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 Counsel 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, 2007 |
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 |
|
Notes to financial |
statements |
page 18 |
|
Trustees and officers |
page 34 |
|
For more information |
page 40 |
CEO corner
To Our Shareholders,
The U.S. financial markets turned in strong results over the last 12 months. Positive economic news, better-than-expected corporate earnings growth, buoyant global economies, and increased merger and acquisitions activity served to overcome concerns about inflation, high energy costs, a housing slowdown and the troubled subprime mortgage market. Even with a sharp, albeit brief, decline during the period, the broad stock market, as measured by the Standard & Poors 500 Index, returned 22.8% for the year ended May 31, 2007.
This environment also led the Federal Reserve Board to hold short-term interest rates steady, and fixed-income securities also produced positive results. The broad Lehman Brothers Aggregate Bond Index returned 6.7% for the year, while high-yield corporate bonds remained the best performers, reflecting the favorable credit environment and strong demand for yield.
After the markets moves of the last year, we encourage investors to sit back, take stock and set some realistic expectations. While history bodes well for the U.S. market in 2007 (since 1939, the S&P 500 Index has always produced positive results in the third year of a presidential term), there are no guarantees, and opinions are divided on the future of this more-than-four-year-old bull market. Investors are also dealing with heightened uncertainty about the direction of interest rates. Inflation data at the end of the period caused anxiety that the Fed would not cut interest rates any time soon, as had previously been expected.
It may also be time to contact your financial professional to determine whether changes are in order to your investment mix. Some asset groups have had long runs of outperformance and may now represent a larger percentage of your portfolios than prudent diversification would suggest they should. After all, we believe investors with a well-balanced portfolio and a marathon, not a sprint, approach to investing, stand a better chance of weathering the markets short-term twists and turns and reaching their long-term goals.
Sincerely,
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEOs views as of May 31, 2007. 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 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 conditions, the Fund invests at least 80% of its assets in preferred stocks and other preferred securities.
Over the last twelve months
► Preferred stocks posted solid gains, fueled by a relatively benign interest rate backdrop and strong investor demand.
► The Fund outperformed its peers on a net asset value level.
► Holdings in tax-advantaged preferred stocks generally performed best.
Top 10 issuers | ||||
Nexen, Inc. | 3.5% | Lloyds TSB Bank Plc | 2.3% | |
|
| |||
ING Groep NV | 2.9% | Southern Union Co. | 2.3% | |
|
| |||
MetLife, Inc. | 2.7% | PFGI Capital Corp. | 2.2% | |
|
| |||
Viacom, Inc. | 2.5% | JPMorgan Chase Capital XI | 2.2% | |
|
| |||
Telephone & Data Systems, Inc. | 2.4% | Southwest Gas Capital II | 2.1% | |
|
|
As a percentage of net assets plus the value of preferred shares on May 31, 2007.
1
Managers report
John Hancock
Preferred Income Fund III
Preferred stocks posted robust gains for the 12-month period ended May 31, 2007, overcoming two distinct pockets of weakness during the year. In the initial months of the period, preferred stocks performed poorly, coming under pressure due to growing fears of more interest rate hikes amid reasonably strong economic growth and mounting inflation pressures. Because preferreds make fixed-income payments in the form of dividends, their prices tend to move higher and lower in response to expectations for interest rates and inflation.
Preferreds also were stymied by a glut of newly issued preferred stocks, which generally came to market with higher yields than already- outstanding securities, making older issues less attractive and putting pressure on their prices.
But from early August 2006 through the end of that year, preferred stocks rallied strongly, bolstered first by optimism that the Federal Reserve Board would hold interest rates steady and later by growing hopes that the central bank might actually cut rates in the first half of 2007. Also boosting preferreds during that time span was an abatement in new issuance, as issuers called (meaning they refunded) outstanding preferred securities.
During the first calendar quarter of 2007, preferreds continued to perform well. A series of reports indicating that the housing market and other parts of the economy were slowing provided investors
SCORECARD
INVESTMENT | PERIODS PERFORMANCE ... AND WHATS BEHIND THE NUMBERS | |
MetLife | ▲ | Strong demand for tax-advantaged preferreds boosts price |
PNM Resources | ▲ | Strong customer growth and joint venture with Bill Gates |
SLM | ▼ | Investors fear company will be downgraded after leveraged buyout |
2
Portfolio Managers, MFC Global Investment Management (U.S.), LLC
Gregory K. Phelps and Mark T. Maloney
evidence that inflation wasnt the same concern it had been just a few months earlier. But preferreds weakened a bit again in the spring, amid growing concerns that any interest rate cuts might be farther off than most observers had originally anticipated. Additionally, a resurgence in the supply of the securities once again acted as a drag on their prices.
Against that year-long backdrop, preferred stocks that offered a certain tax advantage known as the dividends received deduction (DRD) outpaced those without the tax benefit. Thats primarily because tax-advantaged securities were in short supply throughout much of the period.
Preferred stocks posted robust
gains for the 12-month period
ended May 31, 2007, overcoming
two distinct pockets of weakness
during the year.
Performance
For the 12 months ended May 31, 2007, John Hancock Preferred Income Fund III returned 13.65% at net asset value (NAV) and 23.79% at market value. The difference in the Funds 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. The Funds yield at closing market price on May 31, 2007 was 7.00% . By comparison, the average long-term closed-end bond fund returned 9.35% at NAV, according to Morningstar, Inc. For the same 12-month period, the Lehman Brothers Aggregate Bond Index gained 6.7% and the Merrill Lynch Preferred Stock Hybrid Securities Index rose 9.8% .
Leaders
Given favorable supply and demand dynamics, some of our best performers were DRD-eligible securities. Our holdings in MetLife, Inc.,
Preferred Income Fund III
3
for example, served us well. They also were aided by the strong financial performance of its issuer. Many of our preferred-stock holdings in the brokerage area were beneficial to the Funds performance, led by Goldman Sachs Group, Inc. and Merrill Lynch & Co. The brokers benefited from their ability to fire on all cylinders in their key businesses, including stocks, investment banking, asset management and private equity. They also continued to benefit from providing services to the hedge fund industry, as well as posting strong gains from their proprietary trading accounts.
Among our non-tax-advantaged preferred holdings, we enjoyed good returns from our convertible stocks in PNM Resources, Inc., a New Mexico electric utility. It was boosted by the companys ability to generate greater-than-expected customer growth. In addition, investors were excited by news that Microsoft founder Bill Gates personal investment vehicle was entering into a joint venture with the utility and energy company. Electricity and gas company Aquila, Inc. was another winner, helped by investors enthusiasm over the companys improving business risk profile, recent utility rate increases and the reduction of long-term debt. Our shares in the company were redeemed shortly after the period ended at a significant premium over our purchase price. Natural gas producer Chesapeake Energy Corp. scored well, thanks largely to excitement over the companys program to drill wells on and near the Fort Worth Barnett Shale geologic structure, which contains large natural gas reserves.
INDUSTRY DISTRIBUTION1 | |
Electric utilities | 16% |
Diversified banks | 10% |
Multi-utilities | 9% |
Investment banking | |
& brokerage | 9% |
Other diversified | |
financial services | 8% |
Gas utilities | 6% |
Life & health insurance | 5% |
Oil & gas exploration | |
& production | 4% |
Multi-line insurance | 4% |
Real estate management | |
& development | 4% |
Integrated | |
telecommunication | |
services | 3% |
Automobile | |
manufacturers | 3% |
Consumer finance | 3% |
Movies & entertainment | 3% |
Regional banks | 2% |
Wireless | |
telecommunication | |
services | 2% |
Broadcasting & Cable TV | 2% |
All others | 4% |
Laggards
In contrast, we lost ground with our stake in student loan company SLM Corp. Investors became concerned about a potential credit downgrade of the company amid news about the financing details of the companys agreement to be taken private in a leveraged buyout, particularly the high level of debt that would have to be serviced through cash flow from operations. We continued to hold onto SLM because we believe the preferred stocks price reflected the worst case scenario, and we werent willing to part with it at such discounted valuations.
Preferred Income Fund III
4
Outlook
By the end of the period, Treasury bonds were priced such that investors were still expecting a rate cut in the second calendar quarter of this year. With inflation running at the upper end of the Feds stated comfort zone, however, we dont believe the central bank will be so quick to stimulate the economy via rate cuts. At the end of the period, investors were seemingly beginning to wake up to the idea that rate cuts were farther off than they had originally anticipated, as evidenced by a weaker market for fixed-income related securities. We wouldnt be surprised if Treasuries come under near-term pressure. If Treasuries sell off, its likely that preferreds will follow suit over the near term. Over the longer term, however, we remain optimistic that gradually slowing economic conditions could bode well for fixed-income investments, including preferred stocks, and that long-term demand for income-producing stocks will provide support for them.
