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)
601 Congress Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip code)
Alfred P. Ouellette
Senior Attorney and Assistant Secretary
601 Congress Street
Boston, Massachusetts 02110
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4324
Date of fiscal year end: May 31
Date of reporting period: May 31, 2005
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Preferred Income Fund III
5.31.2005
Annual 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 Keith F. Hartstein, President and Chief Executive Officer of
John Hancock Funds, LLC, 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
Trustees & officers
page 29
For more information
page 33
To Our Shareholders,
I am pleased to be writing to you as the new President and Chief Executive
Officer of John Hancock Funds, LLC, following the departure of James A.
Shepherdson to pursue other opportunities. In addition, on July 25, 2005,
your fund's Board of Trustees appointed me to the roles of President and
Chief Executive Officer of your fund.
As a means of introduction, I have been involved in the mutual fund industry
since 1985. I have been with John Hancock Funds for the last 15 years, most
recently as executive vice president of retail sales and marketing and a
member of the company's executive and investment committees. In my former
capacity, I was responsible for all aspects of the distribution and
marketing of John Hancock Funds' open-end and closed-end mutual funds.
Outside of John Hancock, I have served as Chairman of the Investment Company
Institute (ICI) Sales Force Marketing Committee since September of 2003.
It is an exciting time to be at John Hancock Funds, and I am grateful for
the opportunity to lead and shape its further growth. With the acquisition
of John Hancock by Manulife Financial Corporation in April 2004, we are
receiving broad support toward the goal of providing our shareholders with
excellent investment opportunities and a more complete lineup of choices for
the discerning investor.
As you may have read, John Hancock recently entered into an agreement with
GMO, a Boston-based institutional money manager, to acquire eight of their
mutual funds. In addition, we are in the process of adding five "Lifestyle
Portfolio" funds-of-funds that blend multiple fund offerings from internal
and external money managers to create a broadly diversified asset allocation
portfolio. Look for more information about these exciting additions to the
John Hancock family of funds in your fourth quarter shareholder newsletter.
Although there has been a change in executive-level management, rest assured
that the one thing that never wavers is John Hancock Funds' commitment to
placing the needs of shareholders above all else. We are all dedicated to
the task of working with you and your financial advisors to help you reach
your long-term financial goals.
Sincerely,
/S/ Keith F. Hartstein
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEO's views as of May 31, 2005. 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
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
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 mar-
ket conditions, the
Fund invests at least
80% of its assets
in preferred
stocks and other
preferred securities.
Over the last twelve months
* Preferred stocks posted strong gains, overcoming scattered bouts of
weakness during the year.
* The Fund outpaced its peer group due to favorable security selection.
* High-quality, tax-advantaged preferred stocks 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 year ended May 31,
2005." The chart is scaled in increments of 6% with 0% at the bottom and
18% at the top. The first bar represents the Fund's 16.28% net asset value
and the second bar represents the Fund's 8.22% market value. A note below
the chart reads "The total returns for the Fund are with all distributions
reinvested. The performance data contained within this material represents
past performance, which does not guarantee future results."]
Top 10 issuers
3.1% Nexen, Inc.
3.0% ING Groep N.V.
2.4% TXU Corp.
2.3% Lloyds TSB Bank Plc
2.3% JPMorgan Chase Capital XI
2.1% Royal Bank of Scotland Group Plc
2.0% DTE Energy Co.
2.0% Duke Realty Corp.
2.0% Southwest Gas Capital II
1.9% Public Storage, Inc.
As a percentage of net assets plus the value of preferred shares on May 31,
2005.
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 for the 12-month period ended May 31,
2005, overcoming scattered bouts of weakness during the year. Preferreds
began the period on somewhat rocky footing when the Federal Reserve Board
began to raise interest rates, triggering a late-spring Treasury market
sell-off and putting pressure on preferred stock prices. Because preferreds
make fixed payments in the form of dividends, their prices tend to follow
those of U.S. Treasury securities. Despite evidence of a strengthening
economy and additional short-term interest rate hikes by the Federal Reserve
Board, preferred stock prices generally moved higher throughout the
remainder of 2004, mirroring a somewhat positive tone in the U.S. Treasury
market. That rally 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. Preferred stocks were further
boosted by the combination of constrained supply and strong demand. Supply
was muted, as fewer companies issued new preferred securities, while others
bought back their outstanding shares. Demand was fueled by investors'
appetite for yield, particularly in light of the fact that changes in the
tax code in 2003 helped to make ownership of certain dividend-yielding
stocks more attractive.
"Preferred stocks...posted strong
gains during the 12-month
period ended May 31, 2005..."
Performance
For the 12 months ended May 31, 2005, John Hancock Preferred Income Fund III
returned 16.28% at net asset value and 8.22% 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
2
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 15.18% at net
asset value, according to Lipper, Inc. In the same 12-month period, the Dow
Jones Utility Average -- which tracks the performance of 15 electric and
natural gas utilities -- returned 37.05%, and the broader stock market, as
measured by the Standard & Poor's 500 Index, gained 8.24%. The Fund's
outperformance of its peers stemmed primarily from advantageous security
selection.
[Photos of Greg Phelps and Mark Maloney flush right next to first
paragraph.]
Leaders: Tax-advantaged preferreds
As a group, tax-advantaged preferreds outpaced the preferred market overall
in response to hopes that the 2003 tax reform bill would be made permanent.
That, coupled with strong fundamental performance, helped boost the prices
in holdings such as ABN AMRO and Southern Union, the latter of which further
benefited from expectations that the company's credit rating would be
upgraded. On the flip side, our holdings in the bonds and preferred stock of
Ford Motor Company and General Motors proved disappointing throughout the
period as both struggled amid flagging demand for their cars and worries
that their credit ratings would be cut to below investment grade, which
occurred in the final weeks of the period. Despite their recent travails, we
continue to hold onto our GM and Ford holdings because we like their
attractive yields and we believe that the companies are taking some positive
steps toward addressing their problems, such as cutting costs and reducing
production.
"...tax-advantaged preferreds
outpaced the preferred market
overall..."
