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John Hancock Funds
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Patriot
Premium
Dividend
Fund I
ANNUAL REPORT
September 30, 1996
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TRUSTEES
Edward J. Boudreau, Jr.
Thomas W.L. Cameron
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Richard S. Scipione
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN AND TRANSFER AGENT FOR
COMMON SHAREHOLDERS
State Street Bank and Trust
Company 225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT FOR DARTS
Chemical Bank
450 West 33rd Street
New York, New York 10001
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
One International Place
Boston, Massachusetts 02110-2604
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Most analysts agree that the Social Security system will run out of money by the
year 2030 unless Congress makes some changes. Although it seems a long way off,
the issue is serious enough that a presidential commission is already studying
the problem, and experts and politicians alike have weighed in with a slew of
prescriptions. With the election behind us, we could well see some legislative
action next year in Congress on the subject.
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The problem stems from demographic and societal changes. The number of
retirees collecting Social Security is growing rapidly, while the number of
workers supporting the system is shrinking. Consider this: in 1950, there were
16 workers paying into the Social Security system for each retiree collecting
benefits. Today, there are three workers for each retiree and by 2019 there will
be two. Starting then, the Social Security Administration estimates that the
amount paid out in Social Security benefits will start to be greater than the
amount collected in Social Security taxes. Compounding the issue is the fact
that people are retiring earlier and living longer.
The state of the system has already left many people, especially younger
and middle-aged workers, feeling insecure about Social Security. A recent survey
by the Employee Benefits Research Institute (EBRI) found that 79% of current
workers polled had little confidence in the ability of Social Security to
maintain the same level of benefits as those received by today's retirees.
Instead, they said they expect to use their own savings or employer-sponsored
pensions for their retirement. Yet, remarkably, another EBRI survey revealed
that only slightly more than half of America's current workers are saving money
for retirement. Fewer than half own IRAs or participate in employer-sponsored
pension or savings plans.
No matter how Social Security's problems get solved, one thing is clear.
Americans need to rely on themselves for accumulating the bulk of their
retirement savings. There's no law that says you should have to reduce your
standard of living once you stop working. So we encourage you to save all that
you can now, so you can live the way you'd like later.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Gregory K. Phelps for the Portfolio Management Team
John Hancock
Patriot Premium
Dividend Fund I
Fund produces solid gains in choppy market environment
After a decisive victory in 1995, the bond market hasn't been able to make up
its mind this year. Sentiment has swung sharply and quickly in the past nine
months as investors have tried to figure out where the U.S. economy is headed.
The result has been a volatile bond market susceptible to the whims of the
latest economic reports. Throughout the year, bond prices dropped as strong
economic news sparked fears of inflation N and then rallied back as weaker
reports reassured investors that economic growth was under control.
Utility stocks N the focus of the Fund's investment strategy N have
suffered from the bond market's volatility. That's not surprising given that
utility stocks tend to follow the bond market closely. Other factors have also
kept the group under pressure. Fears of increased industry competition heated up
as closely watched regulators in Massachusetts, New York and New Hampshire
pushed aggressively for lower utility rates. What's more, operating problems at
several high-profile nuclear plants dimmed investor sentiment. Utility stocks,
however, have bounced back recently thanks to a bond market rally and positive
regulatory news from California.
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"Utility stocks...have suffered from the bond market's volatility."
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Performance recap
For the year ended September 30, 1996, John Hancock Patriot Premium Dividend
Fund I had
[A 2" x 3 1/4" photo of the portfolio management team at bottom right hand
column. Caption reads: "The Patriot management team: (l-r) Beverly Cleathero,
Gregory Phelps, Laura Provost."]
3
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John Hancock Funds - Patriot Premium Dividend Fund I
[The Pie chart with the heading `Portfolio Diversification" at top of left hand
column. The chart is divided into five sections. Going from top left to right:
Industrials 13%; Short-term Investments & Other 4%; Preferred Stock Utilities
50%; Common Stock Utilities 16%; Financials 17%. A footnote below states "As a
percentage of net assets on September 30, 1996."]
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"Our biggest winners were among preferred stocks..."
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a total return of 7.27% at net asset value. That compared to a return of 7.21%
for the Dow Jones Utility Average and 7.72% for the average preferred stock
closed-end fund, according to Lipper Analytical Services. Our biggest winners
were among preferred stocks with dividends received deduction (DRD) eligibility.
The important thing to know about DRD-eligible securities i s that they offer
distinct tax advantages to corporate investors. With the supply of DRDs
shrinking, demand has been unusually strong and that's driven prices way up.
