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 02210
(Address of principal executive offices) (Zip
code)
Alfred P. Ouellette
Senior Attorney and Assistant Secretary
601 Congress Street
Boston,
Massachusetts 02210
(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, 2006 |
ITEM 1. REPORT TO SHAREHOLDERS.
Table of contents |
|
Your fund at a glance |
page 1 |
|
Managers report |
page 2 |
|
Funds investments |
page 6 |
|
Financial statements |
page 13 |
|
Trustees & officers |
page 33 |
|
For more information |
page 37 |
|
To Our Shareholders,
After producing modest returns in 2005, the stock market advanced smartly in the first four months of 2006. Investors were encouraged by solid corporate earnings, a healthy economy and stable inflation, which suggested the Federal Reserve could be coming close to the end of its 18-month campaign of raising interest rates. Those hopes were dashed in May, however, when economic data suggested a resurgence of inflation and more Fed rate hikes. The result was a significant market pullback that continued into June, erasing much of the earlier gains. Inflation and rate hike concerns also worked on the bond market, which, with the exception of low-quality bonds, made little headway over the last 12 months.
With the financial markets about-face and increased volatility, it is anyones guess where the market will end 2006, especially given the wild cards of interest rate moves and record-high energy prices and their impact on corporate profits and the economy.
One thing we do know, however, is that the stock markets pattern is one of extremes. Consider the last 10 years. From 1995 through 1999, we saw double-digit returns in excess of 20% per year, only to have 2000 through 2002 produce ever-increasing negative results, followed by another 20%-plus up year in 2004 and a less than 5% advance in 2005. Since 1926, the market, as measured by the Standard & Poors 500 Index, has produced average annual results of 10.4% . However, that normal return is rarely produced in any given year. In fact, calendar-year returns of 8% to 12% have occurred only five times in the 80 years since 1926.
Although the past in no way predicts the future, we have learned at least one lesson from history: Expect highs and lows in the short term, but always invest for the long term. Equally important: Work with your financial professional to maintain a diversified portfolio, spread out among not only different asset classes stocks, bonds and cash but also among various investment styles. Its the best way we know of to benefit from, and weather, the markets extremes.
Sincerely,
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEOs views as of May 31, 2006. They are subject to change at any time.
YOUR FUND
AT A GLANCE
The Fund seeks
to
provide high
current
income,
consistent
with preservation
of
capital. The
Funds
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
conditions, the
Fund invests at
least 80% of
its
assets in
preferred
stocks and
other
preferred
securities.
Over the last twelve months
* Preferred stocks struggled in an environment of fear over the economy and rising interest rates.
* The Fund was slightly ahead of its peers on a net asset value level.
* Several preferred stocks broke convention and produced stellar returns.
The total returns for the Fund include the reinvestment of all distributions. The performance data contained within this material represents past performance, which does not guarantee future results.
The yield at closing market price is calculated by dividing the current annualized distribution per share by the closing market price on the last day of the period.
Top 10 issuers | |
3.6% | Nexen, Inc. |
3.0% | ING Groep NV |
2.6% | MetLife, Inc. |
2.4% | Lloyds TSB Bank Plc |
2.3% | PFGI Capital Corp. |
2.2% | Telephone & Data Systems, Inc. |
2.2% | JPMorgan Chase Capital XI |
2.1% | HSBC Finance Corp. |
2.0% | Duke Realty Corp. |
2.0% | Royal Bank of Scotland Group Plc |
As a percentage of net assets plus the value of preferred shares on May 31, 2006. |
1
MANAGERS
REPORT
BY GREGORY K. PHELPS AND MARK T.
MALONEY FOR THE SOVEREIGN ASSET
MANAGEMENT LLC PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK
Preferred Income
Fund
III
Preferred stocks posted disappointing returns for the 12-month period ended May 31, 2006, amid growing worries about inflation and interest rates. The period began on an upbeat note in June 2005 thanks to investors optimism that the Federal Reserve Board might be at or near the end of its then year-long interest rate hike cycle. Because preferreds make fixed-income payments in the form of dividends, their prices tend to follow those of U.S. Treasury securities. Also aiding preferreds was strong demand from investors seeking out higher-yielding alternatives to U.S. government securities. But from the early fall through the final weeks of 2005, preferreds suffered a significant sell-off in response to worries over the future direction of inflation and interest rates. Stronger-than-expected economic news resurrected worries that inflation wasnt dead after all, raising fears that the Fed might be forced to continue raising rates to cool price pressures.
Preferred stocks posted
disap-
pointing returns for the
12-month
period ended May 31, 2006,
amid
growing worries about
inflation
and interest
rates.
In the early weeks of 2006, preferred stocks staged a rally, although it was very brief. Only weeks later, preferred stocks resumed their decline as the Treasury market weakened in the midst of renewed evidence that inflation was ticking higher as the global economy strengthened. The appointment of a new Fed chairman also added to the markets worries because investors fretted that Ben Bernanke might overshoot and raise interest rates too high. These factors, coupled with a bout of profit taking, put pressure on preferred-stock prices. Also weighing on them was a heavy new-issuance calendar. Uncertainty over the direction of interest rates prompted issuers to rush to issue new preferred stocks before rates moved higher. Those new issues typically came to market with higher yields than already-outstanding securities, making older issues less attractive and putting pressure on their prices.
2
Performance
For the 12 months ended May 31, 2006, John Hancock Preferred Income Fund III returned 0.85% at net asset value and 3.41% at market value. The difference in the Funds 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 Funds NAV share price at any time. By comparison, the average long-term bond fund returned 0.01% at net asset value, according to Morningstar, Inc. In the same period, the Standard & Poors 500 Index returned 8.64% . Going forward, the Fund has switched its benchmark indexes to ones that are more closely correlated to the Funds holdings. They include the broad-based Lehman Brothers Aggregate Bond Index, which returned 0.48%, and the Merrill Lynch Preferred Stock Hybrid Securities Index, which returned 0.98% .
Despite the general difficult
environment for preferred
stocks
overall, some of our holdings
broke with convention and
posted
strong gains...
Preferred-stock leaders and laggards
Despite the general difficult environment for preferred stocks overall, some of our holdings broke with convention and posted strong gains for the 12-month period. Chief among them was Anadarko Petroleum, which engages in the exploration, development, production and marketing of natural gas. It performed well as oil and natural gas prices soared. The holding was further helped by the companys efforts to reduce debt and by a more favorable credit-quality outlook. Furthermore, energy-related and tax-advantaged preferred stocks of Anadarkos caliber were scarce and highly coveted. We sold our position in Anadarko to lock in its strong gains and look for value elsewhere. Another good performer was NVP Capital III, issued by Nevada Power Company, a regulated electric utility and a wholly owned subsidiary of Sierra Pacific Resources. We had purchased this holding at a very attractive price and believed it would be a rewarding play on the recovery of the utility industry. Recently, the company announced that it was calling our holdings in at a premium to our average purchase price. We enjoyed good gains from Consumers Energy Co. Financing IV, which operates electric and gas utilities in the U.S. and internationally, for similar
3
Industry | |
distribution1 | |
| |
Electric | |
utilities | 17% |
| |
Multi-utilities | 12% |
| |
Diversified | |
banks | 11% |
| |
Investment banking | |
& brokerage | 10% |
| |
Other diversified | |
financial | |
services | 9% |
| |
Multi-line | |
insurance | 7% |
| |
Real estate | |
investment | |
trusts | 5% |
| |
Oil & gas exploration | |
& production | 4% |
| |
Gas utilities | 4% |
| |
Integrated | |
telecommunication | |
services | 4% |
| |
Consumer | |
finance | 3% |
| |
Regional banks | 3% |
| |
All others | 11% |
reasons. Our non-callable holdings in DPL, Inc., an electric utility based in and serving Ohio, also made a positive contribution to performance, helped by its high coupons and speculation that the company may be taken over.
On the flip side, our exposure to U.S. automakers detracted from performance. Investments in the preferred stocks of Ford Motor Co. and General Motors Corp. detracted from performance in light of concerns about the ongoing profitability of the U.S. auto industry and the two companies declining global market share and credit-rating downgrade to below investment grade. Despite their recent travails, we continued to maintain our stake in the two automakers because we like the attractive yields their bonds and preferred stocks offer and believe the companies are taking positive steps to address their problems, including cutting costs and reducing production.
