John Hancock Funds
Patriot
Preferred
Dividend
Fund
ANNUAL REPORT
May 31, 1997
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Richard S. Scipione
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN AND TRANSFER AGENT FOR
COMMON SHAREHOLDERS
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT FOR AUCTION RATE
PREFERRED SHARES
IBJ Schroder Bank and Trust Company
One State Street Plaza
New York, New York 10004
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02210-1617
Listed New York Stock Exchange Symbol: PPF
John Hancock Funds: 1-800-843-0090
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the
year. Stocks began 1997 on the high wires, bolstered by a near-perfect
"Goldilocks" economy -- not too hot, not too cold. In almost a straight
shot, the Dow Jones Industrial Average soared through the 7000 level for
the first time in early March. Just days later, stocks lost their
footing and staged a month-long free-fall in a nervous reaction to
rising interest rates and data that showed the economy was picking up
steam. Stocks gave back all of their year's gain and suffered their
worst decline since 1990 during this period. No sooner had real fears
begun to beset investors than they were gone, erased in a euphoric rally
caused by strong earnings and no signs of inflation. By the end of May,
the Dow had risen by 14.6% and the broader Standard & Poor's 500 Stock
Index by 15.4% -- levels not many thought the market would reach all
year, let alone in five months. Bondholders have not enjoyed the same
bounty, as the bond market has mostly stayed worried about the strength
of the economy, the direction of interest rates, and the Federal
Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left
them pondering their valuation models, since the market is now more
expensive than it has been in decades. It's impossible to know what will
happen next in the markets. But whether it's another strong move forward
or a retreat, we recommend keeping a long-term perspective, rather than
over-focusing on the market's daily twists and turns. While the economic
backdrop seems to remain near perfect, the one thing we believe
investors should be prepared for is more market volatility. It also
makes sense to do something we've always advocated: set realistic
expectations, since, as we've also seen this year, markets can move down
as fast as they go up.
Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After
such a strong advance in equities over the last two and a half years, it
could be time to rebalance your portfolio, if you haven't already, to
maintain your desired targets of diversification. As part of that
process, make sure that your investment strategies still reflect your
individual time horizons, objectives and risk tolerance. Despite
turbulence, one thing remains constant. A well-constructed plan and a
cool head can be the best tools for reaching your financial goals.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
By Gregory K. Phelps for the Portfolio Management Team
John Hancock
Patriot Preferred
Dividend Fund
Income-producing stocks perform well
despite a volatile bond market
Because most preferred stocks -- which make up about 94% of John Hancock
Patriot Preferred Dividend Fund -- pay fixed dividends, they are heavily
influenced by the performance of the bond market. And over the past
year, the bond market's performance was nothing if not unpredictable. At
regular intervals, investors worried about the economy's strength and
whether the Federal Reserve Board would choose to raise interest rates
to stave off any future inflation. The bond market rose and fell not so
much because of what the Fed actually did, but because of what it might
do, and almost every month this cycle of anxiety repeated itself. But
after all was said and done, bond prices ended the period higher. Even
though preferred stocks felt the effects of the volatile bond market,
they handily outpaced Treasuries because of favorable supply and demand
factors.
"...the year
was a
gratifying
one for
the Fund..."
Given the uncertainty surrounding the bond market, the year was a
gratifying one for the Fund, which had a total return of 14.06% at net
asset value. By comparison, the average preferred stock closed-end
equity fund returned 14.46% for the same period, according to Lipper
Analytical Services, Inc. A second benchmark, the Merrill Lynch 30-year
Treasury Index, rose 7.92%.
A 2 1/4" x 3 3/4" photo of Gregory K. Phelps at bottom right. Caption
reads "Gregory K. Phelps."
Pie chart with the heading "Portfolio Diversification" at top of left
hand column. The chart is divided into six sections. Going from top
clockwise: Short-Term Investments & Other 2%; Utilities 27%; Financial
Services 51%; Industrials 15%; and Oil & Gas 5%. A footnote below states
"As a percentage of net assets on May 31, 1997."
"...we
increased
our stake
in financial
service
stocks..."
