receivable for futures variation margin 28,125
Other assets 80,100
Total assets 1,111,847,017
Liabilities
Due to custodian 5,567,042
Payable for investments purchased 1,636,869
Payable for swap contracts 58,212
Unrealized depreciation of swap contacts 23,182
Payable to affiliates
Management fees 16,675
Other 24,224
Other payables and accrued expenses 59,538
Total liabilities 7,385,742
Auction Rate Preferred Shares (APS), at value,
unlimited number of shares of beneficial
interest authorized with no par value,
14,000 shares issued, liquidation preference
of $25,000 per share 350,030,533
Net assets
Common shares capital paid-in 741,148,411
Accumulated net realized loss on investments
and financial futures contracts (4,030,382)
Net unrealized appreciation of investments,
financial futures contracts and swap contracts 20,979,592
Distributions in excess of net investment income (3,666,879)
Net assets applicable to common shares $754,430,742
Net asset value per common share
Based on 31,246,304 shares of beneficial
interest outstanding -- unlimited number
of shares authorized with no par value $24.14
See notes to
financial statements.
13
FINANCIAL STATEMENTS
OPERATIONS
For the period ended
November 30, 2004
(unaudited)1
This Statement
of Operations
summarizes the
Fund's investment
income earned and
expenses incurred
in operating the
Fund. It also shows
net gains (losses)
for the period
stated.
Investment income
Dividends $31,780,616
Interest 5,630,724
Total investment income 37,411,340
Expenses
Investment management fees 4,053,286
APS auction fees 453,538
Administration fees 135,110
Custodian fees 56,270
Miscellaneous 49,956
Printing 36,476
Professional fees 21,203
Trustees' fees 19,306
Registration and filing fees 19,245
Transfer agent fees 10,796
Interest 717
Total expenses 4,855,903
Less expense reductions (1,080,876)
Net expenses 3,775,027
Net investment income 33,636,313
Realized and unrealized gain (loss)
Net realized gain (loss) on
Investments 1,135,243
Financial futures contracts (5,302,625)
Change in net unrealized appreciation (depreciation) of
Investments 57,645,313
Financial futures contracts 1,485,197
Swap contracts (414,351)
Net realized and unrealized gain 54,548,777
Distributions to APS (2,975,229)
Increase in net assets from operations $85,209,861
1 Semiannual period from 6-1-04 through 11-30-04.
See notes to
financial statements.
14
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
These Statements
of Changes in Net
Assets show how
the value of the
Fund's net assets
has changed
during the last
two periods. The
difference reflects
earnings less
expenses, any
investment
gains and losses,
distributions, if
any, paid to
shareholders and
the net of Fund
share transactions.
Period Period
ended ended
5-31-04 1 11-30-04 2
Increase in net assets
From operations
Net investment income $54,215,153 $33,636,313
Net realized gain (loss) 3,847,142 (4,167,382)
Change in net unrealized
appreciation (depreciation) (37,736,567) 58,716,159
Distributions to APS (3,228,368) (2,975,229)
Increase in net assets resulting
from operations 17,097,360 85,209,861
Distributions to common shareholders
From net investment income (55,617,481) (33,677,860)
From Fund share transactions 737,661,844 3,757,018
Net assets
Beginning of period -- 699,141,723
End of period 3 $699,141,723 $754,430,742
1 Inception period from 6-19-03 through 5-31-04.
2 Semiannual period from 6-1-04 through 11-30-04. Unaudited.
3 Includes distributions in excess of net investment income of
$650,103 and $3,666,879, respectively.
See notes to
financial statements.
15
FINANCIAL HIGHLIGHTS
FINANCIAL
HIGHLIGHTS
COMMON SHARES
The Financial Highlights show how the Fund's net asset value for a share
has changed since the end of the previous period.
