ANNUAL REPORT
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[PHOTO OMITTED]
Patriot Premium
Dividend Fund II
OCTOBER 31, 1997
[LOGO] John Hancock Funds
A Global Investment Management Firm
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TRUSTEES
EDWARD J. BOUDREAU, JR.
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
THE CHASE MANHATTAN BANK
450 WEST 33RD STREET
NEW YORK, NEW YORK10001
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP
125 SUMMER STREET
BOSTON, MASSACHUSETTS 02110-1617
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 in 1997 has been anything but dull. Investors have been treated
to record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances amid relatively
little volatility, the market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
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A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.
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In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
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
John Hancock Patriot
Premium Dividend Fund II
Favorable bond market and regulatory
environment boost utility stocks
Utility stocks -- which are the primary focus of John Hancock Patriot Premium
Dividend Fund II -- were boosted by the twin engines of a strong bond market and
a more favorable regulatory environment over the past 12 months. Because of
their high yields, utility stocks tend to closely follow the bond market, which
was a bit shaky at first but ended the period with a full head of steam. After
shrugging off several bouts of nervousness earlier this year over whether the
economy was growing fast enough to whip up inflation, investors sent bond prices
higher and bond yields lower throughout most of the summer and fall.
While the bond market's success was the main key to utility stocks'
performance, there were other factors. First, August 1997 was the stock market's
worst month in several years. That was closely followed by the market's sharp
drop in late October, when financial turmoil in Asia caused the Dow Jones
Industrial Average to suffer its largest-ever one-day drop of over 500 points.
In a classic "flight to safety," some investors fled from high-flying growth
stocks into high dividend-yielding stocks, such as utility stocks, as a way to
guard against the vagaries of a weaker stock market. In the meantime, the
regulatory environment showed signs of turning in favor of the utilities
themselves. Some areas of the country appear to be leaning toward adopting
California's and Massachusetts' model of
"...the regulatory environment showed signs of turning in favor of the
utilities..."
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A 3" x 3 1/2" photo ofGregory K. Phelps. Caption reads "Gregory K. Phelps".
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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 Investments & Other 1%; Common Stock Utilities 25%; Preferred Stock
Utilities 40%; Financials 22%; Industrials 12%, A footnote states: "As a
percentage of net assets on October 31, 1996."
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allowing competition. In those states, electric utilities will be allowed to
recoup expenses --incurred at a time when utilities were monopolies -- in a
manner that will allow them to compete effectively with out-of-state providers.
Additionally, the Federal Energy Regulatory Commission and various state
electric utility agencies quickened their response to proposed mergers among
utilities.
Performance and strategy recap
For the year ended October 31, 1997, the Fund had a total return of 14.63% at
net asset value. By comparison, the Dow Jones Utility Average had a total return
of 12.35% and the average preferred stock closed-end fund returned 15.69%,
according to Lipper Analytical Services, Inc. Throughout the past year, we
maintained a defensive stance, but became a bit less so by the end of the
period. Preferred-stock holdings, which made up 75% of net assets at the end of
the period, offer above-average yields. Because of that, they are a great
defense against rising interest rates, and generally weathered the bond market's
volatility better than common stocks. Of our preferred holdings, roughly 65%
were securities eligible for the dividends-received deduction (DRD), which offer
distinct tax advantages to corporate investors. The prices of DRD-eligible
securities were driven higher because supply is shrinking and demand has been
unusually strong.
Despite our continued emphasis on preferred stocks, we made a conscious
effort to maintain our stake in high-yielding utility common stocks because we
thought they were exceptionally cheap, particularly in April, July, and August.
When some of the Fund's higher-yielding preferred stocks were called out of the
market -- or redeemed -- by their issuers, we looked for attractively-priced,
high-yielding common stocks to replace them. In many cases, utility common
stocks were not only more attractively-priced than their preferred DRD-eligible
counterparts, but they also offered higher yields. At the end of the period,
utility common stocks made up 25% of the Fund's net assets.
Winners and losers
During the period, one of our best performers was Boston Edison Co., which was
boosted by favorable and improving regulatory conditions in Massachusetts.
