- --------------------------------------------------------------------------------
John Hancock Funds
- --------------------------------------------------------------------------------
Patriot
Preferred
Dividend
Fund
ANNUAL REPORT
May 31, 1996
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
THOMAS W.L. CAMERON
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
ANNE C. HODSDON
CHARLES L. LADNER*
LEO E. LINBECK, JR.*
PATRICIA P. McCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
JOHN A. MORIN
Vice President and Compliance Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
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 RATE
PREFERRED SHARES
CHEMICAL BANK
450 WEST 33RD STREET
NEW YORK, NEW YORK 10001
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2604
LISTED NEW YORK STOCK EXCHANGE SYMBOL:PPF
JOHN HANCOCK FUNDS: 1-800-843-0090
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 is proving to
be a tough act to follow in 1996. Volatility has returned to the market after
being relatively calm last year. And while the stock market has continued its
advance, albeit at a slower and more erratic pace, bonds have retreated this
year in the face of stronger economic data that has sparked inflation fears. The
change is not surprising, especially after the anomaly of last year's almost
straight-up advance, when both the bond and stock markets soared.
As the old saying "trees don't grow to the sky" suggests, it would be
unrealistic to expect the market to stage a repeat in 1996. Shareholders would
do well to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always be
able to count on consistent customer service performance. At John Hancock Funds,
we never stop working to find ways to sustain and improve the quality of
information and assistance we provide you. Our commitment to this task is no
less than John Hancock's loyalty was to his fledgling country when he is said to
have uttered, "if it does the public good, burn Boston." We won't go that far,
of course, but we share our namesake's dedication to putting the public before
all else.
In our case, that public is you, our shareholders. We take very seriously
the role you have entrusted to us, that of helping you achieve your financial
goals. Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
BY GREGORY K. PHELPS, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Patriot Preferred
Dividend Fund
After stellar 1995, faster economic growth and rising
interest rates undermine fixed-income securities
For most of the past 12 months, John Hancock Patriot Preferred Dividend Fund
benefited from an unusually attractive climate for income investors. From the
early days of the period last summer through February 1996, most trends were
positive. The economy was growing at a steady but moderate rate, inflation was
tame and Congress and the White House seemed headed toward an agreement to
balance the federal budget. The Federal Reserve contributed to the optimistic
mood by lowering the rate banks charge each other for overnight loans three
times during the period: in July and December 1995, and again in January of this
year. But after soaring to double-digit returns in 1995, the bond market
retreated during the first quarter of 1996. Three factors sparked the downturn.
One, the Treasury's semiannual auction of 30-year bonds inundated the market
with new supplies; two, a broad increase in new corporate debt issuance
aggravated the supply imbalance; and three, the infamous February employment
report, the strength of which so surprised analysts that the bond market
suffered its biggest one-day decline in more than five years. The strong
- --------------------------------------------------------------------------------
"...the bond market retreated during the first quarter of 1996."
- --------------------------------------------------------------------------------
[A 2 1/2" x 3 1/2" photo of the Patriot management team at bottom right. Caption
reads: The "Patriot management team (l-r) Beverly Cleathero, Gregory Phelps,
Laura Provost."]
3
<PAGE>
================================================================================
John Hancock Funds - Patriot Preferred Dividend Fund
[Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into six sections. Going from left to right:
Industrials 14%; Banks 27%; Oil & Gas 13%; Utilities 24%; Financial
Services/Insurance 18%; and Short-Term Investments & Other 4%. A footnote below
states "As a percentage of net assets on May 31, 1996."]
- --------------------------------------------------------------------------------
The Fund targeted industrial stocks which profited from rising energy prices.
