================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
Patriot
Premium
Dividend
Fund II
ANNUAL REPORT
October 31, 1996
<PAGE>
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 H. 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
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
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
INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2604
LISTED NEW YORK STOCK EXCHANGE SYMBOL: PDT
THE PATRIOT GROUP OF FUNDS: 1-800-843-0090
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Most analysts agree that the Social Security system will run out of money by the
year 2030 unless Congress makes some changes. Although it seems a long way off,
the issue is serious enough that at least one group has already studied the
problem, and experts and politicians alike have weighed in with a slew of
prescriptions. Legislative action could be in the offing in 1997.
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The problem stems from demographic and societal changes. The number of
retirees collecting Social Security is growing rapidly, while the number of
workers supporting the system is shrinking. Consider this: in 1950, there were
16 workers paying into the Social Security system for each retiree collecting
benefits. Today, there are three workers for each retiree and by 2019 there will
be two. Starting then, the Social Security Administration estimates that the
amount paid out in Social Security benefits will start to be greater than the
amount collected in Social Security taxes. Compounding the issue is the fact
that people are retiring earlier and living longer.
The state of the system has already left many people, especially younger
and middle-aged workers, feeling insecure about Social Security. A recent survey
by the Employee Benefits Research Institute (EBRI) found that 79% of current
workers polled had little confidence in the ability of Social Security to
maintain the same level of benefits as those received by today's retirees.
Instead, they said they expect to use their own savings or employer-sponsored
pensions for their retirement. Yet, remarkably, another EBRI survey revealed
that only slightly more than half of America's current workers are saving money
for retirement. Fewer than half own IRAs or participate in employer-sponsored
pension or savings plans.
No matter how Social Security's problems get solved, one thing is clear.
Americans need to rely on themselves for accumulating the bulk of their
retirement savings. There's no law that says you should have to reduce your
standard of living once you stop working. So we encourage you to save all that
you can now, so you can live the way you'd like later.
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
Choppy market environment for bonds
After a decisive victory in 1995, the bond market hasn't been able to make up
its mind this year. Sentiment has swung sharply and quickly in the past nine
months as investors have tried to figure out where the U.S. economy is headed.
The result has been a volatile bond market susceptible to the whims of the
latest economic reports. Throughout the year, bond prices dropped as strong
economic news sparked fears of inflation -- and then rallied back as weaker
reports reassured investors that economic growth was under control.
Utility stocks -- the focus of the Fund's investment strategy -- have
suffered from the bond market's volatility. That's not surprising given that
utility stocks tend to follow the bond market closely. Other factors have also
kept the group under pressure. Fears of increased industry competition heated up
as closely watched regulators in Massachusetts, New York and New Hampshire
pushed aggressively for lower utility rates. What's more, operating problems at
several high-profile nuclear plants dimmed investor sentiment. Utility stocks,
however, have bounced back recently thanks to a bond market rally and positive
regulatory news from California.
[A 3" x 3 1/2" photo of the Patriot management team, bottom right. Caption
reads: "The Patriot Management Team: (L-R) Beverly Cleathero, Gregory Phelps,
Laura Provost".]
"...the bond market hasn't been
able to make up its mind this year."
3
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John Hancock Funds - Patriot Premium Dividend Fund II
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[A pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into five sections. Going from top left to right:
Short-Term & Other investments 1%; Preferred Stock Utilities 41%; Financials
18%; Industrials 13%; Common Stock Utilities 27%, A footnote states: "As a
percentage of net assets on October 31, 1996."]
- --------------------------------------------------------------------------------
"Throughout the year, we've
kept our defensive posture..."
Performance recap
For the year ended October 31, 1996, John Hancock Patriot Premium Dividend Fund
II had a total return of 7.56% at net asset value. That compared to a return of
11.95% for the Dow Jones Utility Average and 9.19% for the average preferred
stock closed-end fund, according to Lipper Analytical Services. What accounts
for the performance differences is the more conservative nature of our portfolio
versus these two benchmarks.
What did well for us were preferred stocks with dividends received
deduction (DRD) eligibility. The important thing to know about DRD-eligible
securities is that they offer distinct tax advantages to corporate investors.
