================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
Patriot
Premium
Dividend
Fund II
SEMI-ANNUAL REPORT
April 30, 1996
<PAGE>
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TRUSTEES
EDWARD J. BOUDREAU, JR.
THOMAS W.L. CAMERON
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
ANNE C. HODSDON
CHARLES L. LADNER*
LEO E. LINBECK, JR.*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN J. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
JOHN A. MORIN
Vice President and Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
CUSTODIAN AND TRANSFER AGENT FOR
COMMON SHAREHOLDERS
STATE STREET BANK AND TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TRANSFER AGENT FOR DARTS
CHEMICAL BANK
450 WEST 33RD STREET
NEW YORK, NEW YORK 10001
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
LISTED NEW YORK STOCK EXCHANGE SYMBOL:PDT
THE PATRIOT GROUP OF FUNDS: 1-800-843-0090
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders -- technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place -- slow economic growth, muted inflation and decent corporate earnings --
it would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
No matter how you scale back your market expectations, you should always be
able to count on consistent customer service performance. At John Hancock Funds,
we never stop working to find ways to sustain and improve the quality of
information and assistance we provide you. Our commitment to this task is no
less than John Hancock's loyalty was to his fledgling country when he is said to
have uttered, "if it does the public good, burn Boston." We won't go that far,
of course, but we share our namesake's dedication to putting the public before
all else.
In our case, that public is you, our shareholders. We take very seriously
the role you have entrusted to us, that of helping you achieve your financial
goals. Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY GREGORY K. PHELPS,
FOR THE PORTFOLIO MANAGEMENT TEAM
Patriot Premium
Dividend Fund II
Recent period a mixed bag as rising
interest rates reverse earlier gains
Nineteen ninety-five was one of the best years on record for income investors.
As late as last November, when the Fund's six-month period began, optimism among
market participants was still high. The economy was growing at a steady but
moderate rate, inflation was tame and prospects for a balanced-budget agreement
between Congress and the White House were encouraging. The Federal Reserve did
nothing to dispel that optimism when it lowered short-term interest rates in
December and January. But after soaring to double-digit returns in 1995, the
bond market retreated during the first quarter of 1996, driven back by renewed
strength in the economy, rising interest rates and an abundant supply of new
issues. Three factors sparked the downturn. First was the Fed's semiannual
auction of 30-year Treasury bonds, which inundated the market with new supply.
Second, there was a broad increase in corporate debt issuance, which aggravated
the supply imbalance. Third was the infamous February employment report, the
strength of which so surprised analysts that the bond market suffered its
biggest one-day decline in more than five years.
Utility stocks -- the focus of the Fund's investment strategy -- held up
surprisingly well for most of the period, but ultimately got caught
"...the bond market retreated during the first quarter of 1996."
[A 2 1/2" x 3 1/2" photo of the Patriot management team. Caption reads: "The
Patriot management team: (L-R) Beverly Cleathero, Gregory Phelps, Laura
Provost".]
3
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John Hancock Funds - Patriot Premium Dividend Fund II
[Pie chart with heading "Portfolio Diversification" at top of left column. The
pie is divided into five sections. From left to right: Common Stock Utilities
32%; Short-Term Investments & Other 4%; Preferred Stock Utilities 33%;
Industrials 13%; and Financials 18%. A footnote below reads: "As a percentage of
net assets on April 30, 1996."]
"...we increased the Fund's emphasis on preferred stocks..."
in the bond-market downdraft. The upshot was a two-tone semiannual period for
John Hancock Patriot Premium Dividend Fund II: a continuing surge in the first
half, followed by a correction in the second half. Overall, during the six
months that ended April 30, 1996, the Fund had a total return of -0.28% at net
asset value, compared to 0.85% for the Dow Jones Utility Average and 3.64% for
the average income-oriented, closed-end equity fund, according to Lipper
Analytical Services.
Strategy recap
Throughout 1995, we increased the Fund's emphasis on preferred stocks --
gradually at first, then more aggressively later in the year, as we began
preparing for the possibility of rising interest rates. As rates started upward,
our main goal became preserving the Fund's net asset value. Preferreds help us
do that, especially so-called "cushion preferreds," which have particularly high
yields. At the end of the period, preferred stocks totaled 63% of the Fund's net
assets, compared to 62% at the beginning of the period.