Convertible securities and oil and gas holdings
Some of our convertible preferred stock holdings, which will be converted
into common stocks at a set date, also were standouts. One of our best
performers in the group was ONEOK, a diversified energy company involved in
oil and gas production, natural gas processing, gathering, storage and
transmission in the mid-continent areas of the United States. It continued
to reap the benefits of a well-executed business strategy and its ability to
pass on price increases in the wake of higher commodities prices.
3
Another winner was Public Service Enterprise Group, which was boosted
largely by its being acquired by Exelon Corp.
[Table at top left-hand side of page entitled "Industry distribution 1."
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%, the fifth is Other diversified
financial services 10%, the sixth is Real estate investment trusts 5%, the
seventh is Gas utilities 4%, the eighth is Oil and gas exploration &
production 4%, the ninth is Integrated telecommunication services 3%, the
tenth is Multi-line insurance 3%, the eleventh is Automobile manufacturers
3% and the twelfth is All others 12%.]
High energy prices continued to stoke better fundamentals and higher prices
for our holdings in oil and natural gas producers during the period. Our
preferred stock holdings in Nexen Inc., Anadarko Petroleum, Apache Corp. and
Devon Energy performed well as energy prices soared.
A word about dividends
In keeping with our approach of only paying income earned, the Fund's
dividend was reduced twice during the year. These measures were necessary
because a number of high-yielding preferred securities in the Fund's
portfolio were refinanced or called, forcing us to reinvest the proceeds at
lower yields. Rising short-term interest rates have increased our borrowing
costs, putting added pressure on the Fund's dividend. With the two cuts, the
new monthly dividend rate as of June 1, 2005 was $0.148 which equates to an
annualized yield of 7.99% based on the Fund's closing market prices as of
June 1, 2005. The yield represented by the new dividend level remains
attractive relative to other predominantly investment-grade income oriented,
leveraged closed-end funds.
[Pie chart at middle of page with heading "Portfolio diversification 1."
The chart is divided into five sections (from top to left): Preferred
stocks 81%, Capital preferred securities 8%, Corporate bonds 7%, Short-term
investments & other 2% and Common stocks 2%.]
Outlook
In our view, the Fed probably hasn't yet reached the end of its campaign to
raise short-term interest rates to cool economic growth and potential
inflationary pressures. This could pose periodic short-term challenges for
dividend-producing securities. Over the longer term, however, we're more
upbeat, especially given the fact
4
that we believe a good portion, if not all, of future interest rate hikes
already have been factored into preferred and utility common stock prices.
Furthermore, there are already some tangible signs that economic growth has
cooled as rates have moved higher. Still-high oil prices will also probably
act as a drag on economic growth, most likely by reducing consumers'
disposable income and raising corporate America's cost of doing business.
Economic weakness in Japan and Europe could also act as a drag on the U.S.
economy by limiting U.S. companies' ability to export goods and services to
those regions. We believe that a slower-growth, low-inflationary environment
will provide a favorable backdrop for both preferred and common stocks.
That, coupled with what we believe will continue to be a favorable supply
and demand backdrop, could benefit many dividend-paying securities in the
months to come.
[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 ABN AMRO
followed by an up arrow with the phrase "Strong investor demand for
tax-advantage preferreds helps boost price." The second listing is Anadarko
Petroleum followed by an up arrow with the phrase "High energy prices fuel
gains." The third listing is General Motors followed by a down arrow with
the phrase "Company's credit quality downgraded."]
"We believe that a slower-growth,
low-inflationary environment will
provide a favorable backdrop for
both preferred and common stocks."
This commentary reflects the views of the team through the end of the Fund's
period discussed in this report. The managers' 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 May 31, 2005.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
May 31, 2005
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 10.19% $76,316,438
(Cost $73,439,054)
Automobile Manufacturers 0.31% 2,303,927
Ford Motor Co.,
Note 7.450% 07-16-31 BBB- $2,755 2,303,927
Consumer Finance 0.33% 2,509,566
General Motors Acceptance Corp.,
Bond 8.000 11-01-31 BBB- 3,000 2,509,566
Electric Utilities 5.66% 42,360,231
Black Hills Corp.,
Note 6.500 05-15-13 BBB- 15,000 15,756,780
DPL, Inc.,
Sr Note 6.875 09-01-11 B+ 7,000 7,490,000
Entergy Gulf States, Inc.,
1st Mtg Bond 6.200 07-01-33 BBB+ 15,000 15,509,475
Kentucky Power Co.,
Sr Note, Ser D 5.625 12-01-32 BBB 3,565 3,603,976
Integrated Oil & Gas 0.77% 5,733,040
Amerada Hess Corp.,
Note 7.125 03-15-33 BBB- 5,000 5,733,040
Multi-Utilities & Unregulated Power 1.61% 12,064,185
DTE Energy Co.,
Sr Note 6.375 04-15-33 BBB- 7,500 8,073,210
TECO Energy, Inc.,
Note 7.000 05-01-12 BB 3,810 3,990,975
Oil & Gas Refining, Marketing & Transportation 1.51% 11,345,489
Valero Energy Corp.,
Note 7.500 04-15-32 BBB 9,500 11,345,489
See notes to
financial statements.
6
FINANCIAL STATEMENTS
Credit Par value
Issuer, description, maturity date rating (A) (000) Value
Capital preferred securities 11.79% $88,307,827
(Cost $88,361,226)
Diversified Banks 4.69% 35,158,600
Credit Agricole Preferred Funding Trust, 7.00%, 01-29-49 A $9,000 9,296,100
Lloyds TSB Bank Plc, 6.90%, 11-29-49 (United Kingdom) A+ 25,000 25,862,500
Electric Utilities 0.98% 7,315,713
DPL Capital Trust II, 8.125%, 09-01-31 B+ 6,225 7,315,713
Gas Utilities 0.76% 5,688,907
KN Capital Trust III, 7.63%, 04-15-28 BB+ 4,960 5,688,907
Integrated Telecommunication Services 2.14% 16,024,063
TCI Communications Financing Trust III, 9.65%, 03-31-27 BB+ 14,210 16,024,063
Investment Banking & Brokerage 1.36% 10,218,000
HBOS Capital Funding L.P., 6.85%, 03-29-49 A 10,000 10,218,000
Multi-Utilities & Unregulated Power 1.36% 10,172,083
Dominion Resources Capital Trust I, 7.83%, 12-01-27 BBB- 9,097 10,172,083
Other Diversified Financial Services 0.50% 3,730,461
JPM Capital Trust I, 7.54%, 01-15-27 A- 3,447 3,730,461
Issuer Shares Value
Common stocks 3.36% $25,208,685
(Cost $22,820,746)
Electric Utilities 1.66% 12,414,225
Ameren Corp. 48,961 2,672,291
CH Energy Group, Inc. 20,600 931,120
Cinergy Corp. 118,460 4,884,106
Scottish Power Plc, American Depositary Receipt
(United Kingdom) 116,278 3,926,708
Gas Utilities 0.91% 6,783,260
KeySpan Corp. 170,691 6,783,260
Multi-Utilities & Unregulated Power 0.79% 6,011,200
TECO Energy, Inc. 340,000 6,011,200
See notes to
financial statements.
