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John Hancock Funds
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Patriot
Select
Dividend
Trust
Annual Report
June 30, 1997
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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 AUCTION
MARKET PREFERRED SHARES
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
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110-1617
Listed New York Stock Exchange Symbol: DIV
John Hancock Closed-End Funds:
1-800-843-0090
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the year. Stocks
began 1997 on the high wires, bolstered by a near-perfect "Goldilocks" economy -
not too hot, not too cold. In almost a straight shot, the Dow Jones Industrial
Average soared through the 7000 level for the first time in early March. Just
days later, stocks lost their footing and staged a month-long free-fall in a
nervous reaction to rising interest rates and economic data that showed the
economy was picking up steam. Stocks gave back all of their year's gain and
suffered their worst decline since 1990 during this period. No sooner had real
fears begun to beset investors then they were gone, erased in a euphoric rally
caused by strong earnings and no signs of inflation. By the end of June, both
the Dow and the broader Standard & Poor's 500 Stock Index had risen by 20% - a
level not many thought the market would reach all year, let alone in six months.
Bondholders have not enjoyed the same bounty, as the bond market has mostly
stayed worried about the strength of the economy, the direction of interest
rates, and the Federal Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left
them pondering their valuation models, since the market is now more expensive
than it has been in decades. It's impossible to know what will happen next in
the markets. But whether it's another strong move forward or a retreat, we
recommend keeping a long-term perspective, rather than over-focusing on the
market's daily twists and turns. While the economic backdrop seems to remain
near perfect, the one thing we believe investors should be prepared for is more
market volatility. It also makes sense to do something we've always advocated:
set realistic expectations, since, as we've also seen this year, markets can
move down as fast as they go up.
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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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Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After such a
strong advance in equities over the last two and a half years, it could be time
to rebalance your portfolio, if you haven't already, to maintain your desired
targets of diversification. As part of that process, make sure that your
investment strategies still reflect your individual time horizons, objectives
and risk tolerance. Despite turbulence, one thing remains constant. A
well-constructed plan and a cool head can be the best tools for reaching your
financial goals.
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 Select
Dividend Trust
Electric utility stocks end on a strong note
after a year of volatility
Utility stocks-which comprised a large portion of the Fund's net assets
throughout the past 12 months-rotated through a number of peaks and valleys
during the period. In July 1996, utility stock prices-which generally correlate
with price movements in the bond market-plummeted as bond yields moved higher
and bond prices went lower. But beginning in the fall, utility stocks rallied
through the end of 1996 as inflation remained moderate and appeared to eliminate
the need for the Federal Reserve Board to raise interest rates. In January 1997,
utility stocks continued to rally on expectations that the Fed would lower
interest rates in light of a more benign inflationary outlook. By February,
however, there was evidence that economic growth was strengthening, resurrecting
inflationary fears and worries about higher interest rates. Utility stocks
faltered and remained valley-bound throughout the spring, as more data
supporting a strong economy was released and the Fed raised short-term interest
rates in March. But in May and June, utility stocks staged yet another about
face, rallying until the end of the period when bonds perked up on news that
economic growth had moderated.
Utility stocks
followed
bonds on a
bumpy path
for the last
12 months.
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A 2 1/4" x 3 1/2" photo of Gregory Phelps. Caption reads "Gregory K. Phelps".
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3
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John Hancock Funds - Patriot Select Dividend Trust
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Pie chart with heading "Portfolio Diversification" at top of left hand column.
The chart is divided into four sections. Going from top clockwise: Other 1%;
Financials 21%; Utilities 71%; Industrials 7%.
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For the year ended June 30, 1997,
John Hancock Patriot Select Dividend Trust had a total return of 12.46% at net
asset value, compared to 8.42% for the Dow Jones Utilities Index.
"Among the
Fund's best
performers
were our
financial
stocks..."
DRD-eligible securities
Throughout the past year, we maintained our emphasis on cushion-preferred and
common stocks with above-average dividend yields that tend to "cushion" them
against price swings. That focus helped our performance when the bond market was
lagging in one of its valleys. When interest rates were falling, however,
cushion preferreds and commons had a mixed impact on the Fund's performance.
