SEMIANNUAL REPORT
[PHOTO OMITTED]
Patriot Premium
Dividend Fund II
APRIL 30, 1998
[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 and Chief Operating Officer
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 York 10001
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
Listed New York Stock Exchange Symbol: PDT
The Patriot Group of Funds:
1-800-843-0090
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CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
During the last decade, invest'rs have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year wondering
what the market would do for an encore in 1998. The answer so far has been more
of the same. This achievement continues to bolster many investors' convictions
that the market will produce these results forever, or, in the worst case, that
market declines will always be short-lived. While the economy remains solid and
the environment favorable, history and reason tell us it's a highly unlikely
scenario.
[A 1 1/4" x 1" photo of Edward J., Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
This doesn't mean we know what the market will do next, or that it's riding for
a fall. But after such a run, even in this "new era" of strong economic growth
with low inflation, we believe it would be wise for investors to set more
realistic expectations. As we've said before, markets do indeed move in two
directions, even though we've seen "up" much more than "down" recently. Over the
long term, the market's historical results have been more in the 10% per year
range, which is still a solid result, considering it has been produced despite
wars, depressions and other social upheavals along the way.
In addition to adjusting, or at least re-examining, expectations, now could also
be a good time to review with your investment professional how your assets are
diversified, perhaps with an eye toward a more conservative approach. Stocks,
especially with their outsized gains of the last three years, might have grown
to represent a larger piece of your portfolio than you had originally intended,
given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial objectives
and maintain wealth. One way we can do that is by helping you keep your feet on
the ground as you pursue your dreams.
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
Electric utility stocks charge ahead in favorable market
and regulatory environment
It was "lights on" for electric utility stocks - the Fund's primary focus - over
the past six months as they staged one of their most impressive rallies in
years. When the curtain opened on the period, electric companies were just
coming back into favor, as economic and currency problems in Southeast Asia
prompted a wave of electric utility stock buying. In the face of a potentially
dramatic slowdown in that region, with its consequently negative effects on the
world economies, investors turned their sights toward the more essential,
domestically oriented segments of the market N including electric utilities.
Falling bond yields and rising bond prices further fueled electric stocks, which
typically follow bond prices because of their high yields. Finally, the
regulatory environment, which had dealt the sector some blows in early 1997,
turned more favorable. The combination of these factors led the Dow Jones
Utility Average to an all-time high on December 31, 1997.
"...the Dow Jones Utility Average [rose] to an all-time high..."
January and February proved to be less favorable to electric stocks, however,
largely because of a bout of profit-taking and new regulatory concerns. Although
they briefly faltered in those two months, electric stocks took center stage
again in March. Positive regulatory developments in Pennsylvania and Texas,
coupled with a number of favorable comments from influential Wall Street
analysts, set off a new rally that
[A 2 1/4" x 3 3/42" photo at bottom of page of fund management team. Caption
reads "Fund management team members (l-r) Susan Kelly, Gregory Phelps, and Mark
Maloney."]
3
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John Hancock Funds - Patriot Premium Dividend Fund II
[Pie chart at top of left hand column with the heading "Portfolio
Diversification". The chart is divided into 5 sections from top, left to right:
Short-Term Investments & Other 4%; Common Stock Utilities 29%; Preferred Stock
Utilities 39%; Industrials 6% and Financials 22%. A note below the chart reads
"As a percentage of net assets on Ap[ril 30, 1998."]
pushed the Dow Jones Utility Average back up to its previous high set on the
last day of 1997.
April again witnessed some profit taking and sector rotation out of the group
after the highs reached in March.
Performance and strategy recap
For the six months ended April 30, 1998, the Fund posted a total return of
12.20% at net asset value. By comparison, for the same six-month period the Dow
Jones Utility Average had a total return of 19.63% and the average preferred
stock closed-end fund returned 7.49%, according to Lipper Analytical Services,
Inc. Prior to the start of the period, we had built up our stake in electric
common stocks because we felt that their prices were compelling. After their
January and February weakness, we added more. At the end of the period, electric
utility common stocks made up 29% of the Fund's investments, compared to 25% six
months earlier. Our increased holdings in these stocks helped our performance,
since they outpaced their preferred stock counterparts.