Likewise, neighboring New England Electric System benefited from that trend, as
well as from its sale of non-nuclear power plants at favorable prices. Another
solid performer was Montana Power Co., one of the lowest-cost electric providers
in the United States. It was boosted in part on the news of its partnering with
Enron and Williams Companies
"...we made a conscious effort to maintain our stake in high-yielding utility
common stocks..."
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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 Montana Power
Company followed by an up arrow and the phrase "Enters agreement with telecom
providers". The second listing is Florida Progress Corporation followed by an up
arrow and the phrase "Rebounded from nuclear plant problems". The third listing
is Commonwealth Edison Co. followed by a horizontal arrow and the phrase
"Concerns about nuclear plant safety". Footnote below reads: "See `"Schedule of
Investments." Investment holdings are subject to change."
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See "Schedule of Investments." Investment holdings are subject to change.
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, 1997." The chart is
scaled in increments of 5% from top to bottom with 20% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
14.63% total return for John Hancock Patriot Premium Dividend Fund II. The
second represents the 12.35% total return for the Dow Jones Utility Average. The
third represents the 15.69% total return for the average preferred stock
closed-end 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."
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in a telecommunications joint venture to build fiber optic networks. Florida
Progress Corporation also posted attractive gains, after tumbling earlier when
it was forced to close its nuclear plant. We bought the stock after the problems
surfaced because its price cheapened to a level we felt was attractive, given
the company's commitment to a relatively high dividend, its strong balance
sheet, its strong service territory, and the favorable regulatory environment in
Florida. More recently, the NRC has applauded the utility's progress in cleaning
up its nuclear site, which helped the stock stage a rebound. Finally, we enjoyed
good performance from IES Industries, which announced its participation in a
three-party electric company merger.
Outside the utility sector, we saw solid performance from our financial
stocks. The price of Salomon Inc.'s preferred stock, for example, rose on news
that it planned to merge with insurance giant Travelers.
Like any period, this one had its disappointments. One was electric
provider Commonwealth Edison Co., which serves the Chicago metropolitan area.
Concerns about the safety of its nuclear plants, its relatively high costs, and
a less-than-favorable regulatory environment in Illinois kept the credit under
pressure.
Outlook
Our outlook is reasonably optimistic. Recent developments, including turmoil in
Asia, suggest that the economy may be slowing. One implication of that slowing
is that it likely eliminates the impetus for the Federal Reserve Board to raise
interest rates. Stable interest rates, of course, would be a positive for the
bond market and, ultimately, for preferred and utility stocks. Additionally, a
weakening economy could translate into lower corporate earnings. If that is the
case, we could see more buying of utility stocks, which are viewed as immune to
the economy's ebbs and flows. As far as electric utility stocks go, we think
their recent strong performance could be extended. We've already seen evidence
that the regulatory environment has improved and merger activity is quickening.
There's a possibility that the Public Utility Holding Company Act of 1935--
which has slowed merger activity -- will be repealed next year. If so, we're
likely to see the rate of utility company consolidation quicken, aided by
purchases from oil companies and foreign buyers.
"Our outlook is reasonably optimistic."
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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 conditions warrant.
5
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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, 1997. 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, 1997
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Assets:
Investments at value - Note C:
Preferred stocks (cost - $200,501,967) ..................... $213,544,554
Common stocks (cost - $65,475,117) ......................... 71,137,238
Short-term investments (cost - $1,518,380) ................. 1,518,380
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286,200,172
Receivable for investments sold ............................. 464,250
Dividends receivable ........................................ 1,544,425
Other assets ................................................ 22,088