While they augmented our yield, they limited the Fund's price gains. Nearly all
of our preferred stock holdings were DRD-eligible, which generally made a
positive contribution to our performance. DRD stands for "dividends-received
deduction," which offers major tax advantages for corporations that invest in
them. The total available supply of DRD-eligible securities was already quite
low when the Federal Reserve Bank gave banks (a primary issuer in the DRD
market) more flexibility to issue less costly non-DRD securities this past
October. Banks, along with utilities, curtailed their new DRD issuance. That,
coupled with issuers' redeeming or tendering for their outstanding DRD
securities, caused an overall contraction in the amount of DRD securities
outstanding. In a classic example of limited supply trying to satisfy strong
demand, DRD-eligible preferred stocks-which made up the vast majority of the
Fund's investments-performed well.
- --------------------------------------------------------------------------------
Table entitled "Scorecard" at bottom of 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 "Utilicorp
United." followed by an up arrow and the phrase "Bundling of
communications/utilities/security services." The second listing is "Fleet
Financial" followed by an up arrow and the phrase "Improving financial results/
new acquisitions." The third listing is "Source One Mortgage Services" followed
by a down arrow and the phrase "Weak earnings prompt credit downgrade." Footnote
below reads: "See "Schedule of Investments." Investment holdings are subject to
change."
- --------------------------------------------------------------------------------
Increased focus on utilities
Our stake in utility stocks rose to 71% of the Fund's net assets at the end of
the period, up from 66% a year earlier. This increase can be attributed to two
factors. First, we reclassified our natural gas companies as utility holdings to
align with changes in the Dow Jones Utilities Index. One of our best performers
in this area was El Paso Tennessee Pipeline. Not only is the issue DRD-eligible,
but it also offers an attractive coupon and about four years of call protection.
A security with call protection can't be redeemed by the issuer prematurely. The
second reason for our rising utility stake was that some of our DRD preferred
holdings-particularly in the insurance sector-were redeemed by their issuer
during the period. Because insurance stocks currently offer relatively paltry
dividends and their prices tend to be volatile, we replaced them with
higher-dividend, less volatile utility common stocks. A representative addition
was New England Electric Systems, which offers a high dividend, has excellent
relationships with
4
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John Hancock Funds - Patriot Select Dividend Trust
- --------------------------------------------------------------------------------
Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended June 30, 1996." The chart is scaled
in increments of 5% from bottom to top, with 15% at the top and 0% at the
bottom. Within the chart there are two solid bars. The first represents the
12.46% total return for John Hancock Patriot Select Dividend Trust. The second
represents the 8.42% total return of the Dow Jones Utility Average. Footnote
below reads: "The total return for John Hancock Patriot Select Dividend Trust is
at net asset value with all distributions reinvested. The Dow Jones Utility
Average is an unmanaged index which measures the performance of the utility
industry in the United States."
- --------------------------------------------------------------------------------
regulatory bodies, operates in a positive regulatory environment and has a very
strong balance sheet. Another common stock addition was Utilicorp United, which
has an attractive dividend yield of 6.00%. The stock performed well recently
because it announced a joint venture with AT&T, Peco Energy and ADT to provide
one-stop shopping for electric, gas, telephone and security services. South
Carolina Electric and Gas, a preferred holding in the Fund, also performed well
during the period. Not only is the security DRD-eligible, but it also carries a
relatively high credit rating, offers an attractive 6.52% coupon and five years
of call protection. The stock enjoyed solid price appreciation from when we
bought it in mid-April through the end of the period.
Financials post strong gains
Among the Fund's best performers were our financial stocks - which stood at 21%
of the Fund's assets at the end of the period. Financials were boosted by a
combination of factors including rapid consolidation among financial
institutions and rising demand for investment and banking services by aging baby
boomers. Fleet Financial Group rose thanks to those trends and its improved
financial results gained by the aggressive acquisition of competitors. Fleet's
preferred stock offers DRD-eligibility, 10 years of call protection and a 6.75%
coupon. Another strong bank was ABN Amro, North America, the U.S. holding
company of the large Dutch banking concern. This preferred stock offers
DRD-eligibility, 10 years of call protection, a 6.59% coupon and a AA-credit
rating. Brokerage holdings including Merrill Lynch and Saloman Inc., also posted
impressive gains during the period. On a disappointing note, Source One Mortgage
Service Corp. suffered when its credit rating was downgraded on news of
lower-than-expected first quarter 1997 earnings. However, we continue to hold
the stock because it carries a yield of 8.42%, is DRD-eligible and has two years
of call protection.