Given favorable supply and
demand dynamics, some of
our best performers were
DRD-eligible securities.
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 net assets plus the value of preferred shares on May 31, 2007.
Preferred Income Fund III
5
F I N A N C I A L S T A T E M E N T S
Funds investments
Securities owned by the Fund on 5-31-07
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 11.46% | $83,825,147 | |||||
| ||||||
(Cost $83,909,669) | ||||||
Automobile Manufacturers 0.31% | 2,265,987 | |||||
| ||||||
Ford Motor Co., | ||||||
Note | 7.450% | 07-16-31 | CCC+ | $2,755 | 2,265,987 | |
Consumer Finance 0.45% | 3,295,809 | |||||
| ||||||
General Motors Acceptance Corp., | ||||||
Bond | 8.000 | 11-01-31 | BB+ | 3,000 | 3,295,809 | |
Electric Utilities 5.16% | 37,704,393 | |||||
| ||||||
Black Hills Corp., | ||||||
Note | 6.500 | 05-15-13 | BBB | 15,000 | 14,993,175 | |
| ||||||
DPL, Inc., | ||||||
Sr Note | 6.875 | 09-01-11 | BBB | 5,036 | 5,265,279 | |
| ||||||
Entergy Gulf States, Inc., | ||||||
1st Mtg Bond | 6.200 | 07-01-33 | BBB+ | 15,000 | 14,152,560 | |
| ||||||
Kentucky Power Co., | ||||||
Sr Note, Ser D | 5.625 | 12-01-32 | BBB | 3,565 | 3,293,379 | |
Gas Utilities 1.77% | 12,966,629 | |||||
| ||||||
Southern Union Co., | ||||||
Jr Sub Note Ser A (P) | 7.200 | 11-01-66 | BB | 12,900 | 12,966,629 | |
Integrated Oil & Gas 0.73% | 5,348,365 | |||||
| ||||||
Amerada Hess Corp., | ||||||
Note | 7.125 | 03-15-33 | BBB | 5,000 | 5,348,365 | |
Multi-Utilities 1.57% | 11,491,997 | |||||
| ||||||
DTE Energy Co., | ||||||
Sr Note | 6.375 | 04-15-33 | BBB | 7,500 | 7,499,250 | |
| ||||||
TECO Energy, Inc., | ||||||
Note | 7.000 | 05-01-12 | BB | 3,810 | 3,992,747 | |
Oil & Gas Refining & Marketing 1.47% | 10,751,967 | |||||
| ||||||
Valero Energy Corp., | ||||||
Note | 7.500 | 04-15-32 | BBB | 9,500 | 10,751,967 |
See notes to financial statements
Preferred Income Fund III
6
F I N A N C I A L S T A T E M E N T S
Interest | Maturity | Credit | Par value | |||
Issuer, description | rate | date | rating (A) | (000) | Value | |
Capital preferred securities 10.18% | $74,461,782 | |||||
| ||||||
(Cost $75,985,020) | ||||||
Diversified Banks 6.04% | 44,178,350 | |||||
| ||||||
Credit Agricole Preferred | ||||||
Funding Trust | 7.00% | 01-29-49 | A | $9,000 | 9,098,100 | |
| ||||||
HBOS Capital Fund L.P. | ||||||
(United Kingdom) | 6.85 | 03-29-49 | A | 10,000 | 10,038,000 | |
| ||||||
Lloyds TSB Bank Plc | ||||||
(United Kingdom) | 6.90 | 11-29-49 | A+ | 25,000 | 25,042,250 | |
Electric Utilities 1.04% | 7,578,938 | |||||
| ||||||
DPL Capital Trust II | 8.125 | 09-01-31 | BB+ | 6,225 | 7,578,938 | |
Gas Utilities 1.86% | 13,603,036 | |||||
| ||||||
KN Capital Trust I | ||||||
Ser B | 8.56 | 04-15-27 | B | 8,735 | 8,888,596 | |
| ||||||
KN Capital Trust III | 7.63 | 04-15-28 | B | 4,960 | 4,714,440 | |
Multi-Utilities 1.24% | 9,101,458 | |||||
| ||||||
Dominion Resources Capital Trust I | 7.83 | 12-01-27 | BB+ | 9,097 | 9,101,458 | |
Issuer | Shares | Value | ||||
Common stocks 2.24% | $16,364,141 | |||||
| ||||||
(Cost $15,965,889) | ||||||
Electric Utilities 1.15% | 8,441,206 | |||||
| ||||||
Great Plains Energy, Inc. | 271,247 | 8,441,206 | ||||
Integrated Oil & Gas 0.39% | 2,820,719 | |||||
| ||||||
BP Plc, American Depositary Receipt | ||||||
(United Kingdom) | 42,094 | 2,820,719 | ||||
Multi-Utilities 0.70% | 5,102,216 | |||||
| ||||||
CH Energy Group, Inc. | 20,600 | 975,616 | ||||
| ||||||
TECO Energy, Inc. | 235,000 | 4,126,600 | ||||
Credit | ||||||
Issuer, description | rating (A) | Shares | Value | |||
Preferred stocks 119.28% | $872,628,670 | |||||
| ||||||
(Cost $892,297,081) | ||||||
Agricultural Products 2.23% | 16,337,354 | |||||
| ||||||
Ocean Spray Cranberries, Inc., | ||||||
6.25%, Ser A (S) | BB+ | 195,000 | 16,337,354 | |||
Automobile Manufacturers 3.67% | 26,852,699 | |||||
| ||||||
Ford Motor Co., 7.50% | CCC+ | 761,385 | 14,770,869 | |||
| ||||||
General Motors Corp., 7.25%, | ||||||
Ser 07-15-41 | B | 50,641 | 1,001,679 | |||
| ||||||
General Motors Corp., 7.375%, | ||||||
Ser 05-15-48 | Caa1 | 558,194 | 11,080,151 |
See notes to financial statements
Preferred Income Fund III
7
F I N A N C I A L S T A T E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Broadcasting & Cable TV 2.44% | $17,884,244 | ||
| |||
Comcast Corp., 7.00% | BBB+ | 119,900 | 3,077,833 |
| |||
Comcast Corp., 7.00%, Ser B | BBB+ | 587,556 | 14,806,411 |
Consumer Finance 3.51% | 25,700,874 | ||
| |||
Ford Motor Credit Co., 7.60% | B1 | 25,000 | 547,500 |
| |||
HSBC Finance Corp., 6.36%, | |||
Depositary Shares, Ser B | A | 250,000 | 6,330,000 |
| |||
HSBC Finance Corp., 6.875% | AA | 636,118 | 16,106,508 |
| |||
SLM Corp., 6.00% | BBB+ | 84,195 | 1,781,566 |
| |||
SLM Corp., 6.97%, Ser A | BBB | 18,800 | 935,300 |
Diversified Banks 8.68% | 63,516,375 | ||
| |||
BAC Capital Trust II, 7.00% | A+ | 94,600 | 2,382,028 |
| |||
BAC Capital Trust III, 7.00% | A+ | 22,000 | 553,080 |
| |||
BAC Capital Trust IV, 5.875% | A+ | 131,400 | 3,068,190 |
| |||
Royal Bank of Scotland Group Plc, | |||
5.75%, Ser L (United Kingdom) | A | 960,000 | 22,867,200 |
| |||
Santander Finance Preferred SA, | |||
Unipersonal, 6.41%, | |||
Ser 1 (Spain) | A+ | 100,000 | 2,515,000 |
| |||
USB Capital VIII, 6.35%, Ser 1 | A+ | 269,700 | 6,631,923 |
| |||
USB Capital X, 6.50% | A+ | 85,000 | 2,127,550 |
| |||
Wachovia Preferred Funding Corp., | |||
7.25%, Ser A | A | 674,800 | 18,894,400 |
| |||
Wells Fargo Capital Trust | |||
IV, 7.00% | AA | 177,800 | 4,477,004 |
Electric Utilities 16.74% | 122,466,825 | ||
| |||
Cleveland Electric Financing | |||
Trust I, 9.00% | BB+ | 27,400 | 696,782 |
| |||
Consolidated Edison, Inc., $5.00, | |||
Ser A | BBB+ | 30,000 | 2,767,500 |
| |||
DTE Energy Trust II, 7.50% | BB+ | 36,600 | 943,548 |
| |||
Entergy Mississippi, Inc., 7.25% | A | 113,668 | 2,890,577 |
| |||
FPC Capital I, 7.10%, Ser A | BBB | 746,700 | 18,749,637 |
| |||
FPL Group Capital Trust I, 5.875% | BBB+ | 490,000 | 11,554,200 |
| |||
Georgia Power Capital Trust V, | |||
7.125% | BBB+ | 156,100 | 3,950,891 |
| |||
Georgia Power Co., 6.00%, Ser R | A | 730,000 | 17,958,000 |
| |||
HECO Capital Trust III, 6.50% | BB+ | 130,000 | 3,256,500 |
| |||
Interstate Power & Light Co., | |||
7.10%, Ser C | BBB | 354,900 | 9,648,844 |
| |||
Interstate Power & Light Co., | |||
8.375%, Ser B | Baa2 | 54,500 | 1,623,081 |
| |||
Northern States Power Co., 8.00% | BBB | 84,550 | 2,149,261 |
| |||
PPL Electric Utilities Corp., | |||
6.25%, Depositary Shares | BBB | 189,000 | 4,931,728 |
| |||
PPL Energy Supply, LLC, 7.00% | BBB | 857,770 | 22,130,466 |
See notes to financial statements
Preferred Income Fund III
8
F I N A N C I A L S T A T E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Electric Utilities (continued) | |||
| |||
Southern California Edison Co., | |||
6.00%, Ser C | BBB | 30,000 | $2,995,314 |
| |||
Southern California Edison Co., | |||
6.125% | BBB | 20,000 | 2,039,376 |
| |||
Virginia Power Capital | |||
Trust, 7.375% | BB+ | 447,600 | 11,279,520 |