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers. The first listing is Coastal
Corp. followed by an up arrow and the phrase "Paying down debt." The second
listing is NIPSCO Capital Markets followed by an up arrow and the phrase "Recent
credit upgrade." The third listing is Public Service of New Hampshire followed
by a down arrow and the phrase "Regulatory pressure." Footnote below reads: "See
"Schedule of Investments." Investment holdings are subject to change."]
In choosing preferreds, we looked for three qualities: an attractive yield,
eligibility for the dividends received deduction (DRD) and good call protection.
The important thing to know about DRD-eligible securities is that they offer
distinct tax advantages to corporate investors yet are increasingly rare, which
supports higher prices. Call protection is a guarantee on the part of an issuer
that the security won't be redeemed prematurely. We prefer issues with at least
two years of call protection. A good example of a preferred stock that met all
three of those criteria and performed well for the Fund was Coastal Corp., an
oil and gas exploration and refining company. We added to the Fund's existing
stake in Coastal Corp. during the period, shortly before it was put on a
credit-upgrade watch by Standard & Poor's. Coastal Corp. turned in solid
earnings growth in 1995 and should benefit in the months ahead from the decision
to sell its coal assets to pay down debt.
Utilities totaled 65% of the Fund's net assets at the end of the period.
The most interesting story was an unusual, non-DRD-eligible security issued in
early February by NIPSCO Capital Markets, part of NIPSCO Industries, an electric
utility. It appeared in the midst of a flood of corporate issuance, and
initially got swamped. Consequently, we were able to buy a significant stake at
an attractive discount. Soon afterwards, NIPSCO received a credit-rating
upgrade, the stock's price recovered and the Fund profited.
4
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John Hancock Funds - Patriot Premium Dividend Fund II
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the six months ended April 30, 1996." The chart is
scaled in increments of 2% from top to bottom, with 4% at the top and -4% at the
bottom. Within the chart, there are three solid bars. The first represents the
- -0.28% total return for John Hancock Patriot Premium Dividend Fund II. The
second represents the 0.85% total return for the Dow Jones Utility Average. The
third represents the 3.64% total return for average income-oriented closed-end
equity fund. Footnote below reads: "The total return for John Hancock Patriot
Premium Dividend Fund II is at net asset value with all distributions
reinvested. The average income-oriented, closed-end equity fund is tracked by
Lipper Analytical Services.(1) The Dow Jones Utility Average is an unmanaged
index, which measures the performance of the utility industry in the United
States."]
A utility that has not worked out so well is Public Service Co. of New Hampshire
(PSNH). On the plus side, PSNH is DRD-eligible and carries an attractive 10.60%
yield. On the minus side, it's a subsidiary of Northeast Utilities, which has
been under a cloud lately because of its large investment in nuclear power. PSNH
also faces stiff regulatory pressure in New Hampshire. Fortunately, the issue we
own is a so-called "sinking fund preferred," for which PSNH must begin redeeming
its securities at the original-issue price next year. Meanwhile, we'll continue
to benefit from the double-digit yield.
Financial stocks totaled 18% of the Fund's net assets. Our favorites
included a rare DRD-eligible security newly issued by Salomon, Inc. in February.
It has five years of call protection and an 8.40% yield. It has held its own
quite well in the face of rising rates.
Outlook
Our outlook for the next six months is guarded. Happily, inflation remains at
most a minor threat, which bodes well for interest rates. That's good news for
bonds and income-producing stocks, whose prices tend to rise as interest rates
fall. Utilities, with their large capital requirements, benefit further from low
borrowing costs in the absence of inflation. The Fed, meanwhile, probably won't
lower rates again anytime soon, but neither is it likely to raise rates,
especially in an election year. That said, after the year enjoyed by bonds and
income-producing stocks in 1995, it would be unreasonable to expect another
outstanding year in 1996. Our more modest goal going forward will be to preserve
the Fund's net asset value while maximizing yield.
"Our outlook for the next six months is guarded."