"...our focus remained on preferred stocks..."
Despite the increase in our common stock holdings, our focus remained on
preferred stocks because of their more consistent income stream. We also saw
solid performance from this group, which generally offers higher yields than its
common stock counterparts, but doesn't have as much price movement as common
stocks during market declines or rallies. Of our preferred holdings, over
three-quarters were securities eligible for the dividends-received deduction
(DRD), which offers distinct tax advantages to corporate investors. Thanks to a
favorable bond market, a dwindling supply of these securities and a growing
demand for them, many of our DRD-eligible preferred holdings posted attractive
total returns.
Leaders and laggards
One of our best performers during the period was the DRD-eligible preferred
stock of Union Texas Petroleum. It rose nicely after we bought it in March. One
of the primary reasons for its rise was the scarcity of high-quality,
attractively priced preferred stocks in general, and the scarcity of that
security in particular. Not only did it offer an attractive 7.14% yield, but it
also offered good call protection, which means it can't be redeemed by the
company before a specified date. Call protection is extremely beneficial when
interest rates are falling and corporations look to refinance their outstanding
obligations at lower rates as a way to cut their costs. This feature allows us
to hang on to stocks with higher-than-average yields. Another good preferred
stock performer was Ford Motor
[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Montana
Power, followed by an up arrow with the phrase "Joint ventures with telecom
providers well received". The second listing is Union Texas Petroleum followed
by an up arrow with the phrase "Scarcity of DRD-eligible securities boosts
prices". The third listing is TDS Capital followed by an arrow pointing to the
left and right and the phrase "Non-DRD preferreds languish with supply
pressures". A note below the table reads "See 'Schedule of Investments.'
Investment holdings are subject to change."]
4
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John Hancock Funds - Patriot Premium Dividend Fund II
[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the six months ended April 30, 1998". The
chart is scaled in increments of 5% with 0% at the bottom and 20% at the top.
The first bar represents the 12.20% total return for the John Hancock Patriot
Premium Dividend Fund II. The second bar represents the 7.49% total return for
the average preferred stock closed-end fund. The third bar represents the 19.63%
total return for the Dow Jones Utility average. A note below the chart 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 fund is tracked by Lipper Analytical Services, Inc. The Dow Jones
Utility Average is an unmanaged index that measures the performance of the
utility industry in the United States.]
Company, which tendered, or bought back, our holdings at very attractive prices.
A few of our preferred holdings got left behind during the period, primarily
because they weren't DRD-eligible, and as such, their dividends were fully
taxable. One example was telephone and data systems holding TDS Capital. Despite
the fact that the company has strong operating results and that its preferred
stock has an attractive 8.50% yield and relatively good call protection, its
price languished because of its fully taxable status, and the fact that a large
number of this type of preferred stock was issued during the first quarter.
Among our common-stock utility holdings, some of the strongest returns came from
Montana Power and Boston Edison. Montana Power, one of the nation's lowest-cost
energy producers, got rousing applause from investors for entering into a joint
agreement with Williams Companies and Enron to provide telecommunications
services, and for starting the process of selling off its electric generating
plants. In a similar development, Boston Edison has teamed up with a cable
television operator to offer cable and Internet service to its customers.
"...the electric utility sector stands to benefit from its investment in
non-regulated operations..."
Outlook and strategy
We're optimistic about the prospects for domestic electric utility stocks. Most
companies in the industry are feverishly cutting costs, slashing capital
expenditures and reducing debt. Those actions bode well for the profitability of
those companies that undertake these programs. In addition to better profits,
the electric utility sector stands to benefit from its investment in
non-regulated operations such as telecommunications. And we believe the sector
should get an added boost from the actions of many electric companies now
announcing and implementing stock buyback programs. For those reasons, we'll
continue to look for opportunities to add to attractive electric utility common
stocks as long as we feel those fundamentals are in place. As for preferred
stocks, we will keep them our primary focus. But with no signs of change in the
scarcity of DRD-eligible preferreds, selectivity will be the watchword. We'll
take special care to find those that we believe are attractively priced in a
market environment that has pushed some DRD-eligible preferreds to very
expensive price levels.