Monongahela Power stands out as one of our best performers in this area. Not
only is the security DRD- eligible with a fixed dividend of $7.73, but it also
offers eight years of call protection. That means the issuer cannot redeem the
security for at least eight years and we can continue to earn its attractive
yield.
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers. The first listing is Monongahela
Power followed by an up arrow and the phrase "DRD-eligibility boosts price." The
second listing is Oklahoma Gas & Electric Co. followed by an up arrow and the
phrase "Takeover speculation." The third listing is Peco Energy Co. followed by
a down arrow and the phrase "Troubled nuclear plants." Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."]
Peco Energy Co., on the other hand, has been a disappointment. With its
Salem nuclear power plants shut down, this Philadelphia utility has suffered
from higher maintenance and energy costs. Despite its recent underperformance,
however, we're still holding the stock for a couple of reasons. First, investor
fears are overblown and the stock has simply gotten too cheap. Second, Peco's
fundamentals are still intac t. Not only does it have an attractive dividend
yield and improving balance sheet, but the company has laid out specific plans
to reopen its Salem nuclear plants. Once investors recognize that, the stock
should bounce back.
Defensive strategy remains intact
Throughout the year, we've kept our defensive posture in order to protect
against rising interest rates and to preserve the Fund's net asset value. Our
strong focus on preferred stocks N 82% of the Fund's net assets N helped us do
just that. Because of their above-average yields, preferred stocks tend to
cushion against rising interest rates. As we explained in the semi-annual report
six months ago, we look for three things in choosing preferred stocks: an
attractive dividend yield, DRD-eligibility and good call protection.
In recent months, we've also looked for selected opportunities among common
stock utilities. After a tough several months, prices of common stock utilities
have fallen to low levels, while their yields have moved up sharply. A note of
caution. We're not just looking for cheap utility stocks. We're targeting
fundamentally
4
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John Hancock Funds - Patriot Premium Dividend Fund I
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: For the year ended September 30, 1996." The chart is
scaled in increments of 2% with 8% at the top and 0% at the bottom. Within the
chart there are three solid bars. The first represents the 7.27% total return
for the John Hancock Patriot Premium Dividend Fund I. The second represents the
7.21% total return for the Dow Jones Utility Average. The third represents the
7.72% total return for the Average preferred stock closed-end fund. A footnote
below states: "The total return for John Hancock Patriot Premium Dividend Fund I
is at net asset value with all distributions reinvested. The average preferred
stock closed-end fund is tracked by Lipper Analytical Services. The Dow Jones
Utility Average is an unmanaged index which measures the performance of the
utility industry in the United States."]
sound utilities whose common stocks have gotten caught in the utility market
downdraft. Below are two of our favorite common stock utility holdings.
*CONSOLIDATED EDISON. New York utilities are facing one of the worst possible
regulatory environments in the U.S. That's because the overwhelming political
influence in the state's utility commission is leading to irrational policy
decisions. The result has been a sharp drop in all New York utility stocks.
Consolidated Edison, however, doesn't deserve to be painted with the same
negative brush. For starters, this New York City utility not only has one of the
strongest balance sheets of all the utilities in the U.S, but it also has a long
history of positive relations with state regulators. Second, competition isn't
much of a threat for Con Ed. The dearth of transmission lines into the city
preclude other utilities from entering the market. Finally to top it off, Con Ed
offers an attractive 7.55% yield and a history of modest dividend increases.
Given that, we've recently added to our position in the stock.
*MONTANA POWER COMPANY. This is another utility that's well-insulated from
competition. By using inexpensive hydro-power to generate electricity, Montana
Power is one of the lowest-cost electric providers in the U.S. As a result,
virtually no competitor can beat its low rates. What's more, Montana Power has a
solid balance sheet, no nuclear exposure and an attractive dividend yield of
7.5%. By July, the stock had dropped to ridiculously low levels, so we started
adding to our holdings.
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"...Our strategy will remain defensive..."
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Outlook
Bond and utility investors have breathed a collective sigh of relief in recent
weeks, thanks to September's weaker-than-expected employment report and the
Federal Reserve's continued neutral stance. We do not believe, however, that the
volatility is over. Fears of an overheating economy could surface again easily
and quickly. With uncertainty still plaguing the market, our strategy will
remain defensive, with a continued focus on higher-yielding preferred stocks and
selected utility common stocks. As always, our goal is to preserve the
Fund's net asset value, while maximizing income for our shareholders.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
5
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
Statement of Assets and Liabilities
September 30, 1996
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The STATEMENT OF ASSETS AND LIABILITIES is the Fund's balance sheet on September
30, 1996. You'll also find the net asset value per share, for each Common Share,
as of that date.