Period ended 5-31-04 1 11-30-04 2
Per share operating performance
Net asset value,
beginning of period $23.88 3 $22.49
Net investment income 4 1.88 1.08
Net realized and unrealized
gain (loss) on investments (1.21) 1.75
Distributions to APS (0.11) (0.10)
Total from
investment operations 0.56 2.73
Less distributions to
common shareholders
From net investment income (1.80) (1.08)
Capital charges
Offering costs related to common shares (0.02) --
Offering costs and underwriting discounts
related to APS (0.13) --
Net asset value, end of period $22.49 $24.14
Per share market value, end of period $22.42 $24.14
Total return at market value 5 (%) (4.29) 6,7 12.72 7
Ratios and supplemental data
Net assets applicable to common shares,
end of period (in millions) $699 $754
Ratio of expenses
to average net assets 8 (%) 0.99 9 1.03 9
Ratio of adjusted expenses
to average net assets 10 (%) 1.27 9 1.33 9
Ratio of net investment income
to average net assets 11 (%) 7.97 9 9.22 9
Portfolio turnover (%) 99 5
Senior securities
Total value of APS outstanding (in millions) $350 $350
Involuntary liquidation preference
per unit (in thousands) 25 25
Average market value per unit (in thousands) 25 25
Asset coverage per unit 12 $75,065 $78,525
See notes to
financial statements.
16
FINANCIAL HIGHLIGHTS
Notes to Financial Highlights
1 Inception period from 6-19-03 through 5-31-04.
2 Semiannual period from 6-1-04 through 11-30-04. Unaudited.
3 Reflects the deduction of a $1.125 per share sales load.
4 Based on the average of the common shares outstanding.
5 Total returns would have been lower had certain expenses not been reduced
during the periods shown.
6 Assumes dividend reinvestment and a purchase at $25.28 per share on the
inception date and a sale at the current market price on the last day of
the period.
7 Not annualized.
8 Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
annualized ratios of expenses would have been 0.70% and 0.70%,
respectively.
9 Annualized.
10 Ratios calculated on the basis of expenses relative to the average net
assets of common shares, that does not take into consideration expense
reductions during the periods shown. Without the exclusion of preferred
shares, the annualized ratios of expenses would have been 0.90% and 0.90%,
respectively.
11 Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the annualized ratios of net investment income would have been
5.69% and 6.22%, respectively.
12 Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing that amount by the number of APS outstanding as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
See notes to
financial statements.
17
NOTES TO
STATEMENTS
Unaudited
Note A
Accounting policies
John Hancock Preferred Income Fund III (the "Fund") is a diversified
closed-end management investment company registered under the Investment
Company Act of 1940.
Significant accounting
policies of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at fair
value as determined in good faith in accordance with procedures approved by
the Trustees. Short-term debt investments which have a remaining maturity
of 60 days or less may be valued at amortized cost, which approximates
market value. The Fund determines the net asset value of the common shares
each business day.
Investment transactions
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are
determined on the identified cost basis.
Discount and premium
on securities
The Fund accretes discount and amortizes premium from par value on
securities from either the date of issue or the date of purchase over the
life of the security.
Expenses
The majority of the expenses are directly identifiable to an individual
fund. Expenses that are not readily identifiable to a specific fund will be
allocated in such a manner as deemed equitable, taking into consideration,
among other things, the nature and type of expense and the relative sizes
of the funds.
Financial futures contracts
The Fund may buy and sell financial futures contracts. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other fund's instruments. At the time the Fund enters into a
financial futures contract, it is required to deposit with its custodian a
specified amount of cash or U.S. government securities, known as "initial
margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at
the official settlement price of the board of trade or U.S. commodities
exchange on which it trades. Subsequent payments to and from the broker,
known as "variation margin," are made on a daily basis as the market price
of the financial futures contract fluctuates. Daily variation margin
adjustments arising from this "mark to market" are recorded by the Fund as
unrealized gains or losses.
18
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into financial futures contracts include the possibility that
there may be an illiquid market and/or that a change in the value of the
contracts may not correlate with changes in the value of the underlying
securities. In addition, the Fund could be prevented from opening or
realizing the benefits of closing out financial futures positions because
of position limits or limits on daily price fluctuation imposed by an
exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of financial futures
contracts. On November 30, 2004, the Fund had deposited $765,000 in a
segregated account to cover margin requirements on open financial futures
contracts.