7
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Preferred stocks 119.29% $893,719,202
(Cost $886,047,742)
Agricultural Products 2.24% 16,806,563
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) BB+ 195,000 16,806,563
Asset Management & Custody Banks 0.57% 4,276,061
BNY Capital V, 5.95%, Ser F A- 170,361 4,276,061
Automobile Manufacturers 3.84% 28,757,652
Ford Motor Co., 7.50% BB+ 771,385 15,967,669
General Motors Corp., 7.25%, Ser 07-15-41 BB 55,641 1,068,864
General Motors Corp., 7.375%, Ser 05-15-48 Baa3 593,194 11,264,754
General Motors Corp., 7.375%, Ser 10-01-51 BB 22,100 456,365
Broadcasting & Cable TV 0.51% 3,843,658
Shaw Communications, Inc., 8.50% (Canada) B+ 150,850 3,843,658
Consumer Finance 2.46% 18,469,045
Ford Motor Credit Co., 7.60% A3 25,000 540,000
Household Finance Corp., 6.875% A 636,118 16,793,515
SLM Corp., 6.97%, Ser A BBB+ 19,800 1,135,530
Diversified Banks 11.02% 82,584,477
BAC Capital Trust II, 7.00% A- 94,600 2,461,492
BAC Capital Trust III, 7.00% A- 22,000 577,060
BAC Capital Trust IV, 5.875% A 406,400 10,139,680
Fleet Capital Trust VII, 7.20% A 61,604 1,610,945
Fleet Capital Trust IX, 6.00% A 469,200 11,790,996
Royal Bank of Scotland Group Plc, 5.75%, Ser L
(United Kingdom) A 960,000 23,376,000
Santander Finance Preferred S.A. Unipersonal,
6.41%, Ser 1 (Spain) BBB+ 100,000 2,510,000
USB Capital IV, 7.35% A- 59,100 1,536,600
USB Capital V, 7.25% A- 60,700 1,592,161
Wachovia Preferred Funding Corp., 7.25%, Ser A A- 674,800 19,481,476
Wells Fargo Capital Trust IV, 7.00% A 187,800 4,815,192
Wells Fargo Capital Trust VII, 5.85% A 107,500 2,692,875
Electric Utilities 21.98% 164,644,907
American Electric Power Co., Inc., 9.25%, Conv BBB 240,800 10,542,224
Cleveland Electric Financing Trust I, 9.00% BB 27,400 732,950
Consolidated Edison, Inc., $5.00, Ser A BBB+ 30,000 2,803,500
Consolidated Edison, Inc., 7.25% A- 56,000 1,486,800
See notes to
financial statements.
8
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Electric Utilities (continued)
Entergy Mississippi, Inc., 7.25% A- 63,918 $1,662,507
FPC Capital I, 7.10%, Ser A BB+ 684,200 17,159,736
FPL Group Capital Trust I, 5.875% BBB+ 478,254 12,028,088
FPL Group, Inc., 8.00%, Conv A- 112,000 6,881,280
Georgia Power Capital Trust V, 7.125% BBB+ 132,200 3,467,606
Georgia Power Co., 6.00%, Ser R A 737,085 18,714,588
Great Plains Energy, Inc., 8.00%, Conv BBB- 637,000 17,358,250
HECO Capital Trust III, 6.50% BBB- 130,000 3,378,700
Interstate Power & Light Co., 7.10%, Ser C BBB- 354,900 9,659,952
Interstate Power & Light Co., 8.375%, Ser B BBB- 54,500 1,825,750
Monongahela Power Co., $7.73, Ser L B 65,557 6,555,700
Northern States Power Co., 8.00% BBB- 74,550 2,005,395
NVP Capital I, 8.20%, Ser A CCC+ 56,300 1,421,575
NVP Capital III, 7.75% CCC+ 379,505 9,472,445
Sierra Pacific Power Co., 7.80%, Ser 1 (Class A) CCC+ 73,507 1,859,727
TXU Corp., 7.24%, Ser B BB+ 150 15,243,750
TXU Corp., 8.125%, Conv Ba1 170,000 11,009,200
Virginia Power Capital Trust, 7.375% BBB- 356,200 9,375,184
Gas Utilities 4.60% 34,464,916
Laclede Capital Trust I, 7.70% BBB+ 63,300 1,685,679
SEMCO Capital Trust I, 10.25% B- 45,376 1,179,322
Southern Union Co., 7.55% BB+ 350,000 9,432,500
Southwest Gas Capital II, 7.70% BB 810,250 21,568,855
Vectren Utility Holdings, Inc., 7.25% A- 23,200 598,560
Hotels, Resorts & Cruise Lines 0.42% 3,135,784
Hilton Hotels Corp., 8.00% BBB- 118,600 3,135,784
Integrated Oil & Gas 1.59% 11,908,193
Coastal Finance I, 8.375% CCC- 476,900 11,908,193
Integrated Telecommunication Services 3.01% 22,518,996
Telephone & Data Systems, Inc., 6.625% A- 319,500 7,939,575
Telephone & Data Systems, Inc., 7.60%, Ser A A- 415,576 10,792,509
Verizon New England, Inc., 7.00%, Ser B A2 146,100 3,786,912
Investment Banking & Brokerage 13.28% 99,494,528
Bear Stearns Cos., Inc. (The), 5.49%, Depositary Shares,
Ser G BBB 296,032 14,920,013
Lehman Brothers Holdings Capital Trust III, 6.375%,
Ser K BBB+ 793,400 20,073,020
See notes to
financial statements.