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Total Assets .............................. 288,230,935
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Liabilities:
Payable for shares repurchased .............................. 1,385,955
DARTS dividend payable ...................................... 292,135
Common shares dividend payable .............................. 1,125,204
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 241,044
Accounts payable and accrued expenses ....................... 60,077
------------
Total Liabilities ......................... 3,104,415
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Net Assets:
Dutch Auction Rate Transferable Securities Preferred
Shares 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
Shares 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 ..................................... 166,252,942
Accumulated net realized loss on investments ................ (1,564,181)
Net unrealized appreciation of investments .................. 18,707,633
Undistributed net investment income ......................... 1,730,126
------------
Net Assets applicable to
Common Shares ($12.34 per
share based on 15,002,724
shares outstanding) ....................... 185,126,520
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Net Assets ................................ $285,126,520
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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, 1997
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Investment Income:
Dividends (net of foreign withholding taxes of $30,888) $20,574,279
Interest..................................................... 260,342
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20,834,621
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Expenses:
Investment management fee - Note B ......................... 2,443,140
DARTS and auction fees ..................................... 297,865
Administration fee - Note B ................................ 279,978
Custodian fee .............................................. 71,433
Printing and postage fees .................................. 57,451
Federal excise tax ......................................... 56,881
Auditing fee ............................................... 48,380
Miscellaneous fees ......................................... 45,406
Transfer agent fee ......................................... 40,992
Trustees' fee .............................................. 28,751
Legal fees ................................................. 7,244
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Total Expenses ............................ 3,377,521
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Net Investment Income ..................... 17,457,100
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Realized and Unrealized Gain (Loss) on Investments:
Net realized loss on investments sold ....................... (50,758)
Change in net unrealized appreciation/depreciation
of investments ............................................. 11,166,919
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Net Realized and Unrealized
Gain on Investments ....................... 11,116,161
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Net Increase in Net Assets
Resulting from Operations ................. 28,573,261
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Distribution to DARTS
Shareholders .............................. (4,049,056)
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Net Increase in Net Assets
Applicable to Common
Shareholders Resulting from
Operations Less DARTS
Distributions ............................. $24,524,205
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SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Patriot Premium Dividend Fund II
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1996 1997
---------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income............................................................... $17,848,548 $17,457,100
Net realized gain (loss) on investments sold........................................ 434,212 (50,758)
Change in net unrealized appreciation/depreciation of investments................... (1,219,950) 11,166,919
------------ ------------
Net Increase in Net Assets Resulting from Operations.............................. 17,062,810 28,573,261
------------ ------------
Distributions to Shareholders:
DARTS Series A - ($4,135 and $4,034 per share, respectively) - Note A............... (2,067,740) (2,016,809)
DARTS Series B - ($4,128 and $4,064 per share, respectively) - Note A............... (2,063,938) (2,032,247)
Common Shares - Note A:
Dividends from accumulated net investment income
($0.9750 and $1.0600 per share, respectively) .................................... (14,627,148) (15,902,145)
------------ ------------