- --------------------------------------------------------------------------------
employment report suggested to some that the economy was in danger of
overheating. The March employment report, released in early April, added fuel to
the fire, sending fixed-income markets still lower. Conditions during the past
several months took some of the shine off an otherwise gratifying year for the
Fund. John Hancock Patriot Preferred Dividend Fund's total return for the year
ended May 31, 1996 was 9.45% at net asset value, compared to 11.92% for the
average income-oriented, closed-end equity fund, according to Lipper Analytical
Services.1 A second benchmark, the Merrill Lynch 30-year Treasury Index, rose
0.61% during the same period.
STRATEGY REVIEW
As always, our main goal during the period was to produce an attractive current
yield while taking care to minimize fluctuations in the Fund's share price.
That's fundamentally a defensive strategy and for that reason it served us well
during the challenging final months of the period. One way we try to achieve our
goal is by emphasizing cushion preferred stocks, so named because the
above-average yields of these stocks tend to cushion them against price swings
in volatile markets. Another way is by emphasizing securities eligible for the
dividends-received deduction (DRD). DRD-eligible securities, which made up
almost 90% of the Fund's net assets at the end of the period, carry distinct tax
advantages for corporate investors. Lately, as the supply of DRD-eligible
preferred stocks has dropped, they've become correspondingly more valuable.
[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 Coastal Corp.
followed by an up arrow and the DRD-elegible/solid earnings growth." The second
listing is Salomon, Inc. followed by an up arrow and the phrase
"DRD-eligible/positive credit outlook." The third listing is PSNH followed by a
down arrow and the phrase "Strict regulatory climate." Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."]
FINANCIAL STOCKS MAINTAIN POSITION
Financial stocks N including banks, insurance companies, brokerages and leasing
companies Ntotaled 46% of the Fund's net assets at the end of the period, little
changed from six months ago. Among the Fund's top performers was a rare
DRD-eligible security issued this past February by Salomon, Inc. It carries an
attractive 8.40% yield and five years of call protection, which means it can't
be redeemed by the issuer before 2001. Those characteristics, plus an improving
credit outlook for Salomon, Inc., helped the security avoid losing value despite
rising rates. Another new DRD-eligible security the Fund bought in February N
this one issued by J.P. Morgan with ten years of call protection and a 6.63%
yield N has suffered some price erosion but has still significantly outperformed
Treasuries.
UTILITIES RESULTS MIXED
Utilities totaled almost 25% of the Fund's net assets at the end of the period,
close to the
4
<PAGE>
================================================================================
John Hancock Funds - Patriot Preferred Dividend Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended May 31, 1996." The chart is scaled
in increments of 4% from bottom to top, with 12% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
9.45% total return for John Hancock Patriot Preferred Dividend Fund. The second
represents the 11.92% total return for the average income-oriented, closed-end
equity fund. The third bar represents the 0.61% total return for the Merrill
Lynch 30-Year Treasury Index. Footnote below reads: "The total return for John
Hancock Patriot Preferred Dividend Fund is at net asset value with all
distributions reinvested. The average income-oriented, closed-end equity fund is
tracked by Lipper Analytical Services. The Merrill Lynch 30-Year Treasury Index
is an unmanaged index, which measures the performance of the 30-year Treasury
bond."]
maximum allotment under guidelines established for the Fund. They benefited
early in the period from good news on the regulatory front, increased merger
activity and the fact that many investors who profited from the sharp rise in
the broader market flocked to utilities last fall as a perceived safe haven.
Conditions changed abruptly towards the end of the period, however, for two
reasons: the declining bond market and heightened concern over problems at two
high-profile nuclear power plants. Among the disappointments during the period
was Public Service of New Hampshire (PSNH). On the plus side, PSNH is
DRD-eligible and carries a 10.60% yield. On the minus side, it's a subsidiary of
Northeast Utilities, which has been under a cloud lately because of its large
investment in nuclear power. PSNH also faces stiff regulatory pressure in New
Hampshire. Fortunately, the issue we own is a so-called "sinking fund
preferred." As such, PSNH must begin redeeming its securities at the original
issue price next year. Meanwhile, we'll continue to benefit from the
double-digit yield.