- --------------------------------------------------------------------------------
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
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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 April 30, 1998. You'll also find the net asset value
per share, for each Common Share, as of that date.
Statement of Assets and Liabilities
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Preferred stocks (cost - $188,022,365) ............ $203,134,207
Common stocks (cost - $70,203,299) ................ 85,862,981
Bonds (cost - $4,989,252) ......................... 5,020,650
Short-term investments (cost - $3,702,720)......... 3,702,720
------------
297,720,558
Receivable for investments sold .................... 1,955,560
Dividends receivable ............................... 1,312,949
Interest receivable ................................ 52,361
Other assets ....................................... 22,088
------------
Total Assets ......... 301,063,516
-------------------------------------------------
Liabilities:
Payable for shares repurchased ..................... 152,069
DARTS dividend payable ............................. 127,365
Common shares dividend payable ..................... 1,125,204
Payable to John Hancock Advisers, Inc.
and affiliates -Note B ............................ 237,996
Accounts payable and accrued expenses .............. 66,782
------------
Total Liabilities ...... 1,709,416
-------------------------------------------------
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 gain on investments ....... 978,583
Net unrealized appreciation of investments ......... 30,805,847
Undistributed net investment income ................ 1,316,728
------------
Net Assets applicable to
Common Shares ($13.29 per
share based on 15,002,724
shares outstanding) .. 199,354,100
-------------------------------------------------
Net Assets $299,354,100
=================================================
The Statement of Operations summarizes the Fund's investment
income earned and expenses incurred in operating the Fund. It
also shows net gains (losses) for the period stated.
Statement of Operations
Six months ended April 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes
of $13,967) ........................................ $9,991,745
Interest ........................................... 122,280
------------
10,114,025
------------
Expenses:
Investment management fee-Note B ................. 1,243,544
Administration fee-Note B ........................ 147,433
DARTS and auction fees ........................... 140,111
Federal excise tax ............................... 69,657
Custodian fee .................................... 39,329
Auditing fee ..................................... 26,720
Printing and postage ............................. 25,802
Miscellaneous .................................... 21,362
Transfer agent fee ............................... 20,118
Trustees' fee .................................... 11,429
Legal fees ....................................... 2,057
Total Expenses ....... 1,747,562
-------------------------------------------------
Net Investment Income .. 8,366,463
-------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold ............. 2,542,764
Change in net unrealized appreciation/depreciation
of investments ................................... 12,098,214
------------
Net Realized and Unrealized
Gain on Investments .. 14,640,978
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 23,007,441
=================================================
Distribution to
DARTS Shareholders ... (2,028,970)
-------------------------------------------------
Net Increase in Net Assets
Applicable to Common
Shareholders Resulting from
Operations Less DARTS
Distributions ........ $20,978,471
=================================================
SEE NOTES TO FINANCIAL STATEMENTS
6
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1998
OCTOBER 31, 1997 (UNAUDITED)
---------------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................ $17,457,100 $8,366,463