Defensive focus
Throughout the past year, we've maintained a defensive stance to protect
against the vagaries of the volatile bond market. Our emphasis on
cushion-preferred stocks -- with above-average dividend yields that tend
to "cushion" them against price swings -- helped our performance when
the bond market was troubled. Nearly all of our preferred stocks
holdings were DRD-eligible, which was another plus. DRD stands for
"dividends-received deduction," which offers major tax advantages for
corporations that invest in them. The total available supply of DRD-
eligible securities was already quite low when the Federal Reserve Bank
gave banks (a primary issuer in the DRD market) more flexibility to
issue less costly non-DRD securities this past October. Banks, along
with utilities, curtailed their new DRD issuance. That, coupled with
issuers' redeeming or tendering for their outstanding DRD securities,
caused an overall contraction in the amount of DRD securities
outstanding. In a classic example of limited supply trying to satisfy
strong demand, DRD-eligible preferred stocks -- which made up the vast
majority of the Fund's investments -- performed well.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investments"; the header for the right column is
"Recent performance ... and what's behind the numbers." The first
listing is South Carolina Electric & Gas followed by an up arrow and the
phrase "New issue takes off." The second listing is Fleet Financial
followed by an up arrow and the phrase "Improving financial results/new
acquisitions." The third listing is Florida Progress Corporation
followed by a down arrow and the phrase "Temporary closing of nuclear
plant." Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
We continued to focus on finding and holding preferred stock with good
call protection, which protects the investor from having to surrender
the security -- usually a high-yielding one -- to its issuer
prematurely, usually for a lower-yielding one. Whenever possible, we
look for at least two years of call protection.
Cutback in utility exposure
The electric industry is in the early stages of a dramatic
transformation in which electric companies will be forced to compete
with one another, rather than enjoying a monopolistic hold on a given
service area. We sold some of our electric utility common stocks in
January and December when they enjoyed a brief rally. Unfortunately,
that rally was short-lived and a bond market sell-off in late January
coincided with the Nuclear Regulatory Commission's putting a record
number of troubled nuclear plants on its watch list. Those two events
pushed many electric stocks lower. One example was Florida Progress
Corporation, which was forced by the NRC to shut down its nuclear plant
longer than originally expected. Because of its strong financial
position, we continued to hold onto it.
On the flip side, some of our electric utility holdings performed quite
well, including South Carolina Electric and Gas. Not only is the
security DRD-eligible, it carries a relatively high credit rating,
offers an attractive 6.52% coupon and 10 years of call protection. The
stock enjoyed about a 3% price appreciation from when we bought it in
mid-April through the end of the period. Another strong performer was
the common stock of MidAmerican Energy Holdings, a low-cost electricity
and natural gas provider serving Iowa and Illinois. It, too, had an
attractive dividend yield of 7.10% and is a relatively good credit
quality. The company recently announced a buyback of its common stock,
which gave the stock an added boost.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1997."
The chart is scaled in increments of 5% from bottom to top, with 20% at
the top and 0% at the bottom. Within the chart, there are three solid
bars. The first represents the 14.06% total return for John Hancock
Patriot Preferred Dividend Fund. The second represents the 14.46% total
return for the average preferred stock, closed-end equity fund. The
third bar represents the 7.92% 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 preferred stock, closed-end
equity fund is tracked by Lipper Analytical Services, Inc. The Merrill Lynch
30-Year Treasury Index is an unmanaged index, which measures the
performance of the 30-year Treasury bond."
Increased emphasis on financials/industrials
As we pared our utility holdings, we increased our stake in financial
service stocks -- including banks, insurance companies, brokerages and
leasing companies -- to 51% of the Fund's assets at the end of the
period, compared with 45% a year earlier. Two of our better performers
were in the banking sector. One was Fleet Financial Group, which has
improved its financial results partly through the aggressive acquisition
of competitors. Fleet's preferred stock offers DRD-eligibility, 10 years
of call protection and a 6.75% coupon. Another strong bank was ABN Amro
North America, the U.S. holding company of the large Dutch banking
concern. This preferred stock offers DRD-eligibility, 10 years of call
protection and a 6.59% coupon and a AA-credit rating. Brokerage holdings
including Merrill Lynch and Salomon, Inc., and insurer SunAmerica, made
impressive gains during the period.
In the industrial sector, our focus has been on oil and gas. We believe
that energy prices will remain stable or increase, which makes us
optimistic about this sector. One of our best performers was El Paso
Tennessee Pipeline. Not only is the issue DRD-eligible, but it offers an
attractive 8.25% coupon and four years of call protection.
"...we will
continue to
focus on
DRD-eligible
preferreds.."