The STATEMENT OF OPERATIONS summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains and losses for
the period stated.
Assets:
Investments at value - Note C:
Preferred stocks (cost - $159,434,242)...................... $161,399,082
Common stocks (cost - $36,711,250).......................... 32,919,188
Trust originated preferred securities
(cost - $5,476,600)....................................... 5,408,375
Short-term investments (cost - $7,484,934).................. 7,484,934
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207,211,579
Dividends receivable.......................................... 1,024,585
Other assets.................................................. 14,529
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Total Assets...................... 208,250,693
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Liabilities:
DARTS dividend payable........................................ 7,371
Common Share dividend payable................................. 990,032
Payable for investments purchased............................. 4,568,500
Payable to John Hancock Advisers, Inc. - Note B............... 14,529
Accounts payable and accrued expenses......................... 245,672
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Total Liabilities................. 5,826,104
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Net Assets:
Dutch Auction Rate Transferable Securities Preferred
Stock Series A (DARTS) - Without par value, unlimited
number of shares of beneficial interest authorized,
685 shares issued, liquidation preference
of $100,000 per share - Note A.............................. 68,500,000
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Common Shares -
Without par value, unlimited number of shares of
beneficial interest authorized, 14,843,056 shares
issued and outstanding...................................... 137,976,469
Accumulated net realized loss on investments.................. ( 1,689,748)
Net unrealized depreciation of investments.................... ( 1,894,371)
Distributions in excess of net investment income.............. ( 467,761)
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Net Assets Applicable to
Common Shares ($9.02 per
share based on 14,843,056
shares outstanding)............... 133,924,589
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Net Assets........................ $202,424,589
=================================================
Statement of Operations
Year ended September 30, 1996
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Investment Income:
Dividends (net of foreign withholding taxes
of $53,509)................................................. $16,314,155
Interest...................................................... 130,900
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16,445,055
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Expenses:
Investment management fee - Note B.......................... 1,853,327
Administration fee - Note B................................. 205,680
DARTS and auction fees...................................... 198,979
Printing.................................................... 59,958
Custodian fee............................................... 58,992
Transfer agent fee.......................................... 58,770
Auditing fee................................................ 53,270
Miscellaneous............................................... 37,210
Trustees' fees.............................................. 26,574
Legal fees.................................................. 6,311
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Total Expenses.................... 2,559,071
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Net Investment Income............. 13,885,984
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold......................... 1,608,570
Change in net unrealized appreciation/depreciation
of investments.............................................. ( 2,986,883)
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Net Realized and Unrealized
Loss on Investments............... ( 1,378,313)
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Net Increase in Net Assets
Resulting from Operations......... 12,507,671
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Distributions to DARTS ( 2,849,681)
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Net Increase in Net Assets
Applicable to Common Shareholders
Resulting from Operations
Less DARTS Distributions $ 9,657,990
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996
------------ ------------
<S> <C> <C>
From Operations:
Net investment income......................................................... $ 13,992,687 $ 13,885,984
Net realized gain (loss) on investments sold.................................. ( 1,482,849) 1,608,570
Change in net unrealized appreciation/depreciation of investments............. 20,715,056 ( 2,986,883)
------------ ------------
Net Increase in Net Assets Resulting from Operations........................ 33,224,894 2,507,671
------------ ------------
Distributions to Shareholders:
DARTS ($4,486 and $4,160 per share, respectively ) - Note A................... ( 3,073,252) ( 2,849,681)
Common Shares - Note A
Dividends from net investment income ($0.7986 and $0.7442) per share,
respectively)............................................................. ( 11,772,508) ( 11,036,303)
Distributions in excess of net investment income ($0.0018 and $0.0562
per share, respectively).................................................. ( 26,964) ( 832,797)
------------ ------------
Total Distributions to Shareholders....................................... ( 14,872,724) ( 14,718,781)
------------ ------------
From Fund Share Transactions:
Value of shares issued to common shareholders in reinvestment of