- --------------------------------------------------------------------------------
(1)Source: Lipper Analytical Services
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
5
<PAGE>
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Financial Statements
John Hancock Funds - Patriot Premium Dividend Fund II
Statement of Assets and Liabilities
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Preferred stocks (cost - $170,533,362) .................... $ 171,645,526
Common stocks (cost - $87,975,404) ........................ 86,284,325
Capital securities (cost - $2,349,200) .................... 2,442,100
Short-term notes (cost - $8,289,795) ...................... 8,289,795
-------------
268,661,746
Receivable for investments sold ............................. 1,822,500
Dividends receivable ........................................ 1,247,522
Other assets ................................................ 19,135
-------------
Total Assets .............. 271,750,903
-------------------------------------------
Liabilities:
DARTS dividend payable ...................................... 183,451
Payable for investments purchased ........................... 177,625
Payable to John Hancock Advisers, Inc. - Note B ............. 221,739
Accounts payable and accrued expenses ....................... 31,938
-------------
Total Liabilities ......... 614,753
-------------------------------------------
Net Assets:
Dutch Auction Rate Transferable Securities Preferred
Stock Series A (DARTS) - Without par value, unlimited
number of shares of beneficial interest authorized,
500 shares issued, liquidation preference of
$100,000 per share - Note A ............................... 50,000,000
Dutch Auction Rate Transferable Securities Preferred
Stock Series B (DARTS) - Without par value, unlimited
number of shares of beneficial interest authorized,
500 shares issued, liquidation preference of
$100,000 per share - Note A ............................... 50,000,000
Common Shares - Without par value, unlimited
number of shares of beneficial interest authorized,
15,002,724 shares issued and outstanding .................. 166,459,166
Accumulated net realized gain on investments ................ 840,244
Net unrealized depreciation of investments .................. (484,578)
Undistributed net investment income ......................... 4,321,318
-------------
Net Assets Applicable to
Common Shares ($11.41 per
share based on 15,002,724
shares outstanding) ....... 171,136,150
-------------------------------------------
Net Assets ................ $ 271,136,150
===========================================
The Statement of Assets and Liabilities is the Fund's balance sheet on April 30,
1996. You'll also find the net asset value per share, for each Common Share, as
of that date.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes
of $34,499) ................................................ $ 10,635,194
Interest ..................................................... 99,807
------------
10,735,001
------------
Expenses:
Investment management fee - Note B ......................... 1,231,443
DARTS and auction fees ..................................... 159,593
Federal excise tax ......................................... 153,481
Administration fee - Note B ................................ 138,842
Custodian fee .............................................. 35,803
Printing ................................................... 33,691
Auditing fee ............................................... 26,781
Transfer agent fee ......................................... 21,698
Trustees' fees ............................................. 19,691
Miscellaneous .............................................. 18,239
Legal fees ................................................. 5,110
------------
Total Expenses ............. 1,844,372
-------------------------------------------
Net Investment Income ...... 8,890,629
-------------------------------------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ........................ 2,156,758
Change in net unrealized appreciation/depreciation
of investments ............................................. (9,245,242)
------------
Net Realized and Unrealized
Loss on Investments ........ (7,088,484)
-------------------------------------------
Net Increase in Net Assets
Resulting from Operations .. $ 1,802,145
===========================================
Distributions to DARTS ..... (2,115,486)
-------------------------------------------
Net Decrease in Net Assets Applicable
to Common Shareholders Resulting
from Operations Less DARTS
Distributions .............. ($313,341)
===========================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31
(UNAUDITED) 1995
------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .......................................................... $ 8,890,629 $ 19,650,347
Net realized gain (loss) on investments sold ................................... 2,156,758 (870,125)
Change in net unrealized appreciation/depreciation of investments .............. (9,245,242) 31,160,232
------------- -------------
Net Increase in Net Assets Resulting from Operations ......................... 1,802,145 49,940,454
------------- -------------
Distributions to Shareholders:
DARTS Series A ($2,112 and $4,474 per share, respectively) - Note A ............ (1,056,031) (2,237,124)