Outlook
Looking ahead, we believe that the Federal Reserve Board is likely to
continue raising interest rates until there are tangible signs that the
economy is slowing. Until the "tightening" cycle is complete, we believe
both the bond and stock markets will continue to be volatile. Given that
outlook, we will continue to focus on DRD-eligible preferreds where
positive supply and demand factors favor them. What's more, our emphasis
on cushion-preferreds with good call protection should help maximize the
Fund's yield while stabilizing its share price in the event of a market
correction.
- -----------------------------------------------------------------------
This commentary reflects the views of the portfolio management team
through the end of the Fund's period discussed in this report. Of
course, the team's views are subject to change as market and other
conditions warrant.
<TABLE>
<CAPTION>
Financial Statements
The Statement of Assets and Liabilities is the Fund's balance sheet and
shows the value of what the Fund owns, is due and owes on May 31, 1997.
You'll also find the net asset value and the maximum offering price per
share as of that date.
Statement of Assets and Liabilities
May 31, 1997
- -----------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Preferred stocks (cost - $137,224,403) $141,069,884
Common stocks (cost - $7,719,081) 7,500,125
Short-term investments (cost - $2,630,469) 2,630,469
--------------
151,200,478
Dividends receivable 544,536
Deferred organizational expenses - Note A 16,581
Other assets 19,924
--------------
Total Assets 151,781,519
- -----------------------------------------------------------------------
Liabilities:
Auction Rate Preferred Shares dividend
payable - Note A 151,120
Common Shares dividend payable 71,373
Payable for investments purchased 572,000
Payable to John Hancock Advisers, Inc. and
Affiliates - Note B 134,132
Accounts payable and accrued expenses 54,874
--------------
Total Liabilities 983,499
- -----------------------------------------------------------------------
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 99,512,018
Accumulated net realized loss on investments (6,024,670)
Net unrealized appreciation of investments 3,627,318
Undistributed net investment income 1,183,354
--------------
Net Assets Applicable to Common Shares
($13.54 per share based on 7,257,200
shares outstanding) 98,298,020
--------------
Net Assets $150,798,020
=======================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income earned
and expenses incurred in operating the Fund. It also shows net gains
(losses) for the period stated.
Statement of Operations
Year ended May 31, 1997
- -----------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $75,932) $12,019,622
Interest 158,523
--------------
12,178,145
--------------
Expenses:
Investment management fee - Note B 1,191,490
Administration fee - Note B 223,404
Auction rate preferred shares and auction fees 142,876
Federal excise tax 83,036
Auditing fee 55,510
Custodian fee 53,143
Miscellaneous 35,519
Printing 35,023
Transfer agent fee 32,811
Organization expense - Note A 16,581
Trustees' fees 13,529
Legal fees 6,742
--------------
Total Expenses 1,889,664
- -----------------------------------------------------------------------
Net Investment Income 10,288,481
- -----------------------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold 201,916
Change in net unrealized appreciation/depreciation
of investments 4,071,613
--------------
Net Realized and Unrealized
Gain on Investments 4,273,529
- -----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 14,562,010
=======================================================================
Distributions to Auction Rate
Preferred Shares (2,131,341)
=======================================================================
Net Increase in Net Assets
Applicable to Common
Shareholders Resulting
from Operations Less Auction
Rate Preferred Shares
Distributions $12,430,669
=======================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
YEAR ENDED MAY 31,
-------------------------
1996 1997
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $10,624,429 $10,288,481
Net realized gain on investments sold 1,475,976 201,916
Change in net unrealized appreciation/depreciation
of investments (1,143,713) 4,071,613
------------ ------------
Net Increase in Net Assets Resulting from Operations 10,956,692 14,562,010