The Fund
plans to stay
defensive in
an uncertain
interest-rate
environment.
Outlook
Looking ahead, we believe that the Federal Reserve Board is likely to continue
to raise interest rates until there are tangible signs that the economy is
slowing. Until the "tightening" cycle is complete, we believe both the bond and
stock markets will continue to be volatile. Given that outlook, we will continue
to focus on DRD-eligible preferreds where favorable supply and demand factors
favor them. What's more, our emphasis on cushion preferreds with good call
protection should help maximize the Fund's yield, while stabilizing its share
price in the event of a market correction.
- --------------------------------------------------------------------------------
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 Select Dividend Trust
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on June 30, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
June 30, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Preferred stocks (cost - $160,626,244) ..................... $ 168,537,977
Common stocks (cost - $48,021,665) ......................... 52,014,631
Short-term investments (cost - $3,677,987) ................. 3,677,987
-------------
............................................................... 224,230,595
Dividends receivable ......................................... 1,288,556
Other assets ................................................. 15,455
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Total Assets ..................... 225,534,606
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Liabilities:
AMPS dividend payable ........................................ 164,498
Common Share dividend payable ................................ 109,679
Payable for investments purchased ............................ 283,654
Payable to John Hancock Advisers, Inc. - Note B .............. 197,451
Federal income tax payable - Note A .......................... 516,849
Accounts payable and accrued expenses ........................ 48,792
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Total Liabilities ................ 1,320,923
-------------------------------------------------
Net Assets:
Auction Market Preferred Shares Series A (AMPS)
Without par value, unlimited number of shares of
beneficial interest authorized, 700 shares issued,
liquidation preference of $100,000 per share -
Note A ..................................................... 70,000,000
-------------
Common Shares - Without par value, unlimited number
of shares of beneficial interest authorized, 9,885,027
shares issued and outstanding .............................. 139,427,509
Distributions in excess of net realized gain
on investments ............................................. ( 160,617)
Net unrealized appreciation of investments ................... 11,905,851
Undistributed net investment income .......................... 3,040,940
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Net Assets Applicable to Common Shares
($15.60 per share based on 9,885,027
shares outstanding) ........................................ 154,213,683
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Net Assets ....................... $ 224,213,683
=================================================
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 June 30, 1997
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $28,530) ...... $16,537,928
Interest ..................................................... 198,593
-----------
............................................................... 16,736,521
-----------
Expenses:
Investment management fee - Note B ......................... 1,761,512
Administration fee - Note B ................................ 330,283
AMPS and auction fees ...................................... 202,306
Federal excise tax ......................................... 155,377
Custodian fee .............................................. 64,610
Printing ................................................... 53,940
Auditing fee ............................................... 51,980
Transfer agent fee ......................................... 42,587
Miscellaneous .............................................. 31,840
Trustees' fees ............................................. 20,884
Legal fees ................................................. 8,059
-----------
Total Expenses ................... 2,723,378
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Net Investment Income ............ 14,013,143
-------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold (net of federal
income taxes of $516,849) .................................. 1,321,734
Change in net unrealized appreciation/depreciation
of investments ............................................. 5,182,877
-----------
Net Realized and Unrealized
Gain on Investments .............. 6,504,611
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........ $20,517,754
=================================================
Distributions to AMPS ............ ( 2,806,445)