Net realized gain (loss) on investments sold ..... (50,758) 2,542,764
Change in net unrealized appreciation/depreciation
of investments ................................... 11,166,919 12,098,214
------------ ------------
Net Increase in Net Assets Resulting from Operations 28,573,261 23,007,441
------------ ------------
Distributions to Shareholders:
DARTS Series A - ($4,034 and $2,029 per share,
respectively) -Note A ............................ (2,016,809) (1,014,288)
DARTS Series B - ($4,064 and $2,029 per share,
respectively) -Note A ............................ (2,032,247) (1,014,682)
Common Shares -Note A:
Dividends from accumulated net investment income
($1.0600 and $0.4500 per share, respectively)..... (15,902,145) (6,750,891)
------------ ------------
Total Distributions to Shareholders ............. (19,951,201) (8,779,861)
------------ ------------
Net Assets:
Beginning of period .............................. 276,504,460 285,126,520
------------ ------------
End of period (including undistributed net investment
income of $1,730,126 and $1,316,728, respectively). $285,126,520 $299,354,100
============ ============
</TABLE>
Analysis of Common Shareholder Transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1998
OCTOBER 31, 1997 (UNAUDITED)
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period ............ 15,002,724 $166,305,685 15,002,724 $166,252,942
Reclassification of capital accounts - (52,743) - -
----------- ------------ ---------- ------------
Shares outstanding, end of period .................. 15,002,724 $166,252,942 15,002,724 $166,252,942
=========== ============ ========== ============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the FundOs 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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED
------------------------------------------ APRIL 30, 1998
1993 1994 1995 1996 1997 (UNAUDITED)
-------- --------- ------- -------- -------- ---------
<S> <C> <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 $12.34
------ ------ ------ ------ ------ ------
Net Investment Income ........................... 1.13 1.10 1.31 1.19 1.16 0.56
Net Realized and Unrealized Gain (Loss)
on Investments 1.80 (3.61) 2.02 (0.06) 0.75 0.98
------ ------ ------ ------ ------ ------
Total from Investment Operations ............ 2.93 (2.51) 3.33 1.13 1.91 1.54
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends to DARTS Shareholders ................. (0.21) (0.22) (0.30) (0.28) (0.27) (0.14)
Dividends to Common Shareholders from Net
Investment Income ............................... (0.86) (0.93) (0.82) (0.97) (1.06) (0.45)
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) (0.59)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period .................. $13.65 $9.67 $11.88 $11.76 $12.34 $13.29
====== ====== ====== ====== ====== ======
Per Share Market Value, End of Period ........... $12.625 $8.875 $10.750 $10.875 $11.50 $11.875
Total Investment Return, at Market Value 22.06% (20.91%) 31.24% 9.86% 16.12% 7.13%(5)
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 $199,354
Ratio of Expenses to Average Net Assets (1)...... 1.28% 1.27% 1.33% 1.26% 1.21% 1.19%(4)
Ratio of Net Investment Income to Average
Net Assets (1)................................... 5.53% 6.20% 7.58% 6.47% 6.24% 5.67%(4)
Portfolio Turnover Rate ......................... 57% 52% 87% 35% 41% 14%
Senior Securities
Total DARTS Series A Outstanding (000s omitted).. $50,000 $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 $50,000
Asset Coverage per Unit (2) ..................... $307,595 $244,639 $276,974 $272,651 $284,939 $301,028
Involuntary Liquidation Preference DARTS
A per Unit (3) .................................. $100,000 $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 $100,000
Approximate Market Value per Unit (3) ........... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
(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 FundOs total liabilities (not including the
DARTS) from the FundOs 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) Annualized.
(5) Not annualized.