With the supply of DRDs shrinking, demand has been unusually strong and that's
driven prices way up. Monongahela Power stands out as one of our best performers
in this area. Not only is the security DRD-eligible with a fixed dividend of
$7.73, but it also offers eight years of call protection. That simply means the
issuer cannot redeem the security for at least eight years and we can continue
to earn its attractive yield.
- --------------------------------------------------------------------------------
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Investment"' the header for the right column is "Recent
performance...and what's behind the numbers." The first listing is Monongahela
Power followed by an up arrow and the phrase "DRD-Eligibility boosts price". The
second listing is Pacific Enterprises followed by an up arrow and the phrase
"Takeover candidate". The third listing is Peco Energy Co. followed by a down
arrow and the phrase "Troubled nuclear plants". Footnote below reads: "See
`"Schedule of Investments." Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
Peco Energy Co., on the other hand, has been a disappointment. With its
Salem nuclear power plants shut down, this Philadelphia utility has suffered
from higher maintenance and energy costs. Despite its recent underperformance,
however, we're still holding the stock for a couple of reasons. First, investor
fears are overblown and the stock has simply gotten too cheap. Second, Peco's
fundamentals are still intact. Not only does it have an attractive dividend
yield and improving balance sheet, but the company has laid out specific plans
to reopen its Salem nuclear plants. Once investors recognize that, the stock
should bounce back.
Defensive strategy remains intact
Throughout the year, we've kept our defensive posture in order to protect
against rising interest rates and to preserve the Fund's net asset value. Our
strong focus on preferred stocks -- nearly 71% of the Fund's net assets --
helped us do just that. Because of their above-average yields, preferred stocks
tend to cushion against rising interest rates. As we explained in the
semi-annual report six months ago, we look for three things in choosing
preferred stocks: an attractive dividend yield, DRD-eligibility and good call
protection.
In recent months, we've also looked for selected opportunities among common
stock utilities. After a tough several months, prices of common stock
4
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John Hancock Funds - Patriot Premium Dividend Fund II
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[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote "For the year ended October 31, 1996." The chart is
scaled in increments of 3% from top to bottom with 12% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
7.56% total return for John Hancock Patriot Premium Dividend Fund II. The second
represents the 11.95% total return for the Dow Jones Utility Average. The third
represents the 9.19% total return for the average preferred 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 preferred stock, closed-end equity fund is tracked by Lipper Analytical
Services. The Dow Jones Utility Average is an unmanaged index which measures the
performance of the utility industry in the United States."]
- --------------------------------------------------------------------------------
utilities have fallen to low levels, while their yields have moved up sharply. A
note of caution: We're not just looking for cheap utility stocks. We're
targeting fundamentally sound utilities whose common stocks have gotten caught
in the utility market downdraft. Below are two of our favorite common stock
utility holdings.
o CONSOLIDATED EDISON. New York utilities are facing one of the worst possible
regulatory environments in the U.S. That's because the overwhelming political
influence in the state's utility commission is leading to irrational policy
decisions. The result has been a sharp drop in all New York utility stocks.
Consolidated Edison, however, doesn't deserve to be painted with the same
negative brush. For starters, this New York City utility not only has one of the
strongest balance sheets of all the utilities in the U.S, but also has a long
history of positive relations with state regulators. Second, competition isn't
much of a threat for Con Ed. The dearth of transmission lines into the city
preclude other utilities from entering the market. To top it off, Con Ed offers
an attractive yield of over 7% and a history of modest dividend increases.
o MONTANA POWER COMPANY. This is another utility that's well-insulated from
competition. By using inexpensive hydro-power to generate electricity, Montana
Power is one of the lowest-cost electric providers in the U.S. As a result,
virtually no competitor can beat its low rates. What's more, Montana Power has a
solid balance sheet, no nuclear exposure and an attractive dividend yield.
"Fears of an overheating economy
could surface again easily....."
Outlook
Bond and utility investors have breathed a collective sigh of relief lately,
thanks to September's weaker-than-expected employment report and the Federal
Reserve's continued neutral stance on interest rates. We do not believe,
however, that the volatility is over. Fears of an overheating economy could
surface again easily and quickly. With uncertainty still plaguing the market,
our strategy will remain defensive with a continued focus on higher-yielding
preferred stocks and selected utility common stocks. As always, our goal is to
preserve the Fund's net asset value, while maximizing income for our
shareholders.