Total Distributions to Shareholders............................................... (18,758,826) (19,951,201)
------------ ------------
Net Assets:
Beginning of period................................................................. 278,200,476 276,504,460
------------ ------------
End of period (including undistributed net investment income of
$4,171,484 and $1,730,126, respectively) ......................................... $276,504,460 $285,126,520
============ ============
<CAPTION>
Analysis of Common Shareholder Transactions:
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
1996 1997
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SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period................ 15,002,724 $166,459,166 15,002,724 $166,305,685
Reclassification of capital accounts - Note D.......... -- (153,481) -- (52,743)
------------ ------------ ------------ ------------
Shares outstanding, end of period...................... 15,002,724 $166,305,685 15,002,724 $166,252,942
============ ============ ============ ============
</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 the 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 each period indicated,
investment returns, key ratios and supplemental data are listed as follows:
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period......................... $12.28 $13.65 $9.67 $11.88 $11.76
-------- -------- -------- -------- --------
Net Investment Income........................................ 1.13 1.10 1.31 1.19 1.16
Net Realized and Unrealized Gain (Loss) on Investments....... 1.80 (3.61) 2.02 (0.06) 0.75
-------- -------- -------- -------- --------
Total from Investment Operations......................... 2.93 (2.51) 3.33 1.13 1.91
-------- -------- -------- -------- --------
Less Distributions:
Dividends to DARTS Shareholders.............................. (0.21) (0.22) (0.30) (0.28) (0.27)
Dividends to Common Shareholders from Net Investment Income.. (0.86) (0.93) (0.82) (0.97) (1.06)
Distributions to Common Shareholders from Net Realized
Short-term Capital Gains on Investments ................... (0.49) (0.32) -- -- --
-------- -------- -------- -------- --------
Total Distributions...................................... (1.56) (1.47) (1.12) (1.25) (1.33)
-------- -------- -------- -------- --------
Net Asset Value, End of Period............................... $13.65 $9.67 $11.88 $11.76 $12.34
======== ======== ======== ======== ========
Per Share Market Value, End of Period........................ $12.625 $8.875 $10.750 $10.875 $11.50
Total Investment Return, at Market Value..................... 22.06% (20.91%) 31.24% 9.86% 16.12%
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period
(000s omitted) ............................................ $204,768 $145,120 $178,200 $176,504 $185,127
Ratio of Expenses to Average Net Assets (1).................. 1.28% 1.27% 1.33% 1.26% 1.21%
Ratio of Net Investment Income to Average Net Assets (1)..... 5.53% 6.20% 7.58% 6.47% 6.24%
Portfolio Turnover Rate...................................... 57% 52% 87% 35% 41%
Average Brokerage Commission Rate (4)........................ N/A N/A N/A $0.0568 $0.0653
Senior Securities
Total DARTS Series A Outstanding (000s omitted).............. $50,000 $50,000 $50,000 $50,000 $50,000
Total DARTS Series B Outstanding (000s omitted).............. $50,000 $50,000 $50,000 $50,000 $50,000
Asset Coverage per Unit (2).................................. $307,595 $244,639 $276,974 $272,651 $284,939
Involuntary Liquidation Preference DARTS A per Unit (3)...... $100,000 $100,000 $100,000 $100,000 $100,000
Involuntary Liquidation Preference DARTS B per Unit (3)...... $100,000 $100,000 $100,000 $100,000 $100,000
Approximate Market Value per Unit (3)........................ $100,000 $100,000 $100,000 $100,000 $100,000
</TABLE>
(1) 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.
(2) 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.
(3) Plus accumulated and unpaid dividends.
(4) Per portfolio share traded. Required for fiscal years that began September
1, 1995, or later.
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indi cated: net investment income, and total
investment return of the Fund. It shows how the Fund's net asset value for a
share has changed since the end of the previous period. Additionally, important
rela tionships between some items presented in the financial statements are
expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Patriot Premium Dividend Fund II
Schedule of Investments
October 31, 1997
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The Schedule of Investments is a complete list of all securities owned by the
Fund on October 31, 1997. It's divided into three main categories: preferred
stocks, common stocks and short-term investments. The stocks are further broken
down by industry group. Short-term investments, which represent the Fund's
"cash" position, are listed last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ----------