| |||
Westar Energy, Inc., 6.10% | AAA | 117,000 | 2,901,600 |
Gas Utilities 4.99% | 36,491,748 | ||
| |||
Laclede Capital Trust I, 7.70% | BBB+ | 82,000 | 2,060,660 |
| |||
Southern Union Co., 7.55%, Ser A | BB | 449,000 | 11,516,850 |
| |||
Southwest Gas Capital II, 7.70% | BB | 850,250 | 22,914,238 |
Hotels, Resorts & Cruise Lines 0.42% | 3,074,112 | ||
| |||
Hilton Hotels Corp., 8.00% | BB+ | 118,600 | 3,074,112 |
Integrated Telecommunication Services 4.24% | 31,012,145 | ||
| |||
Telephone & Data Systems, | |||
Inc., 6.625% | BB+ | 497,600 | 11,658,768 |
| |||
Telephone & Data Systems, Inc., | |||
7.60%, Ser A | BB+ | 550,776 | 13,791,431 |
| |||
Verizon New England, Inc., 7.00%, | |||
Ser B | A3 | 222,300 | 5,561,946 |
Investment Banking & Brokerage 13.67% | 99,995,358 | ||
| |||
Fleet Capital Trust IX, 6.00% | A+ | 469,200 | 11,448,480 |
| |||
Goldman Sachs Group, Inc., 6.20%, | |||
Ser B | A | 240,000 | 6,180,000 |
| |||
Lehman Brothers Holdings Capital | |||
Trust III, 6.375%, Ser K | A | 793,400 | 19,811,198 |
| |||
Lehman Brothers Holdings, Inc., | |||
5.67%, Depositary Shares, Ser D | A | 142,500 | 6,975,375 |
| |||
Merrill Lynch Preferred Capital | |||
Trust III, 7.00% | A | 417,017 | 10,592,232 |
| |||
Merrill Lynch Preferred Capital | |||
Trust IV, 7.12% | A | 232,700 | 5,938,503 |
| |||
Merrill Lynch Preferred Capital | |||
Trust V, 7.28% | A | 373,700 | 9,615,301 |
| |||
Morgan Stanley Capital Trust III, | |||
6.25% | A | 764,025 | 18,527,606 |
| |||
Morgan Stanley Capital Trust IV, | |||
6.25% | A | 393,925 | 9,651,163 |
| |||
Morgan Stanley Capital Trust VI, | |||
6.60% | A | 50,000 | 1,255,500 |
Life & Health Insurance 8.02% | 58,670,197 | ||
| |||
Lincoln National Capital VI, | |||
6.75%, Ser F | A | 304,000 | 7,676,000 |
| |||
MetLife, Inc., 6.50%, Ser B | BBB | 1,108,850 | 28,752,481 |
| |||
Phoenix Cos., Inc. (The), 7.45% | BBB | 574,949 | 14,517,462 |
| |||
PLC Capital Trust IV, 7.25% | BBB+ | 141,400 | 3,588,732 |
See notes to financial statements
Preferred Income Fund III
9
F I N A N C I A L S T A T E M E N T S
Credit | |||
Issuer, description | rating (A) | Shares | Value |
Life & Health Insurance (continued) | |||
| |||
PLC Capital Trust V, 6.125% | BBB+ | 83,300 | $2,009,612 |
| |||
Prudential Plc, 6.50% | |||
(United Kingdom) | A | 83,500 | 2,125,910 |
Movies & Entertainment 3.76% | 27,519,099 | ||
| |||
Viacom, Inc., 6.85% | BBB | 1,117,300 | 27,519,099 |
Multi-Line Insurance 5.63% | 41,153,583 | ||
| |||
Aegon NV, 6.375% (Netherlands) | A | 241,265 | 6,034,038 |
| |||
Aegon NV, 6.50% (Netherlands) | A | 150,850 | 3,793,878 |
| |||
ING Groep NV, 7.05% (Netherlands) | A | 603,970 | 15,159,647 |
| |||
ING Groep NV, 7.20% (Netherlands) | A | 641,000 | 16,166,020 |
Multi-Utilities 10.31% | 75,448,966 | ||
| |||
Aquila, Inc., 7.875% | B2 | 266,707 | 6,673,009 |
| |||
Avista Corp., $6.95, Ser K | BB | 129,860 | 12,986,000 |
| |||
BGE Capital Trust II, 6.20% | BBB | 807,028 | 19,578,499 |
| |||
DTE Energy Trust I, 7.80% | BB+ | 229,400 | 5,783,174 |
| |||
PNM Resources, Inc., 6.75%, Conv | BBB | 305,999 | 15,758,948 |
| |||
PSEG Funding Trust II, 8.75% | BB+ | 462,275 | 11,894,336 |
| |||
Public Service Electric & Gas Co., | |||
5.05%, Ser D | BB+ | 30,000 | 2,775,000 |
Oil & Gas Exploration & Production 5.81% | 42,514,129 | ||
| |||
Chesapeake Energy Corp., 6.25%, | |||
Conv (G) | B+ | 7,330 | 2,110,967 |
| |||
Devon Energy Corp., 6.49%, Ser A | BB+ | 25,250 | 2,558,141 |
| |||
Nexen, Inc., 7.35% (Canada) | BB+ | 1,494,079 | 37,845,021 |
Other Diversified Financial Services 11.78% | 86,146,337 | ||
| |||
ABN AMRO Capital Funding Trust | |||
V, 5.90% | A | 665,400 | 15,523,782 |
| |||
ABN AMRO Capital Funding Trust | |||
VI, 6.25% | A | 353,900 | 8,780,259 |
| |||
Citigroup Capital VII, 7.125% | A+ | 28,042 | 705,817 |
| |||
Citigroup Capital VIII, 6.95% | A+ | 241,200 | 6,131,304 |
| |||
Citigroup Capital X, 6.10% | A+ | 720,000 | 17,532,000 |
| |||
DB Capital Funding VIII, 6.375% | A | 228,500 | 5,735,350 |
| |||
DB Capital Trust II, 6.55% | A | 250,000 | 6,328,125 |
| |||
JPMorgan Chase Capital XI, | |||
5.875%, Ser K | A | 985,000 | 23,305,100 |
| |||
JPMorgan Chase Capital XIV, | |||
6.20%, Ser N | A | 25,000 | 616,000 |
| |||
JPMorgan Chase Capital XVI, 6.35% | A | 60,000 | 1,488,600 |
Real Estate Management & Development 5.32% | 38,900,479 | ||
| |||
Duke Realty Corp., 6.50%, | |||
Depositary Shares, Ser K REIT | BBB | 151,600 | 3,788,484 |
| |||
Duke Realty Corp., 6.60%, | |||
Depositary Shares, Ser L REIT | BBB | 118,500 | 2,958,945 |
See notes to financial statements
Preferred Income Fund III
10
F I N A N C I A L S T A T E M E N T S
Credit | ||||||
Issuer, description | rating (A) | Shares | Value | |||
Real Estate Management & Development (continued) | ||||||
| ||||||
Duke Realty Corp., 6.625%, | ||||||
Depositary Shares, Ser J REIT | BBB | 638,100 | $15,888,690 | |||
| ||||||
Public Storage, Inc., 6.18%, | ||||||
Depositary Shares, Ser D REIT | BBB+ | 20,000 | 487,000 | |||
| ||||||
Public Storage, Inc., 6.50%, | ||||||
Depositary Shares, Ser W REIT | BBB+ | 450,000 | 11,070,000 | |||
| ||||||
Public Storage, Inc., 7.50%, | ||||||
Depositary Shares, Ser V REIT | BBB+ | 184,530 | 4,707,360 | |||
Regional Banks 3.27% | 23,925,606 | |||||
| ||||||
PFGI Capital Corp., 7.75% | A | 926,900 | 23,925,606 | |||
Reinsurance 0.40% | 2,929,176 | |||||
| ||||||
RenaissanceRe Holdings Ltd., | ||||||
6.08%, Ser C (Bermuda) | BBB | 127,800 | 2,929,176 | |||
Specialized Finance 0.72% | 5,267,330 | |||||
| ||||||
CIT Group, Inc., 6.35%, Ser A | BBB+ | 70,000 | 1,775,200 | |||
| ||||||
Repsol International Capital | ||||||
Ltd., 7.45%, Ser A | ||||||
(Cayman Islands) | BB+ | 137,000 | 3,492,130 | |||
Thrifts & Mortgage Finance 1.16% | 8,485,170 | |||||
| ||||||
Abbey National Plc, 7.375% | ||||||
(United Kingdom) | A+ | 339,000 | 8,485,170 | |||
Wireless Telecommunication Services 2.51% | 18,336,864 | |||||
| ||||||
United States Cellular | ||||||
Corp., 7.50% | BB+ | 729,100 | 18,336,864 | |||
Interest | Maturity | Credit | Par value | |||
Issuer, description | rate | date | rating (A) | (000) | Value | |
Short-term investments 3.80% | $27,800,000 | |||||
| ||||||
(Cost $27,800,000) | ||||||
Government U.S. Agency 3.80% | 27,800,000 | |||||
| ||||||
Federal Home Loan Bank, | ||||||
Discount Note | 5.05% | 06-01-07 | AAA | $27,800 | 27,800,000 | |
| ||||||
Total investments (Cost $1,095,957,659) 146.96% | $1,075,079,740 | |||||
| ||||||
Other assets and liabilities, net 0.89% | $6,570,069 | |||||
| ||||||
Fund preferred shares, at liquidation value (47.85%) | ($350,086,468) | |||||
| ||||||
Total net assets applicable to common shareholders 100.00% | $731,563,341 | |||||
|
See notes to financial statements
Preferred Income Fund III
11
F I N A N C I A L S T A T E M E N T S
Notes to Schedule of Investments
REIT Real Estate Investment Trust
(A) Credit ratings are unaudited and are rated by Moodys Investors Service where Standard & Poors ratings are not available.