DARTS Series B ($2,119 and $4,492 per share, respectively) - Note A ............ (1,059,455) (2,245,808)
Common Shares - Note A
Dividends from accumulated net investment income ($0.4500 and $0.8250 per share,
respectively) ................................................................ (6,750,985) (12,376,834)
------------- -------------
Total Distributions to Shareholders .......................................... (8,866,471) (16,859,766)
------------- -------------
Net Assets:
Beginning of period ............................................................ 278,200,476 245,119,788
------------- -------------
End of period (including undistributed net investment income of $4,321,318 and
$4,297,160 respectively) ..................................................... $ 271,136,150 $ 278,200,476
============= =============
*Analysis of Common Shareholder Transactions:
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period ............... 15,002,724 $ 166,459,166 15,002,724 $ 166,554,224
Reclassification of undistributed net investment income -- -- -- (95,058)
------------- ------------- ------------- -------------
Shares outstanding, end of period ..................... 15,002,724 $ 166,459,166 15,002,724 $ 166,459,166
============= ============= ============= =============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses and distributions paid
to shareholders. The footnote illustrates any reclassifications of share capital
amounts, the number of Common Shares outstanding at the beginning and end of the
period, for the last two periods, along with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
7
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
Financial Highlights
Selected data for a Common Share outstanding throughout the periods indicated,
investment returns, key ratios and supplemental data are listed as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 1996 -------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(a) 1991
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................... $ 11.88 $ 9.67 $ 13.65 $ 12.28 $ 11.38 $ 9.69
-------- -------- -------- -------- -------- --------
Net Investment Income ..................................... 0.59 1.31 1.10 1.13 1.18 1.28
Net Realized and Unrealized Gain (Loss) on Investments .... (0.47) 2.02 (3.61) 1.80 0.81 1.59
-------- -------- -------- -------- -------- --------
Total from Investment Operations ........................ 0.12 3.33 (2.51) 2.93 1.99 2.87
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends to DARTS Shareholders ........................... (0.14) (0.30) (0.22) (0.21) (0.19) (0.28)
Dividends to Common Shareholders from Net Investment Income (0.45) (0.82) (0.93) (0.86) (0.90) (0.90)
Distributions to Common Shareholders from Net Realized
Short-term Capital Gains on Investments ................. -- -- (0.32) (0.49) -- --
-------- -------- -------- -------- -------- --------
Total Distributions ..................................... (0.59) (1.12) (1.47) (1.56) (1.09) (1.18)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ............................ $ 11.41 $ 11.88 $ 9.67 $ 13.65 $ 12.28 $ 11.38
======== ======== ======== ======== ======== ========
Per Share Market Value, End of Period ..................... $ 10.750 $ 10.750 $ 8.875 $ 12.625 $ 11.375 $ 10.50
Total Investment Return, at Market Value .................. 4.15%(e) 31.24% (20.91%) 22.06% 17.10% 12.03%
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period
(000's omitted) ......................................... $171,136 $178,200 $145,120 $204,768 $184,253 $170,701
Ratio of Expenses to Average Net Assets * ................. 1.33%(f) 1.33% 1.27% 1.28% 1.33% 1.38%
Ratio of Net Investment Income to Average Net Assets * .... 6.40%(f) 7.58% 6.20% 5.53% 6.60% 8.13%
Portfolio Turnover Rate ................................... 15% 87% 52% 57% 99% 157%
Average Broker Commission Rate (per share of security) (g) $ 0.06 N/A N/A N/A N/A N/A
Senior Securities
Total DARTS Series A Outstanding (000's omitted) .......... $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Total DARTS Series B Outstanding (000's omitted) .......... $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Asset Coverage per Unit (c) ............................... $269,790 $276,974 $244,639 $307,595 $285,078 $268,819
Involuntary Liquidation Preference DARTS A per Unit (d) ... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Involuntary Liquidation Preference DARTS B per Unit (d) ... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Approximate Market Value per Unit (d) ..................... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
</TABLE>
* Ratios calculated on the basis of expenses and net investment income
applicable to both common and preferred shares relative to the average net
assets for both common and preferred shares.
(a) Prior to the assumption of the advisory contract on May 6, 1992 by John
Hancock Advisers, Inc., the Fund was advised by Patriot Advisers, Inc.
(b) Initial capitalization, net of offering expenses.
(c) Calculated by subtracting the Fund's total liabilities (not including the
DARTS) from the Fund's total assets and dividing such amount by the number
of DARTS outstanding as of the applicable 1940 Act Evaluation Date.
(d) Plus accumulated and unpaid dividends.
(e) Not annualized.
(f) On an annualized basis.