Credit quality upgrade
Our view is that the global economy is poised for a slowdown. With that in mind, we have purposely added more defensive names to the portfolio, including those issued by companies in recession-resistant industries. By the end of the period, the vast majority of our holdings were issued by utility and energy companies, which traditionally have proven defensive amid slower economic conditions. We also have a large stake in top-tier multinational financial institutions, including Citigroup Capital, HSBC Finance Corp. and Lehman Brothers Holdings. We believe that they, too, can not only withstand it, but possibly even prosper if the global economy weakens.
4
Our view is that the global economy
is
poised for a slowdown. With that
in
mind, we have purposely added
more
defensive names to the
portfolio...
Outlook
Our outlook for the coming year is guardedly optimistic. At the end of the period, there was mounting evidence that the U.S. economy and most likely, the global economy was slowing. Stocks issued by home builders, home improvement stores and low-end retailers sold off heavily, suggesting that U.S. consumers, whose spending accounts for roughly two-thirds of the U.S. gross domestic product, may finally have tightened their purse strings. At the same time, commodity prices sold off and the bond market rallied, suggesting investors views that economic growth was slowing. A late-period inverted yield curve a graph that plots the yield difference between short- and long-term bonds also suggested slower economic conditions ahead. In our view, slowing economic conditions will bode well for fixed-income investments, including preferred stocks, as they traditionally have done. We also believe that long-term demand driven by the baby boomer generations increasing need for income-producing investments will also provide an ongoing boost for preferreds.
This commentary reflects the views of the portfolio managers through the end of the Funds 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 to factors adversely affecting the utilities industry than a more broadly diversified fund. Sector investing is subject to greater risks than the market as a whole.
1 As a percentage of the Funds portfolio on May 31, 2006.
5
F I N A N C I A L S TAT E M E N T S
FUNDS
INVESTMENTS
Securities owned
by the Fund on
May 31, 2006
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 Funds cash position, are listed last.
Interest | Maturity | Credit | Par value | ||
Issuer, description | rate | date | rating (A) | (000) | Value |
Bonds 9.84% | $68,213,685 | ||||
(Cost $70,954,554) | |||||
Automobile Manufacturers 0.29% | 1,997,375 | ||||
| |||||
Ford Motor Co., | |||||
Note | 7.450% | 07-16-31 | BB | $2,755 | 1,997,375 |
Consumer Finance 0.41% | 2,817,882 | ||||
| |||||
General Motors Acceptance Corp., | |||||
Bond | 8.000 | 11-01-31 | BB | 3,000 | 2,817,882 |
Electric Utilities 5.30% | 36,726,686 | ||||
| |||||
Black Hills Corp., | |||||
Note | 6.500 | 05-15-13 | BBB | 15,000 | 14,845,770 |
| |||||
DPL, Inc., | |||||
Sr Note | 6.875 | 09-01-11 | BB | 5,036 | 5,223,652 |
| |||||
Entergy Gulf States, Inc., | |||||
1st Mtg Bond | 6.200 | 07-01-33 | BBB+ | 15,000 | 13,560,915 |
| |||||
Kentucky Power Co., | |||||
Sr Note, Ser D | 5.625 | 12-01-32 | BBB | 3,565 | 3,096,349 |
Integrated Oil & Gas 0.75% | 5,236,480 | ||||
| |||||
Amerada Hess Corp., | |||||
Note | 7.125 | 03-15-33 | BBB | 5,000 | 5,236,480 |
Multi-Utilities 1.58% | 10,958,377 | ||||
| |||||
DTE Energy Co., | |||||
Sr Note | 6.375 | 04-15-33 | BBB | 7,500 | 7,072,177 |
| |||||
TECO Energy, Inc., | |||||
Note | 7.000 | 05-01-12 | BB | 3,810 | 3,886,200 |
Oil & Gas Refining & Marketing 1.51% | 10,476,885 | ||||
| |||||
Valero Energy Corp., | |||||
Note | 7.500 | 04-15-32 | BBB | 9,500 | 10,476,885 |
See notes to financial statements.
6
F I N A N C I A L S TAT E M E N T S
Credit | Par value | ||
Issuer, description, maturity date | rating (A) | (000) | Value |
Capital preferred securities 11.99% | $83,189,933 | ||
(Cost $88,542,585) | |||
Diversified Banks 4.85% | 33,649,200 | ||
| |||
Credit Agricole Preferred Funding Trust, 7.00%, 01-29-49 | A | $9,000 | 8,899,200 |
| |||
Lloyds TSB Bank Plc, 6.90%, 11-29-49 (United Kingdom) | A+ | 25,000 | 24,750,000 |
Electric Utilities 1.01% | 6,987,562 | ||
| |||
DPL Capital Trust II, 8.125%, 09-01-31 | B+ | 6,225 | 6,987,562 |
Gas Utilities 0.64% | 4,447,954 | ||
| |||
KN Capital Trust III, 7.63%, 04-15-28 | BB+ | 4,960 | 4,447,954 |
Integrated Telecommunication Services 2.19% | 15,206,874 | ||
| |||
TCI Communications Financing Trust III, 9.65%, 03-31-27 | BBB | 14,210 | 15,206,874 |
Investment Banking & Brokerage 1.40% | 9,713,000 | ||
| |||
HBOS Capital Funding L.P., 6.85%, 03-29-49 | |||
(United Kingdom) | A | 10,000 | 9,713,000 |
Multi-Utilities 1.38% | 9,585,227 | ||
| |||
Dominion Resources Capital Trust I, 7.83%, 12-01-27 | BB+ | 9,097 | 9,585,227 |
Other Diversified Financial Services 0.52% | 3,600,116 | ||
| |||
JPM Capital Trust I, 7.54%, 01-15-27 | A | 3,447 | 3,600,116 |
Issuer | Shares | Value | |
Common stocks 6.31% | $43,743,685 | ||
(Cost $35,852,250) | |||
Electric Utilities 1.22% | 8,486,323 | ||
| |||
FPL Group, Inc. | 139,000 | 5,536,370 | |
| |||
Scottish Power Plc, American Depositary Receipt | |||
(United Kingdom) | 55,555 | 2,322,755 | |
| |||
Scottish Power Plc, B Shares (United Kingdom) | 93,333 | 627,198 | |
Gas Utilities 0.43% | 2,941,510 | ||
| |||
ONEOK, Inc. | 87,571 | 2,941,510 | |
Independent Power Producers & Energy Traders 2.23% | 15,482,345 | ||
| |||
TXU Corp. | 270,198 | 15,482,345 | |
Multi-Utilities 2.43% | 16,833,507 | ||
| |||
CH Energy Group, Inc. | 20,600 | 948,630 | |
| |||
DTE Energy Co. | 281,516 | 11,378,877 | |
| |||
TECO Energy, Inc. | 300,000 | 4,506,000 |
See notes to financial statements.