(G) Security rated internally by John Hancock Advisers, LLC. (P) Represents rate in effect on May 31, 2007.
(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 $16,337,354 or 2.23% of the Funds net assets as of May 31, 2007.
Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets applicable to common shareholders of the Fund.
See notes to financial statements
Preferred Income Fund III
12
F I N A N C I A L S T A T E M E N T S
Financial statements
Statement of assets and liabilities 5-31-07
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 $1,095,957,659) | $1,075,079,740 |
Cash | 24,014 |
Receivable for futures variation margin (Note 1) | 120,318 |
Cash segregated at broker for future contracts (Note 1) | 715,000 |
Dividends and interest receivable | 6,070,525 |
Unrealized appreciation of swap contracts (Note 1) | 874,720 |
Other assets | 39,566 |
Total assets | 1,082,923,883 |
Liabilities | |
| |
Payable for investments purchased | 1,022,500 |
Payable to affiliates | |
Management fees | 16,303 |
Other | 30,364 |
Other payables and accrued expenses | 204,907 |
Total liabilities | 1,274,074 |
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 | 350,086,468 |
Net assets | |
| |
Common shares capital paid-in | 741,598,332 |
Accumulated net realized gain on investments, financial futures contracts | |
and swap contracts | 6,270,703 |
Net unrealized depreciation of investments, financial futures contracts | |
and swap contracts | (18,524,183) |
Accumulated net investment income | 2,218,489 |
Net assets applicable to common shares | $731,563,341 |
Net asset value per common share | |
| |
Based on 31,280,764 shares of beneficial interest outstanding unlimited | |
number of shares authorized with no par value | $23.39 |
See notes to financial statements
Preferred Income Fund III
13
F I N A N C I A L S T A T E M E N T S
Statement of operations For the year ended 5-31-07
This Statement of Operations summarizes the Funds investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated.
Investment income | |
| |
Dividends (net of foreign withholding tax of $731) | $59,757,168 |
Interest | 12,683,655 |
Total investment income | 72,440,823 |
Expenses | |
| |
Investment management fees (Note 2) | 8,083,027 |
Accounting and legal services fees (Note 2) | 141,508 |
Compliance fees | 17,600 |
APS auction fees | 912,151 |
Custodian fees | 170,332 |
Printing fees | 167,593 |
Federal excise tax | 71,984 |
Professional fees | 51,104 |
Trustees fees | 44,661 |
Registration and filing fees | 29,364 |
Transfer agent fees | 29,362 |
Interest | 456 |
Miscellaneous | 49,241 |
Total expenses | 9,768,383 |
Less expense reductions (Note 2) | (2,155,474) |
Net expenses | 7,612,909 |
Net investment income | 64,827,914 |
Realized and unrealized gain (loss) | |
| |
Net realized gain (loss) on | |
Investments | 9,953,514 |
Financial futures contracts | (2,308,467) |
Swap contracts | 457,739 |
Change in net unrealized appreciation (depreciation) of | |
Investments | 34,047,257 |
Financial futures contracts | 1,082,815 |
Swap contracts | (506,114) |
Net realized and unrealized gain | 42,726,744 |
Distributions to APS | (17,621,518) |
Increase in net assets from operations | $89,933,140 |
See notes to financial statements
Preferred Income Fund III
14
F I N A N C I A L S T A T E M E N T S
Statement of 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 | |
5-31-06 | 5-31-07 | |
Increase (decrease) in net assets | ||
| ||
From operations | ||
Net investment income | $67,502,745 | $64,827,914 |
Net realized gain | 10,565,773 | 8,102,786 |
Change in net unrealized appreciation (depreciation) | (64,012,922) | 34,623,958 |
Distributions to APS | (13,641,482) | (17,621,518) |
Increase in net assets resulting from operations | 414,114 | 89,933,140 |
Distributions to common shareholders | ||
From net investment income | (53,052,176) | (49,548,730) |
From net realized gain | (3,149,660) | (2,242,831) |
(56,201,836) | (51,791,561) | |
Total increase (decrease) | (55,787,722) | 38,141,579 |
Net assets | ||
| ||
Beginning of year | 749,209,484 | 693,421,762 |
End of year1 | $693,421,762 | $731,563,341 |
1 Includes accumulated (distributions in excess of) net investment of ($4,259,052) and $2,218,489, respectively.
See notes to financial statements
Preferred Income Fund III
15
F I N A N C I A L S T A T E M E N T S
Financial highlights
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 | 5-31-07 |
Per share operating performance | ||||
| ||||
Net asset value, beginning of period | $23.883 | $22.49 | $23.95 | $22.17 |
Net investment income4 | 1.88 | 2.16 | 2.16 | 2.07 |
Net realized and unrealized | ||||
gain (loss) on investments | (1.21) | 1.58 | (1.70) | 1.36 |
Distributions to APS | (0.11) | (0.25) | (0.44) | (0.56) |
Total from investment operations | 0.56 | 3.49 | 0.02 | 2.87 |
Less distributions to common shareholders | ||||
From net investment income | (1.80) | (2.03) | (1.70) | (1.58) |
From net realized gain | | | (0.10) | (0.07) |
(1.80) | (2.03) | (1.80) | (1.65) | |
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 | $23.39 |
Per share market value, end of period | $22.42 | $22.22 | $19.70 | $22.64 |
Total return at net asset value5,6 (%) | 1.768 | 16.28 | 0.85 | 13.65 |
Total return at market value5,6 (%) | (4.29)7,8 | 8.22 | (3.41) | 23.79 |
Ratios and supplemental data | ||||
| ||||
Net assets applicable | ||||
to common shares, end of period | ||||
(in millions) | $699 | $749 | $693 | $732 |
Ratio of net expenses to average | ||||
net assets9 (%) | 0.9910 | 1.05 | 1.04 | 1.05 |
Ratio of gross expenses to average | ||||
net assets11 (%) | 1.2710 | 1.34 | 1.34 | 1.34 |
Ratio of net investment income | ||||
to average net assets12 (%) | 7.9710 | 9.15 | 9.22 | 8.91 |
Portfolio turnover (%) | 998 | 14 | 16 | 14 |
Senior securities | ||||
| ||||
Total value of APS outstanding | ||||
(in millions) | $350 | $350 | $350 | $350 |
Involuntary liquidation preference | ||||
per unit (in thousands) | $25 | $25 | $25 | $25 |
Average market value per unit | ||||
(in thousands) | $25 | $25 | $25 | $25 |
Asset coverage per unit 13 | $75,065 | $78,169 | $74,123 | $76,917 |
See notes to financial statements
Preferred Income Fund III
16
F I N A N C I A L S T A T E M E N T S
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 return based on net asset value reflects changes in the Funds net asset value during each period. Total return based on market value reflects changes in market value. Each figure assumes that dividend and capital gain distributions, if any, were reinvested. These figures will differ depending upon the level of any discount from or premium to net asset value at which the Funds shares traded during the period.