distributions*.............................................................. 1,464,283 196,359
------------ ------------
Net Assets:
Beginning of period........................................................... 184,622,887 204,439,340
------------ ------------
End of period (including distributions in excess of net investment
income of $26,964 and $467,761 respectively)................................ $204,439,340 $202,424,589
============ ============
</TABLE>
* Analysis of Common Shareholder Transactions:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1995 1996
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares outstanding beginning of period.............. 14,645,024 $136,315,827 14,821,141 $137,780,110
Shares issued to common shareholders for reinvestment
of distributions 176,117 1,464,283 21,915 196,359
---------- ------------ ---------- ------------
Shares outstanding end of period.................... 14,821,141 $137,780,110 14,843,056 $137,976,469
========== ============ ========== ============
</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, distributions paid to
shareholders, and any increase due to reinvestment of distributions. The
footnote illustrates any reclassifications of capital share amounts, the number
of Common Shares outstanding at the beginning of the period, reinvested and
outstanding at 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 I
Financial Highlights
Selected data for a Common Share outstanding throughout the periods indicated,
investment returns, key ratios and supplemental data are listed as follows:
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<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------
1992(a) 1993 1994 1995 1996
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Common Shares
Per Share Operating Performance
Net Asset Value, Beginning of Period................... $ 9.54 $ 10.47 $ 11.29 $ 7.93 $ 9.17
------------ ------------ ------------ ------------ ------------
Net Investment Income.................................. 0.92 0.90 0.89 0.95 0.94
Net Realized and Unrealized Gain (Loss)
on Investments....................................... 0.95 1.25 ( 2.86) 1.30 ( 0.10)
------------ ------------ ------------ ------------ ------------
Total from Investment Operations................... 1.87 2.15 ( 1.97) 2.25 0.84
------------ ------------ ------------ ------------ ------------
Less Distributions:
Dividends to DARTS Shareholders...................... ( 0.14) ( 0.13) ( 0.14) ( 0.21) ( 0.19)
Dividends from Accumulated Net Investment
Income to Common Shareholders...................... ( 0.54) ( 0.64) ( 1.00) ( 0.80) ( 0.74)
Distributions in Excess of Accumulated Net Investment
Income to Common Shareholders...................... --- --- --- --- ( 0.06)
Distributions from Net Realized Short-term
Capital Gains on Investments to
Common Shareholders................................ ( 0.26) ( 0.56) ( 0.25) --- ---
------------ ------------ ------------ ------------ ------------
Total Distributions................................ ( 0.94) ( 1.33) ( 1.39) ( 1.01) ( 0.99)
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period......................... $ 10.47 $ 11.29 $ 7.93 $ 9.17 $ 9.02
Per Share Market Value, End of Period.................. $ 10.500 $ 10.875 8.000 $ 9.000 $ 9.125
Total Investment Return at Market Value................ 26.52% 15.66% ( 16.05%) 23.68% 10.58%
Ratios and Supplemental Data
Net Assets Applicable to Common Shares,
End of Period........................................ $151,458,764 $163,682,949 $116,122,887 $135,939,340 $133,924,589
Ratio of Expenses to Average Net Assets * 1.37% 1.40% 1.29% 1.32% 1.24%
Ratio of Net Investment Income to
Average Net Assets *................................. 6.46% 5.62% 6.42% 7.29% 6.75%
Portfolio Turnover Rate................................ 100% 69% 56% 74% 57%
Senior Securities
Total DARTS Outstanding................................ $ 68,500,000 $ 68,500,000 $ 68,500,000 $ 68,500,000 $ 68,500,000
Asset Coverage per Unit (b)............................ $ 318,829 $ 342,383 271,736 $ 290,238 $ 294,044
Involuntary Liquidation Preference per Unit (c) $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value per Unit (c).................. $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Average Broker Commission Rate (d)..................... N/A N/A N/A N/A $ 0.0580
</TABLE>
* Ratios calculated on the basis of expenses and net investment income
applicable to both common and preferred shares relative to the average net
assets for both common and preferred shares.
(a) Prior to the assumption of the advisory contract on May 6, 1992 by John
Hancock Advisers, Inc., the Fund was advised by Patriot Advisers, Inc.
(b) Calculated by subtracting the Fund's total liabilities (not including the
DARTS) from the Fund's total assets and dividing such amount by the number
of DARTS outstanding as of the applicable 1940 Act Evaluation Date.
(c) Plus accumulated and unpaid dividends.
(d) Per portfolio share traded. Required for fiscal years that began September
1, 1995, or later. (e) Distribution in excess of net investment income is
less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
Schedule of Investments
September 30, 1996
- --------------------------------------------------------------------------------
The SCHEDULE OF INVESTMENTS is a complete list of all securities owned by the
Fund on September 30, 1996. It's divided into four main categories: preferred
stocks, common stocks, trust originated preferred securities and short-term
investments. The stocks and trust originated preferr ed securities are further
broken down by industry groups. Under each industry group is a list of the
stocks owned by the Fund. Short-term investments, which represent the Fund's
"cash" position, are listed last.