7
F I N A N C I A L S TAT E M E N T S | |||
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Preferred stocks 120.68% | $836,807,010 | ||
(Cost $891,530,100) | |||
Agricultural Products 2.13% | 14,752,978 | ||
| |||
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) | BB+ | 195,000 | 14,752,978 |
Asset Management & Custody Banks 0.55% | 3,799,050 | ||
| |||
BNY Capital V, 5.95%, Ser F | A | 170,361 | 3,799,050 |
Automobile Manufacturers 3.33% | 23,091,266 | ||
| |||
Ford Motor Co., 7.50% | BB | 761,385 | 12,882,634 |
| |||
General Motors Corp., 7.25%, Ser 07-15-41 | B | 50,641 | 853,301 |
| |||
General Motors Corp., 7.375%, Ser 05-15-48 | B3 | 558,194 | 9,355,331 |
Consumer Finance 3.85% | 26,680,338 | ||
| |||
CIT Group, Inc., 6.35%, Ser A | BBB+ | 70,000 | 1,722,700 |
| |||
Ford Motor Credit Co., 7.60% | Ba2 | 25,000 | 507,500 |
| |||
HSBC Finance Corp., 6.36%, Depositary Shares, Ser B | BBB+ | 250,000 | 6,152,500 |
| |||
HSBC Finance Corp., 6.875% | A | 636,118 | 15,864,783 |
| |||
SLM Corp., 6.00% | A | 64,195 | 1,427,055 |
| |||
SLM Corp., 6.97%, Ser A | BBB+ | 18,800 | 1,005,800 |
Diversified Banks 11.13% | 77,201,799 | ||
| |||
BAC Capital Trust II, 7.00% | A | 94,600 | 2,365,946 |
| |||
BAC Capital Trust III, 7.00% | A | 22,000 | 553,080 |
| |||
BAC Capital Trust IV, 5.875% | A | 411,400 | 9,063,142 |
| |||
Fleet Capital Trust VII, 7.20% | A | 61,604 | 1,557,349 |
| |||
HSBC Holdings Plc, 6.20%, Ser A (United Kingdom) | A | 222,200 | 5,221,700 |
| |||
Royal Bank of Scotland Group Plc, 5.75%, Ser L | |||
(United Kingdom) | A | 960,000 | 21,014,400 |
| |||
Santander Finance Preferred SA Unipersonal, | |||
6.41%, Ser 1 (Spain) | A | 100,000 | 2,474,000 |
| |||
USB Capital IV, 7.35% | A | 59,100 | 1,489,320 |
| |||
USB Capital V, 7.25% | A | 60,700 | 1,535,103 |
| |||
USB Capital VIII, 6.35%, Ser 1 | A | 269,700 | 6,340,647 |
| |||
USB Capital X, 6.50% | A | 45,000 | 1,073,700 |
| |||
Wachovia Preferred Funding Corp., 7.25%, Ser A | A | 674,800 | 18,017,160 |
| |||
Wells Fargo Capital Trust IV, 7.00% | A | 187,800 | 4,674,342 |
| |||
Wells Fargo Capital Trust VII, 5.85% | A | 81,700 | 1,821,910 |
Electric Utilities 17.19% | 119,218,139 | ||
| |||
Cleveland Electric Financing Trust I, 9.00% | BB | 27,400 | 710,482 |
| |||
Consolidated Edison, Inc., $5.00, Ser A | BBB+ | 30,000 | 2,610,000 |
| |||
Consolidated Edison, Inc., 7.25% | A | 56,000 | 1,419,600 |
See notes to financial statements. | |||
8
F I N A N C I A L S TAT E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Electric Utilities (continued) | |||
| |||
DTE Energy Trust II, 7.50% | BB+ | 36,600 | $933,300 |
| |||
Entergy Mississippi, Inc., 7.25% | A | 113,668 | 2,846,247 |
| |||
FPC Capital I, 7.10%, Ser A | BB+ | 746,700 | 18,518,160 |
| |||
FPL Group Capital Trust I, 5.875% | BBB+ | 490,000 | 11,123,000 |
| |||
Georgia Power Capital Trust V, 7.125% | BBB+ | 156,100 | 3,957,135 |
| |||
Georgia Power Co., 6.00%, Ser R | A | 730,000 | 16,936,000 |
| |||
Great Plains Energy, Inc., 8.00%, Conv | BBB | 685,400 | 16,106,900 |
| |||
HECO Capital Trust III, 6.50% | BBB | 130,000 | 3,263,000 |
| |||
Interstate Power & Light Co., 7.10%, Ser C | BBB | 354,900 | 9,083,240 |
| |||
Interstate Power & Light Co., 8.375%, Ser B | Baa3 | 54,500 | 1,689,500 |
| |||
Northern States Power Co., 8.00% | BBB | 84,550 | 2,183,081 |
| |||
NVP Capital III, 7.75% | B1 | 379,705 | 9,606,536 |
| |||
PPL Electric Utilities Corp., 6.25%, Depositary Shares | BBB | 130,000 | 3,258,125 |
| |||
Sierra Pacific Power Co., 7.80%, Ser 1 (Class A) | B2 | 73,507 | 1,881,779 |
| |||
Southern California Edison Co., 6.125% | BBB | 20,000 | 1,933,750 |
| |||
Virginia Power Capital Trust, 7.375% | BB+ | 444,200 | 11,158,304 |
Gas Utilities 5.08% | 35,198,754 | ||
| |||
Laclede Capital Trust I, 7.70% | BBB+ | 82,000 | 2,148,400 |
| |||
Southern Union Co., 7.55%, Ser A | BB+ | 449,000 | 11,629,100 |
| |||
Southwest Gas Capital II, 7.70% | BB | 810,250 | 20,839,630 |
| |||
Vectren Utility Holdings, Inc., 7.25% | A | 23,200 | 581,624 |
Hotels, Resorts & Cruise Lines 0.43% | 2,999,394 | ||
| |||
Hilton Hotels Corp., 8.00% | BB | 118,600 | 2,999,394 |
Integrated Telecommunication Services 3.83% | 26,565,041 | ||
| |||
Telephone & Data Systems, Inc., 6.625% | A | 462,900 | 10,716,135 |
| |||
Telephone & Data Systems, Inc., 7.60%, Ser A | A | 492,976 | 12,211,016 |
| |||
Verizon New England, Inc., 7.00%, Ser B | A3 | 146,100 | 3,637,890 |
Investment Banking & Brokerage 13.82% | 95,840,285 | ||
| |||
Fleet Capital Trust IX, 6.00% | A | 469,200 | 10,533,540 |
| |||
Goldman Sachs Group, Inc., 6.20%, Ser B | A | 240,000 | 5,952,000 |
| |||
Lehman Brothers Holdings Capital Trust III, 6.375%, Ser K | A | 793,400 | 18,724,240 |
| |||
Lehman Brothers Holdings, Inc., 5.67%, Depositary Shares, Ser D | A | 142,500 | 6,697,500 |
| |||
Merrill Lynch Preferred Capital Trust III, 7.00% | A | 417,017 | 10,512,999 |
| |||
Merrill Lynch Preferred Capital Trust IV, 7.12% | A | 232,700 | 5,903,599 |
| |||
Merrill Lynch Preferred Capital Trust V, 7.28% | A | 373,700 | 9,604,090 |
| |||
Morgan Stanley Capital Trust III, 6.25% | A | 764,025 | 17,572,575 |
| |||
Morgan Stanley Capital Trust IV, 6.25% | A | 393,925 | 9,127,242 |
| |||
Morgan Stanley Capital Trust VI, 6.60% | A | 50,000 | 1,212,500 |
See notes to financial statements.
9
F I N A N C I A L S TAT E M E N T S | |||
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Life & Health Insurance 3.73% | $25,848,277 | ||
| |||
Lincoln National Capital VI, 6.75%, Ser F | A | 304,000 | 7,423,680 |
| |||
Phoenix Cos., Inc. (The), 7.45% | BBB | 486,849 | 12,151,751 |
| |||
PLC Capital Trust IV, 7.25% | BBB+ | 128,600 | 3,203,426 |
| |||
PLC Capital Trust V, 6.125% | BBB+ | 83,300 | 1,865,920 |
| |||
Prudential Plc, 6.50% (United Kingdom) | A | 50,000 | 1,203,500 |
Multi-Line Insurance 9.74% | 67,567,398 | ||
| |||
Aegon NV, 6.375% (Netherlands) | A | 241,265 | 5,705,917 |
| |||
Aegon NV, 6.50% (Netherlands) | A | 138,850 | 3,342,119 |
| |||
ING Groep NV, 7.05% (Netherlands) | A | 603,970 | 15,111,329 |
| |||
ING Groep NV, 7.20% (Netherlands) | A | 641,000 | 16,230,120 |
| |||
MetLife, Inc., 6.50%, Ser B | BBB | 1,108,850 | 27,177,913 |
Multi-Utilities 12.21% | 84,641,134 | ||
| |||
Aquila, Inc., 7.875% | B2 | 218,707 | 5,458,927 |
| |||
Avista Corp., $6.95, Ser K | BB | 138,517 | 13,920,958 |
| |||
BGE Capital Trust II, 6.20% | BBB | 668,928 | 15,405,412 |
| |||
Consumers Energy Co. Financing IV, 9.00% | Ba2 | 211,700 | 5,381,414 |
| |||
DTE Energy Trust I, 7.80% | BB+ | 177,400 | 4,479,350 |
| |||
Energy East Capital Trust I, 8.25% | BBB | 204,900 | 5,171,676 |
| |||
PNM Resources, Inc., 6.75%, Conv | BBB | 273,199 | 13,181,852 |
| |||
PSEG Funding Trust II, 8.75% | BB+ | 462,275 | 12,134,719 |
| |||
Public Service Electric & Gas Co., 5.05%, Ser D | BB+ | 30,000 | 2,625,000 |
| |||
Puget Sound Energy Capital Trust II, 8.40% | BB | 185,600 | 4,714,240 |
| |||
TECO Capital Trust I, 8.50% | B | 85,845 | 2,167,586 |