6 Total returns would have been lower had certain expenses not been reduced during the periods shown.
7 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.
8 Not annualized.
9 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%, 0.71% and 0.71%, respectively.
10 Annualized.
11 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%, 0.91% and 0.91%, respectively.
12 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%, 6.24% and 6.49%, respectively.
13 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.
See notes to financial statements
Preferred Income Fund III
17
Notes to financial statements
Note 1
Accounting policies
John Hancock Preferred Income Fund III (the Fund) is a diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund is authorized to issue an unlimited amount of common shares with no par value per share.
Significant accounting policies of the Fund are as follows:
Security valuation
The net asset value of the common shares of the Fund is determined daily as of the close of the NYSE, normally at 4:00 p.m. Eastern Time. Short-term debt investments that have a remaining maturity of 60 days or less are valued at amortized cost, and thereafter assume a constant amortization to maturity of any discount or premium, which approximates market value. All other securities held by the Fund are valued at the last sale price or official closing price (closing bid price or last evaluated quote if no sale has occurred) as of the close of business on the principal securities exchange (domestic or foreign) on which they trade or, lacking any sales, at the closing bid price. Securities traded only in the over-the-counter market are valued at the last bid price quoted by brokers making markets in the securities at the close of trading. Securities for which there are no such quotations, principally debt securities, are valued based on the valuation provided by an independent pricing service, which utilizes both dealer-supplied and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data.
Other assets and securities for which no such quotations are readily available are valued at fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Board of Trustees. Generally, trading in non-U.S. securities is substantially completed each day at various times prior to the close of trading on the NYSE. The values of such securities used in computing the net asset value of the Funds shares are generally determined as of such times. Occasionally, significant events that affect the values of such securities may occur between the times at which such values are generally determined and the close of the NYSE. Upon such an occurrence, these securities will be valued at fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Board of Trustees.
Investment transactions
Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Net realized gains and losses on sales of investments are determined on the identified cost basis.
Discount and premium on securities
The Fund utilizes the level yield method to accrete discount 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 expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund are allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Financial futures contracts
The Fund may buy and sell financial futures contracts. Buying futures tends to increase the
Preferred Income Fund III
18
Funds exposure to the underlying instrument. Selling futures tends to decrease the Funds exposure to the underlying instrument or hedge other Funds instruments. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities or cash as collateral for the account of the broker (the Funds agent in acquiring the futures position). 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.
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, 2007, the Fund had deposited $715,000 in a segregated account for the broker to cover margin requirements on open financial futures contracts.
The Fund had the following financial futures contracts open on May 31, 2007:
NUMBER OF | ||||
OPEN CONTRACTS | CONTRACTS | POSITION | EXPIRATION | APPRECIATION |
| ||||
U.S. 10-Year Treasury Note | 1,100 | Short | Sep 2007 | $1,479,016 |
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 counter-parties to exchange cash flows based on the difference in the two interest rates, applied to the notional principal amount for a specified period. The payment flows are usually netted against each other, with the difference being paid by one party to the other. The Fund settles accrued net receivable or payable under the swap contracts on a periodic basis.
The Fund records changes in the value of the swaps as unrealized gains or losses on swap contracts. Net periodic payments accrued, but not yet received (paid) are included in change in the unrealized appreciation/depreciation on the Statement of Operations.
Swap contracts are subject to risks related to the counterpartys ability to perform under the contract, and may decline in value if the counterpartys 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, 2007:
RATE TYPE | |||||
|
|||||
PAYMENTS | |||||
NOTIONAL | PAYMENTS MADE | RECEIVED | TERMINATION | ||
AMOUNT | BY FUND | BY FUND | DATE | COUNTERPARTY | APPRECIATION |
| |||||
$35,000,000 | 3.99% (a) | 3-month LIBOR | Apr 2009 | Morgan Stanley | $874,720 |
(a) Fixed rate |
Preferred Income Fund III
19
Federal income taxes
The Fund qualifies as a regulated investment company by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required.
New accounting pronouncements
In June 2006, Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the Interpretation), was issued and is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the effective date. The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return, and requires certain expanded disclosures. Management has evaluated the application of the Interpretation to the Fund and does not believe there is a material impact resulting from adoption of the Interpretation on the Funds financial statements. The Fund will implement this pronouncement no later than November 30, 2007.
In September 2006, FASB Standard No. 157, Fair Value Measurements (FAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishing a framework for measuring fair value and expands disclosure about fair value measurements. Management is currently evaluating the application of FAS 157 to the Fund and its impact, if any, resulting from the adoption of FAS 157 on the Funds financial statements.
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Interest income on investment securities is recorded on the accrual basis. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable.
The Fund records distributions to shareholders from net investment income and net realized gain, if any, on the ex-dividend date. During the year ended May 31, 2006, the tax character of distributions paid was as follows: ordinary income $66,198,977 and long-term capital gain $3,644,341. During the year ended May 31, 2007, the tax character of distributions paid was as follows: ordinary income $66,632,491 and long-term capital gain $2,780,588.
As of May 31, 2007, the components of distributable earnings on a tax basis included $11,513,748 of undistributed ordinary income.
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 2
Management fee and transactions with
affiliates and others
The Fund has an investment management contract with John Hancock Advisers LLC (the Adviser), a wholly owned subsidiary of the John Hancock Financial Services, Inc. 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 (APS) (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 principal advisor on the
Preferred Income Fund III
20
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.
Effective October 1, 2006 Sovereign changed its name to MFC Global Investment Management (U.S.), LLC.
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 $2,155,474 for the year ended May 31, 2007. 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 affiliates to perform necessary tax, accounting and legal services for the Fund. The compensation for the year amounted to $141,508. The Fund also reimbursed JHLICO for certain compliance costs, included in the Funds Statement of Operations.
The Adviser and other subsidiaries of JHLICO owned 5,990 shares of beneficial interest of the Fund on May 31, 2007.
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 3
Guarantees and indemnifications
Under the Funds organizational documents, its Officers and Trustees are indemnified against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund believes the risk of loss to be remote.
Preferred Income Fund III
21
Note 4
Fund share transactions Common shares
This listing illustrates the Funds reclassification of the Funds capital accounts and the number of common shares outstanding at the beginning and end of May 31, 2006, and May 31, 2007, along with the corresponding dollar value.
Year ended 5-31-06 | Year ended 5-31-07 | |||
Shares | Amount | Shares | Amount | |
Beginning of period | 31,280,764 | $741,790,150 | 31,280,764 | $741,664,736 |
Reclassification of capital | ||||
accounts | | (125,414) | | (66,404) |
End of period | 31,280,764 | $741,664,736 | 31,280,764 | $741,598,332 |
Auction preferred shares
The Fund issued a total of 14,000 APS (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 seven days thereafter by an auction. During the year ended May 31, 2007, dividend rates on APS ranged as follows: Series M from 4.40% to 5.32%, Series T from 4.25% to 5.32%, Series W from 4.70% to 5.30%, Series TH from 4.44% to 5.25% and Series F from 4.50% to 5.32% . 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 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. Under the 1940 Act, the Fund is required to maintain asset coverage of at least 130% with respect to the Preferred Shares as of the last business day of each month in which any shares are outstanding. 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.
Leverage
The Fund issued preferred shares to increase its assets available for investment. The Fund generally will not issue preferred shares unless the Adviser expects that the Fund will achieve a greater return on the proceeds resulting from the use of leverage than the additional costs the Fund incurs as a result of leverage. When the Fund leverages its assets, the fees paid to the Adviser for investment advisory and administrative services will be higher than if the Fund did not borrow because the Advisers fees are calculated based on the Funds total assets, including the proceeds of the issuance of preferred shares. Consequently, the Fund and the Adviser may have differing interests in determining whether to leverage the Funds assets. The Board of Trustees will monitor this potential conflict. The Funds use of leverage is premised upon the expectation that the Funds dividends on its outstanding preferred shares will be lower than the return the Fund achieves on its investments with the proceeds of the issuance of preferred shares.