9
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Investment Banking & Brokerage (continued)
Lehman Brothers Holdings, Inc., 5.67%,
Depositary Shares, Ser D BBB+ 142,500 $7,053,750
Merrill Lynch Preferred Capital Trust III, 7.00% A- 387,017 10,240,470
Merrill Lynch Preferred Capital Trust IV, 7.12% A- 232,700 6,199,128
Merrill Lynch Preferred Capital Trust V, 7.28% A- 373,700 10,033,845
Morgan Stanley Capital Trust III, 6.25% A- 764,025 19,016,582
Morgan Stanley Capital Trust IV, 6.25% A- 393,925 9,848,125
Morgan Stanley Capital Trust V, 5.75% A1 88,713 2,109,595
Life & Health Insurance 3.03% 22,675,266
Lincoln National Capital VI, 6.75%, Ser F BBB 304,000 7,943,520
Phoenix Cos., Inc. (The), 7.45% BBB 387,849 9,897,906
PLC Capital Trust IV, 7.25% BBB+ 120,600 3,183,840
PLC Capital Trust V, 6.125% BBB+ 66,000 1,650,000
Multi-Line Insurance 4.55% 34,099,245
AEGON N.V., 6.375% (Netherlands) A- 60,000 1,509,378
ING Groep N.V., 7.05% (Netherlands) A- 603,970 15,763,617
ING Groep N.V., 7.20% (Netherlands) A- 641,000 16,826,250
Multi-Utilities & Unregulated Power 14.13% 105,828,470
Aquila, Inc., 7.875% B2 218,707 5,393,315
Avista Corp., $6.95, Ser K BB- 147,176 15,085,540
BGE Capital Trust II, 6.20% BBB- 592,728 15,096,782
Consumers Energy Co. Financing IV, 9.00% Ba2 189,700 4,953,067
DTE Energy Co., 8.75%, Conv BBB- 569,000 14,139,650
DTE Energy Trust I, 7.80% BB+ 106,500 2,782,845
Energy East Capital Trust I, 8.25% BBB- 179,900 4,693,591
Enterprise Capital Trust I, 7.44%, Ser A BB+ 68,200 1,726,824
Enterprise Capital Trust III, 7.25%, Ser C BB+ 104,100 2,639,976
ONEOK, Inc., 8.50%, Conv BBB+ 197,600 7,417,904
PSEG Funding Trust II, 8.75% BB+ 462,275 12,615,485
Public Service Electric & Gas Co., 5.05%, Ser D BB+ 30,000 2,640,000
Public Service Enterprise Group, Inc., 10.25%, Conv BBB- 105,600 7,355,040
Puget Sound Energy Capital Trust II, 8.40% BB 185,600 4,853,440
TECO Capital Trust I, 8.50% B 171,700 4,435,011
Oil & Gas Exploration & Production 5.60% 41,935,503
Anadarko Petroleum Corp., 5.46%, Depositary
Shares, Ser B BBB- 24,600 2,450,007
Apache Corp., 5.68%, Depositary Shares, Ser B BBB 27,500 2,841,094
See notes to
financial statements.
10
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Oil & Gas Exploration & Production (continued)
Devon Energy Corp., 6.49%, Ser A BB+ 25,250 $2,670,187
Nexen, Inc., 7.35% (Canada) BB+ 1,281,079 33,974,215
Other Diversified Financial Services 14.03% 105,120,027
ABN AMRO Capital Funding Trust V, 5.90% A 867,400 21,312,018
ABN AMRO Capital Funding Trust VI, 6.25% A 400,000 10,240,000
Citigroup Capital VII, 7.125% A 30,042 774,783
Citigroup Capital VIII, 6.95% A 220,200 5,729,604
Citigroup Capital IX, 6.00% A 384,700 9,621,347
Citigroup Capital X, 6.10% A 720,000 18,180,000
General Electric Capital Corp., 5.875% AAA 370,930 9,432,750
General Electric Capital Corp., 6.10% AAA 94,747 2,443,525
JPMorgan Chase Capital XI, 5.875%, Ser K A- 1,035,000 25,254,000
JPMorgan Chase Capital XIV, 6.20%, Ser N A- 25,000 624,500
JPMorgan Chase Capital XVI, 6.35% A- 60,000 1,507,500
Real Estate Investment Trusts 7.17% 53,720,243
Duke Realty Corp., 6.50%, Depositary Shares, Ser K BBB 145,000 3,581,500
Duke Realty Corp., 6.60%, Depositary Shares, Ser L BBB 103,000 2,556,460
Duke Realty Corp., 6.625%, Depositary, Shares, Ser J BBB 638,100 16,112,025
Kimco Realty Co., 6.65%, Depositary Shares, Ser F BBB+ 384,750 9,965,025
Public Storage, Inc., 6.50%, Depositary Shares, Ser W BBB+ 450,000 11,340,000
Public Storage, Inc., 7.50%, Depositary Shares, Ser V BBB+ 184,530 4,864,211
Public Storage, Inc., 7.625%, Depositary Shares, Ser T BBB+ 25,500 666,315
Public Storage, Inc., 8.00%, Depositary Shares, Ser R BBB+ 177,100 4,634,707
Regional Banks 2.69% 20,149,819
National Commerce Capital Trust II, 7.70% A- 86,800 2,293,256
PFGI Capital Corp., 7.75% A3 634,900 17,856,563
Reinsurance 0.40% 3,017,358
RenaissanceRe Holdings Ltd., 6.08%, Ser C (Bermuda) BBB+ 127,800 3,017,358
Thrifts & Mortgage Finance 1.74% 13,062,643
Abbey National Plc, 7.25% (United Kingdom) A- 163,265 4,191,013
Abbey National Plc, 7.375% (United Kingdom) A- 339,000 8,871,630
Wireless Telecommunication Services 0.43% 3,205,848
United States Cellular, 7.50% A- 119,800 3,205,848
See notes to
financial statements.