The Fund had the following financial futures contracts open on November 30,
2004:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION APPRECIATION
------------------------------------------------------------------------------
U.S. 10-Yr Note 900 Short March 05 $1,108,153
Swap contracts
The Fund may enter into swap transactions in order to hedge the value of
the Fund's portfolio against interest rate fluctuations or to enhance the
Fund's income. Interest rate swaps represent an agreement between two
counterparties to exchange cash flows based on the difference in the two
interest rates, applied to the notional principal amount for a specified
period. The payment flows are usually netted against each other, with the
difference being paid by one party to the other. The Fund settles accrued
net receivable or payable under the swap contracts on a periodic basis.
The Fund records changes in the value of the swaps as unrealized gains or
losses on swap contracts. Accrued interest receivable or payable on the
swap contracts is recorded as realized gain (loss).
Swap contracts are subject to risks related to the counterparty's ability
to perform under the contract, and may decline in value if the
counterparty's creditworthiness deteriorates. The risks may arise from
unanticipated movement in interest rates. The Fund may also suffer losses
if it is unable to terminate outstanding swap contracts or reduce its
exposure through offsetting transactions.
The Fund had the following interest rate swap contracts open on November
30, 2004:
RATE TYPE
-----------------------------
PAYMENTS
NOTIONAL PAYMENTS MADE RECEIVED TERMINATION
AMOUNT BY FUND BY FUND DATE DEPRECIATION
------------------------------------------------------------------------------
$35,000,000 4.00% (a) 3-month LIBOR April 09 $23,182
(a) Fixed rate
19
Federal income taxes
The Fund qualifies as a "regulated investment company" by complying with
the applicable provisions of the Internal Revenue Code and will not be
subject to federal income tax on taxable income that is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $240,044 of a capital loss
carryforward available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent that such carryforward is
used by the Fund, no capital gain distributions will be made. The entire
amount of the loss carryforward expires May 31, 2012.
Dividends, interest and
distributions
Dividend income on investment securities is recorded on the ex-dividend
date or, in the case of some foreign securities, on the date thereafter
when the Fund identifies the dividend. Interest income on investment
securities is recorded on the accrual basis. Foreign income may be subject
to foreign withholding taxes, which are accrued as applicable.
The Fund records distributions to shareholders from net investment income
and net realized gains, if any, on the ex-dividend date. During the period
ended May 31, 2004, the tax character of distributions paid was as follows:
ordinary income $58,845,849.
Such distributions, on a tax basis, are determined in conformity with
income tax regulations, which may differ from accounting principles
generally accepted in the United States of America. Distributions in excess
of tax basis earnings and profits, if any, are reported in the Fund's
financial statements as a return of capital.
Use of estimates
The preparation of these financial statements, in accordance with
accounting principles generally accepted in the United States of America,
incorporates estimates made by management in determining the reported
amount of assets, liabilities, revenues and expenses of the Fund. Actual
results could differ from these estimates.
Note B
Management fee and
transactions with
affiliates and others
The Fund has an investment management contract with John Hancock Advisers
LLC (the "Adviser"), a wholly owned subsidiary of John Hancock Financial
Services, Inc. Under the investment management contract, the Fund pays a
daily management fee to the Adviser at an annual rate of 0.75% of the
Fund's average daily net asset value and the value attributable to the
Auction Preferred Shares (collectively "managed assets").
The Adviser has contractually agreed to limit the Fund's management fee to
the following: 0.55% of the Fund's average daily managed assets until the
fifth anniversary of the commencement of the Fund's operations, 0.60% of
such assets in the sixth year, 0.65% of such assets in the seventh year and
0.70% of average daily managed assets in the eighth year. Accordingly, the
expense reductions related to the reduction in management fees amounted to
$1,080,876 for the period ended November 30, 2004. After the eighth year
the Adviser will no longer waive a portion of the management fee.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Fund. The compensation for the period
amounted to $135,110. The Fund also paid the Adviser the amount of $295 for
certain publishing services, included in the printing fees.