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the FundOs net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
Schedule of Investments
April 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Fund on April 30, 1998. It's divided into four main categories: preferred
stocks, common stocks, bonds and short-term investments. The stocks and bonds
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 (3.11%)
General Motors Corp., 9.12%,
Depositary Shares, Ser G .......... 208,800 $5,911,650
General Motors Corp., 9.125%,
Depositary Shares, Ser B .......... 130,000 3,388,125
---------
9,299,775
---------
Banks -D Foreign (0.83%)
Australia and New Zealand Banking Group
Ltd., 9.125% (Australia) .......... 51,200 1,392,000
Banco Bilbao Vizcaya International
(Gibraltar) Ltd., 9.75%, Gtd
Ser A, American Depositary Receipt
(ADR) (Spain) ..................... 40,000 1,112,500
---------
2,504,500
---------
Banks -D United States (9.16%)
ABN AMRO North America, Inc., 6.59%,
Ser H (R) .......................... 4,000 4,460,000
ABN AMRO North America, Inc., 8.75%,
Ser A (R) .......................... 1,060 1,250,800
Chase Manhattan Corp., 10.84%,
Ser C .............................. 137,376 4,224,312
Chase Manhattan Corp., 9.76%,
Ser B .............................. 68,000 1,861,500
Fleet Financial Group, Inc., 6.75%,
Ser VI ............................. 97,000 5,335,000
Fleet Financial Group, Inc., 9.35%,
Depositary Shares ................ 175,700 4,831,750
J.P. Morgan & Company Inc., 6.625%,
Depositary Shares, Ser H .......... 100,000 5,450,000
----------
27,413,362
----------
Broker Services (4.95%)
Bear Stearns Companies, Inc., 5.72%,
Ser F ............................. 40,000 $2,000,000
Bear Stearns Companies, Inc., 6.15%,
Ser E ............................. 84,300 4,467,900
Merrill Lynch & Co., Inc., 9.00%,
Depositary Shares, Ser A .......... 112,000 3,549,000
Morgan Stanley Group, Inc., 7.75%,
Depositary Shares ................. 91,000 4,811,625
----------
14,828,525
----------
Diversified Operations (0.51%)
Grand Metropolitan Delaware, L.P., 9.42%,
Gtd Ser A ......................... 54,000 1,525,500
----------
Finance (1.48%)
MBNA Corp., 7.50%, Ser A ........... 113,600 3,067,200
SI Financing Trust I, 9.50%, Gtd Pfd Sec &
Purchase Contract ................ 50,100 1,352,700
----------
4,419,900
----------
Insurance (4.87%)
Travelers Group, Inc., 6.213% ...... 96,000 5,112,000
Travelers Group, Inc. 6.231%,
Depositary Shares, Ser H .......... 64,500 3,418,500
Travelers Group, Inc., 6.365% ...... 28,500 1,567,500
Travelers Group, Inc., 8.40%,
Depositary Shares, Ser K .......... 160,000 4,480,000
----------
14,578,000
----------
Leasing Companies (1.17%)
AMERCO, 8.50%, Ser A ............... 90,300 2,432,456
Capita Preferred Trust, 9.06% ...... 40,000 1,075,000
----------
3,507,456
----------
Oil & Gas (1.79%)
Union Texas Petroleum Holdings, Inc.,
7.14%, Ser A ....................... 50,000 5,350,000
-----------
Paper & Paper Products (1.04%)
Bowater Inc., 8.40%,
Depositary Shares, Ser C .......... 120,000 3,120,000
----------
Utilities (38.95%)
Baltimore Gas & Electric Co., 6.70%,
Ser 1993 .......................... 10,000 1,110,000
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
Baltimore Gas & Electric Co., 6.99%,
Ser 1995 .......................... 30,000 $3,435,000
Boston Edison Co., 4.78% ........... 29,994 2,474,505
Commonwealth Edison Co., $7.24 ..... 35,785 3,614,285
Commonwealth Edison Co., $8.38 ..... 26,830 2,693,061
Commonwealth Edison Co., $8.40,
Ser A ............................. 48,586 4,910,223
Consumers Energy Co., $2.08
(Class A) ......................... 187,025 4,815,894
El Paso Tennessee Pipeline Co., 8.25%,