- --------------------------------------------------------------------------------
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
The Statement of Assets and Liabilities is the Fund's balance sheet on October
31, 1996. You'll also find the net asset value per share, for each Common Share,
as of that date.
Statement of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Preferred stocks (cost - $191,683,008) ................... $ 197,836,572
Common stocks (cost - $74,320,580) ....................... 75,706,294
Short-term notes (cost - $1,669,174) ..................... 1,669,174
-------------
275,212,040
Receivable for investments sold ............................ 1,878,106
Dividends receivable ....................................... 1,491,834
Other assets ............................................... 19,367
-------------
Total Assets .......................... 278,601,347
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Liabilities:
DARTS dividend payable ..................................... 48,134
Common Share dividend payable .............................. 1,125,204
Payable for investments purchased .......................... 680,260
Payable to John Hancock Advisers, Inc. - Note B ............ 239,807
Accounts payable and accrued expenses ...................... 3,482
-------------
Total Liabilities ..................... 2,096,887
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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 ................. 166,305,685
Accumulated net realized loss on investments ............... (1,513,423)
Net unrealized appreciation of investments ................. 7,540,714
Undistributed net investment income ........................ 4,171,484
-------------
Net Assets Applicable to
Common Shares ($11.76 per
share based on 15,002,724
shares outstanding) ................... 176,504,460
--------------------------------------------------------
Net Assets ............................ $ 276,504,460
========================================================
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
Year ended October 31, 1996
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $68,996) ..... $ 21,123,055
Interest .................................................... 206,678
------------
21,329,733
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Expenses:
Investment management fee - Note B ........................ 2,448,956
DARTS and auction fees .................................... 303,917
Administration fee - Note B ............................... 275,796
Federal excise tax ........................................ 153,481
Custodian fee ............................................. 68,259
Printing .................................................. 63,982
Auditing fee .............................................. 50,120
Transfer agent fee ........................................ 40,631
Miscellaneous ............................................. 34,732
Trustees' fees ............................................ 34,711
Legal fees ................................................ 6,600
------------
Total Expenses ......................... 3,481,185
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Net Investment Income .................. 17,848,548
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ....................... 434,212
Change in net unrealized appreciation/depreciation
of investments ............................................ (1,219,950)
------------
Net Realized and Unrealized
Loss on Investments .................... (785,738)
--------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .............. $ 17,062,810
========================================================
Distributions to DARTS ................. (4,131,678)
--------------------------------------------------------
Net Increase in Net Assets Applicable
to Common Shareholders Resulting
from Operations Less DARTS
Distributions .......................... $ 12,931,132
========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .................................................... $ 19,650,347 $ 17,848,548
Net realized gain (loss) on investments sold ............................. (870,125) 434,212
Change in net unrealized appreciation/depreciation of investments ........ 31,160,232 (1,219,950)
------------- -------------
Net Increase in Net Assets Resulting from Operations ................... 49,940,454 17,062,810
------------- -------------
Distributions to Shareholders:
DARTS Series A ($4,474 and $4,135 per share, respectively) - Note A ...... (2,237,124) (2,067,740)
DARTS Series B ($4,492 and $4,128 per share, respectively) - Note A ...... (2,245,808) (2,063,938)
Common Shares - Note A
Dividends from accumulated net investment income ($0.8250 and $0.9750 per