RISING ENERGY PRICES HELP INDUSTRIAL STOCKS
Our emphasis lately among industrial stocks has been on companies that are
profiting from rising energy prices and increased exploration activity. Our
favorite was Coastal Corp., an oil and gas exploration and refining company. We
added to the Fund's existing stake in Coastal Corp. in October 1995, shortly
before it was put on a credit-upgrade watch by Standard & Poor's. Besides an
attractive yield, DRD eligibility and good call protection, Coastal Corp. turned
in solid earnings growth in 1995 and should benefit in the months ahead from the
decision to sell its coal assets to pay down debt.
- --------------------------------------------------------------------------------
"The Fund will likely maintain a defensive posture in the months ahead..."
- --------------------------------------------------------------------------------
OUTLOOK
The Fund will likely maintain a defensive posture in the months ahead by
emphasizing DRD-eligible preferred stocks and seeking to benefit from their
growing scarcity in the market. Increased economic activity in recent months, as
well as some disturbing tremors on the inflation front, all but eliminate the
possibility of further Fed rate cuts for the time being. After a year in which
the Fund profited from falling interest rates, we have more modest goals going
forward: to preserve the Fund's net asset value while maximizing yield.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
5
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
Statement of Assets and Liabilities
May 31, 1996
- --------------------------------------------------------------------------------
The STATEMENT OF ASSETS AND LIABILITIES is the Fund's balance sheet on May 31,
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 (losses) for the period stated.
Assets:
Investments at value - Note C:
Preferred stocks (cost - $132,945,996) ................... $132,332,240
Common stocks (cost - $4,017,720) ........................ 4,343,138
Capital securities (cost - $4,396,750) ................... 4,240,000
Trust originated preferred securities
(cost - $962,500)....................................... 962,500
Short-term investments (cost - $4,292,501) ............... 4,292,501
------------
146,170,379
Dividends receivable........................................ 717,258
Deferred organization expenses - Note A .................... 33,162
Other assets................................................ 26,548
------------
Total Assets 146,947,347
--------------------------------------------
Liabilities:
Auction Rate Preferred Shares dividend payable -
Note A.................................................... 17,456
Payable to John Hancock Advisers, Inc. - Note B............. 128,064
Accounts payable and accrued expenses....................... 52,474
------------
Total Liabilities.......... 197,994
--------------------------------------------
Net Assets:
Auction Rate Preferred Shares - Without par value,
unlimited number of shares of beneficial interest
authorized, 525 shares issued, liquidation preference
of $100,000 per share - Note A............................ 52,500,000
------------
Common Shares - Without par value, unlimited number
of shares of beneficial interest authorized, 7,257,200
shares issued and outstanding............................. 99,542,066
Accumulated net realized loss on investments................ ( 6,226,586)
Net unrealized depreciation of investments.................. ( 444,295)
Undistributed net investment income......................... 1,378,168
------------
Net Assets Applicable to
Common Shares ($12.99
per share based on 7,257,200
shares outstanding)........ 94,249,353
--------------------------------------------
Net Assets................. $146,749,353
============================================
Statement of Operations
Year ended May 31, 1996
- -------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $86,807)..... $ 12,330,051
Interest.................................................... 194,979
------------
12,525,030
------------
Expenses:
Investment management fee - Note B.......................... 1,182,903
Administration fee - Note B................................. 221,794
Auction rate preferred shares and auction fees.............. 142,150
Federal excise tax.......................................... 92,628
Custodian fee............................................... 56,937
Auditing fee................................................ 53,400
Printing.................................................... 49,941
Miscellaneous............................................... 33,888
Transfer agent fee.......................................... 27,653
Trustees' fees.............................................. 20,189
Organization expense - Note A............................... 16,581
Legal fees.................................................. 2,537
------------
Total Expenses............. 1,900,601
--------------------------------------------
Net Investment Income...... 10,624,429
--------------------------------------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold....................... 1,475,976
Change in net unrealized appreciation/depreciation
of investments............................................ ( 1,143,713)
------------
Net Realized and Unrealized