-------------------------------------------------
Net Increase in Net Assets
Applicable to Common
Shareholders Resulting from
Operations Less AMPS
Distributions .................... $17,711,309
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Select Dividend Trust
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 14,838,672 $ 14,013,143
Net realized gain on investments sold 2,153,915 1,321,734
Change in net unrealized appreciation/depreciation of investments 3,048,191 5,182,877
------------ ------------
Net Increase in Net Assets Resulting from Operations 20,040,778 20,517,754
------------ ------------
Distributions to Shareholders:
AMPS ($4,278 and $4,009 per share, respectively) - Note A ( 2,994,753) ( 2,806,445)
Common Shares - Note A
Dividends from net investment income ($1.1329 and $1.2371
per share, respectively) ( 11,198,710) ( 12,228,832)
Distributions from net realized gain on investments sold ($0.1042
and none per share, respectively) ( 1,030,173) -
------------ ------------
Total Distributions to Shareholders ( 15,223,636) ( 15,035,277)
------------ ------------
Net Assets:
Beginning of period 213,914,064 218,731,206
------------ ------------
End of period (including undistributed net investment income of
$3,112,514 and $3,040,940, respectively) $218,731,206 $224,213,683
============ ============
Analysis of Common Shareholder Transactions:
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1996 1997
--------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period 9,885,027 $137,984,373 9,885,027 $138,623,025
Reclassification of net realized long-term gains retained on investments
sold (net of federal income taxes of $438,897 and $516,849,
respectively) - Note A - 815,094 - 959,861
Reclassification of capital accounts - Note D - ( 176,442) - ( 155,377)
--------- ------------ --------- ------------
Shares outstanding, end of period 9,885,027 $138,623,025 9,885,027 $139,427,509
========= ============ ========= ============
</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 reclassification of capital
amounts and the number of shares outstanding at the beginning and end of the
period for the last two periods, along with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Select Dividend Trust
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Common Shares
Per Share Operating Performance
Net Asset Value, Beginning of Period .................................. $ 15.78 $ 17.33 $ 13.17 $ 14.56 $ 15.05
-------- -------- ------- -------- --------
Net Investment Income ................................................. 1.31 1.34 1.62 1.50 1.42
Net Realized and Unrealized Gain (Loss) on Investments ................ 2.11 ( 3.47) 1.31 0.53 0.65
-------- -------- ------- -------- --------
Total from Investment Operations .................................... 3.42 ( 2.13) 2.93 2.03 2.07
-------- -------- ------- -------- --------
Less Distributions:
Dividends to AMPS Shareholders ........................................ ( 0.22) ( 0.22) ( 0.30) ( 0.30) ( 0.28)
Distributions to Common Shareholders from Net Investment Income ....... ( 1.08) ( 1.30) ( 1.24) ( 1.13) ( 1.24)
Distributions to Common Shareholders from Net Realized
Short-Term Gain on Investments ...................................... ( 0.57) ( 0.51) - ( 0.11) -
-------- -------- ------- -------- --------
Total Distributions ................................................. ( 1.87) ( 2.03) ( 1.54) ( 1.54) ( 1.52)
-------- -------- ------- -------- --------
Net Asset Value, End of Period ........................................ $ 17.33 $ 13.17 $ 14.56 $ 15.05 $ 15.60
======== ======== ======= ======== ========
Per Share Market Value, End of Period ................................. $ 18.250 $ 12.750 $ 13.875 $ 14.250 $ 14.313
Total Investment Return at Market Value ............................... 19.14% ( 21.60%) 19.73% 11.83% 9.38%
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period (000s omitted) .. $170,512 $130,157 $143,914 $148,731 $154,214
Ratio of Expenses to Average Net Assets (1) ........................... 1.52% 1.30% 1.29% 1.25% 1.24%
Ratio of Net Investment Income to Average Net Assets (1) .............. 5.50% 5.83% 7.96% 6.79% 6.36%
Portfolio Turnover Rate ............................................... 53% 39% 107% 49% 47%
Average Broker Commission Rate (4) .................................... N/A N/A N/A N/A $ 0.0702
Senior Securities
Total AMPS Outstanding (000s omitted) ................................. $ 70,000 $ 70,000 $ 70,000 $ 70,000 $ 70,000
Asset Coverage per Unit (2) ........................................... $339,312 $285,137 $305,754 $306,112 $318,281
Involuntary Liquidation Preference 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
(1) Ratios calculated on the basis of expenses and net investment income applicable to both the 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 AMPS) from the Fund's
total assets and dividing such amount by the number of AMPS 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.