share, respectively) ..................................................... (12,376,834) (14,627,148)
------------- -------------
Total Distributions to Shareholders .................................... (16,859,766) (18,758,826)
------------- -------------
Net Assets:
Beginning of period ...................................................... 245,119,788 278,200,476
------------- -------------
End of period (including undistributed net investment income of $4,297,160
and $4,171,484, respectively) ............................................ $ 278,200,476 $ 276,504,460
============= =============
</TABLE>
* Analysis of Common Shareholder Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1995 1996
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period ............... 15,002,724 $ 166,554,224 15,002,724 $ 166,459,166
Reclassification of undistributed net investment income -- (95,058) -- (153,481)
------------- ------------- ------------- -------------
Shares outstanding, end of period ..................... 15,002,724 $ 166,459,166 15,002,724 $ 166,305,685
============= ============= ============= =============
</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
<PAGE>
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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>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
1992(a) 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................ $ 11.38 $ 12.28 $ 13.65 $ 9.67 $ 11.88
-------- -------- -------- -------- --------
Net Investment Income ............................................... 1.18 1.13 1.10 1.31 1.19
Net Realized and Unrealized Gain (Loss) on Investments .............. 0.81 1.80 (3.61) 2.02 (0.06)
-------- -------- -------- -------- --------
Total from Investment Operations .................................. 1.99 2.93 (2.51) 3.33 1.13
-------- -------- -------- -------- --------
Less Distributions:
Dividends to DARTS Shareholders ..................................... (0.19) (0.21) (0.22) (0.30) (0.28)
Dividends to Common Shareholders from Net Investment Income ......... (0.90) (0.86) (0.93) (0.82) (0.97)
Distributions to Common Shareholders from Net Realized
Short-term Capital Gains on Investments ........................... -- (0.49) (0.32) -- --
-------- -------- -------- -------- --------
Total Distributions ............................................... (1.09) (1.56) (1.47) (1.12) (1.25)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ...................................... $ 12.28 $ 13.65 $ 9.67 $ 11.88 $ 11.76
======== ======== ======== ======== ========
Per Share Market Value, End of Period ............................... $ 11.375 $ 12.625 $ 8.875 $ 10.750 $ 10.875
Total Investment Return, at Market Value ............................ 17.10% 22.06% (20.91%) 31.24% 9.86%
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period (000's omitted) $184,253 $204,768 $145,120 $178,200 $176,504
Ratio of Expenses to Average Net Assets * ........................... 1.33% 1.28% 1.27% 1.33% 1.26%
Ratio of Net Investment Income to Average Net Assets * .............. 6.60% 5.53% 6.20% 7.58% 6.47%
Portfolio Turnover Rate ............................................. 99% 57% 52% 87% 35%
Average Brokerage Commission Rate (d) ............................... N/A N/A N/A N/A $ 0.0568
Senior Securities
Total DARTS Series A Outstanding (000's omitted) .................... $ 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
Asset Coverage per Unit (b) ......................................... $285,078 $307,595 $244,639 $276,974 $272,651
Involuntary Liquidation Preference DARTS A per Unit (c) ............. $100,000 $100,000 $100,000 $100,000 $100,000
Involuntary Liquidation Preference DARTS B per Unit (c) ............. $100,000 $100,000 $100,000 $100,000 $100,000
Approximate Market Value per Unit (c) ............................... $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) 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.
(c) Plus accumulated and unpaid dividends.
(d) Per portfolio share traded. Required for fiscal years that began September
1, 1995, or later.
SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
Schedule of Investments
October 31, 1996
- --------------------------------------------------------------------------------
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
PREFERRED STOCKS
Automobile / Trucks (3.15%)
Ford Motor Co., 8.25%,
Depositary Shares, Ser B ..................... 65,800 $ 1,776,600
General Motors Corp., 9.125%,
Depositary Shares, Ser B ..................... 200,000 5,575,000
General Motors Corp., 9.12%,
Depositary Shares, Ser G ..................... 50,000 1,356,250
------------
8,707,850