Mr. James A. Shepherdson is a director and/or officer of the Adviser and/or
its affiliates, as well as Trustee of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may
elect to defer,
20
for tax purposes, their receipt of this compensation under
the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes
investments into other John Hancock funds, as applicable, to cover its
liability for the deferred compensation. Investments to cover the Fund's
deferred compensation liability are recorded on the Fund's books as an
other asset. The deferred compensation liability and the related other
asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investments, as well as any unrealized
gains or losses. The Deferred Compensation Plan investments had no impact
on the operations of the Fund.
Note C
Fund share transactions
Common shares
This listing illustrates the Fund common shares sold, offering cost and
underwriting discount charged to capital paid-in, distributions reinvested,
reclassification of the Fund's capital accounts and the number of common
shares outstanding at the end of the period, along with the corresponding
dollar value.
Period ended 5-31-04 1 Period ended 11-31-04 2
Shares Amount Shares Amount
Beginning of period -- -- 31,084,744 $737,391,393
Shares sold 30,630,990 $731,314,886 3 -- --
Offering cost related to
common shares -- (687,576) -- --
Offering cost and underwriting
discount related to
Auction Preferred Shares -- (3,712,531) -- --
Distribution reinvested 453,754 10,747,065 161,560 3,757,018
Reclassification of
capital accounts -- (270,451) -- --
Net increase 31,084,744 $737,391,393 31,246,304 $741,148,411
1 Inception period from 6-19-03 through 5-31-04.
2 Semiannual period from 6-1-04 through 11-30-04. Unaudited.
3 Net of $1.125 per share sales load of the initial offering price of
$25.00 per share.
Auction preferred shares
The Fund issued a total of 14,000 Auction Preferred Shares (2,800 shares of
Series M, 2,800 shares of Series T, 2,800 shares of series W, 2,800 shares
of Series TH and 2,800 shares of Series F) (collectively, the "APS") on
August 19, 2003, in a public offering. The underwriting discount of
$3,500,000 has been charged to capital paid-in of common shares during the
period ended May 31, 2004. Offering costs of $687,576 related to common
shares and $212,531 incurred in connection with the preferred shares were
charged to the Fund's capital paid-in during the period ended May 31, 2004.
Dividends on the APS, which accrue daily, are cumulative at a rate that was
established at the offering of the APS and has been reset every 7 days
thereafter by an auction (except for Series W, which reset its rate on
August 18, 2004, at which time the Fund elected a Special Dividend Payment
of 182 days for the subsequent distributions). Dividend rates on APS ranged
from 1.15% to 2.13% during the period ended November 30, 2004. Accrued
dividends on APS are included in the value of APS on the Fund's Statement
of Assets and Liabilities.
21
The APS are redeemable at the option of the Fund, at a redemption price
equal to $25,000 per share, plus accumulated and unpaid dividends on any
dividend payment date. The APS are also subject to mandatory redemption at
a redemption price equal to $25,000 per share, plus accumulated and unpaid
dividends, if the Fund is in default on its asset coverage requirements
with respect to the APS as defined in the Fund's by-laws. If the dividends
on the APS shall remain unpaid in an amount equal to two full years'
dividends, the holders of the APS, as a class, have the right to elect a
majority of the Board of Trustees. In general, the holders of the APS and
the common shareholders have equal voting rights of one vote per share,
except that the holders of the APS, as a class, vote to elect two members
of the Board of Trustees, and separate class votes are required on certain
matters that affect the respective interests of the APS and common
shareholders.
Note D
Investment
transactions
Purchases and proceeds from sales or maturities of securities, other than
short-term securities and obligations of the U.S. government, during the
period ended November 30, 2004, aggregated $73,579,722 and $55,445,440,
respectively.
The cost of investments owned on November 30, 2004, including short-term
investments, for federal income tax purposes was $1,086,099,064. Gross
unrealized appreciation and depreciation of investments aggregated
$28,478,591 and $8,812,851, respectively, resulting in net unrealized
appreciation of $19,665,740. The difference between book basis and tax
basis net unrealized appreciation of investments is attributable primarily
to the tax deferral of losses on amortization of premiums and accretion of
discounts on debt securities.