11
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Short-term investments 2.63% $19,700,000
(Cost $19,700,000)
Government U.S. Agency 2.63% 19,700,000
Federal Home Loan Bank, Disc Note 2.980% 06-01-05 AAA $19,700 19,700,000
Total investments 147.26% $1,103,252,152
Other assets and liabilities, net (0.54%) ($4,042,668)
Fund preferred shares, at value (46.72%) ($350,000,000)
Total net assets 100.00% $749,209,484
(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 security may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $16,806,563 or 2.24% of the Fund's net assets as of
May 31, 2005.
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.
12
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
May 31, 2005
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 $1,090,368,768) $1,103,252,152
Cash segregated for futures contracts 825,000
Receivable for investments sold 1,124,160
Dividends and interest receivable 4,628,074
Unrealized appreciation of swap contracts 132,069
Other assets 24,270
Total assets 1,109,985,725
Liabilities
Due to custodian 79,158
Payable for investments purchased 5,022,793
Payable for swap contracts 22,925
Payable for futures variation margin 481,250
Common shares dividends payable 4,973,641
Payable to affiliates
Management fees 66,096
Other 23,984
Other payables and accrued expenses 70,279
Total liabilities 10,740,126
Auction Preferred Shares (APS), and accrued
dividends, unlimited number of shares of
beneficial interest authorized with no par
value, 14,000 shares issued, liquidation
preference of $25,000 per share 350,036,115
Net assets
Common shares capital paid-in 741,790,150
Accumulated net realized gain on investments,
financial futures contracts and swap contracts 1,085,703
Net unrealized appreciation of investments,
financial futures contracts and swap contracts 10,864,781
Distributions in excess of net investment income (4,531,150)
Net assets applicable to common shares $749,209,484
Net asset value per common share
Based on 31,280,764 shares of beneficial interest
outstanding -- unlimited number of shares
authorized with no par value $23.95
See notes to
financial statements.
13
FINANCIAL STATEMENTS
OPERATIONS
For the year ended
May 31, 2005
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 (net of foreign withholding taxes of $43,268) $63,870,694
Interest 11,739,546
Total investment income 75,610,240
Expenses
Investment management fees 8,189,442
APS auction fees 912,151
Accounting and legal services fees 255,812
Miscellaneous 199,370
Custodian fees 173,193
Printing fees 107,839
Professional fees 60,694
Transfer agent fees 32,086
Registration and filing fees 29,073
Trustees' fees 15,545
Interest 1,022
Total expenses 9,976,227
Less expense reductions (2,183,851)
Net expenses 7,792,376
Net investment income 67,817,864
Realized and unrealized gain (loss)
Net realized gain (loss) on
Investments 6,599,813
Financial futures contracts (5,747,971)
Swap contracts (651,031)
Change in net unrealized appreciation (depreciation) of
Investments 50,634,076
Financial futures contracts (1,773,628)
Swap contracts (259,100)
Net realized and unrealized gain 48,802,159
Distributions to APS (7,621,435)
Increase in net assets from operations $108,998,588
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 Year
ended ended
5-31-04 1 5-31-05
Increase (decrease) in net assets
From operations
Net investment income $54,215,153 $67,817,864
Net realized gain 3,847,142 200,811
Change in net unrealized
appreciation (depreciation) (37,736,567) 48,601,348
Distributions to APS (3,228,368) (7,621,435)
Increase in net assets resulting
from operations 17,097,360 108,998,588
Distributions to common shareholders
From net investment income (55,617,481) (63,519,709)
From Fund share transactions 737,661,844 4,588,882
Net assets
Beginning of period -- 699,141,723
End of period 2 $699,141,723 $749,209,484
1 Inception period from 6-19-03 through 5-31-04.
2 Includes distributions in excess of net investment income of $650,103 and
$4,531,150, 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 5-31-05
Per share operating performance
Net asset value,
beginning of period $23.88 2 $22.49
Net investment income 3 1.88 2.16
Net realized and unrealized
gain (loss) on investments (1.21) 1.58
Distributions to APS (0.11) (0.25)
Total from
investment operations 0.56 3.49
Less distributions to
common shareholders
From net investment income (1.80) (2.03)
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 $23.95
Per share market value, end of period $22.42 $22.22
Total return at market value 4 (%) (4.29) 5,6 8.22
Ratios and supplemental data
Net assets applicable to common shares,
end of period (in millions) $699 $749
Ratio of expenses
to average net assets 7 (%) 0.99 8 1.05
Ratio of adjusted expenses
to average net assets 9 (%) 1.27 8 1.34
Ratio of net investment income
to average net assets 10 (%) 7.97 8 9.15
Portfolio turnover (%) 99 14
Senior securities
Total value of APS outstanding (in millions) $350 $350
Involuntary liquidation preference
APS per unit (in thousands) 25 25
Average market value per unit (in thousands) 25 25
Asset coverage per unit 11 $75,065 $78,169
See notes to
financial statements.
16
Notes to Financial Highlights
1 Inception period from 6-19-03 through 5-31-04.
2 Reflects the deduction of a $1.125 per share sales load.
3 Based on the average of the common shares outstanding.
4 Total returns would have been lower had certain expenses not been reduced
during the periods shown.
5 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.
6 Not annualized.
7 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 0.71%, respectively.
8 Annualized.
9 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 0.91%,
respectively.
10 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 ratio of net investment income would have been 5.69%
and 6.21%, respectively.
11 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
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 contracts, 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
18
the Fund as unrealized gains or losses.
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 May 31, 2005, the Fund had deposited $825,000 in a segregated
account to cover margin requirements on open financial
futures contracts.
The Fund had the following financial futures contracts open on May 31, 2005:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION DEPRECIATION
-----------------------------------------------------------------------------
U.S. 10-Year Treasury Note 1,100 Short Sept 05 ($2,150,672)
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 May 31, 2005:
RATE TYPE
----------------------------
PAYMENTS
NOTIONAL PAYMENTS MADE RECEIVED TERMINATION
AMOUNT BY FUND BY FUND DATE APPRECIATION
------------------------------------------------------------------------------
$35,000,000 4.00% (a) 3-month LIBOR April 09 $132,069
(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.
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, if any, from net investment
income and net realized gain 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. During the year ended May 31, 2005, the tax
character of distributions paid was as follows: ordinary income
$71,141,144.
As of May 31, 2005, the components of distributable earnings on a tax basis
included $517,848 of undistributed ordinary income and $1,042,617 of
undistributed long-term gain.