Gain on Investments........ 332,263
--------------------------------------------
Net Increase in Net Assets
Resulting from Operations.. $10,956,692
============================================
Distributions to Auction Rate
Preferred Shares........... ( 2,349,041)
--------------------------------------------
Net Increase in Net Assets
Applicable to Common
Shareholders Resulting from
Operations Less Auction
Rate Preferred Shares
Distributions.............. $ 8,607,651
============================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1996 1995
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income....................................................................... $ 10,624,429 $ 11,025,633
Net realized gain (loss) on investments sold................................................ 1,475,976 ( 6,490,992)
Change in net unrealized appreciation/depreciation of investments........................... ( 1,143,713) 11,148,363
------------ ------------
Net Increase in Net Assets Resulting from Operations...................................... 10,956,692 15,683,004
------------ ------------
Distributions to Shareholders:
Auction Rate Preferred Shares ($4,474 and $4,152 per share, respectively) - Note A.......... ( 2,349,041) ( 2,179,847)
Common Shares - Note A
Dividends from net investment income ($1.16 and $1.16 per share, respectively)............ ( 8,381,567) ( 8,381,752)
------------ ------------
Total Distributions to Shareholders..................................................... ( 10,730,608) ( 10,561,599)
------------ ------------
Net Assets:
Beginning of Period......................................................................... 146,523,269 141,401,864
------------ ------------
End of period (including undistributed net investment income of $1,378,168
and $478,382, respectively)............................................................... $146,749,353 $146,523,269
============ ============
Analysis of Fund Share Transactions:
YEAR ENDED MAY 31,
--------------------------------------------------
1996 1995
----------------------- ------------------------
Shares Amount Shares Amount
--------- ----------- --------- ------------
Shares outstanding, beginning of period................................. 7,257,200 $99,634,694 7,257,200 $ 99,681,698
Reclassification of Capital Accounts - Note D........................... --- ( 92,628) --- ( 47,004)
--------- ----------- --------- ------------
Common Shares, outstanding end of period................................ 7,257,200 $99,542,066 7,257,200 $99,634,694
========= =========== ========= ===========
</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. The footnote illustrates any reclassification of capital amounts,
the number of Common Shares outstanding at the beginning and end of the period,
for the last two periods, along with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JUNE 1, 1993
YEAR ENDED MAY 31, (COMMENCEMENT OF OPERATIONS)
1996 1995 TO MAY 31, 1994
--------- -------- --------------------------
<S> <C> <C> <C>
Common Shares
Per Share Operating Performance
Net Asset Value, Beginning of Period................................. $ 12.96 $ 12.25 $ 13.95(a)
-------- -------- --------
Net Investment Income................................................ 1.46 1.52 1.13
Net Realized and Unrealized Gain (Loss) on Investments............... 0.05 0.65 ( 1.48)
-------- -------- --------
Total from Investment Operations............................... 1.51 2.17 ( 0.35)
-------- -------- --------
Less Distributions:
Dividends to Auction Rate Preferred Shareholders................. ( 0.32) ( 0.30) ( 0.18)
Dividends from Net Investment Income to Common Shareholders...... ( 1.16) ( 1.16) ( 0.95)
Distributions in Excess of Net Investment Income to Common Shareholders --- --- ( 0.01)
-------- -------- --------
Total Distributions............................................ ( 1.48) ( 1.46) ( 1.14)
-------- -------- --------
Preferred and Common Shares Offering Costs........................... --- --- ( 0.08)
-------- -------- --------
Preferred Shares Underwriting Discounts.............................. --- --- ( 0.13)
-------- -------- --------
Net Asset Value, End of Period....................................... $ 12.99 $ 12.96 $ 12.25
======== ======== ========
Per Share Market Value, End of Period................................ $ 12.500 $ 12.250 $ 12.625
Total Investment Return at Market Value.............................. 11.58% 7.18% ( 9.68%)
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period (000's omitted) $ 94,249 $ 94,023 $ 88,902
Ratio of Expenses to Average Net Assets *............................ 1.29% 1.30% 1.24%
Ratio of Net Investment Income to Average Net Assets *............... 7.19% 7.93% 5.81%
Portfolio Turnover Rate.............................................. 33% 88% 90%
Senior Securities
Total Auction Rate Preferred Shares Outstanding (000's omitted)...... $ 52,500 $ 52,500 $ 52,500
Asset Coverage per Unit (b).......................................... $277,555 $274,463 $266,908
Involuntary Liquidation Preference per Unit (c)...................... $100,000 $100,000 $100,000
Approximate Market Value per Unit (c)................................ $100,000 $100,000 $100,000
* 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) Initial price to commence operations.