(g) Average broker commission rate (per share of security) as required by
amended disclosure requirements effective September 1, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
Schedule of Investments
April 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
PREFERRED STOCKS
Auto/Truck (3.20%)
Ford Motor Co., 8.25%,
Depositary Shares, Ser B ................... 65,800 $ 1,751,925
General Motors Corp., 9.125%,
Depositary Shares, Ser B ................... 50,000 1,368,750
General Motors Corp., 9.12%,
Depositary Shares, Ser G ................... 200,000 5,550,000
-----------
8,670,675
-----------
Banks - U.S. (11.84%)
Ahmanson, H.F. & Co., 9.60%,
Depositary Shares, Ser B ................... 117,900 3,035,925
Ahmanson, H.F. & Co., 8.40%,
Depositary Shares, Ser C ................... 64,900 1,687,400
Bank of Boston Corp., 8.60%,
Depositary Shares, Ser E ................... 146,000 3,777,750
Chase Manhattan Corp., 9.76%, Ser B .......... 26,700 740,925
Chase Manhattan Corp., 8.40%, Ser M .......... 21,345 549,634
Fleet Financial Group, Inc., 9.35% ........... 175,700 4,765,862
Fleet Financial Group, Inc., 7.25%,
Depositary Shares, Ser V ................... 121,000 2,888,875
Fleet Financial Group, Inc.,
Adjustable Rate Preferred ("ARP") .......... 37,500 1,565,625
LaSalle National Corp., 8.75%, Ser K (R) ..... 81,500 4,075,000
J.P. Morgan & Co., 6.625%,
Depositary Shares, Ser H ................... 100,000 4,625,000
Wells Fargo & Co., 9.875%,
Depositary Shares, Ser F ................... 167,700 4,381,162
-----------
32,093,158
-----------
Computer Services (0.29%)
Comdisco, Inc., 8.75%, Ser A ................. 30,900 787,950
-----------
Conglomerate/Diversified (0.53%)
Grand Metropolitan Delaware, 9.42%,
Gtd Ser A .................................. 54,000 1,451,250
-----------
Equipment Leasing (0.49%)
AMERCO, 8.50%, Ser A ......................... 55,300 1,320,288
-----------
Financial Services (2.10%)
Merrill Lynch & Co., 9.00%,
Depositary Shares, Ser A ................... 30,000 855,000
Salomon Inc., 8.40%, Depositary
Shares, Ser E .............................. 50,000 1,243,750
The Schedule of Investments is a complete list of all securities owned by the
Fund on April 30, 1996. It's divided into four main categories: preferred
stocks, common stocks, capital securities, and short-term investments. The
stocks and capital securities are further broken down by industry groups. Under
each industry group is a list of the stocks owned by the Fund. Short-term
investments, which represent the Fund's "cash" position, are listed last.
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
Financial Services (continued)
Salomon Inc., 8.08%, Depositary
Shares, Ser D .............................. 50,000 $ 1,218,750
Source One Mortgage Services Corp.,
8.42%, Ser A ............................... 94,000 2,385,250
-----------
5,702,750
-----------
Insurance (3.05%)
American Life Holding Co., $2.16 ............. 40,000 960,000
Old Republic International Corp.,
8.75%, Ser H ............................... 27,000 695,250
Provident Life & Accident Insurance Co. ......
of America, 8.10%, Depositary Shares ....... 87,800 2,216,950
SunAmerica Inc., 9.25%, Ser B ................ 100,000 2,600,000
Travelers Group, Inc., 9.25%,
Depositary Shares, Ser D ................... 69,200 1,807,850
-----------
8,280,050
-----------
Oil & Gas (6.56%)
Coastal Corp., $2.125, Ser H ................. 163,740 4,154,902
Elf Overseas Ltd., 8.50%,
Gtd Ser A (Cayman Islands) ................. 200,000 5,200,000
ENSERCH Corp., ARP,
Depositary Shares, Ser F ................... 35,000 770,000
Enterprise Oil PLC, 10.50%,
American Depositary Receipt ("ADR"),
Ser A (United Kingdom) ..................... 30,000 772,500
Lasmo PLC, 10.00%, ADR,
Ser A (United Kingdom) ..................... 152,500 3,755,313
Phillips Gas Co., 9.32%, Ser A ............... 120,000 3,120,000
-----------
17,772,715