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends 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 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 Select Dividend Trust
Schedule of Investments
June 30, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Patriot Select Dividend Trust on June 30, 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 (4.14%)
Ford Motor Co., 8.25%,
Depositary Shares, Ser B ............... 60,000 $ 1,695,000
General Motors Corp., 9.12%,
Depositary Shares, Ser G ............... 170,000 4,930,000
General Motors Corp., 9.125%,
Depositary Shares, Ser B ............... 97,750 2,651,469
------------
9,276,469
------------
Banks - Foreign (0.66%)
Australia and New Zealand Banking
Group Ltd., 9.125% (Australia) ......... 55,000 1,488,437
------------
Banks - United States (10.02%)
ABN AMRO North America, Inc.,
6.59% (R) .............................. 4,000 4,060,000
Ahmanson, H.F. & Co., 8.40%,
Depositary Shares, Ser C ............... 35,000 901,250
BankBoston Corp., 8.60%,
Depositary Shares, Ser E ............... 97,886 2,496,093
Chase Manhattan Corp., 10.84%, Ser C ..... 52,800 1,626,900
Chase Manhattan Corp., 9.76%, Ser B ...... 51,000 1,412,062
Fleet Financial Group, Inc., 6.75%,
Ser VI ................................. 119,000 6,232,625
Fleet Financial Group, Inc., 9.35%,
Depositary Shares ...................... 165,000 4,578,750
LaSalle National Corp., 8.75%,
Ser K, (R) ............................. 22,000 1,149,500
------------
22,457,180
------------
Broker Services (2.51%)
Merrill Lynch & Co., Inc., 9.00%,
Depositary Shares, Ser A ............... 55,700 1,664,038
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Broker Services (continued)
Morgan Stanley Group, Inc., 7.75%,
Depositary Shares ...................... 20,000 $ 1,085,000
Salomon Inc., 8.08%,
Depositary Shares, Ser D ............... 50,000 1,271,875
Salomon Inc., 8.40%,
Depositary Shares, Ser E ............... 60,000 1,605,000
------------
5,625,913
------------
Diversified Operations (0.31%)
Grand Metropolitan Delaware, L.P., 9.42%,
Gtd Ser A .............................. 25,000 696,875
------------
Finance (2.31%)
Source One Mortgage Services Corp.,
8.42%, Ser A ........................... 143,000 3,682,250
Southern Union Financing I, 9.48% ........ 59,000 1,508,188
------------
5,190,438
------------
Insurance (2.83%)
American Life Holding Co., $2.16 ......... 40,000 1,050,000
Provident Companies, Inc., 8.10%,
Depositary Shares ...................... 41,500 1,071,219
Travelers Group, Inc., 6.365% ............ 84,400 4,220,000
------------
6,341,219
------------
Leasing Companies (1.66%)
AMERCO, 8.50%, Ser A ..................... 105,000 2,690,625
Capita Preferred Trust, 9.06% ............ 40,000 1,027,500
------------
3,718,125
------------
Oil & Gas (0.78%)
Enterprise Oil PLC, 10.50%, Ser A,
American Depository Receipts
("ADR") (United Kingdom) ............... 24,500 652,312
Lasmo PLC, 10.00%, Ser A, ADR
(United Kingdom) ....................... 42,000 1,089,375
------------
1,741,687
------------
Paper & Paper Products (2.55%)
Boise Cascade Corp., 9.40%,
Depositary Shares, Ser F ............... 103,000 2,626,500
Bowater Inc., 8.40%,
Depositary Shares, Ser C ............... 120,000 3,090,000
------------
5,716,500
------------
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Select Dividend Trust
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (47.40%)
Atlanta Gas Light Co., 7.70%,
Depositary Shares ........................ 63,100 $ 1,605,106
Baltimore Gas & Electric Co., 6.70%,
Ser 1993 ................................. 10,000 1,057,500
Baltimore Gas & Electric Co., 6.99%,
Ser 1995 ................................. 40,000 4,324,000
Baltimore Gas & Electric Co., 7.78%,
Ser 1973 ................................. 16,515 1,668,015
Boston Edison Co., 4.25% ................... 39,314 2,427,640
Boston Gas Co., 6.421%, Ser A .............. 64,000 1,632,000
Coastal Corp., $2.125, Ser H ............... 174,125 4,461,953
Columbus Southern Power Co., 8.375%,
Ser A .................................... 60,000 1,500,000