Such distributions and distributable earnings, 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 the 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, on
an annual basis, 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 $2,183,851 for the year ended May
31, 2005. 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 year
amounted to $255,812. The Fund also paid the Adviser the amount of $300 for
certain publishing services, included in the printing fees and the amount
of $4,675 for certain compliance costs, included in the miscellaneous
expenses.
The compensation of unaffiliated Trustees is borne by the Fund. The
unaffiliated Trustees may elect to defer, for tax purposes, their receipt
of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The
20
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.
The Fund is listed for trading on the New York Stock Exchange ("NYSE") and
has filed with the NYSE its chief executive officer certification regarding
compliance with the NYSE's listing standards. The Fund also files with the
Securities and Exchange Commission the certification of its chief executive
officer and chief accounting officer required by Section 302 of the
Sarbanes-Oxley Act.
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 Year ended 5-31-05
Shares Amount Shares Amount
Beginning of period -- -- 31,084,744 $737,391,393
Shares sold 30,630,990 $731,314,886 2 -- --
Offering cost related
to common shares -- (687,576) -- --
Offering costs and
underwriting discount
related to Auction
Preferred Shares -- (3,712,531) -- --
Distributions reinvested 453,754 10,747,065 196,020 4,588,882
Reclassification of
capital accounts -- (270,451) -- (190,125)
Net increase 31,084,744 $737,391,393 31,280,764 $741,790,150
1 Inception period from 6-19-03 through 5-31-04.
2 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
21
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
February 16, 2005, at which time the Fund elected a Special Dividend
Payment of 182 days for the subsequent distributions). During the year
ended May 31, 2005, dividend rates on APS ranged as follows: Series M from
1.28% to 3.50%, Series T from 1.20%, to 3.50%, Series W from 1.15% to
3.00%, Series TH from 1.30% to 3.40% and Series F from 1.33% to 3.45%.
Accrued dividends on APS are included in the value of APS on the Fund's
Statement of Assets and Liabilities.
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
year ended May 31, 2005, aggregated $161,456,757 and $149,100,351,
respectively.
The cost of investments owned on May 31, 2005, including short-term
investments, for federal income tax purposes was $1,092,798,304. Gross
unrealized appreciation and depreciation of investments aggregated
$31,384,907 and $20,931,059, respectively, resulting in net unrealized
appreciation of $10,453,848. 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 on debt
securities, tax deferral of losses on certain sales of securities and
financial futures contracts.
Note E
Reclassification
of accounts
During the year ended May 31, 2005, the Fund reclassified amounts to
reflect an increase in accumulated net realized gain on investments of
$747,892, an increase in distributions in excess of net investment income
of $557,767 and a decrease in capital paid-in of $190,125. This represents
the amounts necessary to report these balances on a tax basis, excluding
certain temporary differences, as of May 31, 2005. Additional adjustments
may be needed in subsequent reporting periods. These reclassifications,
which have no impact on the net asset value of the Fund, are primarily
attributable to certain differences in the computation of distributable
income and capital gains under federal tax rules versus accounting
principles generally accepted in the United States of America, book and tax
differences in accounting for deferred compensation, REIT adjustments,
amortization of premium and swap contracts. The calculation of net
investment income per share in the Fund's Financial Highlights excludes
these adjustments.
22
Change in
Independent Auditor
(unaudited)
Based on the recommendation of the Audit Committee of the Fund, the Board
of Trustees has determined not to retain Deloitte & Touche LLP as the
Fund's Independent Registered Public Accounting Firm and voted to appoint
PricewaterhouseCoopers LLP for the fiscal year ending May 31, 2006. During
the two most recent fiscal years, Deloitte & Touche LLP's audit reports
contained no adverse opinion or disclaimer of opinion; nor were their
reports qualified as to uncertainty, audit scope or accounting principles.
Further, there were no disagreements between the Fund and Deloitte & Touche
LLP on accounting principles, financial statements disclosures or audit
scope, which, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused them to make reference to the disagreement in their
reports.
23
AUDITORS'
REPORT
Report of Deloitte
& Touche LLP
Independent
Registered Public
Accounting Firm
To the Board of Trustees and Shareholders of
John Hancock Preferred Income Fund III,
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of John Hancock Preferred Income Fund
III (the "Fund"), including the schedule of investments as of May 31, 2005,
and the related statement of operations for the year then ended, and the
statement of changes in net assets and the financial highlights for each of
the years in the two-year period ended May 31, 2005. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. The Fund is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned at May 31, 2005, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
the Fund as of May 31, 2005, and the results of its operations and the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 25, 2005
24
TAX
INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund, if any, paid during its taxable
year ended May 31, 2005.
With respect to the ordinary dividends paid by the Fund for the fiscal year
ended May 31, 2005, 39.40% of the dividends qualifies for the corporate
dividends-received deduction.
The Fund hereby designates the maximum amount allowable of its net taxable
income as qualified dividend income as provided in the Jobs and Growth Tax
Relief Reconciliation Act of 2003. This amount will be reflected on Form
1099-DIV for the calendar year 2005.
Shareholders will be mailed a 2005 U.S. Treasury Department Form 1099-DIV in
January 2006. This will reflect the total of all distributions that are
taxable for calendar year 2005.
25
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.
Dividends and distributions
During the year ended May 31, 2005, dividends from net investment income
totaling $2.0340 per share were paid to shareholders. The dates of payments
and the amounts per share are as follows:
INCOME
PAYMENT DATE DIVIDEND
----------------------------------
June 10, 2004 $0.1800
July 15, 2004 0.1800
August 12, 2004 0.1800
September 9, 2004 0.1800
October 14, 2004 0.1800
November 10, 2004 0.1800
December 9, 2004 0.1590
January 13, 2005 0.1590
February 10, 2005 0.1590
March 10, 2005 0.1590
April 14, 2005 0.1590
May 12, 2005 0.1590
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
26
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 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
27
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).
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.
Shareholder meeting
On May 26, 2005, the Annual Meeting of the Fund was held to elect four
Trustees and to ratify the actions of the Trustees in selecting independent
auditors for the Fund.