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
Paper (2.02%)
Boise Cascade Corp., 9.40%, Ser F ............ 93,400 $ 2,428,400
Bowater, Inc., 8.40%,
Depositary Shares, Ser C ................... 120,000 3,060,000
-----------
5,488,400
-----------
Utilities (33.23%)
Appalachian Power Co., 7.40% ................. 14,937 1,471,294
Baltimore Gas & Electric Co., 7.125% ......... 15,000 1,494,375
Baltimore Gas & Electric Co., 6.99% .......... 20,000 1,960,000
Boston Edison Co., 4.78% ..................... 24,739 1,502,894
Central Maine Power Co., 8.875% (R) .......... 16,000 1,480,000
Central Maine Power Co., 7.999%, Ser A ....... 10,000 890,000
Central Power & Light Co., 7.12% ............. 12,096 1,194,480
CL&P Capital, 9.30%, Ser A ................... 35,000 866,250
Columbus Southern Power Co.,
8.375%, Ser A .............................. 140,000 3,517,500
Columbus Southern Power Co., 7.875% .......... 8,000 829,000
Commonwealth Edison Co., $8.40, Ser A ........ 46,696 4,669,600
Commonwealth Edison Co., $8.38 ............... 11,010 1,098,247
Commonwealth Edison Co., $7.24 ............... 21,505 2,042,975
Detroit Edison Co.,
Depositary Shares, 7.75% ................... 80,000 2,030,000
Duke Power Co., 7.85%, Ser S ................. 10,000 1,067,500
Florida Power & Light Co., 6.98%, Ser S ...... 13,021 1,284,196
Florida Power Corp., 7.76% ................... 27,100 2,769,890
Georgia Power Co., $7.80 ..................... 11,190 1,121,798
GTE Florida, Inc., 8.16% ..................... 26,790 2,759,370
GTE North, Inc., $7.60, Ser IND .............. 10,000 1,002,500
Entergy Gulf States Utilities Co.,
$9.96 (formerly Gulf States
Utilities Co.) ............................. 23,250 2,313,375
Entergy Gulf States Utilities Co.,
$8.52 (formerly Gulf States
Utilities Co.) ............................. 18,997 1,795,216
Entergy Gulf States Utilities Co.,
ARP, Depositary Shares, Ser B
(formerly Gulf States Utilities Co.) ....... 34,369 1,619,639
Houston Lighting & Power Co., $8.12 .......... 12,302 1,257,880
Idaho Power Co., 8.375% ...................... 23,800 2,504,950
Idaho Power Co., 7.07% ....................... 14,000 1,379,000
Jersey Central Power & Light Co.,
7.52%, Ser K ............................... 15,000 1,530,000
Mass Electric Co., 6.8400% ................... 42,000 966,000
MCN Michigan Limited Partnership,
9.375%, Ser A .............................. 50,000 1,331,250
Monongahela Power Co., $7.73, Ser L .......... 45,500 4,709,250
Narragansett Electric Co., 6.95% ............. 43,500 1,962,938
Northern States Power Co. of MN, $7.00 ....... 17,050 1,687,950
PacifiCorp, 8.375%, Ser A .................... 25,000 637,500
PECO Energy Co., $7.48 ....................... 13,000 1,300,000
PSI Energy, Inc., 7.44% ...................... 91,900 2,366,425
PSI Energy, Inc., 6.875% ..................... 7,500 705,000
Public Service Co. of NH, 10.60%, Ser A ...... 50,000 1,250,000
Public Service Electric & Gas Co., 6.92% ..... 32,000 2,820,000
Public Service Electric & Gas Co., 6.80% ..... 22,060 2,106,730
Sierra Pacific Power Co., $3.90, Ser C ....... 13,476 667,062
Sierra Pacific Power Co., 7.80%,
Ser 1 (Class A) ............................ 139,688 3,649,349
Texas Utilities Electric Co., $7.98 .......... 31,500 3,244,500
Texas Utilities Electric Co., $1.875,
Depositary Shares, Ser A ................... 82,880 2,092,720
UtiliCorp Capital Limited Partnership,
8.875%, Ser A .............................. 95,000 2,434,375
Utilicorp United, Inc., 2.05% ................ 23,700 595,463
Virginia Electric & Power Co., $6.98 ......... 15,000 1,473,750
Washington Natural Gas Company,
8.50%, Ser III ............................. 158,505 4,081,504
Washington Natural Gas Company,
7.45%, Ser II .............................. 103,861 2,544,594
-----------
90,078,290
-----------
TOTAL PREFERRED STOCKS
(Cost $170,533,362) (63.31%) 171,645,526
------- -----------
SEE NOTES TO FINANCIAL STATEMENTS.