Commonwealth Edison Co., $8.38 ............. 44,700 4,425,300
Commonwealth Edison Co., $8.40,
Ser A .................................... 25,110 2,511,000
Consumers Energy Co., $2.08 (Class A) ...... 119,375 3,073,906
Detroit Edison Co., 7.75%,
Depositary Shares ........................ 60,000 1,522,500
El Paso Tennessee Pipeline Co., 8.25%,
Ser A .................................... 135,000 7,290,000
Entergy Gulf States, Inc., Adjustable Rate
Preferred, Depositary Shares, Ser B ...... 41,002 1,968,096
Florida Power & Light Co., 6.75%, Ser U .... 25,000 2,643,750
Hawaiian Electric Industries Capital
Trust I, 8.36% ........................... 50,000 1,256,250
Jersey Central Power & Light Co., 7.52%,
Ser K .................................... 6,500 679,250
Massachusetts Electric Co., 6.84% .......... 89,000 2,269,500
Massachusetts Electric Co., 6.99% .......... 13,500 1,399,275
MCN Michigan, L.P., 9.375%, Ser A .......... 50,000 1,312,500
Monongahela Power Co., 7.73%, Ser L ........ 44,000 4,719,000
Montana Power Co., $6.875 .................. 36,500 3,832,500
Narragansett Electric Co., 6.95% ........... 17,950 942,375
NIPSCO Capital Markets, Inc., 7.75%,
Ser A .................................... 32,000 786,000
PECO Energy Co., $7.48 ..................... 19,200 2,047,200
Phillips Gas Co., 9.32%, Ser A ............. 52,000 1,352,000
Potomac Electric Power Co., $3.82,
Ser 1969 ................................. 33,743 1,699,804
PSI Energy, Inc., 6.875% ................... 48,000 5,066,400
PSI Energy, Inc., 7.44% .................... 122,000 3,111,000
Public Service Electric & Gas Co., 6.92% ... 14,000 1,428,000
Puget Sound Energy, Inc., 7.45%, Ser II .... 165,140 4,458,780
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
Puget Sound Energy, Inc., 8.50%, Ser III .. 99,530 $ 2,575,339
Sierra Pacific Power Capital I, 8.60% ..... 30,000 772,500
Sierra Pacific Power Co., 7.80%, Ser 1
(Class A) ............................... 183,600 5,067,360
South Carolina Electric & Gas Co.,
6.52% ................................... 50,000 5,200,000
Southern California Gas Co., 7.75% ........ 49,902 1,263,144
Texas Utilities Electric Co., $1.805,
Depositary Shares, Ser B ................ 53,581 1,399,804
Texas Utilities Electric Co., $1.875,
Depositary Shares, Ser A ................ 128,000 3,456,000
Texas Utilities Electric Co., $2.05,
Depositary Shares ....................... 33,500 841,687
Texas Utilities Electric Co., $7.98 ....... 29,200 3,164,550
UtiliCorp Capital, L.P., 8.875%, Ser A .... 70,000 1,872,500
Virginia Electric & Power Co., $6.98 ...... 10,500 1,126,650
Virginia Electric & Power Co., $7.05 ...... 10,000 1,075,000
-------------
106,285,134
-------------
TOTAL PREFERRED STOCKS
(Cost $160,626,244) ( 75.17%) 168,537,977
-------- -------------
COMMON STOCKS
Utilities (23.20%)
Allegheny Power System, Inc. ............... 86,000 2,295,125
Boston Edison Co. .......................... 25,800 680,475
CINergy Corp. .............................. 75,000 2,610,938
Consolidated Edison Co. of NY, Inc. ........ 50,000 1,471,875
Delmarva Power & Light Co. ................. 60,000 1,143,750
DPL, Inc. .................................. 200,000 4,925,000
Hawaiian Electric Industries, Inc. ......... 19,400 749,325
IES Industries, Inc. ....................... 100,000 2,950,000
MidAmerican Energy Holdings Co. ............ 327,600 5,671,575
Montana Power Co. .......................... 88,400 2,049,775
Nevada Power Co. ........................... 75,000 1,593,750
New England Electric System ................ 45,000 1,665,000
NYNEX Corp. ................................ 35,000 2,016,875
OGE Energy Corp. ........................... 40,000 1,820,000
Pacific Enterprises ........................ 25,000 840,625
PacifiCorp ................................. 120,000 2,640,000
Potomac Electric Power Co. ................. 39,300 908,812
Puget Sound Power & Light Co. .............. 215,500 5,710,750
Sierra Pacific Resources ................... 35,000 1,120,000
Southwestern Public Service Co. ............ 47,700 1,875,206
SEE NOTES TO FINANCIAL STATEMENTS.