Ser A ............................. 181,100 10,254,788
Empire District Electric Co., 8.125%. 150,100 1,567,044
Entergy Gulf States, Inc.,
Adjustable Rate Preferred (ARP),
Depositary Shares, Ser B ......... 5,394 272,397
Florida Power & Light Co., 6.75%,
Ser U ............................. 33,000 3,675,375
Florida Power & Light Co., 6.98%,
Ser S ............................. 13,021 1,458,352
Hawaiian Electric Industries Capital
Trust I, 8.36% .................... 50,000 1,290,625
Idaho Power Co., 7.07% ............. 14,000 1,559,250
Indianapolis Power & Light Co., 5.65% 10,000 1,032,500
MCN Michigan, L.P., 9.375%,
Ser A ............................. 50,000 1,296,875
Massachusetts Electric Co., 6.99% .. 16,500 1,837,687
Monongahela Power Co., 7.73%,
Ser L ............................. 45,500 5,187,000
Montana Power Co., $6.875 .......... 50,000 5,550,000
Narragansett Electric Co., 6.95% ... 53,500 2,969,250
NIPSCO Capital Markets, Inc., 7.75%,
Ser A ............................. 76,000 1,919,000
PSI Energy, Inc., 6.875% ........... 45,430 5,065,445
Pacific Gas & Electric, 7.04%,
Ser U ............................. 75,542 2,086,848
Public Service Electric & Gas Co., 6.92% 45,500 5,078,938
Puget Sound Energy, Inc., 7.45%,
Ser II ............................ 155,711 4,379,371
Puget Sound Energy, Inc., 8.50%,
Ser III ........................... 164,405 4,356,733
Sierra Pacific Power Capital I, 8.60% 32,000 844,000
Sierra Pacific Power Co., $3.90,
Ser C ............................. 13,476 694,014
Sierra Pacific Power Co., 7.80%,
Ser 1 (Class A) .................... 153,986 4,388,601
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
South Carolina Electric & Gas Co.,
6.52% ............................. 50,000 $5,525,000
TDS Capital Trust I, 8.50% ......... 141,215 3,442,116
TDS Capital Trust II, 8.04% ........ 40,000 975,000
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 3,212,475
Texas Utilities Electric Co., $7.98. 34,500 3,933,000
UtiliCorp Capital, L.P., 8.875%,
Ser A ............................. 95,000 2,464,062
Virginia Electric & Power Co., $6.98 35,000 3,924,375
Virginia Electric & Power Co., $7.05 10,000 1,123,750
-----------
116,587,189
-----------
TOTAL PREFERRED STOCKS
(Cost $188,022,365) (67.86%) 203,134,207
COMMON STOCKS
Utilities (28.68%)
Boston Edison Co. .................. 90,000 3,667,500
Cinergy Corp. ...................... 105,000 3,661,875
Conectiv, Inc. (Class A) ........... 30,400 997,500
Conectiv, Inc. ..................... 85,000 1,779,687
DPL, Inc. .......................... 207,000 3,764,812
DTE Energy Corp. ................... 61,500 2,410,031
Dominion Resources, Inc. ........... 67,700 2,678,381
Florida Progress Corp. ............. 176,250 7,160,156
Hawaiian Electric Industries, Inc. .. 19,500 789,750
Houston Industries, Inc. ........... 82,300 2,391,844
Interstate Energy Corp. ............ 153,900 4,857,469
KeySpan Energy Corp. ............... 31,000 1,057,875
Long Island Lighting Co. ........... 152,600 4,568,463
MidAmerican Energy Holdings Co. .... 298,300 6,301,588
Montana Power Co. .................. 103,300 3,841,469
Nevada Power Co. ................... 75,000 1,842,187
New Century Energies, Inc. ......... 76,760 3,646,100
New England Electric System ........ 99,500 4,328,250
OGE Energy Corp. ................... 50,000 2,746,875
Pacific Enterprises ................ 51,100 1,989,706
PacifiCorp ........................ 26,900 625,425
Potomac Electric Power Co. ......... 150,500 3,687,250
Puget Sound Energy, Inc. ........... 215,400 5,667,713
Southern Co. ....................... 58,000 1,537,000
Teco Energy, Inc. .................. 72,000 1,917,000
Texas Utilities Co. ................ 29,000 1,160,000
SEE NOTES TO FINANCIAL STATEMENTS.