Oil & Gas Exploration & Production 6.18% | 42,856,935 | ||
| |||
Apache Corp., 5.68%, Depositary Shares, Ser B | BBB | 27,500 | 2,696,719 |
| |||
Devon Energy Corp., 6.49%, Ser A | BB+ | 25,250 | 2,569,188 |
| |||
Nexen, Inc., 7.35% (Canada) | BB+ | 1,494,079 | 37,591,028 |
Other Diversified Financial Services 13.68% | 94,881,738 | ||
| |||
ABN AMRO Capital Funding Trust V, 5.90% | A | 867,400 | 19,507,826 |
| |||
ABN AMRO Capital Funding Trust VI, 6.25% | A | 353,900 | 8,426,359 |
| |||
Citigroup Capital VII, 7.125% | A | 30,042 | 750,449 |
| |||
Citigroup Capital VIII, 6.95% | A | 241,200 | 6,030,000 |
| |||
Citigroup Capital IX, 6.00% | A | 384,700 | 8,794,242 |
| |||
Citigroup Capital X, 6.10% | A | 720,000 | 16,768,800 |
| |||
General Electric Capital Corp., 5.875% | AAA | 325,930 | 7,444,241 |
| |||
General Electric Capital Corp., 6.10% | AAA | 94,747 | 2,257,821 |
| |||
JPMorgan Chase Capital XI, 5.875%, Ser K | A | 1,030,000 | 22,917,500 |
See notes to financial statements. | |||
10
F I N A N C I A L S TAT E M E N T S
Credit | |||||
Issuer, description | rating (A) | Shares | Value | ||
Other Diversified Financial Services (continued) | |||||
| |||||
JPMorgan Chase Capital XIV, 6.20%, Ser N | A | 25,000 | $577,500 | ||
| |||||
JPMorgan Chase Capital XVI, 6.35% | A | 60,000 | 1,407,000 | ||
Real Estate Investment Trusts 7.35% | 50,972,834 | ||||
| |||||
Duke Realty Corp., 6.50%, Depositary Shares, Ser K | BBB | 151,600 | 3,501,960 | ||
| |||||
Duke Realty Corp., 6.60%, Depositary Shares, Ser L | BBB | 118,500 | 2,744,460 | ||
| |||||
Duke Realty Corp., 6.625%, Depositary Shares, Ser J | BBB | 638,100 | 14,995,350 | ||
| |||||
Kimco Realty Co., 6.65%, Depositary Shares, Ser F | BBB+ | 384,750 | 9,330,188 | ||
| |||||
Public Storage, Inc., 6.18%, Depositary Shares, Ser D | BBB+ | 20,000 | 435,800 | ||
| |||||
Public Storage, Inc., 6.50%, Depositary Shares, Ser W | BBB+ | 450,000 | 10,251,000 | ||
| |||||
Public Storage, Inc., 7.50%, Depositary Shares, Ser V | BBB+ | 184,530 | 4,648,311 | ||
| |||||
Public Storage, Inc., 7.625%, Depositary Shares, Ser T | BBB+ | 25,500 | 638,265 | ||
| |||||
Public Storage, Inc., 8.00%, Depositary Shares, Ser R | BBB+ | 177,100 | 4,427,500 | ||
Regional Banks 3.80% | 26,314,536 | ||||
| |||||
National Commerce Capital Trust II, 7.70% | A | 86,800 | 2,215,136 | ||
| |||||
PFGI Capital Corp., 7.75% | A | 926,900 | 24,099,400 | ||
Reinsurance 0.39% | 2,709,360 | ||||
| |||||
RenaissanceRe Holdings Ltd., 6.08%, Ser C (Bermuda) | BBB | 127,800 | 2,709,360 | ||
Thrifts & Mortgage Finance 1.82% | 12,646,398 | ||||
| |||||
Abbey National Plc, 7.25% (United Kingdom) | A | 163,265 | 4,083,258 | ||
| |||||
Abbey National Plc, 7.375% (United Kingdom) | A | 339,000 | 8,563,140 | ||
Wireless Telecommunication Services | 0.44% | 3,021,356 | |||
| |||||
United States Cellular, 7.50% | A | 119,800 | 3,021,356 | ||
Interest | Maturity | Credit | Par value | ||
Issuer, description | rate | date | rating (A) | (000) | Value |
Short-term investments 1.07% | $7,400,000 | ||||
(Cost $7,400,000) | |||||
Government U.S. Agency 1.07% | 7,400,000 | ||||
| |||||
Federal Home Loan Bank, Disc Note | 4.90% | 06-01-06 | AAA | $7,400 | 7,400,000 |
| |||||
Total investments 149.89% | $1,039,354,313 | ||||
| |||||
Other assets and liabilities, net 0.60% | $4,166,798 | ||||
| |||||
Fund preferred shares, at value (50.49%) | ($350,099,349) | ||||
| |||||
Total net assets 100.00% | $693,421,762 |
See notes to financial statements.
11
F I N A N C I A L S TAT E M E N T S
Notes to Schedule of Investments
(A) Credit ratings are unaudited and are rated by Moodys Investors Service where Standard & Poors 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 $14,752,978 or 2.13% of the Funds net assets as of May 31, 2006.
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
F I N A N C I A L S TAT E M E N T S
ASSETS AND
LIABILITIES
May 31, 2006
This Statement
of Assets and
Liabilities
is the
Funds
balance
sheet. It
shows
the value of
what the
Fund
owns, is due
and owes.
Youll
also find the
net
asset value for
each
common
share.
Assets | |
Investments at value (cost $1,094,279,489) | $1,039,354,313 |
Cash | 61,082 |
Cash segregated for futures contracts | 660,000 |
Dividends and interest receivable | 5,960,072 |
Receivable for swap contracts | 41,161 |
Unrealized appreciation of swap contracts | 1,380,834 |
Receivable for futures variation margin | 326,557 |
Receivable from affiliates | 15,666 |
Other assets | 24,271 |
Total assets | 1,047,823,956 |
Liabilities | |
Payable for investments purchased | 37,388 |
Common shares dividends payable | 4,129,061 |
Payable to affiliates | |
Management fees | 15,684 |
Other payables and accrued expenses | 120,712 |
Total liabilities | 4,302,845 |
Auction Preferred Shares (APS), including 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 | 350,099,349 |
Net assets | |
Common shares capital paid-in | 741,664,736 |
Accumulated net realized gain on investments, | |
financial futures contracts and swap contracts | 9,164,219 |
Net unrealized depreciation of investments, | |
financial futures contracts and swap contracts | (53,148,141) |
Distributions in excess of net investment income | (4,259,052) |
Net assets applicable to common shares | $693,421,762 |
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 | $22.17 |
See notes to financial statements.
13
F I N A N C I A L S TAT E M E N T S
OPERATIONS
For the year ended
May 31, 2006
This Statement
of
Operations
summarizes
the
Funds
investment
income earned
and
expenses incurred
in operating
the
Fund. It also
shows net
gains
(losses) and
distrib-
utions paid to
APS
shareholders
for
the period
stated.
Investment income | |
| |
Dividends (net of foreign withholding tax of $22,881) | $63,878,596 |
Interest | 11,272,535 |
Total investment income | 75,151,131 |
Expenses | |
| |
Investment management fees | 8,117,012 |
APS auction fees | 912,151 |
Accounting and legal services fees | 224,724 |
Custodian fees | 176,651 |
Printing fees | 120,575 |
Miscellaneous | 65,073 |
Trustees fees | 58,847 |
Professional fees | 50,933 |
Transfer agent fees | 36,775 |
Registration and filing fees | 27,711 |
Compliance fees | 21,936 |
Interest | 535 |
Total expenses | 9,812,923 |
Less expense reductions | (2,164,537) |
Net expenses | 7,648,386 |
Net investment income | 67,502,745 |
Realized and unrealized gain (loss) | |
| |
Net realized gain on | |
Investments | 7,546,999 |
Financial futures contracts | 2,958,590 |
Swap contracts | 60,184 |
Change in net unrealized appreciation (depreciation) of | |
Investments | (67,808,560) |
Financial futures contracts | 2,546,873 |
Swap contracts | 1,248,765 |
Net realized and unrealized loss | (53,447,149) |
Distributions to APS | (13,641,482) |
Increase in net assets from operations | $414,114 |
See notes to financial statements.
14
F I N A N C I A L S TAT E M E N T S
CHANGES IN
NET ASSETS
These
Statements
of Changes in
Net
Assets show
how
the value of
the
Funds 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.