------------ ------------
Distributions to Shareholders:
Auction Rate Preferred Shares ($4,474 and $4,060
per share, respectively) - Note A (2,349,041) (2,131,341)
Common Shares - Note A
Dividends from net investment income ($1.16 and
$1.16 per share, respectively) (8,381,567) (8,382,002)
------------ ------------
Total Distributions to Shareholders (10,730,608) (10,513,343)
------------ ------------
Net Assets:
Beginning of Period 146,523,269 146,749,353
------------ ------------
End of period (including undistributed net investment
income of $1,378,168 and $1,183,354, respectively) $146,749,353 $150,798,020
============ ============
Analysis of Common Shareholder Transactions:
YEAR ENDED MAY 31,
------------------------------------------------------
1996 1997
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Shares outstanding beginning of period 7,257,200 $99,634,694 7,257,200 $99,542,066
Reclassification of Capital Accounts - Note D -- (92,628) -- (30,048)
------------ ------------ ------------ ------------
Common Shares outstanding end of period 7,257,200 $99,542,066 7,257,200 $99,512,018
============ ============ ============ ============
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses and distributions paid to
shareholders. The footnote illustrates any reclassification of capital amounts,
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.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are listed as follows:
FOR THE PERIOD
FROM
JUNE 1, 1993
(COMMENCEMENT
OF OPERATIONS) YEAR ENDED MAY 31
TO MAY 31, ------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Common Shares
Per Share Operating Performance
Net Asset Value, Beginning of Period $13.95(1) $12.25 $12.96 $12.99
--------- --------- --------- ---------
Net Investment Income 1.13 1.52 1.46 1.42
Net Realized and Unrealized Gain (Loss) on Investments (1.48) 0.65 0.05 0.58
--------- --------- --------- ---------
Total from Investment Operations (0.35) 2.17 1.51 2.00
--------- --------- --------- ---------
Less Distributions:
Dividends to Auction Rate Preferred Shareholders (0.18) (0.30) (0.32) (0.29)
Dividends from Net Investment Income to Common Shareholders (0.95) (1.16) (1.16) (1.16)
Distributions in Excess of Net Investment Income to Common Shareholders (0.01) -- -- --
--------- --------- --------- ---------
Total Distributions (1.14) (1.46) (1.48) (1.45)
--------- --------- --------- ---------
Preferred and Common Shares Offering Costs (0.08) -- -- --
--------- --------- --------- ---------
Preferred Shares Underwriting Discounts (0.13) -- -- --
--------- --------- --------- ---------
Net Asset Value, End of Period $12.25 $12.96 $12.99 $13.54
========= ========= ========= =========
Per Share Market Value, End of Period $12.625 $12.250 $12.500 $13.750
Total Investment Return at Market Value (9.68%) 7.18% 11.58% 19.87%
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period (000s omitted) $88,902 $94,023 $94,249 $98,298
Ratio of Expenses to Average Net Assets (2) 1.24% 1.30% 1.29% 1.27%
Ratio of Net Investment Income to Average Net Assets (2) 5.81% 7.93% 7.19% 6.91%
Portfolio Turnover Rate 90% 88% 33% 38%
Average Broker Commission Rate (5) N/A N/A N/A $0.0550
Senior Securities
Total Auction Rate Preferred Shares (000s omitted) $52,500 $52,500 $52,500 $52,500
Asset Coverage per Unit (3) $266,908 $274,463 $277,555 $283,817
Involuntary Liquidation Preference per Unit (4) $100,000 $100,000 $100,000 $100,000
Approximate Market Value per Unit (4) $100,000 $100,000 $100,000 $100,000
(1) Initial price to commence operations.
(2) 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.
(3) 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.
(4) Plus accumulated and unpaid dividends.
(5) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: the net investment income and total
investment return of the Fund. It shows how the Fund's net asset value for
a share has changed since the end of the previous period. Additionally,
important relationships between some items presented in the financial
statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1997
The Schedule of Investments is a complete list of all securities owned by the
Patriot Preferred Dividend Fund on May 31, 1997. It's divided into three main
categories: preferred stocks, common stocks and short-term investments.
Preferred stocks and common stocks are further broken down by industry group.