(b) Calculated by subtracting the Fund's total liabilities (not including the
Auction Rate Preferred Shares) from the Fund's total assets and dividing
such amount by the number of Auction Rate Preferred Shares outstanding, as
of the applicable 1940 Act Evaluation Date.
(c) Plus accumulated and unpaid dividends.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
Schedule of Investments
May 31, 1996
- --------------------------------------------------------------------------------
The SCHEDULE OF INVESTMENTS is a complete list of all securities owned by the
Fund on May 31, 1996. It's divided into five main categories: preferred stocks,
common stocks, capital securities, trust originated preferred securities and
short-term investments. The stocks and capital securities and trust originated
preferred 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.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
PREFERRED STOCKS
Auto/Truck (3.82%)
Ford Motor Co., 8.25%,
Depositary Shares, Ser B ............... 85,000 $ 2,284,375
General Motors Corp., 9.125%,
Depositary Shares, Ser B ............... 122,400 3,320,100
-----------
5,604,475
-----------
Banks - U.S. (24.31%)
Ahmanson, H.F. & Co., 8.40%,
Depositary Shares, Ser C ............... 100,500 2,600,436
Ahmanson, H.F. & Co., 9.60%,
Depositary Shares, Ser B ............... 109,000 2,752,250
Bank of Boston Corp., 8.60%,
Depositary Shares, Ser E ............... 44,000 1,127,500
BankAmerica Corp., 9.000%, Ser H ......... 30,000 768,750
Chase Manhattan Corp., 8.40%, Ser M1 ..... 37,000 3,562,000
Chase Manhattan Corp., 9.08%, Ser D ...... 55,000 1,436,875
Chase Manhattan Corp., 9.76%, Ser H ...... 100,000 2,837,500
Chase Manhattan Corp., 10.84%, Ser C ..... 32,000 956,000
Citicorp, 7.75%, Ser 22 .................. 25,000 637,500
Citicorp, 9.08%, Ser 14 .................. 34,000 875,500
Fleet Financial Group Inc., Adjustable
Rate Preferred........ ................. 31,250 1,343,750
Fleet Financial Group Inc., 9.35%,
Depositary Shares..... ................. 177,000 4,867,500
J. P. Morgan &Co., Inc., 6.625%,
Depositary Shares, Ser H ............... 60,000 2,850,000
Source One Mortgage Services Corp.,
8.42%, Ser A.......... ................. 62,000 1,581,000
Sumitomo Bank of CA, 8.125%,
Depositary Shares, Ser A ............... 70,000 1,732,500
Wells Fargo & Co., 9.00%,
Depositary Shares, Ser G ............... 100,000 2,637,500
Wells Fargo & Co., 9.875%,
Depositary Shares, Ser F ............... 119,000 3,108,875
-----------
35,675,436
-----------
Computer Services (1.91%)
Comdisco, Inc., 8.75%, Ser A ............. 110,000 2,805,000
-----------
Conglomerate/Diversified (0.83%)
Grand Metropolitan Delaware,
9.42%, Gtd Ser A........................ 45,000 1,226,250
-----------
Equipment Leasing (3.49%)
AMERCO, 8.50%, Ser A.. ................... 220,000 $ 5,115,000
-----------
Financial Services (9.61%)
Merrill Lynch & Company, Inc., 9.00%,
Depositary Shares, Ser A ............... 105,000 2,992,500
Salomon, Inc., 8.08%, Depositary Shares,
Ser D................. ................. 134,757 3,335,236
Salomon, Inc., 8.40%, Depositary Shares,
Ser E................. ................. 100,000 2,525,000
SunAmerica Inc., 9.25%, Ser B ............ 198,000 5,247,000
-----------
14,099,736
-----------
Insurance (5.57%)