10
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Select Dividend Trust
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
Teco Energy, Inc. .......................... 100,000 $ 2,556,250
UtiliCorp United, Inc. ..................... 70,000 2,038,750
Washington Water Power Co. ................. 136,600 2,680,775
------------
TOTAL COMMON STOCKS
(Cost $48,021,665) .................. ( 23.20%) 52,014,631
------------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Finance (1.64%)
Prudential Funding Corp.,
07-01-97 ................ 5.55% $ 3,678 3,677,987
------------
TOTAL SHORT-TERM INVESTMENTS ( 1.64%) 3,677,987
-------- ------------
TOTAL INVESTMENTS ( 100.01%) $224,230,595
======== ============
(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 $5,209,500 or 2.32% of net assets as of
June 30, 1997.
Parenthetical disclosure of a foreign country in the security description
represents country of a 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 Select Dividend Trust
NOTE A -
ACCOUNTING POLICIES
John Hancock Patriot Select Dividend Trust (the "Fund") is a diversified
closed-end management investment company, registered under the Investment
Company Act of 1940. Significant accounting policies of the Fund are as follows:
VALUATION 0F 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders.
The Fund has chosen to retain and pay the applicable federal income tax on
its net long-term capital gains for its fiscal year ended June 30, 1997.
Shareholders will be informed of their proportionate share of the undistributed
net long-term gains and the tax paid on their share of such gains via IRS Form
2439, which will be mailed within 60 days of the Fund's fiscal year end.
Shareholders are required to include income reported to them on IRS Form 2439 in
their taxable income as long-term capital gains; tax paid on their behalf as
reported on IRS Form 2439 may be credited against any resulting federal income
tax liability. Information reported to shareholders on IRS Form 2439 will not be
reported on IRS Form 1099-DIV, the form usually used to report the Fund's
taxable income to its shareholders.
In addition to the above, shareholders are entitled to increase the
adjusted tax basis of their shares in the Fund, by the excess of capital gains
included in their income over their tax paid by the Fund on such gains, as
reported on IRS Form 2439.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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 June 30, 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.
AUCTION MARKET PREFERRED SHARES SERIES A (AMPS) The Fund issued 700 shares of
Auction Market Preferred Shares Series A (AMPS) on August 30, 1990 in a public
offering. The underwriting discount was recorded as a reduction of the capital
of the Common Shares. Dividends on the AMPS, which accrue daily, are cumulative
at a rate which was established at the offering of the AMPS and have been reset
every 49 days thereafter by an auction. Dividend rates ranged from 3.82% to
4.23% during the period ended June 30, 1997.
The AMPS 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 AMPS 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 AMPS. If the dividends on the AMPS shall remain unpaid in an
amount equal to two full years' dividends, the holders of the AMPS as a class
have the right to elect a majority of the Board of Trustees. In general, the
holders of the AMPS and the Common Shares have equal voting rights of one vote
per share,
12
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Select Dividend Trust
except that the
holders of the AMPS, 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 AMPS and Common Shares. The AMPS have a
liquidation preference of $100,000 per share, plus accumulated and unpaid
dividends. The Fund is required to maintain certain asset coverage with respect
to the AMPS, as defined in the Fund's By-Laws.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the present 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 0.80% of the Fund's average weekly
net assets.
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 the sum of 0.15% 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 directors and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At June 30, 1997, the Fund's investment to cover the deferred
compensation liability had unrealized appreciation of $2,339.
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 June 30, 1997, aggregated $100,851,017 and $100,681,885, respectively.
There were no purchases or sales of obli-gations of the U.S. government and its
agencies during the period ended June 30, 1997.