PREFERRED STOCKS
Automobile / Trucks (5.03%)
Ford Motor Co., 8.25%,
Depositary Shares, Ser B ..................... 173,185 $4,935,773
General Motors Corp., 9.12%,
Depositary Shares, Ser G ..................... 208,800 5,950,800
General Motors Corp., 9.125%,
Depositary Shares, Ser B ..................... 130,000 3,453,125
-------------
14,339,698
-------------
Banks - Foreign (0.50%)
Australia and New Zealand Banking
Group Ltd., 9.125% (Australia) ............... 51,200 1,417,600
-------------
Banks - United States (10.11%)
ABN AMRO North America, Inc., 6.59%,
Ser H (R) ................................... 4,000 4,228,000
ABN AMRO North America, Inc., 8.75%,
Ser A (R) ................................... 1,060 1,176,600
Ahmanson, H.F. & Co., 8.40%, Depositary
Shares, Ser C ................................ 74,900 1,933,356
Chase Manhattan Corp., 10.84%, Ser C ........... 137,376 4,232,898
Chase Manhattan Corp., 9.76%, Ser B ............ 68,000 1,891,250
Fleet Financial Group, Inc., 6.75%, Ser VI ..... 97,000 5,044,000
Fleet Financial Group, Inc., 9.35%,
Depositary Shares ............................ 175,700 4,875,675
J.P. Morgan & Company, Inc., 6.625%,
Depositary Shares, Ser H ..................... 100,000 5,450,000
-------------
28,831,779
-------------
Broker Services (5.40%)
Merrill Lynch & Co., Inc., 9.00%,
Depositary Shares, Ser A ..................... 152,000 4,740,500
Morgan Stanley Group, Inc., 7.75%,
Depositary Shares ............................ 91,000 $4,914,000
Salomon Inc., 8.08%, Depositary Shares,
Ser D ........................................ 50,000 1,278,125
Salomon Inc., 8.40%, Depositary Shares,
Ser E ........................................ 160,000 4,450,000
-------------
15,382,625
-------------
Diversified Operations (0.53%)
Grand Metropolitan Delaware, L.P., 9.42%,
Gtd Ser A .................................... 54,000 1,518,750
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Finance (0.94%)
MBNA Corp., 7.50%, Ser A ....................... 50,000 1,321,875
SI Financing Trust I, 9.50%, Gtd Pfd Sec &
Purchase Contract ............................ 50,100 1,358,962
-------------
2,680,837
-------------
Insurance (4.16%)
Provident Companies, Inc., 8.10%,
Depositary Shares ............................ 87,800 2,216,950
Travelers Group, Inc., 6.231%,
Depositary Shares, Ser H ..................... 64,500 3,273,375
Travelers Group, Inc., 6.213% .................. 96,000 4,896,000
Travelers Group, Inc., 6.365% .................. 28,500 1,482,000
-------------
11,868,325
-------------
Leasing Companies (1.21%)
AMERCO, 8.50%, Ser A ........................... 90,300 2,364,731
Capita Preferred Trust, 9.06% .................. 40,000 1,080,000
-------------
3,444,731
-------------
Oil & Gas (5.12%)
Coastal Corp., $2.125, Ser H ................... 174,761 4,511,018
El Paso Tennessee Pipeline Co., 8.25%,
Ser A ........................................ 100,000 5,500,000
Elf Overseas Ltd., 8.50%, Gtd Ser A
(Cayman Islands) ............................. 100,000 2,612,500
Lasmo PLC, 10.00%, Ser A, American
Depositary Receipt (ADR),
(United Kingdom) ............................. 74,500 1,974,250
-------------
14,597,768
-------------
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Patriot Premium Dividend Fund II
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ----------
Paper & Paper Products (2.07%)
Boise Cascade Corp., 9.40%, Depositary
Shares, Ser F .................................. 107,300 $2,736,150
Bowater Inc., 8.40%, Depositary Shares,
Ser C .......................................... 120,000 3,150,000
-------------
5,886,150
-------------
Utilities (39.83%)
Atlanta Gas & Light Co., 7.70%, Depositary
Shares ......................................... 39,100 989,719
Baltimore Gas & Electric Co., 6.70%,
Ser 1993 ....................................... 10,000 1,080,000
Baltimore Gas & Electric Co., 6.99%,
Ser 1995 ....................................... 30,000 3,326,250
Boston Edison Co., 4.78% ......................... 29,374 2,203,050
Columbus Southern Power Co., 8.375%,
Ser A .......................................... 140,000 3,552,500
Commonwealth Edison Co., $7.24. .................. 35,785 3,506,930
Commonwealth Edison Co., $8.38. .................. 26,830 2,656,170
Commonwealth Edison Co., $8.40, Ser A ............ 48,586 4,858,600
Consumers Energy Co., $2.08 (Class A) ............ 187,025 4,909,406
Detroit Edison Co., 7.75%, Depositary
Shares ......................................... 80,000 2,050,000
Duke Power Co., 7.85%, Ser S ..................... 10,000 1,120,000
Entergy Gulf States, Inc., Adjustable
Rate Preferred (ARP), Depositary
Shares, Ser B .................................. 49,928 2,483,918
Florida Power & Light Co., 6.75%, Ser U .......... 33,000 3,630,000
Florida Power & Light Co., 6.98%, Ser S .......... 13,021 1,432,310
Hawaiian Electric Industries Capital Trust I,