------------
Banks - Foreign (0.50%)
Australia and New Zealand Banking Group
Ltd., 9.125% (Australia) ..................... 51,200 1,376,000
------------
Banks - United States (10.40%)
Ahmanson, H.F. & Co., 8.40%,
Depositary Shares, Ser C ..................... 74,900 1,966,125
Bank of Boston Corp., 8.60%,
Depositary Shares, Ser E ..................... 146,000 3,796,000
Chase Manhattan Corp., 10.84%, Ser C ........... 86,975 2,663,609
Chase Manhattan Corp., 9.76%, Ser B ............ 26,700 760,950
Chase Manhattan Corp., 8.40%, Ser M ............ 21,345 557,638
Fleet Financial Group, Inc., 9.35% ............ 175,700 4,853,712
Fleet Financial Group, Inc., 6.75%, Ser VI ..... 97,000 4,850,000
J.P. Morgan & Co., 6.625%,
Depositary Shares, Ser H ..................... 100,000 5,037,500
LaSalle National Corp., 8.75%,
Ser K (R) .................................... 81,500 4,268,563
------------
28,754,097
------------
Conglomerate (0.54%)
Grand Metropolitan Delaware, 9.42%,
Gtd Ser A .................................... 54,000 1,498,500
------------
Equipment Leasing (1.14%)
AMERCO, 8.50%, Ser A ........................... 55,300 1,347,937
Capita Preferred Trust, 9.06% .................. 40,000 1,025,000
Comdisco, Inc., 8.75%, Ser A ................... 30,900 791,812
------------
3,164,749
------------
Financial Services (4.15%)
Merrill Lynch & Co., Inc. 9.00%,
Depositary Shares, Ser A ..................... 40,000 1,180,000
Morgan Stanley Group Inc., 7.75%,
Depositary Shares ............................ 55,000 2,860,000
Salomon Inc., 8.40%, Depositary
Shares, Ser E ................................ 150,000 3,787,500
The Schedule of Investments is a complete list of all securities owned by the
Fund on October 31, 1996. It's divided into three main categories: preferred
stocks, common stocks, and short-term investments. The stocks 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.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Financial Services (continued)
Salomon Inc., 8.08%, Depositary Shares,
Ser D ........................................ 50,000 $ 1,237,500
Source One Mortgage Services Corp.,
8.42%, Ser A ................................. 94,000 2,397,000
------------
11,462,000
------------
Insurance (2.75%)
American Life Holding Co., $2.16 ............... 40,000 985,000
Provident Companies, Inc., 8.10%,
Depositary Shares ............................ 87,800 2,227,925
SunAmerica, Inc., 9.25%, Ser B ................. 100,000 2,587,500
Travelers Group, Inc., 9.25%,
Depositary Shares, Ser D ..................... 69,200 1,790,550
------------
7,590,975
------------
Oil & Gas (6.36%)
Coastal Corp., $2.125, Ser H ................... 174,761 4,521,941
Elf Overseas Ltd., 8.50%, Gtd Ser A
(Cayman Islands) ............................. 200,000 5,275,000
Enterprise Oil PLC, 10.50%, American
Depositary Receipt ("ADR"), Ser A
(United Kingdom) ............................. 30,000 795,000
Lasmo PLC, 10.00%, ADR, Ser A
(United Kingdom) ............................. 152,500 3,888,750
Phillips Gas Co., 9.32%, Ser A ................. 120,000 3,105,000
------------
17,585,691
------------
Paper (2.13%)
Boise Cascade Corp., 9.40%, Ser F .............. 107,300 2,776,387
Bowater, Inc., 8.40%, Depositary Shares,
Ser C ........................................ 120,000 3,120,000
------------
5,896,387
------------
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
Utilities (40.43%)
Baltimore Gas & Electric Co., 7.125% ........... 15,000 $ 1,578,750
Baltimore Gas & Electric Co., 6.99%
Ser 1995 ..................................... 30,000 3,138,750
Baltimore Gas & Electric Co., 6.70%
Ser 1993 ..................................... 10,000 1,020,000
Boston Edison Co., 4.78% ....................... 28,487 1,812,485
Central Maine Power Co., 8.875% (R) ............ 9,600 954,000
Central Maine Power Co., 7.999%,
Ser A ........................................ 10,000 967,500
Central Power & Light Co., 7.12% ............... 12,096 1,209,600
Columbus Southern Power Co.,
8.375%, Ser A ................................ 140,000 3,500,000
Columbus Southern Power Co., 7.875% ............ 8,000 838,000
Commonwealth Edison Co., $8.40, Ser A .......... 47,746 4,846,219
Commonwealth Edison Co., $8.38 ................. 24,710 2,458,645
Commonwealth Edison Co., $7.24 ................. 33,975 3,057,750
Detroit Edison Co., 7.75%,
Depositary Shares ............................ 80,000 2,020,000
Duke Power Co., 7.85%, Ser S ................... 10,000 1,086,250
Entergy Gulf States Utilities Co., $9.96 ....... 23,250 2,371,500
Entergy Gulf States Utilities Co., $8.52 ....... 18,997 1,826,087
Entergy Gulf States Utilities Co.,
Adjustable Rate Preferred ("ARP")
Depositary Shares, Ser B ..................... 34,369 1,666,896