Short-term investments, which represent the Fund's "cash" position, are listed
last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- -------------------------------------- ------------ ------------
<S> <C> <C>
PREFERRED STOCKS
Automobile/Trucks (8.11%)
Ford Motor Co., 8.25%, Depositary
Shares, Ser B 185,100 $5,159,662
General Motors Corp., 7.92%,
Depositary Shares, Ser D 49,400 1,302,925
General Motors Corp., 9.12%,
Depositary Shares, Ser G 20,000 570,000
General Motors Corp., 9.125%,
Depositary Shares, Ser B 192,400 5,194,800
------------
12,227,387
------------
Banks -- United States (20.62%)
ABN AMRO North America Inc.,
6.59% (R) 5,000 4,925,000
Ahmanson, H.F. & Co., 8.40%,
Depositary Shares, Ser C 100,500 2,575,313
BankBoston Corp., 8.60%,
Depositary Shares, Ser E 44,000 1,105,500
Chase Manhattan Corp., 8.40%, Ser M 94,000 2,455,750
Chase Manhattan Corp., 9.76%, Ser B 88,900 2,533,650
Chase Manhattan Corp., 10.84%, Ser C 119,500 3,749,312
Citicorp, 7.75%, Depositary Shares,
Ser 22 25,000 659,375
Fleet Financial Group, Inc., 6.75%,
Ser VI 51,000 2,709,375
Fleet Financial Group, Inc., 9.35%,
Depositary Shares 177,000 4,956,000
J.P. Morgan & Company Inc., 6.625%,
Depositary Shares, Ser H 60,000 3,180,000
LaSalle National Corp., 8.75%,
Ser K, (R) 43,000 2,241,375
------------
31,090,650
------------
Conglomerates (0.82%)
Grand Metropolitan Delaware, L.P.,
9.42%, Gtd Ser A 45,000 1,237,500
------------
Insurance (5.45%)
American Life Holding Co., $2.16 75,000 1,987,500
Aon Corp., 8.00% 70,000 1,785,000
Provident Companies, Inc., 8.10%,
Depositary Shares 40,000 1,025,000
Travelers Group, Inc., 9.25%,
Depositary Shares, Ser D 137,600 3,422,800
------------
8,220,300
------------
Equipment Leasing (5.54%)
AMERCO, 8.50%, Ser A 220,000 5,555,000
Comdisco, Inc., 8.75%, Ser A 110,000 2,805,000
------------
8,360,000
------------
Financial Services (19.49%)
ARM Financial Group, Inc. 9.50% 51,796 1,343,459
Lehman Brothers Holdings, Inc., 5.00% 40,000 1,135,000
Merrill Lynch & Co., Inc., 9.00%,
Depositary Shares, Ser A 135,700 4,104,925
Morgan Stanley Group Inc., 7.75%,
Depositary Shares 95,000 5,153,750
Salomon Inc., 8.08%, Depositary
Shares, Ser D 134,757 3,486,837
Salomon Inc., 8.40%, Depositary
Shares, Ser E 156,000 4,212,000
Source One Mortgage Services Corp.,
8.42%, Ser A 193,100 4,924,050
SunAmerica, Inc., 9.25%, Ser B 198,000 5,024,250
------------
29,384,271
------------
Oil & Gas (4.62%)
Elf Overseas Ltd., 8.50%, Gtd Ser A
(Cayman Islands) 57,000 1,517,625
Enterprise Oil PLC, 10.50%, Ser A,
American Depository Receipt,
(ADR) (United Kingdom) 30,000 787,500
Lasmo PLC, 10.00%, Ser A, ADR
(United Kingdom) 142,000 3,674,250
Phillips 66 Capital I, 8.240% 38,500 991,375
------------
6,970,750
------------
Paper Products & Containers (6.66%)
Boise Cascade Corp., 9.40%,
Depositary Shares, Ser F 178,000 4,605,750
Bowater Inc., 8.40%, Depositary
Shares, Ser C 204,900 5,429,850
------------
10,035,600
------------
Utilities -- Electric Power (9.80%)
Baltimore Gas & Electric Co., 6.99%,
Ser 1995 10,000 1,078,750
Commonwealth Edison Co.,
$8.40, Ser A 30,850 3,108,138
Massachusetts Electric Co., 6.99% 10,500 1,081,500
New England Power Co., 6.08% 21,312 1,934,064
PSI Energy, Inc., 6.875% 14,350 1,492,400
PSI Energy, Inc., 7.44% 60,000 1,530,000
Public Service Electric & Gas Co.,
6.92% 19,000 1,961,750
South Carolina Electric & Gas Co.,
6.52% 25,000 2,593,750
------------
14,780,352
------------
Utilities -- Gas Distribution (1.68%)
Southern California Gas Co., 7.75% 99,313 2,532,482
------------
Utilities -- Other (10.76%)
Coastal Corp., $2.125, Ser H 198,735 5,067,742
El Paso Tennessee Pipeline Co.,
8.25%, Ser A 119,000 6,455,750
Phillips Gas Co., 9.32%, Ser A 182,800 4,707,100
------------
16,230,592
------------
TOTAL PREFERRED STOCKS
(Cost $137,224,403) (93.55%) 141,069,884
-------- ------------
COMMON STOCKS
Utilities Electric Power (4.97%)
Boston Edison Co. 50,000 $1,287,500
Delmarva Power & Light Co. 40,000 695,000
Florida Progress Corp. 50,000 1,468,750
MidAmerican Energy Holdings Co. 90,000 1,518,750
Public Service Enterprise Group, Inc. 57,000 1,410,750
Puget Sound Power & Light Co. 45,000 1,119,375
------------
TOTAL COMMON STOCKS
(Cost $7,719,081) (4.97%) 7,500,125
-------- ------------
<CAPTION>
INTEREST PAR VALUE
RATE (000s OMITTED)
--------- ----------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Commercial Paper (1.74%)
Chevron Oil Finance Co.,
6/2/97 5.45% $2,631 2,630,469
------------
TOTAL SHORT-TERM INVESTMENTS (1.74%) 2,630,469
-------- ------------
TOTAL INVESTMENTS (100.26%) $151,200,478
======== ============
(R) These securities are exempt from registration under rule 144A of the Securities Act of 1933.