10
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================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund II
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
UtiliCorp United, Inc. ............. 75,000 $2,821,875
Washington Water Power Co. ......... 172,400 3,965,200
-----------
TOTAL COMMON STOCKS
(Cost $70,203,299) (28.68%) 85,862,981
------- -----------
INTEREST CREDIT PAR VALUE
RATE RATING* (000s OMITTED)
---- ------- --------------
BONDS
Utilities (1.68%)
K N Energy, Inc.,
Sr Deb 03-01-28 7.25% BBB- $5,000 5,020,650
-----------
TOTAL BONDS
(Cost $4,989,252) (1.68%) 5,020,650
------- -----------
SHORT-TERM INVESTMENTS
Commercial Paper (1.23%)
Chevron Corp.,
05-01-98 5.45 AA 3,703 3,702,720
-----------
TOTAL SHORT-TERM INVESTMENTS (1.23%) 3,702,720
------- -----------
TOTAL INVESTMENTS (99.45%) 297,720,558
------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.55%) 1,633,542
------- -----------
TOTAL NET ASSETS (100.00%) $299,354,100
------- -----------
(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 $5,710,800 or 1.91% of net assets as of
April 30, 1998.
* Credit ratings are unaudited and are rated by Moody's Investors Service or
John Hancock Advisers, Inc. where Standard and Poor's ratings are not
available.
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 Hanock Funds - Patriot Premium Dividend Fund II
(UNAUDITED)
NOTE A -
ACCOUNTING POLICIES
John Hancock Patriot Premium Dividend Fund II (the "Fund") is a diversified
closed-end management investment company, registered under the Investment
Company Act of 1940, as amended. Significant accounting policies of the Fund are
as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services,
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
Effective June 1, 1998, the Fund will determine the net asset value of the
Common Shares each business day at the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m. Eastern Time).
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 capital
loss carryforwards available to the extent provided by regulations, to offset
future net realized capital gains. To the extent such carryforwards are used by
the Fund, no capital gains distribution will be made. The carryforwards will
expire as follows: October 31, 2004 N $642,996 and October 31, 2005 N $921,185.
Expired capital loss carryforwards are reclassified to capital paid-in in the
year of expiration.
DIVIDENDS, INTEREST AND DISTRIBUTIONSE 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 3.34% to 3.99% and 3.88% to 4.27%, respectively, during the
period ended April 30, 1998. 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
12
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hanock Funds - Patriot Premium Dividend Fund II
Shares. The DARTS have a liquidation preference of $100,000 per share, plus
accumulated and unpaid dividends. The Fund is required to maintain certain asset
coverage with respects to the DARTS, as defined in the Fund's By-Laws.
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, Inc., 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 April 30, 1998, 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
assets are always equal and are marked to market on a periodic basis to reflect
any income earned by the investment as well as any unrealized gains or losses.
At April 30, 1998 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 April 30, 1998, aggregated $40,201,645 and $45,506,631, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended April 30, 1998.
The cost of long-term investments owned at April 30, 1998, for federal income
tax purposes was $263,214,916. Gross unrealized appreciation and depreciation of
investments aggregated $31,440,681 and $637,759, respectively, resulting in net
unrealized appreciation of $30,802,922 for federal tax purposes.
SHAREHOLDER MEETING
On March 5, 1998, 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 are duly elected and qualified, with the votes tabulated
as follows:
WITHHELD
FOR AUTHORITY
--- ---------
Edward J. Boudreau, Jr. 12,022,905 163,603
Anne C. Hodsdon 12,012,045 174,463
Steven R. Pruchansky 12,023,114 163,394
Norman H. Smith 12,024,753 161,755
The shareholders also ratified the Trustees' selection of Deloitte & Touche LLP
as the Fund's independent auditors for the fiscal year ending October 31, 1998,
with the votes tabulated as follows: 11,994,647 FOR, 44,569 AGAINST and 147,871
ABSTAINING.
13
<PAGE>
================================================================================
John Hanock 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 no 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 contract 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 to
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.
14
<PAGE>
================================================================================
John Hanock Funds - Patriot Premium Dividend Fund II
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions. Participants under the Plan will
receive tax information annually. The amount of dividend to be reported on Form
1099-DIV should be (1) in the case of 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).
15
<PAGE>
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