Year | Year | |
ended | ended | |
5-31-051 | 5-31-06 | |
Increase (decrease) in net assets | ||
From operations | ||
Net investment income | $67,817,864 | $67,502,745 |
Net realized gain | 200,811 | 10,565,773 |
Change in net unrealized | ||
appreciation (depreciation) | 48,601,348 | (64,012,922) |
Distributions to APS | (7,621,435) | (13,641,482) |
Increase in net assets | ||
resulting from operations | 108,998,588 | 414,114 |
Distributions to common shareholders | ||
From net investment income | (63,519,709) | (53,052,176) |
From net realized gain | | (3,149,660) |
(63,519,709) | (56,201,836) | |
From Fund share transactions | 4,588,882 | |
Net assets | ||
Beginning of period | 699,141,723 | 749,209,484 |
End of period2 | $749,209,484 | $693,421,762 |
1 Audited by previous auditor.
2 Includes distributions in excess of net investment income of $4,531,150 and $4,259,052 respectively.
See notes to financial statements.
15
F I N A N C I A L H I G H L I G H T S
FINANCIAL
HIGHLIGHTS
COMMON SHARES
The Financial Highlights show how the Funds net asset value for a
share has changed since the end of the previous period.
Period ended | 5-31-041,2 | 5-31-051 | 5-31-06 |
Per share operating performance | |||
Net asset value, | |||
beginning of period | $23.883 | $22.49 | $23.95 |
Net investment income4 | 1.88 | 2.16 | 2.16 |
Net realized and unrealized | |||
gain (loss) on investments | (1.21) | 1.58 | (1.70) |
Distributions to APS | (0.11) | (0.25) | (0.44) |
Total from | |||
investment operations | 0.56 | 3.49 | 0.02 |
Less distributions to | |||
common shareholders | |||
From net investment income | (1.80) | (2.03) | (1.70) |
From net realized gain | | | (0.10) |
(1.80) | |||
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 | $22.17 |
Per share market value, end of period | $22.42 | $22.22 | $19.70 |
Total return at market value5 (%) | (4.29)6,7 | 8.22 | (3.41) |
Ratios and supplemental data | |||
Net assets applicable to common shares, | |||
end of period (in millions) | $699 | $749 | $693 |
Ratio of expenses | |||
to average net assets8 (%) | 0.999 | 1.05 | 1.04 |
Ratio of gross expenses | |||
to average net assets10 (%) | 1.279 | 1.34 | 1.34 |
Ratio of net investment income | |||
to average net assets11 (%) | 7.979 | 9.15 | 9.22 |
Portfolio turnover (%) | 99 | 14 | 16 |
Senior securities | |||
Total value of APS outstanding (in millions) | $350 | $350 | $350 |
Involuntary liquidation preference | |||
per unit (in thousands) | $25 | $25 | $25 |
Average market value per unit (in thousands) | $25 | $25 | $25 |
Asset coverage per unit12 | $75,065 | $78,169 | $74,123 |
See notes to financial statements.
16
Notes to Financial Highlights
1 Audited by previous auditor.
2 Inception period from 6-19-03 through 5-31-04.
3 Reflects the deduction of a $1.125 per share sales load.
4 Based on the average of the 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%, 0.71% and 0.71%, 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%, 0.91% and 0.91%, 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 ratio of net investment income would have been 5.69%, 6.21% and 6.24%, respectively.
12 Calculated by subtracting the Funds total liabilities from the Funds 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.
17
NOTES TO
STATEMENTS
Note A
Accounting policies
John Hancock Preferred Income Fund III (the Fund) is a diversi-fied 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 Funds 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 that 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 finan-cial futures contracts. Buying futures tends to increase the Funds exposure to the underlying instrument. Selling futures tends to decrease the Funds exposure to the underlying instrument or hedge Funds other 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 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 Funds gains and/or losses can be affected as a result of financial futures contracts. On May 31, 2006, the Fund had deposited $660,000 in segregated account to cover margin requirements on open financial futures contracts.
The Fund had the following financial futures contracts open on May 31, 2006: | ||||
NUMBER OF | ||||
OPEN CONTRACTS | CONTRACTS | POSITION | EXPIRATION | APPRECIATION |
| ||||
U.S. 10-Year Treasury Note | 1,100 | Short | Sep 06 | $396,201 |
Swap contracts
The Fund may enter into swap transactions in order to hedge the value of the Funds portfolio against interest rate fluctuations or to enhance the Funds 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 speci-fied 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 coun-terpartys ability to perform under the contract and may decline in value if the coun-terpartys 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, 2006: | ||||
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 | $1,380,834 |
(a) Fixed rate |
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
19
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 year ended May 31, 2005, the tax character of distributions paid was as follows: ordinary income $71,141,144. During the year ended May 31, 2006, the tax character of distributions paid was as follows: ordinary income $66,693,658 and long-term capital gain $3,149,660.
As of May 31, 2006, the components of distributable earnings on a tax basis included $8,142,214 of undistributed ordinary income and $3,275,269 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 Funds 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., a subsidiary of Manulife Financial Corporation (MFC). Under the investment management contract, the Fund pays a daily management fee to the Adviser at an annual rate of 0.75% of the Funds average daily net asset value and the value attributable to the Auction Preferred Shares (collectively, managed assets).
Effective December 31, 2005, the investment management teams of the Adviser were reorganized into Sovereign Asset Management LLC (Sovereign), a wholly owned indirect subsidiary of John Hancock Life Insurance Company (JHLICo), a subsidiary of MFC. The Adviser remains the principle advisor on the Fund and Sovereign acts as subadviser under the supervision of the Adviser. The restructuring did not have an impact on the Fund, which continues to be managed using the same investment philosophy and process. The Fund is not responsible for payment of the subadvisory fees.
The Adviser has contractually agreed to limit the Funds management fee, on an annual basis, to the following: 0.55% of the Funds average daily managed assets until the fifth anniversary of the commencement of the Funds 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 $2,164,537 for the year ended May 31, 2006. After the eighth year the Adviser will no longer waive a portion of the management fee.
The Fund has an agreement with the Adviser and affili-ates to perform necessary tax, accounting and legal services for the Fund. The compensation for the year amounted to $224,724. The Fund also paid the Adviser the amount of $473 for certain publishing services, included in the printing fees. The Fund reimbursed JHLICo for certain compliance costs, included in the Funds Statement of Operations.
20
Mr. James R. Boyle is Chairman of the Adviser, as well as affiliated Trustee of the Fund, and is compensated by the Adviser and/or its affiliates. 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 Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Funds deferred compensation liability are recorded on the Funds 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 NYSEs listing standards. The Fund also files with the Securities and Exchange Commission the certification of its chief executive officer and chief financial officer required by Section 302 of the Sarbanes-Oxley Act.
Note C
Fund share transactions
Common shares
This listing illustrates the Funds common shares sold, distributions reinvested, reclassification of the Funds capital accounts and the number of common shares outstanding at the beginning and end of the last two periods, along with the corresponding dollar value.
Year ended 5-31-051 | Year ended 5-31-06 | |||
Shares | Amount | Shares | Amount | |
Beginning of period | 31,084,744 | $737,391,393 | 31,280,764 | $741,790,150 |
Distributions reinvested | 196,020 | 4,588,882 | | |
Reclassification of | ||||
capital accounts | | (190,125) | | (125,414) |
End of period | 31,280,764 | $741,790,150 | 31,280,764 | $741,664,736 |
1 Audited by previous auditor. |
Auction preferred shares
The Fund issued 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 and offering costs were recorded as a reduction of the capital paid-in of common shares. 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. Prior to February 15, 2006 the rates on Series W had been reset and paid over special dividend payment periods. During the year ended May 31, 2006, dividend rates on APS ranged as follows: Series M from 2.80% to 4.75%, Series T from 2.98% to 4.78%, Series W from 3.00% to 4.77%, Series TH from 2.80% to 4.75% and Series F from 2.85% to 4.75% . Accrued dividends on APS are included in the value of APS on the Funds 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
21
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 Funds bylaws. 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, 2006, aggregated $183,580,966 and $174,752,870, respectively.