American Life Holding Co., $2.16 ......... 75,000 1,837,500
Aon Corporation, 8.00% ................... 70,000 1,785,000
Travelers Group, Inc., 8.125%,
Depositary Shares, Ser A ............... 40,000 1,010,000
Travelers Group, Inc., 9.25%,
Depositary Shares, Ser D ............... 137,600 3,543,200
-----------
8,175,700
-----------
Oil & Gas (12.12%)
Coastal Corp., $2.125, Ser H ............. 188,835 4,768,084
Elf Overseas Ltd., 8.50%, Gtd Ser A
(Cayman Islands)...... ................. 95,000 2,458,125
Enterprise Oil PLC, 10.50%, American
Depositary Receipt ("ADR"), Ser A
(United Kingdom)...... ................. 30,000 765,000
Lasmo PLC, 10.00%, ADR, Ser A
(United Kingdom)...... ................. 200,000 5,025,000
Phillips Gas Co., 9.32%, Ser A ........... 182,800 4,775,650
-----------
17,791,859
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Paper (6.76%)
Boise Cascade Corp., 9.40%, Ser F ........ 178,000 $ 4,694,750
Bowater, Inc., 8.40%,
Depositary Shares, Ser C ............... 204,900 5,224,950
------------
9,919,700
------------
Publishing (0.68%)
Newscorp Overseas Ltd., 8.625%,
Gtd Ser A (Cayman Islands) ............... 40,225 1,000,597
------------
Utilities (21.07%)
Baltimore Gas & Electric Co., 6.99% ...... 10,000 973,750
Central Maine Power Co., 7.999%, Ser A ... 10,000 890,000
Central Maine Power Co., 8.875% (R) ...... 16,000 1,482,000
Commonwealth Edison Co., $8.40, Ser A .... 30,000 3,000,000
Entergy Gulf States Utilities Co., $9.96 . 17,550 1,790,100
Houston Lighting & Power Co., $8.12 ...... 14,000 1,424,500
Idaho Power Co., 8.375% .................. 25,500 2,664,750
Massachusetts Electric Co., 6.99% ........ 10,500 981,750
New England Power Co., 6.08% ............. 21,312 1,704,960
Northern States Power Co. of MN, $6.80 ... 20,200 1,919,000
PSI Energy Inc., 6.875% .................. 25,350 2,408,250
PSI Energy Inc., 7.44% ................... 60,000 1,515,000
Public Service Co. of NH, 10.60%, Ser A .. 52,000 1,287,000
Public Service Electric & Gas Co., 6.92% . 27,000 2,548,125
Public Service Electric & Gas Co., 6.80% . 24,040 2,379,960
Southern California Gas Co., 7.75% ....... 99,313 2,507,653
Texas Utilities Electric Co., $1.875,
Depositary Shares, Ser A ............... 25,000 631,250
Washington National Gas Co.,
7.45%, Ser II......... ................. 32,745 810,439
------------
30,918,487
------------
TOTAL PREFERRED STOCKS
(Cost $132,945,996) (90.17%) 132,332,240
------ ------------
COMMON STOCKS
Utilities (2.96%)
CINergy Corp.......... ................... 102,300 3,030,638
Houston Industries, Inc. .................. 60,000 1,312,500
------------
TOTAL COMMON STOCKS
(Cost $4,017,720) ( 2.96%) 4,343,138
------ ------------
CAPITAL SECURITIES
Banks - Foreign (2.89%)
A/S Eksportfinans, 8.70%, Capital
Securities (Norway)... .................. 50,000 $ 1,325,000
Australia and New Zealand Banking
Group Ltd., 9.125%, Capital Securities
(Australia)........... .................. 110,000 2,915,000
------------
TOTAL CAPITAL SECURITIES
(Cost $4,396,750) ( 2.89%) 4,240,000
------ ------------
TRUST ORIGINATED PREFERRED SECURITIES
Oil & Gas (0.66%)
Phillips 66 Capital I, 8.24% ................ 38,500 962,500
------------
TOTAL TRUST ORIGINATED
PREFERRED SECURITIES
(Cost $962,500) ( 0.66%) 962,500
------ ------------
INTEREST PAR VALUE
RATE (000'S OMITTED)