8.36% .......................................... 50,000 1,287,500
Idaho Power Co., 7.07% ........................... 14,000 1,554,000
Jersey Central Power & Light Co., 7.52%,
Ser K .......................................... 15,000 1,554,375
MCN Michigan, L.P., 9.375%, Ser A ................ 50,000 1,312,500
Massachusetts Electric Co., 6.84% ................ 42,000 1,092,000
Massachusetts Electric Co., 6.99% ................ 16,500 1,796,438
Monongahela Power Co., 7.73%, Ser L .............. 45,500 4,936,750
Montana Power Co., $6.875 ........................ 50,000 5,393,750
NIPSCO Capital Markets, Inc., 7.75%,
Ser A .......................................... 76,000 1,885,750
Narragansett Electric Co., 6.95% ................. 53,500 2,862,250
PECO Energy Co., $7.48 ........................... 13,000 1,428,375
PSI Energy, Inc., 6.875% ......................... 45,430 4,798,544
PSI Energy, Inc., 7.44% .......................... 91,900 2,354,938
Pacific Gas & Electric, 7.04%, Ser U ............. 75,542 2,067,962
Public Service Electric & Gas Co., 6.92% ......... 45,500 4,857,125
Puget Sound Energy, Inc., 7.45%, Ser II .......... 155,711 4,204,197
Puget Sound Energy, Inc., 8.50%, Ser III ......... 164,405 $4,356,733
Sierra Pacific Power Capital I, 8.60% ............ 32,000 846,000
Sierra Pacific Power Co., $3.90, Ser C ........... 13,476 683,907
Sierra Pacific Power Co., 7.80%, Ser 1
(Class A) ...................................... 153,986 4,330,856
South Carolina Electric & Gas Co., 6.52% ......... 50,000 5,350,000
Texas Utilities Electric Co., $1.805,
Depositary Shares, Ser B ....................... 81,900 2,170,350
Texas Utilities Electric Co., $1.875,
Depositary Shares, Ser A ....................... 122,380 3,365,450
Texas Utilities Electric Co., $7.98 .............. 34,500 3,846,750
UtiliCorp Capital, L.P., 8.875%, Ser A ........... 95,000 2,499,688
Virginia Electric & Power Co., $6.98 ............. 35,000 3,841,250
Virginia Electric & Power Co., $7.05 ............. 10,000 1,100,000
-------------
113,576,291
-------------
TOTAL PREFERRED STOCKS
(Cost $200,501,967) (74.90%) 213,544,554
--------- -------------
COMMON STOCKS
Utilities (24.95%)
Boston Edison Co. ................................ 90,000 2,840,625
Cinergy Corp. .................................... 105,000 3,465,000
DPL, Inc. ........................................ 138,000 3,424,125
DTE Energy Co. ................................... 61,500 1,891,125
Delmarva Power & Light Co. ....................... 85,000 1,684,062
Dominion Resources, Inc. ......................... 67,700 2,517,594
Florida Progress Corp. ........................... 176,250 5,739,141
Hawaiian Electric Industries, Inc. ............... 19,500 737,344
Houston Industries, Inc. ......................... 82,300 1,790,025
IES Industries, Inc. ............................. 85,000 2,741,250
Long Island Lighting Co. ......................... 60,000 1,511,250
MidAmerican Energy Holdings Co. .................. 331,300 5,921,987
Montana Power Co. ................................ 103,300 2,614,781
Nevada Power Co. ................................. 75,000 1,612,500
New Century Energies, Inc. ....................... 76,760 3,204,730
New England Electric System ...................... 99,500 3,899,156
OGE Energy Corp. ................................. 50,000 2,421,875
Pacific Enterprises .............................. 6,100 199,394
PacifiCorp. ...................................... 53,800 1,166,787
Potomac Electric Power Co. ....................... 150,500 3,376,844
Puget Sound Energy, Inc. ......................... 215,400 5,735,025
Scana Corp. ...................................... 25,000 631,250
Sierra Pacific Resources ......................... 14,900 453,519
Southern Co. ..................................... 58,000 1,330,375
Teco Energy, Inc. ................................ 72,000 1,719,000
Texas Utilities Co. .............................. 29,000 1,040,375
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Patriot Premium Dividend Fund II
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ----------
Utilities (continued)
UtiliCorp United, Inc. ........................... 75,000 $2,367,187
WPL Holdings, Inc. ............................... 57,000 1,663,687
Washington Water Power Co. ....................... 172,400 3,437,225
-------------
TOTAL COMMON STOCKS
(Cost $65,475,117) (24.95%) 71,137,238
--------- -------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED)
- ------------------- -------- ------------
SHORT-TERM INVESTMENTS
Commercial Paper (0.53%)
Chevron Corp., 11-03-97 .......... 5.55% $1,519 1,518,380
-------------
TOTAL SHORT-TERM INVESTMENT (0.53%) 1,518,380
--------- -------------
TOTAL INVESTMENTS (100.38%) $286,200,172
========= =============
(R) These 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. Rule 144A
securities amounted to $5,404,600 or 1.90% of net assets as of October 31, 1997.