10
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
COMMON STOCKS
Utilities (31.83%)
American Electric Power Co., Inc. ............ 111,000 $ 4,509,375
Boston Edison Co. ............................ 200,000 4,875,000
Central & South West Corp. ................... 13,400 365,150
CINergy Corp. ................................ 170,000 4,930,000
Consolidated Edison Co. of NY, Inc. .......... 289,000 8,489,375
Delmarva Power & Light Co. ................... 95,600 1,876,150
Dominion Resources, Inc. of VA ............... 190,000 7,315,000
DPL, Inc. .................................... 180,000 4,117,500
Florida Progress Corp. ....................... 176,250 5,816,250
Houston Industries, Inc. ..................... 245,600 5,249,700
IES Industries, Inc. ......................... 85,000 2,252,500
MidAmerican Energy Co. ....................... 91,300 1,563,512
Montana Power Co. ............................ 90,000 1,991,250
New England Electric System .................. 127,500 4,494,375
Oklahoma Gas & Electric Co. .................. 90,000 3,397,500
Pacific Enterprises .......................... 70,000 1,802,500
PECO Energy Co. .............................. 50,000 1,243,750
Potomac Electric Power Co. ................... 292,500 7,275,938
Public Service Enterprise Group, Inc. ........ 196,000 5,120,500
Puget Sound Power & Light Co. ................ 175,400 4,165,750
Scana Corp. .................................. 55,000 1,409,375
Southern Co. ................................. 51,000 1,122,000
Southwestern Public Service Co. .............. 70,000 2,231,250
Washington Water Power Co. ................... 37,000 670,625
-----------
TOTAL COMMON STOCKS
(Cost $87,975,404) (31.83%) 86,284,325
------- -----------
CAPITAL SECURITIES
Banks - Foreign (0.50%)
Australia and New Zealand Banking
Group Ltd., 9.125% (Australia) ............. 51,200 1,369,600
-----------
Utilities (0.40%)
NIPSCO Capital Markets, Inc., 7.75% .......... 44,000 1,072,500
-----------
TOTAL CAPITAL SECURITIES
(Cost $2,349,200) (0.90%) 2,442,100
------ -----------
INTEREST PAR VALUE
RATE (000'S OMITTED)
---- ---------------
SHORT-TERM INVESTMENTS
Commercial Paper (3.06%)
Prudential Funding Corp.
05-01-96..................... 5.27% $8,290 8,289,795
------------
TOTAL SHORT-TERM INVESTMENTS (3.06%) 8,289,795
----- ------------
TOTAL INVESTMENTS (99.10%) $268,661,746
====== ============
(R) The securities are 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.
See Note A of the Notes to Financial Statements for valuation policy. Rule
144A securities amounted to $5,555,000 as of April 30, 1996.
Parenthetical disclosure of a foreign country in the security description
represents country of foreign issuer, however, security is U.S. dollar
denominated.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
11
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Patriot Premium Dividend Fund II (the "Fund") is a diversified
closed-end management investment company, registered under the Investment
Company Act of 1940, as amended. Significant accounting policies of the Fund are
as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services,
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date. Interest income on investment securities is
recorded on the accrual basis.
The Fund records all dividends and distributions to shareholders from net
investment income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with federal income tax regulations. Due to
permanent book/tax differences in accounting for certain transactions, this has
the potential for treating certain distributions as return of capital as opposed
to distributions of net investment income or realized capital gains. The Fund
has adjusted for the cumulative effect of such permanent book/tax differences
through October 31, 1995, which has no effect on the Fund's net assets, net
investment income or net realized gains.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues,
and expenses of the Fund.
DUTCH AUCTION RATE TRANSFERABLE SECURITIES PREFERRED STOCK SERIES A AND SERIES B
(DARTS) The Fund issued 598 shares of DARTS Series A and 598 shares of DARTS
Series B concurrently with the issuance of its Common Shares in the public
offering. The underwriting discount was recorded as a reduction of the capital
of the Common Shares. Dividends on the DARTS, which accrue daily, are cumulative
at a rate which was established at the offering of the DARTS and have been reset
every 49 days thereafter by auction. Dividend rates on the DARTS Series A and
Series B ranged from 3.89% to 4.35% and 3.87% to 4.45%, respectively, during the
period ended April 30, 1996. During the period ended October 31, 1990, the Fund
retired 98 shares of DARTS from both Series A and Series B.
The DARTS are redeemable at the option of the Fund, at a redemption price
equal to $100,000 per share, plus accumulated and unpaid dividends on any
dividend payment date. The DARTS are also subject to mandatory redemption at a
redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends, if the Fund is in default on its asset coverage requirements with
respect to the DARTS. If the dividend on the DARTS shall remain unpaid in an
amount equal to two full years' dividends, the holders of the DARTS, as a class,
have the right to elect a majority of the Board of Trustees. In general, the
holders of the DARTS and the Common Shares have equal voting rights of one vote
per share, except that the holders of the DARTS, 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 DARTS and Common
Shares. The DARTS have a liquidation preference of $100,000 per share, plus
accumulated and unpaid dividends. The Fund is required to maintain certain asset
coverage with respects to the DARTS, as defined in the Fund's By-Laws.
12
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the investment management contract, the Fund pays a monthly management fee
to John Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, for a continuous investment program equivalent, on an
annual basis, to the sum of .50 of 1% of the Fund's average weekly net assets,
plus 5% of the Fund's weekly gross income. The Adviser's total fee is limited to
a maximum amount equal to 1% annually of the Fund's average weekly net assets.