SHORT-TERM INVESTMENTS
Commercial Paper (2.93%)
Prudential Funding Corp.
06-03-96...... 5.30% 4,294 4,292,501
------------
TOTAL SHORT-TERM INVESTMENTS ( 2.93%) 4,292,501
------ ------------
TOTAL INVESTMENTS (99.61%) $146,170,379
====== ============
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. See Note A of
the Notes to Financial Statements for valuation policy. Rule 144A securities
amounted to $1,482,000 as of May 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
10
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Patriot Preferred Dividend Fund (the "Fund") is a diversified, cl
osed-end management investment company, registered under the Investment Company
Act of 1940. 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. For federal income tax purposes, the Fund has
$6,059,076 of a capital loss carryforward available, to the extent provided by
regulations, to offset future net realized capital gains. If such carryforward
is used by the Fund, no capital gains distributions will be made. The
carryforward expires May 31, 2003.
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 May 31, 1996, which has no effect on the Fund's net assets, net
investment income or net realized gains.
DEFERRED ORGANIZATION EXPENSES Expenses incurred in connection with the
organization of the Fund have been capitalized and are being charged ratably to
the Fund's operations over a five-year period that began with the commencement
of the investment operations of the Fund.
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.
AUCTION RATE PREFERRED SHARES The Fund issued 525 shares of Auction Rate
Preferred Shares (the "Preferred Shares") on July 29, 1993 in a public offering.
The underwriting discount on the Preferred Shares of $918,750 was recorded as a
reduction of the capital of the Common Shares, and the offering costs associated
with the offering of the Common Shares and Preferred Shares of $610,007 have
been recorded as a reduction of the capital of the Common Shares. Dividends on
the Preferred Shares, which accrue daily, are cumulative at a rate which was
established at the offering of the Preferred Shares and has been reset every 49
days thereafter by an auction. Dividend rates ranged from 3.89% to 4.61%, during
the period ended May 31, 1996.
The Preferred Shares 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 Preferred Shares 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 Preferred Shares. If the dividends on
the Preferred Shares shall remain unpaid in an amount equal to two full years'
dividends, the holders of the Preferred Shares, as a class, have the right to
elect a majority of the Board of Trustees. In general, the holders of the
Preferred Shares and the Common Shares have equal voting rights of one vote per
share, except that the holders of the Preferred Shares, as a class, vote to
elect two members of the Board of Trustees, and
11
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Patriot Preferred Dividend Fund
separate class votes are required on certain matters that affect the respective
interests of the Preferred Shares and Common Shares. The Preferred Shares 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 Preferred Shares, 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 1% of the Fund's average
weekly net asset value.