22
Investment
objective
and policy
The Fund's primary objective is to provide a high level of current income,
consistent with preservation of capital. The Fund's secondary objective is
to provide growth of capital to the extent consistent with its primary
objective. The Fund seeks to achieve its objectives by investing in a
diversified portfolio of securities that, in the opinion of the Adviser,
may be undervalued relative to similar securities in the marketplace.
Under normal market conditions, the Fund invests at least: (a) 80% of its
assets in preferred stocks and other preferred securities, including
convertible preferred securities, (b) 25% of its total assets in the
industries comprising the utilities sector and (c) 80% of its total assets
in preferred securities or other fixed income securities which are rated
investment-grade or higher by Moody's or Standard & Poor's at the time of
investment. "Assets" are defined as net assets including the liquidation
preference of APS plus borrowing for investment purposes.
By-laws
On December 16, 2003, the Trustees approved the following change to the
Fund's by-laws. The auction preferred section of the Fund's by-laws was
changed to update the rating agency requirements, in keeping with recent
changes to the agencies' basic maintenance reporting requirements for
leveraged closed-end funds. By-laws now require an independent accountants'
confirmation only once per year, at the Fund's fiscal year end, and changes
to the agencies' basic maintenance reporting requirements that include
modifications to the eligible assets and their respective discount factors.
These revisions bring the Fund's by-laws in line with current rating agency
requirements.
On September 14, 2004, the Trustees approved an amendment to the Fund's
by-laws increasing the maximum applicable dividend rate ceiling on the
preferred shares to conform with the modern calculation methodology used by
the industry and other John Hancock funds.
Dividend
reinvestment plan
The Fund offers its shareholders a Dividend Reinvestment Plan (the "Plan"),
which offers the opportunity to earn compounded yields. Each holder of
common shares will automatically have all distributions of dividends and
capital gains reinvested by Mellon Investor Services, as Plan Agent for the
common shareholders (the "Plan Agent"), unless an election is made to
receive cash. Holders of common shares who elect not to participate in the
Plan will receive all distributions in cash, paid by check mailed directly
to the shareholder of record (or, if the common shares are held in street
or other nominee name, then to the nominee) by the Plan Agent, as dividend
disbursing agent. Shareholders whose shares are held in the name of a
broker or a nominee should contact the broker or nominee to determine
whether and how they may participate in the Plan.
If the Fund declares a dividend payable either in common shares or in cash,
non-participants will receive cash and participants in the Plan will
receive the equivalent in common shares. If the market price of the common
shares on the payment date of the dividend is equal to or exceeds their net
asset value as determined on the payment date, participants will be issued
common shares (out of authorized but unissued shares) at a value equal to
the higher of net asset value or 95% of the market price. If the net asset
value exceeds the market price of the common shares at such time, or if the
Board of Trustees declares a dividend payable only in cash, the Plan Agent
will, as agent for Plan participants, buy shares in the open market, on the
New York Stock Exchange or elsewhere, for the participants' accounts. Such
purchases will be made
23
promptly after the payable date for such dividend and, in any event, prior
to the next ex-dividend date after such date, except where necessary to
comply with federal securities laws. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value of
the common shares, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the common shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in shares
issued by the Fund.
Each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends and distributions. The cost
per share of the shares purchased for each participant's account will be
the average cost, including brokerage commissions, of any shares purchased
on the open market plus the cost of any shares issued by the Fund. There
will be no brokerage charges with respect to common shares issued directly
by the Fund. There are no other charges to participants for reinvesting
dividends or capital gain distributions.
Participants in the Plan may withdraw from the Plan at any time by
contacting the Plan Agent by telephone, in writing or by visiting the Plan
Agent's Web site at www.melloninvestor.com. Such withdrawal will be
effective immediately if received not less than ten days prior to a
dividend record date; otherwise, it will be effective for all subsequent
dividend record dates. When a participant withdraws from the Plan or upon
termination of the Plan, as provided below, certificates for whole common
shares credited to his or her account under the Plan will be issued and a
cash payment will be made for any fraction of a share credited to such
account.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the
accounts, including information needed by the shareholders for personal and
tax records. The Plan Agent will hold common shares in the account of each
Plan participant in non-certificated form in the name of the participant.