Proxies covering 30,845,586 shares of beneficial interest were voted at the
meeting. The common shareholders elected the following Trustees to serve
until their respective successors are duly elected and qualified, with the
votes tabulated as follows:
WITHHELD
FOR AUTHORITY
------------------------------------------------------------------------------
James F. Carlin 30,315,900 517,182
William H. Cunningham 30,296,810 536,272
Richard P. Chapman, Jr. 30,293,961 539,121
James A. Shepherdson* 30,308,406 524,676
* Mr. James A. Shepherdson resigned effective July 15, 2005.
The preferred shareholders elected Patti McGill Peterson to serve as the
Fund's Trustee until her successor is duly elected and qualified with the
votes tabulated as follows: 12,489 FOR, 0 AGAINST, 11 WITHHELD.
The common and preferred shareholders also ratified the Trustees' selection
of Deloitte & Touche LLP as the Fund's independent auditor for the fiscal
year ending May 31, 2005, with votes tabulated as follows: 30,377,058 FOR,
322,720 AGAINST and 145,808 ABSTAINING.
28
TRUSTEES
& OFFICERS
This chart provides information about the Trustees and Officers who oversee
your John Hancock fund. Officers elected by the Trustees manage the
day-to-day operations of the Fund and execute policies formulated by the
Trustees.
Independent Trustees
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
Charles L. Ladner, 2 Born: 1938 2003 51
Independent Chairman (since 2004); Chairman and Trustee, Dunwoody
Village, Inc. (retirement services) (until 2003); Senior Vice President and
Chief Financial Officer, UGI Corporation (public utility holding company)
(retired 1998); Vice President and Director for AmeriGas, Inc. (retired
1998); Director of AmeriGas Partners, L.P. (until 1997) (gas distribution);
Director, EnergyNorth, Inc. (until 1995); Director, Parks and History
Association (since 2001).
James F. Carlin, Born: 1940 2003 51
Director and Treasurer, Alpha Analytical Inc. (analytical laboratory) (since 1985);
Part Owner and Treasurer, Lawrence Carlin Insurance Agency, Inc. (since 1995);
Part Owner and Vice President, Mone Lawrence Carlin Insurance Agency, Inc.
(since 1996); Director and Treasurer, Rizzo Associates (engineering) (until 2000);
Chairman and CEO, Carlin Consolidated, Inc. (management/investments) (since
1987); Director and Partner, Proctor Carlin & Co., Inc. (until 1999); Trustee,
Massachusetts Health and Education Tax Exempt Trust (since 1993); Director of
the following: Uno Restaurant Corp. (until 2001), Arbella Mutual (insurance)
(until 2000), HealthPlan Services, Inc. (until 1999), Flagship Healthcare, Inc. (until
1999), Carlin Insurance Agency, Inc. (until 1999); Chairman, Massachusetts
Board of Higher Education (until 1999).
Richard P. Chapman, Jr., 2 Born: 1935 2005 51
President and Chief Executive Officer, Brookline Bancorp Inc. (lending)
(since 1972); Director, Lumber Insurance Co. (insurance) (until 2000);
Chairman and Director, Northeast Retirement Services, Inc. (retirement
administration) (since 1998).
William H. Cunningham, Born: 1944 2003 51
Former Chancellor, University of Texas System and former President of the
University of Texas, Austin, Texas; Chairman and CEO, IBT Technologies
(until 2001); Director of the following: The University of Texas Investment
Management Company (until 2000), Hire.com (until 2004), STC Broadcasting,
Inc. and Sunrise Television Corp. (electronic manufacturing) (until 2001),
Symtx, Inc. (electronic manufacturing) (since 2001), Adorno/Rogers Technology,
Inc. (until 2004), Pinnacle Foods Corporation (until 2003), rateGenius (Internet
29
Independent Trustees (continued)
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
William H. Cunningham, Born: 1944 (continued) 2003 51
service) (until 2003), Jefferson-Pilot Corporation (diversified life insurance
company) (since 1985), New Century Equity Holdings (formerly Billing Concepts)
(until 2001), eCertain (until 2001), ClassMap.com (until 2001), Agile Ventures
(until 2001), LBJ Foundation (until 2000), Golfsmith International, Inc.
(until 2000), Metamor Worldwide (until 2000), AskRed.com (until 2001),
Southwest Airlines (since 2000) and Introgen (since 2000); Advisory Director,
Q Investments (until 2003); Advisory Director, Chase Bank (formerly Texas
Commerce Bank -- Austin) (since 1988), LIN Television (since 2002), WilTel
Communications (until 2003) and Hayes Lemmerz International, Inc.
(diversified automotive parts supply company) (since 2003).
Ronald R. Dion, Born: 1946 2003 51
Chairman and Chief Executive Officer, R.M. Bradley & Co., Inc.; Director,
The New England Council and Massachusetts Roundtable; Trustee, North
Shore Medical Center; Director, Boston Stock Exchange; Director, BJ's
Wholesale Club, Inc. and a corporator of the Eastern Bank; Trustee,
Emmanuel College; Director, Boston Municipal Research Bureau; Member
of the Advisory Board, Carroll Graduate School of Management at
Boston College.
John A. Moore, 2 Born: 1939 2003 51
President and Chief Executive Officer, Institute for Evaluating Health
Risks, (nonprofit institution) (until 2001); Chief Scientist, Sciences
International (health research) (until 2003); Principal, Hollyhouse
(consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002).
Patti McGill Peterson, 2 Born: 1943 2003 51
Executive Director, Council for International Exchange of Scholars and
Vice President, Institute of International Education (since 1998);
Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until
1998); Former President of Wells College and St. Lawrence University;
Director, Niagara Mohawk Power Corporation (until 2003); Director, Ford
Foundation, International Fellowships Program (since 2002); Director,
Lois Roth Endowment (since 2002); Director, Council for International
Educational Exchange (since 2003).
Steven R. Pruchansky, Born: 1944 2003 51
Chairman and Chief Executive Officer, Greenscapes of Southwest
Florida, Inc. (since 2000); Director and President, Greenscapes of
Southwest Florida, Inc. (until 2000); Managing Director, JonJames, LLC
(real estate) (since 2001); Director, First Signature Bank & Trust Company
(until 1991); Director, Mast Realty Trust (until 1994); President, Maxwell
Building Corp. (until 1991).