The cost of investments owned on May 31, 2006, including short-term investments, for federal income tax purposes was $1,096,583,917. Gross unrealized appreciation and depreciation of investments aggregated $12,823,327 and $70,052,931, respectively, resulting in net unrealized depreciation of $57,229,604. 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, 2006, the Fund reclassified amounts to reflect an increase in accumulated net realized gain on investments of $662,403, an increase in distributions in excess of net investment income of $536,989 and a decrease in capital paid-in of $125,414. This represents the amounts necessary to report these balances on a tax basis, excluding certain temporary differences, as of May 31, 2006. Additional adjustments may be needed in subsequent reporting periods. These reclassifica-tions, 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, and book and tax differences in accounting for deferred compensation, REIT adjustments, amortization of premium, non-deductible organizational costs, certain foreign currency adjustments and interest rate swap contracts. The calculation of net investment income per share in the Funds Financial Highlights excludes these adjustments.
22
AUDITORS
REPORT
Report of
Independent
Registered
Public
Accounting
Firm
To the Board of Trustees and Shareholders of John Hancock Preferred Income Fund III,
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of John Hancock Preferred Income Fund III (the Fund) at May 31, 2006, the results of its operations, the changes in its net assets and the financial highlights for the year ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements) are the responsibility of the Funds management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities as of May 31, 2006 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. The statement of changes in net assets of the Fund for the year ended May 31, 2005 and the financial highlights for each of the periods ended on or before May 31, 2005 were audited by another independent registered public accounting firm, whose report dated July 25, 2005 expressed an unqualified opinion thereon.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July
14, 2006
23
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, 2006.
With respect to the ordinary dividends paid by the Fund for the fiscal year ended May 31, 2006, 37.79% 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 2006.
Shareholders will be mailed a 2006 U.S. Treasury Department Form 1099-DIV in January 2007. This will reflect the total of all distributions that are taxable for calendar year 2006.
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Investment objective and policy
The Funds primary objective is to provide a high level of current income, consistent with preservation of capital. The Funds 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 Moodys or Standard & Poors at the time of investment. Assets are defined as net assets including the liquidation preference of APS plus borrowing for investment purposes.
Bylaws
On December 16, 2003, the Trustees approved the following change to the Funds bylaws. The auction preferred section of the Funds bylaws 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. Bylaws now require an independent accountants confirmation only once per year, at the Funds 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 Funds bylaws in line with current rating agency requirements.
On September 14, 2004, the Trustees approved an amend ment to the Funds bylaws increasing the maximum applicable dividend rate ceil ing 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, 2006, dividends from net investment income totaling $1.6960 and distributions from capital gains totaling $0.1007 per share were paid to shareholders. The dates of payments and the amounts per share are as follows:
INCOME | |
PAYMENT DATE | DIVIDEND |
| |
June 30, 2005 | $0.1480 |
July 29, 2005 | 0.1480 |
August 31, 2005 | 0.1480 |
September 30, 2005 | 0.1480 |
INCOME | |
PAYMENT DATE | DIVIDEND |
| |
October 31, 2005 | 0.1480 |
November 30, 2005 | 0.1480 |
December 30, 2005 | 0.1480 |
January 31, 2006 | 0.1320 |
February 28, 2006 | 0.1320 |
March 31, 2006 | 0.1320 |
April 28, 2006 | 0.1320 |
June 2, 2006 | 0.1320 |
CAPITAL GAIN | |
DISTRIBUTION | |
| |
December 30, 2005 | $0.1007 |
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.
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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 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 Agents open market purchases in connection with the reinvestment of dividends and distributions. The cost per share of the shares purchased for each participants 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 Agents 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 shareholders account in the Plan and furnishes monthly written confirma-tions 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.
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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).
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
Newport
Office Center VII 480
Washington Boulevard Jersey City, NJ 07310
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 March 22, 2006, the Annual Meeting of the Fund was held to elect three Trustees and to ratify the actions of the Trustees in selecting independent auditors for the Fund.
Proxies covering 28,787,244 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:
W I T H H E L D | ||
F O R | A U T H O R I T Y | |
| ||
James R. Boyle | 27,615,112 | 1,172,132 |
Charles L. Ladner | 27,599,501 | 1,187,743 |
John A. Moore | 27,604,498 | 1,182,746 |
The preferred shareholders elected Ronald R. Dion as a Trustee of the Fund until his successor is duly elected and qualified, with the votes tabulated as follows: 11,332 FOR, 26 AGAINST and 9 ABSTAINING.
The common and preferred shareholders also ratified the Trustees selection of PricewaterhouseCoopers LLP as the Funds independent auditors for the fiscal year ending May 31, 2006, with the votes tabulated as follows: 28,361,614 FOR, 188,100 AGAINST and 237,529 ABSTAINING.
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Board Consideration of and Continuation of Investment Advisory Agreement: John Hancock Preferred Income Fund III
Section 15(c) of the Investment Company Act of 1940 (the 1940 Act) requires the Board of Trustees (the Board) of John Hancock Preferred Income Fund III (the Fund), including a majority of the Trustees who have no direct or indirect interest in the investment advisory agreement and are not interested persons of the Fund, as defined in the 1940 Act (the Independent Trustees), annually to review and consider the continuation of the investment advisory agreement (the Advisory Agreement) with John Hancock Advisers, LLC (the Adviser) for the Fund.
At meetings held on May 1920 and June 67, 2005, the Board, including the Independent Trustees, considered the factors and reached the conclusions described below relating to the selection of the Adviser and the continuation of the Advisory Agreement. During such meetings, the Boards Contracts/Operations Committee and the Independent Trustees also met in executive sessions with their independent legal counsel. In evaluating the Advisory Agreement, the Board, including the Contracts/Operations Committee and the Independent Trustees, reviewed a broad range of information requested for this purpose by the Independent Trustees, including but not limited to the following: (i) the investment performance of the Fund and a broader universe of relevant funds (the Universe) selected by Lipper Inc. (Lipper), an independent provider of investment company data, for a range of periods, (ii) advisory and other fees incurred by, and the expense ratios of, the Fund and a peer group of comparable funds selected by Lipper (the Peer Group), (iii) the advisory fees of comparable portfolios of other clients of the Adviser, (iv) the Advisers financial results and condition, including its and certain of its affiliates profitability from services performed for the Fund, (v) breakpoints in the Funds and the Peer Groups fees and a study undertaken at the direction of the Independent Trustees as to the allocation of the benefits of economies of scale between the Fund and the Adviser, (vi) the Advisers record of compliance with applicable laws and regulations, with the Funds investment policies and restrictions, and with the Funds Code of Ethics and the structure and responsibil ities of the Advisers compliance department, (vii) the background and experience of senior management and investment professionals, and (viii) the nature, cost and character of advisory and non-investment management services provided by the Adviser and its affiliates.
Nature, extent and quality of services
The Board considered the ability of the Adviser, based on its resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory and supervisory personnel. The Board further considered the compliance programs and compliance records of the Adviser. In addition, the Board took into account the administrative services provided to the Fund by the Adviser and its affiliates.
Based on the above factors, together with those referenced below, the Board concluded that, within the context of its full deliberations, the nature, extent and quality of the investment advisory services provided to the Fund by the Adviser were sufficient to support renewal of the Advisory Agreement.
Fund performance
The Board noted that the Fund had less than three full years of operational history, and considered the performance results for the Fund reported by Lipper through December 31, 2004. The
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Board also considered these results in comparison to the performance of the Universe, as well as the Funds benchmark indexes. Lipper determined the Universe for the Fund. The Board reviewed with a representative of Lipper the methodology used by Lipper to select the funds in the Universe and the Peer Group.
The Board noted that the performance of the Fund was above the median and not appreciably below the average performance of its Universe for the time period under review. The Board also noted that the Fund performed lower than its benchmark index, the Lipper Closed-End Income and Preferred Funds Index, as did the Universe. The Board recognized the relatively short operational history of the Fund and indicated its intent to continue to monitor the Funds performance trends.
Investment advisory fee rates and expenses
The Board reviewed and considered the contractual investment advisory fee rate payable by the Fund to the Adviser for investment advisory services (the Advisory Agreement Rate). In addition, the Board reviewed and considered the existing fee waiver/limit arrangements applicable to the Advisory Agreement Rate and considered the Advisory Agreement Rate after taking the waivers/limits into account (the Net Advisory Rate). The Board received and considered information comparing the Advisory Agreement Rate and the Net Advisory Rate with fees for the Peer Group. The Board noted that the Advisory Agreement Rate was near the mid-range of other funds in the Peer Group, but noted that the Peer Group included very few funds. The Board also noted that the Net Advisory Rate was lower than the median rate of the Peer Group. The Board concluded that the Advisory Agreement Rate and the Net Advisory Rate were reasonable in relation to the services provided.