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 $1,564,181 of a capital
loss carryforward available to the extent provided by regulations, to offset
future net realized capital gains. To the extent such carryforward is used by
the Fund, no capital gains distribution will be made. The carryforward will
expire as follows: October 31, 2004 -- $642,996 and October 31, 2005 --
$921,185. Expired capital loss carryforwards are reclassified to capital
paid-in, in the year of expiration.
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, 1997, 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 4.23% and 3.82% to 4.19%, respectively, during the
period ended October 31, 1997. During the period ended October 30, 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
12
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Patriot Premium Dividend Fund II
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 0.50% of the Fund's average weekly net assets, plus
5.00% 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, 1997, 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 0.10% 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., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are trustees 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. 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 other assets. 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, 1997 the Fund's investment to cover the deferred compensation
liability had unrealized appreciation of $2,925.
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, 1997, aggregated $112,722,604 and $112,697,620, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended October 31, 1997.
The cost of long-term investments owned at October 31, 1997, for federal
income tax purposes was $265,977,085. Gross unrealized appreciation and
depreciation of investments aggregated $19,144,701 and $439,994, respectively,
resulting in net unrealized appreciation of $18,704,707 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, 1997, the Fund has reclassified amounts to reflect an increase
in undistributed net investment income of $52,743, and a corresponding decrease
in capital paid in. The calculation of net investment income per share excludes
these adjustments.
13
<PAGE>
================================================================================
John Hancock Funds - Patriot Premium Dividend Fund II
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
John Hancock Patriot Premium Dividend Fund II
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of John Hancock Patriot Premium Dividend Fund II
(the "Fund") as of October 31, 1997, the related statements of operations and
changes in net assets, and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
The financial statements of the Fund for the year ended October 31, 1996 and
the financial highlights for the four years then ended, were audited by other
auditors whose report, dated December 6, 1996, expressed an unqualified opinion
on those statements.
We conducted our audit 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 at October
31, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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 audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund at October
31, 1997, the results of its operations, the changes in its net assets, and its
financial highlights for the year then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 5, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during its fiscal year ended October
31, 1997.
The Board of Trustees of the Fund declared dividends on the
Common Shares from undistributed net investment income amounting to $1.06 per
share, for the year ended October 31, 1997. Distributions to preferred and
common shareholders were 100% qualified for the dividends received deductions.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV in
January 1998 representing their proportionate share.
SHAREHOLDER MEETING (UNAUDITED)
On March 6, 1997, the Annual Meeting of John Hancock Patriot
Premium Dividend Fund II (the "Fund") was held to elect four 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 ar duly elected and qualified, with the votes tabulated as
follows:
WITHHELD
FOR AUTHORITY
--- ---------
Charles L. Ladner 13,570,512 212,288
Leo E. Linbeck, Jr. 13,543,211 239,589
Patricia P. McCarter 13,565,646 217,154
The preferred shareholders elected Richard S. Scipione to serve until his
successor is duly elected and qualified, with the votes tabulated as follows:
731 FOR and 0 WITHHELD AUTHORITY.
The shareholders also ratified the Trustees' selection of Deloitte & Touche
LLP as the Fund's independent auditors for the Fund for the fiscal year ending
October 31, 1997, with the votes tabulated as follows: 13,577,828 FOR, 36,467
AGAINST and 169,235 ABSTAINING.
14
<PAGE>
================================================================================
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 may elect to 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. Holders of Common
Shares who do not elect 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 may
join the Plan by filling out and mailing an authorization card showing an
election to reinvest all or a portion of dividend payments. If received in
proper form by State Street Bank and Trust Company, P.O. Box 8209, Boston,
Massachusetts 02266-8209 not later than seven business days before the record
date for a dividend, the election will be effective with respect to all
dividends paid after such record date. Shareholders whose shares are held in the
name of a broker or nominee should contact the broker, bank, or nominee to
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
15
<PAGE>
================================================================================
John Hancock Funds - Patriot Premium Dividend Fund II
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
<PAGE>
=====================================NOTES======================================
John Hancock Funds - Patriot Premium Dividend Fund II
17
<PAGE>
=====================================NOTES======================================
John Hancock Funds - Patriot Premium Dividend Fund II
18
<PAGE>
=====================================NOTES======================================
John Hancock Funds - Patriot Premium Dividend Fund II
19
<PAGE>
================================================================================
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