Proxy material relating to the shareholders' meetings of the Fund will
include those shares purchased as well as shares held pursuant to the Plan.
The reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to
be withheld on such dividends or distributions. Participants under the Plan
will receive tax information annually. The amount of dividend to be
reported on 1099-DIV should be (1) in the case of shares issued by the
Fund, the fair market value of such shares on the dividend payment date and
(2) in the case of shares purchased by the Plan Agent in the open market,
the amount of cash used by the Plan Agent to purchase shares in the open
market, including the amount of cash allocated to brokerage commissions
paid on such purchases.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice
of the change sent to all shareholders of the Fund at least 90 days before
the record date for the dividend or distribution. The Plan may be amended
or terminated by the Plan Agent after at least 90 days' written notice to
all shareholders of the Fund. All correspondence or additional information
concerning the Plan should be directed to the Plan Agent, Mellon Bank,
N.A., c/o Mellon Investor Services, P.O. Box 3338, South Hackensack, NJ
07606-1938 (telephone 1-800-852-0218).
24
Shareholder
communication
and assistance
If you have any questions concerning the Fund, we will be pleased to assist
you. If you hold shares in your own name and not with a brokerage firm,
please address all notices, correspondence, questions or other
communications regarding the Fund to the transfer agent at:
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Telephone 1-800-852-0218
If your shares are held with a brokerage firm, you should contact that
firm, bank or other nominee for assistance.
25
26
27
28
For more information
The Fund's proxy voting policies, procedures and records are available
without charge, upon request:
By phone On the Fund's Web site On the SEC's Web site
1-800-225-5291 www.jhfunds.com/proxy www.sec.gov
Trustees
Charles L. Ladner, Chairman*
James F. Carlin
William H. Cunningham
Ronald R. Dion
Dr. John A. Moore*
Patti McGill Peterson*
Steven R. Pruchansky
James A. Shepherdson
Lt. Gen. Norman H. Smith,
USMC (Ret.)
*Members of the Audit Committee
Officers
James A. Shepherdson
President and
Chief Executive Officer
Susan S. Newton
Senior Vice President and
Secretary
William H. King
Vice President and Treasurer
Investment adviser
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, MA 02199-7603
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer agent and
dividend disburser
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Transfer agent for APS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, NY 10017
Legal counsel
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109-1803
Stock symbol
Listed New York Stock
Exchange:
HPS
For shareholder assistance
refer to page 25
How to contact us
Internet www.jhfunds.com
Mail Regular mail:
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Phone Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7054
24-hour automated information 1-800-843-0090
TDD line 1-800-231-5469
A listing of month-end portfolio holdings is available on our Web site,
www.jhfunds.com. A more detailed portfolio holdings summary is available on
a quarterly basis 60 days after the fiscal quarter on our Web site or upon
request by calling 1-800-225-5291, or on the Securities and Exchange
Commission's Web site, www.sec.gov.
29
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
1-800-852-0218
1-800-843-0090 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
P12SA 11/04
1/05
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to previously disclosed John Hancock Funds -
Administration Committee Charter.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls
and procedures as conducted within 90 days of the filing date of this
Form N-CSR, the registrant's principal executive officer and principal
accounting officer have concluded that those disclosure controls and
procedures provide reasonable assurance that the material information
required to be disclosed by the registrant on this report is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal half-year (the registrant's second fiscal half-year in the case of
an annual report) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) Separate certifications for the registrant's principal executive
officer and principal accounting officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company
Act of 1940, are attached.
(b)(1) Separate certifications for the registrant's principal executive
officer and principal accounting officer, as required by 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
and Rule 30a-2(b) under the Investment Company Act of 1940, are attached.
The certifications furnished pursuant to this paragraph are not deemed to
be "filed" for purposes of Section 18 of the Securities Exchange Act of
1934, or otherwise subject to the liability of that section. Such
certifications are not deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent that the Registrant specifically incorporates
them by reference.
(c)(1) Contact person at the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Preferred Income Fund III
By:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: January 26, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: January 26, 2005
By:
-----------------------
William H. King
Vice President and Treasurer
Date: January 26, 2005