The cost of investments owned at June 30, 1997 (including the short-term
investments) for federal income tax purposes was $212,486,512. Gross unrealized
appreciation and depreciation of investments aggregated $12,251,332 and
$507,249, respectively, resulting in net unrealized appreciation of $11,744,083.
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 June 30, 1997, the Fund has reclassified $155,377 of federal excise taxes
from undistributed net investment income to Common Shares capital.
Also, for the year ended June 30, 1997, $795,183 was redesignated from
distributions from net investment income to distributions in excess of net
realized gain on investments.
13
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Select Dividend Trust
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
John Hancock Patriot Select Dividend Trust
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of John Hancock Patriot Select Dividend Trust (the
"Fund") as of June 30, 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 June 30, 1996 and
the financial highlights for the four years ended June 30, 1996, were audited by
other auditors whose report, dated August 9, 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 June 30,
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 priciples 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 June 30,
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
August 1, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Trust paid during its taxable year ended June
30, 1997.
All of the dividends paid for the fiscal year are taxable as ordinary
income. Distributions to preferred and common shareholders were 100% qualified
for the dividends received deduction available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV
in January 1998. This will reflect the total of all distributions which are
taxable for calendar year 1997.
SHAREHOLDER MEETING (UNAUDITED)
On March 6, 1997, the Annual Meeting of John Hancock Patriot Select Dividend
Trust (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
--- ---------
Charles L. Ladner 9,136,377 146,698
Leo E. Linbeck, Jr. 9,114,051 169,024
Patricia P. McCarter 9,129,124 153,950
The preferred shareholders elected Richard S. Scipione to serve until his
successor is duly elected and qualified, with the votes tabulated as follows:
534 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
June 30, 1997, with the votes tabulated as follows: 9,061,721 FOR, 54,910
AGAINST and 166,978 ABSTAINING.
14
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John Hancock Funds - Patriot Select Dividend Trust
INVESTMENT OBJECTIVE AND POLICY
The Fund's investment objective is to provide high current income, consistent
with modest growth of capital for holders of its common shares. The Fund will
pursue its objective by investing in a diversified portfolio of dividend-paying
preferred and common equity securities.
DIVIDEND REINVESTMENT PLAN
The Fund provides shareholders with a Dividend Reinvestment Plan ("the Plan")
which offers the opportunity to earn compounded yields. Each holder of common
shares will automatically have all distributions of dividends and capital gains
reinvested by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts, 02110, as agent for the common shareholders unless an election is
made to receive cash. Holders of Common Shares who elect not to participate in
the Plan will receive all distributions in cash, paid by check, mailed directly
to the shareholder of record (or if the Common Shares are held in street or
other nominee name then to the nominee) by the Plan Agent, as dividend
disbursing agent. Shareholders whose shares are held in the name of a broker or
nominee should contact the broker or nominee to determine whether and how they
may participate in the Plan.
If the Fund declares a dividend payable either in Common Shares or in cash,
nonparticipants will receive cash and participants in the Plan will receive the
equivalent in Common Shares. If the market price of the Common Shares on the
payment date for the dividend is equal to or exceeds their net asset value as
determined on the payment date, participants will be issued Common Shares (out
of authorized but unissued shares) at a value equal to the higher of net asset
value or 95% of the market price. If the net asset value exceeds the market
price of the Common Shares at such time, or if the Board of Trustees declares a
dividend payable only in cash, the Plan Agent will, as agent for Plan
participants, buy shares in the open market on the New York Stock Exchange or
elsewhere for the participant's accounts. Such purchases will be made promptly
after the payable date for such dividend and, in any event, prior to the next
ex-dividend date, 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 shareholders' 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
gains distributions, except for certain brokerage commissions, as described
above.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions. Participants under the Plan will
receive tax information annually. The amount of dividend to be reported on Form
1099-DIV should be (1) in the case of shares issued by the Fund, the fair market
value of such shares on the div-
15
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John Hancock Funds - Patriot Select Dividend Trust
idend 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 at least 90 days after 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, Mas-sachusetts 02266-8209 (telephone 1-800-426-5523).
16
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NOTES
17
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NOTES
18
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NOTES
19
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