Florida Power & Light Co., 6.98%, Ser S ........ 13,021 1,367,205
Florida Power & Light Co. 6.75% Ser U .......... 33,000 3,403,125
GTE Florida, Inc., 8.16% ....................... 26,790 2,812,950
GTE North, Inc., $7.60, Ser IND ................ 10,000 1,010,000
Houston Lighting & Power Co., $8.12 ............ 12,302 1,242,502
Idaho Power Co., 8.375% ........................ 23,800 2,558,500
Idaho Power Co., 7.07% ......................... 14,000 1,450,750
Jersey Central Power & Light Co., 7.52%,
Ser K ........................................ 15,000 1,545,000
Mass Electric Co., 6.99% ....................... 6,500 657,313
Mass Electric Co., 6.84% ....................... 42,000 1,018,500
MCN Michigan Limited Partnership,
9.375%, Ser A ................................ 50,000 1,337,500
Monongahela Power Co., $7.73, Ser L ............ 45,500 4,800,250
Montana Power Co., 6.875% ...................... 40,000 4,060,000
Narragansett Electric Co., 6.95% ............... 43,500 2,202,188
NIPSCO Capital Markets, Inc., 7.75% ............ 44,000 1,045,000
Northern States Power Co. of MN, $7.00 ......... 17,050 1,705,000
PECO Energy Co., $7.48 ......................... 13,000 1,361,750
PSI Energy, Inc., 7.44% ........................ 45,430 4,622,503
PSI Energy, Inc., 6.875% ....................... 91,900 2,331,963
Public Service Co. of NH, 10.60%,
Ser A ........................................ 50,000 1,256,250
Public Service Electric & Gas Co., 6.92% ....... 40,000 4,000,000
Public Service Electric & Gas Co., 6.80% ....... 22,060 2,018,490
Sierra Pacific Power Capital, 8.60% ............ 32,000 828,000
Sierra Pacific Power Co., 7.80%, Ser 1
(Class A) .................................... 139,688 3,631,888
Sierra Pacific Power Co., $3.90, Ser C ......... 13,476 675,485
Texas Utilities Electric Co., $7.98 ............ 34,500 3,717,375
Texas Utilities Electric Co., $1.875,
Depositary Shares, Ser A ..................... 115,780 2,952,390
Texas Utilities Electric Co., $1.805,
Depositary Shares, Ser B ..................... 54,000 1,363,500
UtiliCorp Capital Limited Partnership,
8.875%, Ser A ................................ 95,000 2,470,000
Utilicorp United, Inc., 2.05% .................. 45,800 1,162,175
Virginia Electric & Power Co., $6.98 ........... 35,000 3,657,500
Virginia Electric & Power Co., $7.05 ........... 10,000 1,052,500
Washington Natural Gas Co., 8.50%,
Ser III ...................................... 158,505 4,101,317
Washington Natural Gas Co., 7.45%,
Ser II ....................................... 155,711 4,029,022
------------
111,800,323
------------
TOTAL PREFERRED STOCK
(Cost $191,683,008) (71.55%) 197,836,572
------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS.
10
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Utilities (27.38%)
American Electric Power Co., Inc. .............. 111,000 $ 4,606,500
Boston Edison Co. .............................. 200,000 4,800,000
Central & South West Corp. ..................... 13,400 355,100
CINergy Corp. .................................. 170,000 5,631,250
Consolidated Edison Co. of NY, Inc. ............ 154,000 4,504,500
Delmarva Power & Light Co. ..................... 95,600 1,900,050
Dpl, Inc. ...................................... 180,000 4,297,500
Florida Progress Corp. ......................... 176,250 5,882,344
Hawaiian Electric Industries, Inc. ............. 19,500 694,687
Houston Industries, Inc. ....................... 245,600 5,618,100
IES Industries, Inc. ........................... 85,000 2,613,750
MidAmerican Energy Co. ......................... 251,300 3,895,150
Montana Power Co. .............................. 90,000 1,912,500
Nevada Power Co. ............................... 50,000 1,018,750
New England Electric System .................... 127,500 4,303,125
Oklahoma Gas & Electric Co. .................... 105,000 4,108,125
Pacific Enterprises ............................ 70,000 2,152,500
PECO Energy Co. ................................ 60,000 1,515,000
Potomac Electric Power Co. ..................... 150,500 3,856,563
Puget Sound Power & Light Co. .................. 215,400 4,765,725
Scana Corp. .................................... 55,000 1,471,250
Southern Co. ................................... 51,000 1,128,375
Southwestern Public Service Co. ................ 80,800 2,747,200
UtiliCorp United, Inc. ......................... 45,000 1,220,625
Washington Water Power Co. ..................... 37,000 707,625
------------
TOTAL COMMON STOCK
(Cost $74,320,580) (27.38%) 75,706,294
------------ ------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000's OMITTED) VALUE
- ------------------- ---- --------------- -----
SHORT-TERM INVESTMENTS
Finance (0.60%)
Prudential Funding Corp.