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
PREFERRED STOCKS
Auto/Truck (2.19%)
Ford Motor Co., 8.25%,
Depositary Shares, Ser B................... 60,000 $ 1,612,500
General Motors Corp., 9.12%,
Depositary Shares, Ser G................... 100,000 2,812,500
------------
4,425,000
------------
Banks - U.S. (10.79%)
Ahmanson, H.F. & Co., 8.40%,
Depositary Shares, Ser C................... 45,000 1,164,375
Bank of Boston Corp., 8.60%,
Depositary Shares, Ser E................... 168,654 4,321,759
Chase Manhattan Corp., 8.40%, Ser M ......... 21,000 535,500
Chase Manhattan Corp., 10.84%, Ser C......... 26,700 797,662
Fleet Financial Group, Inc., 6.75%, Ser VI... 29,000 1,344,875
Fleet Financial Group, Inc., 9.35%,
Depositary Shares.......................... 140,000 3,797,500
Fleet Financial Group, Inc., Adjustable
Rate Preferred ("ARP")..................... 37,500 1,575,000
LaSalle National Corp., 8.75%, Ser K (R)..... 60,000 3,120,000
Mellon Bank Corp., 9.60%, Ser I.............. 55,000 1,402,500
J.P. Morgan & Co., Inc., 6.625%,
Depositary Shares, Ser H................... 80,000 3,790,000
------------
21,849,171
------------
Conglomerate (0.48%)
Grand Metropolitan Delaware, 9.42%,
Gtd Ser A.................................. 35,420 982,905
------------
Equipment Leasing (1.33%)
AMERCO, 8.50%, Ser A......................... 80,000 1,910,000
Comdisco, Inc., 8.75%, Ser A................. 30,900 780,225
------------
2,690,225
------------
Financial Services (3.52%)
Merrill Lynch & Co., 9.00%,
Depositary Shares, Ser A................... 30,000 840,000
Morgan Stanley Group, Inc., 7.75%,
Depositary Shares.......................... 15,000 757,500
Salomon, Inc., 8.40%,
Depositary Shares, Ser E................... 165,000 4,104,375
Source One Mortgage Services Corp.,
8.42%, Ser A............................... 56,800 1,427,100
------------
7,128,975
------------
Insurance (2.43%)
Provident Cos., Inc., 8.10%, Depositary
Shares (formerly Provident Life &
Accident Insurance Co. of America)......... 41,500 $ 1,047,875
SunAmerica, Inc., 9.25%, Ser B............... 150,000 3,862,500
------------
4,910,375
------------
Media (0.36%)
Newscorp Overseas Ltd., 8.625%, Gtd
Ser A (Cayman Islands)..................... 30,000 731,250
------------
Oil & Gas (7.69%)
Coastal Corp., $2.125, Ser H................. 188,500 4,783,187
Elf Overseas Ltd., 8.50%, Gtd Ser A
(Cayman Islands)........................... 150,000 3,937,500
ENSERCH Corp., ARP, Depositary
Shares, Ser F.............................. 25,000 559,375
Enterprise Oil PLC, 10.50%, American
Depositary Receipt ("ADR"), Ser A
(United Kingdom)........................... 24,000 624,000
Lasmo PLC, 10.00%, ADR, Ser A
(United Kingdom)........................... 117,500 2,996,250
Phillips Gas Co., 9.32%, Ser A............... 101,100 2,666,512
------------
15,566,824
------------
Paper (2.36%)
Boise Cascade Corp., 9.40%, Ser F............ 66,700 1,734,200
Bowater, Inc., 8.40%, Depositary
Shares, Ser C.............................. 120,000 3,045,000
------------
4,779,200
------------
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
Utilities (48.58%)
Baltimore Gas & Electric Co.,
6.99%, Ser 1995............................ 34,000 $ 3,468,000
Baltimore Gas & Electric Co.,
6.97%, Ser 1993............................ 6,500 661,375
Boston Edison Co., 4.25% 37,172 2,114,158
Central Maine Power Co., 7.999%, Ser A....... 10,000 930,000
Central Maine Power Co., 8.875% (R).......... 9,600 945,600
Columbus Southern Power Corp., 7.875%........ 20,000 2,110,000
Columbus Southern Power Corp.,
8.375%, Ser A.............................. 66,000 1,650,000
Commonwealth Edison Co., $7.24............... 47,000 4,136,000
Commonwealth Edison Co., $8.40, Ser A........ 45,283 4,528,300
Detroit Edison Co., 7.75%.................... 60,000 1,500,000
Entergy Gulf States, Inc., $8.52