Leverage creates risks which may adversely affect the return for the holders of common shares, including:
Preferred Income Fund III
22
the likelihood of greater volatility of net asset value and market price of common shares
fluctuations in the dividend rates on any preferred shares
increased operating costs, which may reduce the Funds total return to the holders of common shares
the potential for a decline in the value of an investment acquired through leverage, while the Funds obligations under such leverage remains fixed
To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Funds return will be greater than if leverage had not been used.
Note 5
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, 2007, aggregated $150,285,541 and $178,806,333, respectively.
The cost of investments owned on May 31, 2007, including short-term investments, for federal income tax purposes was $1,097,798,142. Gross unrealized appreciation and depreciation of investments aggregated $12,471,069 and $35,189,471, respectively, resulting in net unrealized depreciation of $22,718,402. The difference between book basis and tax basis net unrealized depreciation of investments is attributable primarily to the tax deferral of losses certain sales of securities.
Note 6
Reclassification of accounts
During the year ended May 31, 2007, the Fund reclassified amounts to reflect a decrease in accumulated net realized gain on investments of $8,753,471, a decrease in accumulated net investment loss of $8,819,875 and a decrease in capital paid-in of $66,404. This represents the amounts necessary to report these balances on a tax basis, excluding certain temporary differences, as of May 31, 2007. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America, book and tax differences in accounting for prior period adjustments, premium amortization, interest rate swap adjustment, REIT reclass of long-term distributions and federal excise tax. The calculation of net investment income per share in the Funds Financial Highlights excludes these adjustments.
Note 7
Subsequent event
On June 25, 2007, John Hancock Advisers, LLC (the Adviser) and John Hancock Funds, LLC (the Distributor) and two of their affiliates (collectively, the John Hancock Affiliates) reached a settlement with the Securities and Exchange Commission that resolved an investigation of certain practices relating to the John Hancock Affiliates variable annuity and mutual fund operations involving directed brokerage and revenue sharing. Under the terms of the settlement, each John Hancock Affiliate was censured and agreed to pay a $500,000 civil penalty to the United States Treasury. In addition, the Adviser and the Distributor agreed to pay disgorgement of $2,087,477 and prejudgment interest of $359,460 to entities, including certain John Hancock Funds, that participated in the Advisers directed brokerage program during the period from 2000 to October 2003. Collectively, all John Hancock Affiliates agreed to pay a total disgorgement of $16,926,420 and prejudgment interest of $2,361,460 to the entities advised or distributed by John Hancock Affiliates. The Adviser discontinued the use of directed brokerage in recognition of the sale of fund shares in October 2003. As a result of this settlement, a gain of $1,050 was recorded by the Fund on June 25, 2007.
Preferred Income Fund III
23
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, 2007, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, 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 audits. We conducted our audits 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 audits, which included confirmation of securities at May 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. 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 27, 2007
24
Tax information
Unaudited
For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund, if any, paid during its taxable year ended May 31, 2007.
The Fund has designated distributions to shareholders of $2,780,588 as a long-term capital gain dividend.
With respect to the ordinary dividends paid by the Fund for the fiscal year ended May 31, 2007, 31.72% 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 2007.
Shareholders will be mailed a 2007 U.S. Treasury Department Form 1099-DIV in January 2008. This will reflect the total of all distributions that are taxable for calendar year 2007.
25
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 amendment to the Funds bylaws increasing the maximum applicable dividend rate ceiling on the preferred shares to conform with the modern calculation methodology used by the industry and other John Hancock funds.
Dividends and distributions
During the year ended May 31, 2007, dividends from net investment income totaling $1.5840 and distributions from capital gains totaling $0.0717 per share were paid to shareholders.
The dates of payments and the amounts per share are as follows:
INCOME | |
PAYMENT DATE | DIVIDEND |
| |
June 30, 2006 | $0.1320 |
July 31, 2006 | 0.1320 |
August 31, 2006 | 0.1320 |
September 29, 2006 | 0.1320 |
October 31, 2006 | 0.1320 |
November 30, 2006 | 0.1320 |
December 29, 2006 | 0.1320 |
January 31, 2007 | 0.1320 |
February 28, 2007 | 0.1320 |
March 30, 2007 | 0.1320 |
April 30, 2007 | 0.1320 |
May 31, 2007 | 0.1320 |
CAPITAL GAIN | |
DISTRIBUTION | |
| |
December 29, 2007 | $0.0717 |
Dividend reinvestment plan
The Fund offers its shareholders a Dividend Reinvestment Plan (the Plan), which offers the opportunity to earn compounded yields. Each holder of common shares will automatically have all distributions of dividends and capital gains reinvested by Mellon Investor Services, as Plan Agent for the common shareholders (the Plan Agent), unless an election is made to receive cash. Holders of common shares who elect not to participate in the Plan will receive all distributions in cash, paid by check mailed directly to the shareholder of record (or, if the common shares are held in street or other nominee name, then to the nominee) by the Plan Agent, as dividend disbursing agent. Shareholders whose shares are held in the name of a broker or a nominee should contact the broker or nominee to determine whether and how they may participate in the Plan.
If the Fund declares a dividend payable either in common shares or in cash, non-participants will receive cash and participants in the Plan will receive the equivalent in common shares. If the market price of the common shares on the payment date of the dividend is equal to or exceeds their net asset value as determined on the payment date, participants will be issued common shares (out of authorized but unissued shares) at a value equal to the higher of net asset value or 95% of the market price. If the net asset value exceeds the market price of
26
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 confirmations of all transactions in the accounts, including information needed by the shareholders for personal and tax records. The Plan Agent will hold common shares in the account of each Plan participant in non-certificated form in the name of the participant. Proxy material relating to the shareholders meetings of the Fund will include those shares purchased as well as shares held pursuant to the Plan.
The reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable or required to be withheld on such dividends or distributions. Participants under the Plan will receive tax information annually. The amount of dividend to be reported on 1099-DIV should be (1) in the case of shares issued by the Fund, the fair market value of such shares on the dividend payment date and (2) in the case of shares purchased by the Plan Agent in the open market, the amount of cash used by the Plan Agent to purchase shares in the open market, including the amount of cash allocated to brokerage commissions paid on such purchases.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to all shareholders of the Fund at least 90 days before the record date for the dividend or distribution. The Plan may be amended or terminated by the Plan Agent after at least 90 days written notice to all shareholders of the Fund. All correspondence or additional information concerning the Plan should be directed to the Plan Agent, Mellon Bank, N.A., c/o Mellon Investor Services, P.O. Box 3338, South Hackensack, NJ 07606-1938 (Telephone: 1-800-852-0218).
27
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 26, 2007, the Annual Meeting of the Fund was held to elect three Trustees.
Proxies covering 28,067,546 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 (there were no current nominees for election by the preferred shareholders), with the votes tabulated as follows:
WITHHELD | ||
FOR | AUTHORITY | |
| ||
James R. Boyle | 27,597,848 | 469,698 |
Steven R. Pruchansky | 27,615,833 | 451,713 |
The preferred shareholders elected Patti McGill Peterson as a Trustee of the Fund until her successor is duly elected and qualified, with the votes tabulated as follows: 12,877 FOR and 93 ABSTAINING.
28
Board Consideration of and
Continuation of Investment Advisory
Agreement and Subadvisory
Agreement: John Hancock Preferred
Income Fund III
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: (i) the investment advisory agreement (the Advisory Agreement) with John Hancock Advisers, LLC (the Adviser) and (ii) the investment subadvisory agreement (the Subadvisory Agreement) with MFC Global Investment Management (U.S.), LLC (the Subadviser). The Advisory Agreement and the Subadvisory Agreement are collectively referred to as the Advisory Agreements.
At meetings held on May 12 and June 56, 2006,1 the Board considered the factors and reached the conclusions described below relating to the selection of the Adviser and Subadviser and the continuation of the Advisory Agreements. 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 Agreements, 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: (i) the investment performance of the Fund and a peer group of comparable funds (the Peer Group) selected by Morningstar, Inc. (Morningstar), an independent provider of investment company data, for a range of periods ended December 31, 2005;2 (ii) advisory and other fees incurred by, and the expense ratios of, the Fund relative to a Peer Group; (iii) the Advisers financial results and condition, including its and certain of its affiliates profitability from services performed for the Fund; (iv) breakpoints in the Funds and the Peer Groups fees and information about economies of scale; (v) the Advisers and Subadvisers record of compliance with applicable laws and regulations, with the Funds investment policies and restrictions and with the applicable Code of Ethics, and the structure and responsibilities of the Advisers and Subadvisers compliance department; (vi) the background and experience of senior management and investment professionals and (vii) the nature, cost and character of advisory and non-investment management services provided by the Adviser and its affiliates and by the Subadviser.