The Board received and considered information regarding the Funds total operating expense ratio and its various components, including contractual advisory fees, actual advisory fees, non-management fees, transfer agent fees and custodian fees, including and excluding investment-related expenses. The Board also considered comparisons of these expenses to the Peer Group and the Universe. The Board noted that the total operating expense ratio of the Fund was lower than the Peer Groups and Universes median total operating expense ratio.
The Adviser also discussed the Lipper data and rankings, and other relevant information, for the Fund. Based on the above-referenced considerations and other factors, the Board concluded that the Funds overall expense results and performance supported the re-approval of the Advisory Agreement.
Profitability
The Board received and considered a detailed profitability analysis of the Adviser based on the Advisory Agreement, as well as on other relationships between the Fund and the Adviser and its affiliates. The Board concluded that, in light of the costs of providing investment management and other services to the Fund, the profits and other ancillary benefits reported by the Adviser were not unreasonable.
Economies of scale
The Board received and considered general information regarding economies of scale with respect to the management of the Fund, including the Funds ability to appropriately benefit from economies of scale under the Funds fee structure. The Board recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Boards understanding that most of the Advisers costs are not specific to individual Funds, but rather are incurred across a variety of products and services.
29
The Board observed that the Advisory Agreement did not offer breakpoints. However, the Board considered the limited relevance of economies of scale in the context of a closed-end fund that, unlike an open-end fund, does not continuously offer its shares, and concluded that the fees were fair and equitable based on relevant factors, including the Funds total expenses ranking relative to its Peer Group.
Information about services to other clients
The Board also received information about the nature, extent and quality of services and fee rates offered by the Adviser to its other clients, including other registered investment companies, institutional investors and separate accounts. The Board concluded that the Advisory Agreement Rate was not unreasonable, taking into account fee rates offered to others by the Adviser and giving effect to differences in services covered by such fee rates.
Other benefits to the Adviser
The Board received information regarding potential fall-out or ancillary bene-fits received by the Adviser and its affiliates as a result of the Advisers relationship with the Fund. Such benefits could include, among others, benefits directly attributable to the relationship of the Adviser with the Fund and benefits potentially derived from an increase in the business of the Adviser as a result of its relationship with the Fund (such as the ability to market to shareholders other financial products offered by the Adviser and its affiliates).
The Board also considered the effectiveness of the Advisers and the Funds policies and procedures for complying with the requirements of the federal securities laws, including those relating to best execution of portfolio transactions and brokerage allocation.
Other factors and broader review
As discussed above, the Board reviewed detailed materials received from the Adviser as part of the annual re-approval process under Section 15(c) of the 1940 Act. The Board also regularly reviews and assesses the quality of the services that the Fund receives throughout the year. In this regard, the Board reviews reports of the Adviser at least quarterly, which include, among other things, a detailed portfolio review, detailed fund performance reports and compliance reports. In addition, the Board meets with portfolio managers and senior investment officers at various times throughout the year.
After considering the above-described factors and based on its deliberations and its evaluation of the information described above, the Board concluded that approval of the continuation of the Advisory Agreement for the Fund was in the best interest of the Fund and its shareholders. Accordingly, the Board unanimously approved the continuation of the Advisory Agreement.
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Information about the portfolio managers
Management Biographies and Fund ownership
Below is an alphabetical list of the portfolio managers who share joint responsibility for the day-to-day investment management of the Fund. It provides a brief summary of their business careers over the past five years and their range of beneficial share ownership in the Fund as of May 31, 2006.
Gregory K. Phelps
Senior Vice President, Sovereign Asset
Management LLC since 2005
Senior Vice
President, John Hancock Advisers, LLC (1995-2005)
Began business career in
1981
Joined fund team in 2003
Fund ownership None
Mark T. Maloney
Vice President, Sovereign Asset Management
LLC since 2005
Vice President, John Hancock Advisers, LLC (1982-2005)
Began business career in 1976
Joined fund team in 2003
Fund
ownership None
Other Accounts the Portfolio Managers are Managing
The table below indicates for each portfolio manager information about the accounts over which the portfolio manager has day-to-day investment responsibility. All information on the number of accounts and total assets in the table is as of May 31, 2006. For purposes of the table, Other Pooled Investment Vehicles may include investment partnerships and group trusts, and Other Accounts may include separate accounts for institutions or individuals, insurance company general or separate accounts, pension funds and other similar institutionalaccounts.
P O R T F O L I O M A N A G E R | O T H E R A C C O U N T S M A N A G E D B Y T H E P O R T F O L I O M A N A G E R S |
| |
Gregory K. Phelps | Other Investment Companies: 8 funds with assets of |
approximately $3.8 billion. | |
Other Pooled Investment Vehicles: 2 accounts with assets of | |
approximately $70 million. | |
Other Accounts: None | |
Mark T. Maloney | Other Investment Companies: 8 funds with assets of |
approximately $3.8 billion. | |
Other Pooled Investment Vehicles: 2 accounts with assets of | |
approximately $70 million. | |
Other Accounts: None |
When a portfolio manager is responsible for the management of more than one account, the potential arises for the portfolio manager to favor one account over another. For the reasons outlined below, the Fund does not believe that any material conflicts are likely to arise out of a portfolio managers responsibility for the management of the Fund as well as one or more other accounts. The Adviser and the Sub-Adviser have adopted procedures, overseen by the Chief Compliance Officer, that are intended to monitor compliance with the policies referred to in the following paragraphs.
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* The Sub-Adviser has policies that require a portfolio manager to allocate investment opportunities in an equitable manner and generally to allocate such investments proportionately among all accounts with similar investment objectives.
* When a portfolio manager intends to trade the same security for more than one account, the policies of the Sub-Adviser generally require that such trades for the individual accounts are aggregated so each account receives the same price. Where not possible or may not result in the best possible price, the Sub-Adviser will place the order in a manner intended to result in as favorable a price as possible for such client.
* The investment performance on specific accounts is not a factor in determining the portfolio managers compensation. See Compensation of Portfolio Managers below. Neither the Adviser nor the Sub-Adviser receives a performance-based fee with respect to other accounts managed by the Funds portfolio managers.
* The Sub-Adviser imposes certain trading restrictions and reporting requirements for accounts in which a portfolio manager or certain family members have a personal interest in order to confirm that such accounts are not favored over other accounts.
* The Sub-Adviser seeks to avoid portfolio manager assignments with potentially conflicting situations. However, where a portfolio manager is responsible for accounts with differing investment objectives and policies, it is possible that the portfolio manager will conclude that it is in the best interest of one account to sell a portfolio security while another account continues to hold or increase the holding in such security.
Compensation of Portfolio Managers
The Sub-Adviser has adopted a system of compensation for portfolio managers and others involved in the investment process that is applied consistently among investment professionals. At the Sub-Adviser, the structure of compensation of investment professionals is currently composed of the following basic components: fixed base salary, and an annual investment bonus plan, as well as customary benefits that are offered generally to all full-time employees of the Sub-Adviser. A limited number of senior portfolio managers, who serve as officers of both the Sub-Adviser and its parent company, may also receive options or restricted stock grants of common shares of Manulife Financial.
Only investment professionals are eligible to participate in the Investment Bonus Plan on an annual basis. While the amount of any bonus is discretionary, the following factors are generally used in determining bonuses: 1) The investment performance of all accounts managed by the investment professional over one- and three- year periods are considered. The pre-tax performance of each account is measured relative to an appropriate peer group benchmark. 2) The profitability of the Sub-Adviser and its parent company are also considered in determining bonus awards, with greater emphasis placed upon the profitability of the Adviser. 3) The more intangible contributions of an investment professional to the Sub-Advisers business, including the investment professionals support of sales activities, new fund/strategy idea generation, professional growth and development, and management, where applicable, are evaluating in determining the amount of any bonus award.
While the profitability of the Sub-Adviser and the investment performance of the accounts that the investment professionals maintain are factors in determining an investment professionals overall compensation, the investment professionals compensation is not linked directly to the net asset value of any fund.