(formerly Gulf States Utilities Co.)....... 18,996 1,804,620
Entergy Gulf States, Inc., $9.96
(formerly Gulf States Utilities Co.)....... 15,605 1,601,463
Entergy Gulf States, Inc., ARP,
Depositary Shares, Ser B
(formerly Gulf States Utilities Co.)....... 25,460 1,234,810
Florida Power & Light Co., 6.75%, Ser U...... 42,000 4,168,500
GTE Florida, Inc., 8.16%..................... 25,000 2,625,000
GTE North, Inc., $7.60, Ser IND.............. 11,000 1,101,375
Houston Lighting & Power Co., $8.12.......... 14,354 1,453,342
Idaho Power Co., 7.07%....................... 13,000 1,319,500
Indianapolis Power & Light Co., 8.20%........ 8,000 808,000
MCN Michigan, Limited Partnership,
9.375%, Ser A.............................. 140,000 3,780,000
Massachusetts Electric Co., 6.84%............ 134,900 3,203,875
Massachusetts Electric Co., 6.99%............ 13,500 1,353,375
MP&L Capital I, 8.05%........................ 81,725 2,032,909
Monongahela Power Co., $7.73, Ser L.......... 29,500 3,085,110
Montana Power Co., $6.875.................... 22,500 2,261,250
NIPSCO Capital Markets, Inc., 7.75%.......... 196,110 4,657,613
PSI Energy, Inc., 6.875%..................... 37,000 3,686,125
PSI Energy, Inc., 7.44%...................... 90,580 2,241,855
PacifiCorp., 8.375%, Ser A................... 25,000 637,500
Peco Energy Co., $7.48....................... 13,000 1,330,875
Portland General Electric Co.,
8.25%, Ser A............................... 59,500 1,472,625
Potomac Electric Power Co.,
$3.82, Ser 1969............................ 25,701 1,304,326
Public Service Co. of NH, 10.60%, Ser A...... 25,000 606,250
Public Service Electric & Gas Co., 6.80%..... 24,509 2,230,319
Public Service Electric & Gas Co., 6.92%..... 25,800 2,580,000
Southern California Gas Co., 7.75%........... 138,550 3,481,069
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
Utilities (continued)
TU Electric Capital III, 8.00%............... 134,000 $ 3,299,750
Texas Utilities Electric Co.,
$1.875, Depositary Shares, Ser A........... 50,000 1,212,500
Texas Utilities Electric Co., $7.98.......... 36,000 3,780,000
UtiliCorp Capital, Limited Partnership,
8.875%, Ser A.............................. 184,256 4,836,720
Virginia Electric & Power Co., $7.05......... 10,000 1,020,000
Washington Natural Gas Co.,
7.45%, Ser II.............................. 124,000 3,038,000
Washington Natural Gas Co.,
8.50%, Ser III............................. 119,336 3,043,068
------------
98,335,157
------------
TOTAL PREFERRED STOCKS
(Cost $159,434,242) (79.73%) 161,399,082
------ ------------
COMMON STOCKS
Utilities (16.26%)
Boston Edison Co...... 175,000 3,871,875
Consolidated Edison Co. of NY, Inc. 83,000 2,303,250
Delmarva Power & Light Co. 140,000 2,870,000
Houston Industries, Inc. 57,800 1,278,825
MidAmerican Energy Co. 126,700 2,011,363
Montana Power Co...... 130,000 2,778,750
New England Electric System 97,000 3,019,125
Oklahoma Gas & Electric Co. 72,000 2,880,000
Peco Energy Co........ 100,000 2,375,000
Public Service Enterprise Group, Inc. 98,500 2,634,875
Puget Sound Power & Light Co. 171,900 3,867,750
Washington Water Power Co. 37,000 698,375
Western Resources, Inc. 80,000 2,330,000
------------
TOTAL COMMON STOCKS
(Cost $36,711,250) (16.26%) 32,919,188
------ ------------
SEE NOTES TO FINANCIAL STATEMENTS.
10
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
TRUST ORIGINATED PREFERRED SECURITIES
Utilities (2.67%)
Southern Union Financing I, 9.48%,
Ser 05-17-25............................... 185,000 $ 4,694,375
Sierra Pacific Power Cap, 8.60% 28,000 714,000
------------
TOTAL TRUST ORIGINATED
PREFERRED SECURITIES
(Cost $5,476,600) ( 2.67%) 5,408,375
------ ------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000'S OMITTED) MARKET VALUE
- ------------------- ---- --------------- ------------
SHORT-TERM INVESTMENTS
Commercial Paper (3.70%)
Prudential Funding Corp.