The Boards review and conclusions were based on a comprehensive consideration of all information presented to the Board and not the result of any single controlling factor. It was based on performance and other information as of December 31, 2005; facts may have changed between that date and the date of this shareholders report. The key factors considered by the Board and the conclusions reached are described below.
Nature, extent and quality of services
The Board considered the ability of the Adviser and the Subadviser, based on their 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 and Subadviser. 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 and Subadviser were sufficient to support renewal of the Advisory Agreements.
Fund performance
The Board considered the performance results for the Fund over various time periods ended December 31, 2005. The Board also considered these results in comparison to the performance of the Peer Group, as well as the Funds benchmark index. Morningstar determined the Peer Group
29
for the Fund. The Board reviewed with a representative of Morningstar the methodology used by Morningstar to select the funds in the Peer Group. The Board noted the imperfect comparability of the Peer Group and that Morningstar was not able to select a comparative Category for the Fund.
The Board recognized the relatively short operational history of the Fund and noted that the Funds performance during the one-year period was lower than the performance of the median of the Peer Group and higher than the performance of its benchmark index, the Merrill Lynch Preferred Stock Hybrid Securities Index. The Board indicated its intent to continue to monitor the Funds performance trends.
Investment advisory fee and subadvisory 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). The Board received and considered information comparing the Advisory Agreement Rate with the advisory fees for the Peer Group. The Board noted that the Advisory Agreement Rate was lower than the median rate of the Peer Group.
The Board received and considered expense information regarding the Funds various components, including advisory fees, and other non-advisory fees, including transfer agent fees, custodian fees and other miscellaneous fees (e.g., fees for accounting and legal services). The Board considered comparisons of these expenses to the Peer Group median. The Board also received and considered expense information regarding the Funds total operating expense ratio (Gross Expense Ratio) and total operating expense ratio after taking the fee waiver arrangement applicable to the Advisory Agreement Rate into account (Net Expense Ratio). The Board received and considered information comparing the Gross Expense Ratio and Net Expense Ratio of the Fund to that of the Peer Group. The Board noted that the Funds Gross and Net Expense Ratios were lower than the median of the Peer Group.
The Adviser also discussed the Morningstar 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 performance and expenses supported the re-approval of the Advisory Agreements.
The Board also received information about the investment subadvisory fee rate (the Subadvisory Agreement Rate) payable by the Adviser to the Subadviser for investment sub-advisory services. The Board concluded that the Subadvisory Agreement Rate was fair and equitable, based on its consideration of the factors described here.
Profitability
The Board received and considered a detailed profitability analysis of the Adviser based on the Advisory Agreements, as well as on other relationships between the Fund and the Adviser and its affiliates, including the Subadviser. 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 and Subadvisers costs are not specific to individual Funds, but rather are incurred across a variety of products and services.
The Board observed that the Advisory Agreements 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. The Board noted that the Fund, as a closed-end investment company, was not expected to increase materially in size and that its assets would grow (if at all) through the investment performance of the Fund. Therefore, the Board did not consider potential economies of scale
30
as a principal factor in assessing the fees payable under the Advisory Agreements, but concluded that the fees were fair and equitable based on relevant factors.
Other benefits to the Adviser
The Board received information regarding potential fall-out or ancillary benefits 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, Subadvisers and 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 and Subadviser as part of the annual re-approval process. 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 and Subadviser at least quarterly, which include, among other things, 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 Agreements for the Fund was in the best interest of the Fund and its shareholders. Accordingly, the Board unanimously approved the continuation of the Advisory Agreements.
1 The Board previously considered information about the Subadvisory Agreement at the September and December 2005 Board meetings in connection with the Advisers reorganization.
2 Morningstar also provided a comparative analysis for most, but not all of the John Hancock Funds, of the investment performance and advisory and other fees incurred by, and the expense ratios of, the John Hancock Funds relative to a broader category of relevant funds (the Category). Morningstar advised the Board that it was not able to select a comparative Category for the John Hancock Preferred Income Fund III. Therefore, Morningstar did not provide a broader Category analysis; instead, it provided only the narrower Peer Group analysis.
31
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-today 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, 2007.
Gregory K. Phelps
Senior Vice President, MFC Global Investment Management (U.S.), LLC since 2005
Senior Vice President, John Hancock Advisers, LLC (19952005)
Began business career in 1981
Joined fund team in 2003
Fund ownership $1$10,000
Mark T. Maloney
Vice President, MFC Global Investment Management (U.S.), LLC since 2005
Vice President, John Hancock Advisers, LLC (19822005)
Began business career in 1976
Joined fund team in 2003
Fund ownership $1$10,000
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, 2007. 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 institutional accounts.
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: 7 funds with assets of |
approximately $4.1 billion. | |
Other Pooled Investment Vehicles: 2 accounts with assets of | |
approximately $46 million. | |
Other Accounts: None | |
Mark T. Maloney | Other Investment Companies: 7 funds with assets of |
approximately $4.1 billion. | |
Other Pooled Investment Vehicles: 2 accounts with assets of | |
approximately $46 million. | |
Other Accounts: None |
The Adviser does not receive a fee based upon the investment performance of any of the accounts included under Other Accounts Managed by the Portfolio Managers in the table above.
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 Subadviser have adopted procedures, overseen by the Chief Compliance Officer, that are intended to monitor compliance with the policies referred to in the following paragraphs.
The Subadviser 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.
32
When a portfolio manager intends to trade the same security for more than one account, the policies of the Subadviser 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 Subadviser 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 Subadviser receives a performance-based fee with respect to other accounts managed by the Funds portfolio managers.
The Subadviser 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 Subadviser 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 Subadviser 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 Subadviser, 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 Subadviser. A limited number of senior portfolio managers, who serve as officers of both the Subadviser 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 Subadviser 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 Subadvisers 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 Subadviser 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.
33
Trustees and 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, Year of Birth | 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 | 60 |
| ||
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 | 60 |
| ||
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); Chairman and Chief Executive Officer, | ||
Carlin Consolidated, Inc. (management/investments) (since 1987); Trustee, | ||
Massachusetts Health and Education Tax Exempt Trust (19932003). | ||
| ||
William H. Cunningham, Born: 1944 | 2003 | 60 |
| ||
Former Chancellor, University of Texas System and former President of the | ||
University of Texas, Austin, Texas; Chairman and Chief Executive Officer, 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 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 (since 2000), Introgen (since 2000) | ||
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, JPMorgan Chase Bank | ||
(formerly Texas Commerce BankAustin), LIN Television (since 2002), WilTel | ||
Communications (until 2003) and Hayes Lemmerz International, Inc. (diversified | ||
automotive parts supply company) (since 2003). |
34
Independent Trustees (continued) | ||
Name, Year of Birth | 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 |
Charles L. Ladner, 2 Born: 1938 | 2003 | 60 |
| ||
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, | ||
AmeriGas, Inc. (retired 1998); Director, AmeriGas Partners, L.P. (gas distribu- | ||
tion) (until 1997); Director, EnergyNorth, Inc. (until 1995); Director, Parks and | ||
History Association (until 2005). | ||
John A. Moore,2 Born: 1939 | 2003 | 60 |
| ||
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 Center for Health Science Research | ||
(nonprofit research) (20022006). | ||
Patti McGill Peterson,2 Born: 1943 | 2003 | 60 |
| ||