11-01-96................ 5.50% $ 1,669 $ 1,669,174
------------
TOTAL SHORT-TERM INVESTMENTS (0.60%) 1,669,174
------------ ------------
TOTAL INVESTMENTS (99.53%) $275,212,040
============ ============
(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 $5,222,563 as of October 31, 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
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. For federal income tax purposes, the Fund has $642,996 of a capital
loss carryforward available to the extent provided by regulations, to offset
future net realized capital gains. If such carryforward is used by the Fund, no
capital gains distributions will be made. The carryforward expires October 31,
2004.
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, 1996, 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. Actual results could differ from these estimates.
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 3.84% to 4.35% and 3.82% to 4.45%, respectively, during the
period ended October 31, 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
12
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
$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.
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 October 31, 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.
Mr. Edward J. Boudreau, Jr., Mr. Thomas W.L. Cameron, Mr. 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
1996, 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 October 31, 1996 the Fund's investment to cover the deferred
compensation liability had unrealized appreciation of $1,436.
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 October 31, 1996, aggregated $99,274,129 and $94,679,670, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended October 31, 1996.
The cost of long-term investments owned at October 31, 1996 for federal
income tax purposes was $268,543,189. Gross unrealized appreciation and
depreciation of investments aggregated $10,265,540 and $3,596,689, respectively,
resulting in net unrealized appreciation of $6,668,851 for federal tax purposes.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
In accordance with Statement of Position 93-2, the Fund has recorded several
reclassifications in the capital accounts. These reclassifications have no
impact on the net asset value of the Fund and are designed generally to present
undistributed net investment income or accumulated net realized gains and losses
on a tax basis, which is considered to be more informative to the shareholder.
As of October 31, 1996, the Fund has reclassified amounts to reflect an increase
in undistributed net investment income of $784,602, an increase in accumulated
net realized loss on investments of $631,121 and a decrease in common shares
capital of $153,481. The calculation of net investment income per share excludes
these adjustments.
13
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John Hancock Funds - Patriot Premium Dividend Fund II
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of John Hancock Patriot Premium
Dividend Fund II:
We have audited the accompanying statement of assets and liabilities of John
Hancock Patriot Premium Dividend Fund II (the Fund), including the schedule of
investments, as of October 31, 1996, the related statement of operations for the
year then ended, and the statement of changes in net assets and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
John Hancock Patriot Premium Dividend Fund II as of October 31, 1996, the
results of its operations for the year then ended, and the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
BOSTON, MASSACHUSETTS
DECEMBER 6, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is
furnished with respect to the taxable distributions of the Fund during its
fiscal year ended October 31, 1996.
The Board of Trustees of the Fund declared dividends on the Common Shares
from undistributed net investment income amounting to $0.97 per share, for the
year ended October 31, 1996. Distributions to preferred and common shareholders
were 100% qualified for the dividends received deductions. Shareholders will be
mailed a 1996 U.S. Treasury Department Form 1099-DIV in January 1997
representing their proportionate share.
14
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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
15
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John Hancock Funds - Patriot Premium Dividend Fund II
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 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).
16
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NOTES
John Hancock Funds - Patriot Premium Dividend Fund II
17
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NOTES
John Hancock Funds - Patriot Premium Dividend Fund II
18
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NOTES
John Hancock Funds - Patriot Premium Dividend Fund II
19
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right, a cube in lower left and a diamond in lower right. A tag line below reads
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P200A 10/96
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