10-01-96.................... 5.65% $ 7,485 $ 7,484,934
------------
TOTAL SHORT-TERM INVESTMENTS ( 3.70%) 7,484,934
------- ------------
TOTAL INVESTMENTS (102.36%) $207,211,579
======= ============
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. The securities indicated
by (R) 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
$4,065,600 as of September 30, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
11
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
NOTE A -
ACCOUNTING POLICIES
Patriot Premium Dividend Fund I (the "Fund") is a diversified closed-end
management investment company, registered under the Investment Company Act of
1940, as amended. Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services,
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $1,654,338 of a capital
loss carryforward available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforward is used by the Fund, no
capital gains distributions will be made. The carryforwards expire as follows:
September 30, 2002 N $305,896 and September 30, 2003 N $1,348,442.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date. Interest income on investment securities is
recorded on the accrual basis. The Fund records all dividends and distributions
to shareholders from net investment income and realized gains on the ex-dividend
date. Such distributions are determined in conformity with federal income tax
regulations. Due to permanent book/tax differences in accounting for certain
transactions, this has the potential for treating certain distributions as
return of capital as opposed to distributions of net investment income or
realized capital gains. The Fund has adjusted for the cumulative effect of such
permanent book/tax differences through September 30, 1996, which has no effect
on the Fund's net assets, net investment income or net realized gains.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues,
and expenses of the Fund. Actual results could differ from these estimates.
DUTCH AUCTION RATE TRANSFERABLE SECURITIES PREFERRED STOCK SERIES A (DARTS) The
Fund issued 685 shares of Dutch Auction Rate Transferable Securities Preferred
Stock Series A (DARTS) 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 ranged from
3.87% to 4.37% during the period ended September 30, 1996.
The DARTS are redeemable at the option of the Fund, at a redemption price
equal to $100,000 per share, plus accumulated and unpaid dividends on any
dividend payment date. The DARTS are also subject to mandatory redemption at a
redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends, if the Fund is in default on its asset coverage requirements with
respect to the DARTS. If the dividend on the DARTS shall remain unpaid in an
amount equal to two full years' dividends, the holders of the DARTS, as a class,
have the right to elect a majority of the Board of Trustees. In general, the
holders of the DARTS and the Common Shares have equal voting rights of one vote
per share, except that the holders of the DARTS, as a class, vote to elect two
members of the Board of Trustees, and separate class votes are required on
certain matters that affect the respective interests of the DARTS and Common
Shares. The DARTS have a liquidation preference of $100,000 per share, plus
accumulated and unpaid dividends. The Fund is required to maintain certain asset
coverage with respects to the DARTS, as defined in the Fund's By-Laws.
12
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Premium Dividend Fund I
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the investment management contract, the Fund pays a monthly management fee
to John Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, for a continuous investment program equivalent on an
annual basis, to the sum of .50 of 1% of the Fund's average weekly net assets,
plus 5% of the Fund's weekly gross income. The Adviser's total fee is limited to
a maximum amount equal to 1% annually of the Fund's average weekly net assets.
For the period ended September 30, 1996, the advisory fee incurred did not
exceed the maximum advisory fee allowed.
The Fund has entered into an administrative agreement with the Adviser
under which the Adviser oversees the custodial, auditing, valuation, accounting,
legal, stock transfer and dividend disbursing services and maintains Fund
communications services with the shareholders. The Adviser receives a monthly
administration fee equivalent, on an annual basis, to .10 of 1% of the Fund's
average weekly net assets. Each unaffiliated Trustee is entitled, as
compensation for his or her services, to an annual fee plus remuneration for
attendance at various meetings.
Mr. Edward J. Boudreau, Jr., Mr. Thomas W. L. Cameron, Mr. Richard S.
Scipione, and Ms. Anne C. Hodsdon are directors and/or officers of the Adviser
and/or its affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. Effective with the fees paid for
1995, the unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock Funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect income earned by the investment as well as any unrealized gains or
losses. At September 30, 1996, the Fund's investment to cover the deferred
compensation liability had unrealized appreciation of $1,076.
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 September 30, 1996, aggregated $115,028,898 and $114,230,587,
respectively. There were no purchases or sales of obligations of the U.S.
government and its agencies during the period ended September 30, 1996.
The cost of long-term investments owned at September 30, 1996 for Federal
income tax purposes was $201,831,938. Gross unrealized appreciation and
depreciation of investments aggregated $3,844,202 and $5,949,495, respectively,
resulting in net unrealized depreciation of $2,105,293 for federal tax purposes.