32
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 | since1 | by Trustee |
Ronald R. Dion, Born: 1946 | 2003 | 53 |
Independent Chairman (since 2005); 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, BJs 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. | ||
James F. Carlin, Born: 1940 | 2003 | 53 |
Director and Treasurer, Alpha Analytical Laboratories, Inc. (chemical analysis) | ||
(since 1985); Part Owner and Treasurer, Lawrence Carlin Insurance Agency, Inc. | ||
(since 1995); Part Owner and Vice President, Mone Lawrence Carlin Insurance | ||
Agency, Inc. (until 2005); 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 | 53 |
President and Chief Executive Officer, Brookline Bancorp Inc. (lending) | ||
(since 1972); Chairman and Director, Lumber Insurance Co. (insurance) | ||
(until 2000); Chairman and Director, Northeast Retirement Services, Inc. | ||
(retirement administration) (since 1998). | ||
William H. Cunningham, Born: 1944 | 2003 | 143 |
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: Hire.com (until 2004); STC Broadcasting, Inc. | ||
and Sunrise Television Corp. (until 2001); Symtx, Inc. (electronic manufacturing) | ||
(since 2001); Adorno/Rogers Technology, Inc. (until 2004); Pinnacle Foods | ||
Corporation (until 2003); rateGenius (until 2003); Lincoln National Corporation | ||
(insurance) (since 2006); Jefferson-Pilot Corporation (diversified life insurance |
33
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 | since1 | by Trustee |
William H. Cunningham, Born: 1944 (continued) | 2003 | 143 |
company) (until 2006); New Century Equity Holdings (formerly Billing Concepts) | ||
(until 2001); eCertain (until 2001); ClassMap.com (until 2001); Agile Ventures | ||
(until 2001); AskRed.com (until 2001); Southwest Airlines, Introgen and | ||
Viasystems Group, Inc. (electronic manufacturer) (until 2003); Advisory | ||
Director, Interactive Bridge, Inc. (college fundraising) (until 2001); Advisory | ||
Director, Q Investments (until 2003); Advisory Director, JP Morgan Chase Bank | ||
(formerly Texas Commerce Bank Austin), LIN Television (since 2002); WilTel | ||
Communications (until 2003) and Hayes Lemmerz International, Inc. | ||
(diversified automotive parts supply company) (since 2003). | ||
Charles L. Ladner,2 Born: 1938 | 2003 | 143 |
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. (gas distribution) (until 1997); | ||
Director, EnergyNorth, Inc. (until 1995); Director, Parks and History Association | ||
(since 2001). | ||
John A. Moore,2 Born: 1939 | 2003 | 53 |
President and Chief Executive Officer, Institute for Evaluating Health Risks, | ||
(nonprofit institution) (until 2001); Senior Scientist, Sciences International | ||
(health research) (until 2003); Former Assistant Administrator and Deputy | ||
Administrator, Environmental Protection Agency; Principal, Hollyhouse | ||
(consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). | ||
Patti McGill Peterson,2 Born: 1943 | 2003 | 53 |
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 | 53 |
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). |
34
Non-Independent Trustee3 | ||
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 | since1 | by Trustee |
James R. Boyle, Born: 1959 | 2005 | 237 |
President, John Hancock Annuities; Executive Vice President, John Hancock | ||
Life Insurance Company (since June, 2004); Chairman and Director, John | ||
Hancock Advisers, LLC (the Adviser), John Hancock Funds, LLC and The | ||
Berkeley Financial Group, LLC (The Berkeley Group) (holding company) (since | ||
2005); President, U.S. Annuities; Senior Vice President, The Manufacturers | ||
Life Insurance Company (U.S.A.) (prior to 2004). | ||
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, the Adviser and The Berkeley Group; | ||
Director, President and Chief Executive Officer, John Hancock Funds, LLC; | ||
Director, President and Chief Executive Officer, Sovereign Asset Management | ||
LLC (Sovereign); Director, John Hancock Signature Services, Inc.; President, | ||
John Hancock Funds II, John Hancock Funds III and John Hancock Trust; Director, | ||
Chairman and President, NM Capital Inc. (since 2005); Chairman, Investment | ||
Company Institute Sales Force Marketing Committee (since 2003); Executive | ||
Vice President, John Hancock Funds (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 advised by the Adviser; Assistant Treasurer | ||
of each of the John Hancock funds advised by the Adviser (until 2001). | ||
Francis V. Knox, Jr., Born: 1947 | 2005 | |
Vice President and Chief Compliance Officer | ||
Vice President and Chief Compliance Officer, John Hancock Investment | ||
Company, John Hancock Life Insurance Company (U.S.A.), John Hancock Life | ||
Insurance Company, the Adviser and Sovereign (since 2005); Vice President | ||
and Chief Compliance Officer, John Hancock Funds II, John Hancock Funds III | ||
and John Hancock Trust (since 2005); Vice President and Assistant Treasurer, | ||
Fidelity Group of Funds (until 2004); Vice President and Ethics & Compliance | ||
Officer, Fidelity Investments (until 2001). | ||
John G. Vrysen, Born: 1955 | 2005 | |
Executive Vice President and Chief Financial Officer | ||
Director, Executive Vice President and Chief Financial Officer, the Adviser, The | ||
Berkeley Group and John Hancock Funds, LLC (since 2005); Executive Vice | ||
President and Chief Financial Officer, Sovereign, John Hancock Funds II, John | ||
Hancock Funds III and John Hancock Trust (since 2005); Vice President and | ||
General Manager, Fixed Annuities, U.S. Wealth Management (until 2005); Vice | ||
President, Operations, Manulife Wood Logan (July 2000 thru September 2004). |
35
Notes to Trustees and Officers pages
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.
3 Non-Independent Trustee holds positions with the Funds investment adviser, underwriter and certain other affiliates.
36
For more information
The Funds proxy voting policies, procedures and records are available without charge, upon request:
By phone | On the Funds Web site | On the SECs Web site |
1-800-225-5291 | www.jhfunds.com/proxy | www.sec.gov |
| ||
Investment adviser | Transfer agent for | Independent registered |
John Hancock Advisers, LLC | common shareholders | public accounting firm |
601 Congress Street | Mellon Investor Services | PricewaterhouseCoopers LLP |
Boston, MA 02210-2805 | Newport Office Center VII | 125 High Street |
480 Washington Boulevard | Boston, MA 02110 | |
Jersey City, NJ 07310 | ||
Subadviser | ||
Sovereign Asset | Stock symbol | |
Management LLC | Transfer agent for | Listed New York Stock |
101 Huntington Avenue | preferred shareholders | Exchange: |
Boston, MA 02199 | Deutsche Bank Trust | HPS |
Company Americas | ||
Custodian | 280 Park Avenue | For shareholder assistance |
The Bank of New York | New York, NY 10017 | refer to page 27 |
One Wall Street | ||
New York, NY 10286 | Legal counsel | |
Wilmer Cutler Pickering | ||
Hale and Dorr LLP | ||
60 State Street | ||
Boston, MA 02109-1803 |
How to contact us | ||
| ||
Internet | www.jhfunds.com | |
| ||
Regular mail: | ||
Mellon Investor Services | ||
Newport Office Center VII | ||
480 Washington Boulevard | ||
Jersey City, NJ 07310 | ||
| ||
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 Commissions Web site, www.sec.gov.
37
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 5/06
7/06
ITEM 2. CODE OF ETHICS.
As of the end of the period, May 31, 2006, 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.
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 registrants annual financial statements or services that are normally provided by the accountant(s) in connection with statutory and regulatory filings or engagements amounted to $34,500 for the fiscal year ended May 31, 2005 and $25,800 for the fiscal year ended May 31, 2006. These fees were billed to the registrant and were approved by the registrants audit committee.
(b) Audit-Related Services
There were no audit-related fees during the fiscal year ended May 31, 2005 and fiscal year ended May 31, 2006 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 $2,400 for the fiscal year ended May 31, 2005 and $3,700 for the fiscal year ended May 31, 2006. The nature of the services comprising the tax fees was the review of the registrants income tax returns and tax distribution requirements. These fees were billed to the registrant and were approved by the registrants 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, 2005 and $3,000 for the fiscal year ended May 31, 2006. There were no other fees during the fiscal year ended May 31, 2005 and May 31, 2006 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
accountants report on the registrants Eligible Asset Coverage. These fees were approved by the registrants 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, 2005 and May 31, 2006 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 registrants principal accountant, for the fiscal year ended May 31, 2006, 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 $71,400 for the fiscal year ended May 31, 2005, and $384,600 for the fiscal year ended May 31, 2006.
(h) The audit committee of the registrant has considered the non-audit services provided by the registrants 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:
Dr. John A. Moore - Chairman
Richard P. Chapman, Jr.
Charles L. Ladner
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 27,2006
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 27,2006
By: /s/ John G. Vrysen
-------------------------------------
John G. Vrysen
Executive Vice President and Chief Financial
Officer
Date: July 27,2006