30
Principal officers who are not Trustees
Name, age
Position(s) held with Fund Officer
Principal occupation(s) and of Fund
directorships during past 5 years since
Keith F. Hartstein, Born: 1956 2005
President and Chief Executive Officer
Senior Vice President, Manulife Financial Corporation (since 2004); Director,
President and Chief Executive Officer, John Hancock Advisers, LLC (the
"Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group")
(holding company); Director, President and Chief Executive Officer, John
Hancock Funds, LLC. ("John Hancock Funds"); Director, President and Chief
Executive Officer, Sovereign Asset Management Corporation ("SAMCorp.");
Director, John Hancock Signature Services, Inc.; Director, Chairman and
President, NM Capital Management, Inc. (NM Capital); Chairman, Investment
Company Institute Sales Force Marketing Committee (since 2003); Executive
Vice President, John Hancock Funds, LLC (until 2005).
William H. King, Born: 1952 2003
Vice President and Treasurer
Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each
of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001).
The business address for all Trustees and Officers is 601 Congress Street,
Boston, Massachusetts 02210-2805.
The Statement of Additional Information of the Fund includes additional
information about members of the Board of Trustees of the Fund and is
available, without charge, upon request, by calling 1-800-225-5291.
1 Each Trustee serves until resignation, retirement age or until his or her
successor is elected.
2 Member of Audit Committee.
31
32
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
Investment adviser
John Hancock Advisers, LLC
601 Congress Street
Boston, MA 02210-2805
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
Independent registered
public accounting firm
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116-5022
Stock symbol
Listed New York
Stock Exchange:
HPS
For shareholder assistance
refer to page 28
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.
33
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
1-800-852-0218
1-800-843-0090 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
P120A 5/05
7/05
ITEM 2. CODE OF ETHICS.
As of the end of the period, May 31, 2005, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, that applies to its
Chief Executive Officer, Chief Financial Officer and Treasurer
(respectively, the principal executive officer, the principal financial
officer and the principal accounting officer, the "Senior Financial
Officers"). A copy of the code of ethics is filed as an exhibit to this
Form N-CSR.
The code of ethics was amended effective February 1, 2005 to address new
Rule 204A-1 under the Investment Advisers Act of 1940 and to make other
related changes.
The most significant amendments were:
(a) Broadening of the General Principles of the code to cover compliance
with all federal securities laws.
(b) Eliminating the interim requirements (since the first quarter of 2004)
for access persons to preclear their personal trades of John Hancock mutual
funds. This was replaced by post-trade reporting and a 30 day hold
requirement for all employees.
(c) A new requirement for "heightened preclearance" with investment
supervisors by any access person trading in a personal position worth
$100,000 or more.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Charles L. Ladner is the audit committee financial expert and is
"independent", pursuant to general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for professional services rendered by the
principal accountant(s) for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant(s) in
connection with statutory and regulatory filings or engagements amounted to
$32,850 for the fiscal year ended May 31, 2004 and $34,500 for the fiscal
year ended May 31, 2005. These fees were billed to the registrant and were
approved by the registrant's audit committee.
(b) Audit-Related Services
There were no audit-related fees during the fiscal year ended May 31, 2004
and fiscal year ended May 31, 2005 billed to the registrant or to the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the adviser that provides ongoing services to the
registrant ("control affiliates").
(c) Tax Fees
The aggregate fees billed for professional services rendered by the
principal accountant(s) for the tax compliance, tax advice and tax planning
("tax fees") amounted to $2,250 for the fiscal year ended May 31, 2004 and
$2,400 for the fiscal year ended May 31, 2005. The nature of the services
comprising the tax fees was the review of the registrant's income tax
returns and tax distribution requirements. These fees were billed to the
registrant and were approved by the registrant's audit committee. There
were no tax fees billed to the control affiliates.
(d) All Other Fees
The all other fees billed to the registrant for products and services
provided by the principal accountant were $4,000 for the fiscal year ended
May 31, 2004 and $4,000 for the fiscal year ended May 31, 2005. There were
no other fees during the fiscal year ended May 31, 2004 and May 31, 2005
billed to control affiliates for products and services provided by the
principal accountant. The nature of the services comprising the all other
fees was related to the principal accountant's report on the registrant's
Eligible Asset Coverage. These fees were approved by the registrant's audit
committee.
(e)(1) See attachment "Approval of Audit, Audit-related, Tax and Other
Services", with the audit committee pre-approval policies and procedures.
(e)(2) There were no fees that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended May 31,
2004 and May 31, 2005 on behalf of the registrant or on behalf of the
control affiliates that relate directly to the operations and financial
reporting of the registrant.
(f) According to the registrant's principal accountant, for the fiscal year
ended May 31, 2005, the percentage of hours spent on the audit of the
registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons who were not full-time, permanent
employees of principal accountant was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant(s)
for services rendered to the registrant and rendered to the registrant's
control affiliates for each of the last two fiscal years of the registrant
were $41,188 for the fiscal year ended May 31, 2004, and $71,400 for the
fiscal year ended May 31, 2005.
(h) The audit committee of the registrant has considered the non-audit
services provided by the registrant's principal accountant(s) to the
control affiliates and has determined that the services that were not
pre-approved are compatible with maintaining the principal accountant(s)'
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee
comprised of independent trustees. The members of the audit committee are
as follows:
Charles L. Ladner - Chairman
Richard P. Chapman, Jr.
Dr. John A. Moore
Patti McGill Peterson
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
See attached Exhibit "Proxy Voting Policies and Procedures".
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The registrant has adopted procedures by which shareholders may
recommend nominees to the registrant's Board of Trustees. A copy of the
procedures is filed as an exhibit to this Form N-CSR. See attached
"John Hancock Funds - Administration Committee Charter".
ITEM 11. 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 financial
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 12. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive
officer and principal financial 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 financial 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) Proxy Voting Policies and Procedures are attached.
(c)(2) Submission of Matters to a Vote of Security Holders is attached. See
attached "John Hancock Funds - Administration Committee Charter".
(c)(3) Approval of Audit, Audit-related, Tax and Other Services is
attached.
(c)(4) 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: /S/ Keith F. Hartstein
------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: July 25, 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: /S/ Keith F. Hartstein
------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: July 25, 2005
By: /S/ William H. King
------------------------------
William H. King
Vice President and Treasurer
Date: July 25, 2005