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
In accordance with Statement of Position 93-2, the Fund has recorded several
reclassifications in the capital accounts. These reclassifications have no
impact on the net asset value of the Fund and are designed generally to present
undistributed net investment income or accumulated net realized gains and losses
on a tax basis, which is considered to be more informative to the shareholder.
As of September 30, 1996, the Fund has reclassified amounts to reflect an
increase in undistributed net investment income and an increase in accumulated
net realized loss on investments of $392,000.
13
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John Hancock Funds - Patriot Premium Dividend Fund 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of John Hancock Patriot Premium
Dividend Fund I:
We have audited the accompanying statement of assets and liabilities of John
Hancock Patriot Premium Dividend Fund I (the Fund), including the schedule of
investments, as of September 30, 1996, the related statement of operations for
the year then ended, and the statement of changes in net assets and the
financial highlights for the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
John Hancock Patriot Premium Dividend Fund I as of September 30, 1996, the
results of its operations for the year then ended, and the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 1, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the taxable distributions of the Fund during its fiscal year ended
September 30, 1996.
The Board of Trustees of the Fund declared dividends on the Common Shares
from undistributed net investment income amounting to $0.80 per share, for the
year ended September 30, 1996. Distributions to preferred and common
shareholders were 100% qualified for the dividends received deductions.
Shareholders will be mailed a 1996 U.S. Treasury Department Form 1099-DIV in
January 1997 representing their proportionate share.
14
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John Hancock Funds - Patriot Premium Dividend Fund 1
INVESTMENT OBJECTIVE AND POLICY
The Fund's investment objective is to provide high current income, consistent
with modest growth of capital for holders of its common shares. The Fund will
pursue its objective by investing in a diversified portfolio of dividend-paying
preferred and common equity securities.
DIVIDEND REINVESTMENT PLAN
The Fund provides shareholders with a Dividend Reinvestment Plan ("the Plan")
which offers the opportunity to earn compounded yields. Each holder of Common
Shares will automatically have all distributions of dividends and capital gains
reinvested by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts, 02210, as agent for the common shareholders unless an election is
made to receive cash. Holders of Common Shares who elect not to participate in
the Plan will receive all distributions in cash, paid by check, mailed directly
to the shareholder of record (or if the Common Shares are held in street or
other nominee name then to the nominee) by the Plan Agent, as dividend
disbursing agent. Shareholders whose shares are held in the name of a broker or
nominee should contact the broker or nominee to determine whether and how they
may participate in the Plan.
If the Fund declares a dividend payable either in Common Shares or in cash,
nonparticipants will receive cash and participants in the Plan will receive the
equivalent in Common Shares. If the market price of the Common Shares on the
payment date for the dividend is equal to or exceeds their net asset value as
determined on the payment date, participants will be issued Common Shares (out
of authorized but unissued shares) at a value equal to the higher of net asset
value or 95% of the market price. If the net asset value exceeds the market
price of the Common Shares at such time, or if the Board of Trustees declares a
dividend payable only in cash, the Plan Agent will, as agent for Plan
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participant's accounts. Such purchases will be made promptly
after the payable date for such dividend and, in any event, prior to the next
ex-dividend date, after such date except where necessary to comply with federal
securities laws. If, before the Plan Agent has completed its purchases, the
market price exceeds the net asset value of the Common Shares, the average per
share purchase price paid by the Plan Agent may exceed the net asset value of
the Common Shares, resulting in the acquisition of fewer shares than if the
dividend had been paid in shares issued by the Fund.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a dividend record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Share credited to
such account.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the accounts,
including information needed by the shareholders for personal and tax records.
Common Shares in the account of each Plan participant will be held by the Plan
Agent in non-certificated form in the name of the participant. Proxy material
relating the shareholder's meetings of the Fund will include those shares
purchased as well as shares held pursuant to the Plan.
There will be no brokerage charges with respect to Common Shares issued
directly by the Fund. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions. In
each case, the cost per share of the shares purchased for each participant's
account will be the average cost, including brokerage commissions, of any shares
purchased on the open market plus the cost of any shares issued by the Fund.
There are no other charges to participants for reinvesting dividends or capital
gain distributions, except for certain brokerage commissions, as described
above.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions. Participants under the Plan will
receive tax information annually. The amount of
15
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John Hancock Funds - Patriot Premium Dividend Fund I
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 225 Franklin
Street, Boston, Massachusetts 02110 (telephone 1-800-426-5523).
16
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NOTES
John Hancock Funds - Patriot Premium Dividend Fund I
17
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NOTES
John Hancock Funds - Patriot Premium Dividend Fund I
18
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NOTES
John Hancock Funds - Patriot Premium Dividend Fund I
19
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