For the period ended April 30, 1996, the advisory fee incurred did not exceed
the maximum advisory fee allowed.
The Fund has entered into an administrative agreement with the Adviser
under which the Adviser oversees the custodial, auditing, valuation, accounting,
legal, stock transfer and dividend disbursing services and maintains Fund
communications services with the shareholders. The Adviser receives a monthly
administration fee equivalent, on an annual basis, to .10 of 1% of the Fund's
average weekly net assets.
Each unaffiliated Trustee is entitled, as compensation for his or her
services, to an annual fee plus remuneration for attendance at various meetings.
Messrs. Edward J. Boudreau, Jr., Thomas W. L. Cameron and Richard S.
Scipione and Ms. Anne C. Hodsdon are directors and/or officers of the Adviser
and/or its affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. Effective with the fees paid for
1995, 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 Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At April 30, 1996, the Fund's investments to cover the deferred
compensation liability has unrealized appreciation of $1,437.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended April 30, 1996, aggregated $41,833,419 and $44,107,128, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended April 30, 1996.
The cost of long-term investments owned at April 30, 1996 for federal
income tax purposes was $262,682,350. Gross unrealized appreciation and
depreciation of investments aggregated $5,333,853 and $7,644,252, respectively,
resulting in net unrealized depreciation of $2,310,399 for federal tax purposes.
13
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John Hancock Funds - Patriot Premium Dividend Fund II
INVESTMENT OBJECTIVE AND POLICY
The Fund's investment objective is to provide high current income, consistent
with modest growth of capital for holders of its common shares. The Fund will
pursue its objective by investing in a diversified portfolio of dividend-paying
preferred and common equity securities.
DIVIDEND REINVESTMENT PLAN
The Fund provides shareholders with 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 State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts, 02210, as agent for the common shareholders 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
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,
nonparticipants 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 for the dividend is equal to or exceeds their net asset value as
determined on the payment date, participants will be issued Common Shares (out
of authorized but unissued shares) at a value equal to the higher of net asset
value or 95% of the market price. If the net asset value exceeds the market
price of the Common Shares at such time, or if the Board of Trustees declares a
dividend payable only in cash, the Plan Agent will, as agent for Plan
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participant's 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.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a dividend record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Share credited to
such account.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the accounts,
including information needed by the shareholders for personal and tax records.
Common Shares in the account of each Plan participant will be held by the Plan
Agent in non-certificated form in the name of the participant. Proxy material
relating the shareholder's meetings of the Fund will include those shares
purchased as well as shares held pursuant to the Plan.
There will be no brokerage charges with respect to Common Shares issued
directly by the Fund. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions. In
each case, the cost per share of the shares purchased for each participant's
account will be the average cost, including brokerage commissions, of any shares
purchased on the open market plus the cost of any shares issued by the Fund.
There are no other charges to participants for reinvesting dividends or capital
gain distributions, except for certain brokerage commissions, as described
above.
The automatic 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 Form
1099-DIV should be (1) in the case of
14
<PAGE>
================================================================================
John Hancock Funds - Patriot Premium Dividend Fund II
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 to purchase them (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, State Street Bank and Trust Company, at P.O. Box 8209,
Boston, Massachusetts 02266-8209 (telephone 1-800-426-5523).
SHAREHOLDER MEETING
On March 7, 1996, the Annual Meeting of John Hancock Patriot Premium Dividend
Fund II (the "Fund") was held to elect five Trustees and to ratify the action of
the Trustees in selecting independent auditors for the Fund.
The common shareholders elected the following Trustees to serve until their
respective successors are duly elected and qualified, with the votes tabulated
as follows:
WITHHELD
NAME OF TRUSTEE FOR AUTHORITY
- --------------- --- ---------
James F. Carlin.............. 13,040,139 144,649
William H. Cunningham........ 13,022,469 162,318
Charles F. Fretz............. 13,029,357 155,431
John P. Toolan............... 13,020,669 164,119
The preferred shareholders elected Harold R. Hiser, Jr. to serve until his
successor is duly elected and qualified, with the votes tabulated as follows:
747 FOR and 0 WITHHELD AUTHORITY.
The shareholders also ratified the Trustees' selection of Arthur Anderson,
LLP as the Fund's independent auditors for the Fund for the fiscal year ending
October 31, 1996, with the votes tabulated as follows: 12,972,523 FOR, 32,618
AGAINST and 180,393 ABSTAINING.
15
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