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. The Fund pays a monthly
administrative fee to the Adviser equivalent, on an annual basis, to the sum of
0.15 of 1% of the Fund's average weekly net asset value.
Each unaffiliated Trustee is entitled, as compensation for his or her
services, to an annual fee plus remuneration for attendance at various meetings.
Messrs. Edward J. Boudreau, Jr., Thomas W. L. Cameron and 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 any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1996, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $793.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities during the period ended May 31,
1996, aggregated $47,844,877 and $47,460,840, respectively.
The cost of investments owned at May 31, 1996 (including the short-term
investments) for Federal income tax purposes was $146,782,977. Gross unrealized
appreciation and depreciation of investments aggregated $2,614,678 and
$3,227,276, respectively, resulting in net unrealized depreciation of $612,598.
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 May 31, 1996, the Fund has reclassified $92,628 of Federal excise taxes
from undistributed net investment income to Common Shares capital and $913,337
from accumulated net realized loss on investments to undistributed net
investment income.
12
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John Hancock Funds - Patriot Preferred Dividend Fund
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of
John Hancock Patriot Preferred Dividend Fund:
We have audited the accompanying statements of assets and liabilities of John
Hancock Patriot Preferred Dividend Fund (the Fund), including the schedule of
investments, as of May 31, 1996, the related statements of operations for the
year then ended, and the statements of changes in net assets and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996 by correspondence with the custodian. 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 Preferred Dividend Fund as of May 31, 1996, the results of
its operations for the year then ended, 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
July 12, 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
May 31, 1996.
The Board of Trustees of the Fund declared dividends on the Common Shares
from undistributed net investment income amounting to $1.16 per share, for the
year ended May 31, 1996. Distributions to preferred and common shareholders were
94.75% qualified for the dividends received deductions. Preferred shareholders
received additional dividends of $66.72 per share as of May 31, 1996 so that
their net after-tax return for all dividends including the additional dividends
was the same as if all regular dividends were 100% qualified for the dividends
received deduction, as defined in the Fund's By-Laws. Shareholders will be
mailed a 1996 U.S. Treasury Department Form 1099-DIV in January 1997
representing their proportionate share.
13
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John Hancock Funds - Patriot Preferred Dividend Fund
INVESTMENT OBJECTIVE AND POLICY
The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its
investment objective by investing in preferred stocks that, in the opinion of
the Adviser, may be undervalued relative to similar securities in the
marketplace.
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.
The Plan Agent serves as agent for the holders of Common Shares in
administering the Plan. After the Fund declares a dividend or makes a capital
gain distribution, the Plan Agent will, as agent for the participants, receive
the cash payment and use it to buy Common Shares in the open market, on the New
York Stock Exchange or elsewhere, for the participants' accounts. The Fund will
not issue any new shares in connection with the Plan.
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.
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. 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.
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, Massachusetts 02266-8209 (telephone 1-800-426-5523).
14
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John Hancock Funds - Patriot Preferred Dividend Fund
SHAREHOLDER MEETING
On March 7, 1996, the Annual Meeting of John Hancock Patriot Premium Dividend
Fund (the "Fund") was held to elect five 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
NAME OF TRUSTEE FOR AUTHORITY
- --------------- --- ---------
James F. Carlin.............. 6,041,852 56,742
William H. Cunningham........ 6,038,991 59,603
Charles F. Fretz............. 6,042,997 55,597
John P. Toolan............... 6,041,300 57,294
The preferred shareholders elected Harold R. Hiser, Jr. to serve until his
successor is duly elected and qualified, with the votes tabulated as follows:
361 FOR and 0 WITHHELD AUTHORITY.
The shareholders also ratified the Trustees' selection of Arthur Anderson,
LLP as the Fund's independent auditors for the Fund for the fiscal year ending
May 31, 1996, with the votes tabulated as follows: 6,022,708 FOR, 22,474 AGAINST
and 53,773 ABSTAINING.
15
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