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, 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 | 60 |
| ||
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). | ||
Non-Independent Trustee3 | ||
Name, Year of Birth | 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 | 264 |
| ||
President, John Hancock Insurance Group; 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); Senior Vice President, The Manufacturers Life Insurance | ||
Company (U.S.A.) (until 2004). |
35
Principal officers who are not Trustees | |
Name, Year of Birth | |
Position(s) held with Fund | Officer |
Principal occupation(s) and other | 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, The Berkeley Group, | |
John Hancock Funds, LLC (since 2005); Director, MFC Global Investment | |
Management (U.S.), LLC (MFC Global (U.S.)) (since 2005); Director, John | |
Hancock Signature Services, Inc. (since 2005); President and Chief Executive | |
Officer, John Hancock Investment Management Services, LLC (since 2006); | |
President and Chief Executive Officer, John Hancock Funds, John Hancock | |
Funds II, John Hancock Funds III and John Hancock Trust (since 2005); | |
Director, Chairman and President, NM Capital Management, Inc. (since 2005); | |
Chairman, Investment Company Institute Sales Force Marketing Committee | |
(since 2003); Director, President and Chief Executive Officer, MFC Global (U.S.) | |
(20052006); Executive Vice President, John Hancock Funds, LLC (until 2005). | |
Thomas M. Kinzler, Born: 1955 | 2006 |
| |
Secretary and Chief Legal Officer | |
Vice President and Counsel, John Hancock Life Insurance Company (U.S.A.) | |
(since 2006); Secretary and Chief Legal Officer, John Hancock Funds, John | |
Hancock Funds II and John Hancock Funds III; Vice President and Associate | |
General Counsel, Massachusetts Mutual Life Insurance Company (1999 | |
2006); Secretary and Chief Legal Counsel, MML Series Investment Fund | |
(20002006); Secretary and Chief Legal Counsel, MassMutual Institutional | |
Funds (20002004); Secretary and Chief Legal Counsel, MassMutual Select | |
Funds and MassMutual Premier Funds (20042006). | |
Francis V. Knox, Jr., Born: 1947 | 2005 |
| |
Chief Compliance Officer | |
Vice President and Chief Compliance Officer, John Hancock Investment | |
Management Services, LLC, the Adviser and MFC Global (U.S.) (since 2005); | |
Vice President and Chief Compliance Officer, John Hancock Funds, 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). | |
Charles A. Rizzo, Born: 1957 | 2007 |
| |
Chief Financial Officer | |
Chief Financial Officer, John Hancock Funds, John Hancock Funds II, John | |
Hancock Funds III and John Hancock Trust (June 2007Present); Assistant | |
Treasurer, Goldman Sachs Mutual Fund Complex (registered investment | |
companies) (2005June 2007); Vice President, Goldman Sachs (2005 | |
June 2007); Managing Director and Treasurer of Scudder Funds, Deutsche | |
Asset Management (20032005); Director, Tax and Financial Reporting, | |
Deutsche Asset Management (20022003); Vice President and Treasurer, | |
Deutsche Global Fund Services (19992002). |
36
Principal officers who are not Trustees (continued) | |
Name, Year of Birth | |
Position(s) held with Fund | Officer |
Principal occupation(s) and other | of fund |
directorships during past 5 years | since |
Gordon M. Shone, Born: 1956 | 2006 |
| |
Treasurer | |
Treasurer, John Hancock Funds (since 2006), John Hancock Funds II, John | |
Hancock Funds III and John Hancock Trust (since 2005); Vice President and | |
Chief Financial Officer, John Hancock Trust (20032005); Senior Vice President, | |
John Hancock Life Insurance Company (U.S.A.) (since 2001); Vice President, | |
John Hancock Investment Management Services, Inc., John Hancock Advisers, | |
LLC (since 2006) and The Manufacturers Life Insurance Company (U.S.A.) | |
(19982000). | |
John G. Vrysen, Born: 1955 | 2005 |
| |
Chief Operating Officer | |
Senior Vice President, Manulife Financial Corporation (since 2006); Director, | |
Executive Vice President and Chief Operating Officer, the Adviser, The Berkeley | |
Group and John Hancock Funds, LLC (June 2007Present); Chief Operating | |
Officer, John Hancock Funds, John Hancock Funds II, John Hancock Funds III | |
and John Hancock Trust (June 2007Present); Director, Executive Vice | |
President and Chief Financial Officer, the Adviser, The Berkeley Group and | |
John Hancock Funds, LLC (until June 2007); Executive Vice President and Chief | |
Financial Officer, John Hancock Investment Management Services, LLC (since | |
2005), Vice President and Chief Financial Officer, MFC Global (U.S.) (since | |
2005); Director, John Hancock Signature Services, Inc. (since 2005); Chief | |
Financial Officer, John Hancock Funds, John Hancock Funds II, John Hancock | |
Funds III and John Hancock Trust (2005June 2007); Vice President and | |
General Manager, Fixed Annuities, U.S. Wealth Management (until 2005); Vice | |
President, Operations, Manulife Wood Logan (20002004). |
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 and Compliance Committee.
3 Non-Independent Trustee holds positions with the Funds investment adviser, underwriter and certain other affiliates.
37
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 public |
John Hancock Advisers, LLC | common shareholders | 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 | |
Subadviser | Jersey City, NJ 07310 | |
MFC Global Investment | Stock symbol | |
Management (U.S.), LLC | Transfer agent for | Listed New York Stock |
101 Huntington Avenue | preferred shareholders | Exchange: HPS |
Boston, MA 02199 | Deutsche Bank Trust | |
Company Americas | For shareholder assistance | |
Custodian | 280 Park Avenue | refer to page 28. |
The Bank of New York | New York, NY 10017 | |
One Wall Street | ||
New York, NY 10286 | Legal counsel | |
Kirkpatrick & Lockhart | ||
Preston Gates Ellis LLP | ||
One Lincoln Street | ||
Boston, MA 02111-2950 | ||
How to contact us | ||
| ||
Internet | www.jhfunds.com | |
| ||
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 SECs Web site, www.sec.gov.
40
J O H N H A N C O C K F A M I L Y O F F U N D S
EQUITY | INTERNATIONAL |
Balanced Fund | Greater China Opportunities Fund |
Classic Value Fund | International Allocation Portfolio |
Classic Value Fund II | International Classic Value Fund |
Classic Value Mega Cap Fund | International Core Fund |
Core Equity Fund | International Growth Fund |
Global Opportunities Fund | |
Global Shareholder Yield Fund | INCOME |
Growth Fund | Bond Fund |
Growth Opportunities Fund | Government Income Fund |
Growth Trends Fund | High Yield Fund |
Intrinsic Value Fund | Investment Grade Bond Fund |
Large Cap Equity Fund | Strategic Income Fund |
Large Cap Select Fund | |
Mid Cap Equity Fund | TAX-FREE INCOME |
Multi Cap Growth Fund | California Tax-Free Income Fund |
Small Cap Equity Fund | High Yield Municipal Bond Fund |
Small Cap Fund | Massachusetts Tax-Free Income Fund |
Small Cap Intrinsic Value Fund | New York Tax-Free Income Fund |
Sovereign Investors Fund | Tax-Free Bond Fund |
U.S. Core Fund | |
U.S. Global Leaders Growth Fund | MONEY MARKET |
Value Opportunities Fund | Money Market Fund |
U.S. Government Cash Reserve | |
ASSET ALLOCATION | |
Allocation Core Portfolio | CLOSED-END |
Allocation Growth + Value Portfolio | Bank and Thrift Opportunity Fund |
Lifecycle 2010 Portfolio | Financial Trends Fund, Inc. |
Lifecycle 2015 Portfolio | Income Securities Trust |
Lifecycle 2020 Portfolio | Investors Trust |
Lifecycle 2025 Portfolio | Patriot Premium Dividend Fund II |
Lifecycle 2030 Portfolio | Patriot Select Dividend Trust |
Lifecycle 2035 Portfolio | Preferred Income Fund |
Lifecycle 2040 Portfolio | Preferred Income II Fund |
Lifecycle 2045 Portfolio | Preferred Income III Fund |
Lifecycle Retirement Portfolio | Tax-Advantaged Dividend Income Fund |
Lifestyle Aggressive Portfolio | |
Lifestyle Balanced Portfolio | |
Lifestyle Conservative Portfolio | |
Lifestyle Growth Portfolio | |
Lifestyle Moderate Portfolio | |
SECTOR | |
Financial Industries Fund | |
Health Sciences Fund | |
Real Estate Fund | |
Regional Bank Fund | |
Technology Fund | |
Technology Leaders Fund |
The Funds investment objectives, risks, charges and expenses are included in the prospectus and should be considered carefully before investing. For a prospectus, call your financial professional, call John Hancock Funds at 1-800-225-5291 or visit the Funds Web site at www.jhfunds.com. Please read the prospectus carefully before investing or sending money.
PRESORTED
STANDARD
U.S. POSTAGE
PAID
MIS
1-800-225-0218
1-800-231-5469 TDD
1-800-843-0090 EASI-Line
www.jhfunds.com
P120A | 5/07 |
7/07 |
ITEM 2. CODE OF ETHICS.
As of the end of the period, May 31, 2007, 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.
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 $25,800 for the fiscal year ended May 31, 2006 and $25,800 for the fiscal year ended May 31, 2007. 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, 2006 and fiscal year ended May 31, 2007 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 $3,700 for the fiscal year ended May 31, 2006 and $3,700 for the fiscal year ended May 31, 2007. 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 $3,000 for the fiscal year ended May 31, 2006 and $3,000 for the fiscal year ended May 31, 2007. There were no other fees during the fiscal year ended May 31, 2006 and May 31, 2007 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, 2006 and May 31, 2007 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, 2007, 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 $10,000 for the fiscal year ended May 31, 2006, and $3,264,859 for the fiscal year ended May 31, 2007.
(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
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 - Governance 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 - Governance 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 23, 2007
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 23, 2007
By: /s/ Charles A. Rizzo
-------------------------------------
Charles A. Rizzo
Chief Financial Officer
Date: July 23, 2007