Such securities may be resold, normally to qualified institutional buyers, in transactions
exempt from registration. Rule 144A securities amounted to $7,166,375 or 4.75% of net assets
as of May 31, 1997.
Parenthetical disclosure of a foreign country in the security description represents country of
foreign issuer; however, security is U.S. dollar denominated.
The percentage shown for each investment category is the total value of that category as a
percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
Notes to Financial Statements
NOTE A --
ACCOUNTING POLICIES
John Hancock Patriot Preferred Dividend Fund (the "Fund") is a
diversified, closed-end management investment company, registered under
the Investment Company Act of 1940. Significant accounting policies of
the Fund are as follows:
VALUATION 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 $5,857,383
of a capital loss carryforward available, to the extent provided by
regulations, to offset future net realized capital gains. To the extent
such carryforward is used by the Fund, no capital gains 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, 1997, 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 3.85% to 4.15%,
during the period ended May 31, 1997.
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 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 the Fund's average weekly net asset value. Advantage
Advisers, Inc., a subsidiary of Oppenheimer & Co., Inc., is the Fund's
sub-adviser (the "Sub-Adviser"). The Sub-Adviser will provide the
Adviser with access on a continuous basis to economic, financial and
political information, research and assistance. The Adviser will pay the
Sub-Adviser a monthly fee computed at the annual rate of 0.15% of the
Fund's average weekly net assets.
The Fund has entered into an administrative agreement with the Adviser
under which the Adviser oversees the custodial, auditing, valuation,
accounting, legal, stock transfer and dividend disbursing services. The
Fund pays a monthly administrative fee to the Adviser equivalent, on an
annual basis, to the sum of 0.15% 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.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are directors and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The
Fund makes investments into other John Hancock funds, as applicable, to
cover its liability for the deferred compensation. Investments to cover
the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the
related other asset are always equal and are marked to market on a
periodic basis to reflect any income earned by the investment as well as
any unrealized gains or losses. At May 31, 1997, the Fund's investment
to cover the deferred compensation liability had unrealized appreciation
of $1,592.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities during the period ended
May 31, 1997, aggregated $57,782,937 and $55,364,335, respectively.
The cost of investments owned at May 31, 1997 (including the short-term
investments) for federal income tax purposes was $147,741,240. Gross
unrealized appreciation and depreciation of investments aggregated
$5,318,033 and $1,858,795, respectively, resulting in net unrealized
appreciation of $3,459,238.
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 income and gains or
accumulated losses on a tax basis, which is considered to be more
informative to the shareholder. As of May 31, 1997, the Fund has
reclassified $30,048 of federal excise taxes from undistributed net
investment income to Common Shares capital.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
John Hancock Patriot Preferred Dividend Fund
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of John Hancock Patriot Preferred
Dividend Fund (the "Fund") as of May 31, 1997, the related statements of
operations and changes in net assets, and financial highlights for the
year then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audit. The financial statements of the Fund for
the year ended May 31, 1996 were audited by other auditors whose report,
dated July 12, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at May 31, 1997 by correspondence with
the custodian and brokers; where replies were not received from brokers,
we performed other auditing procedures. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the
Fund at May 31, 1997, the results of its operations, the changes in its
net assets, and its financial highlights for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 3, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished
with respect to the dividends of the Fund paid during its taxable year
ended May 31, 1997.
All of the dividends paid for the fiscal year are taxable as ordinary
income. Distributions to preferred and common shareholders were 100%
qualified for the dividends received deduction available to
corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-
DIV in January 1998. This will reflect the total of all distributions
which are taxable for calendar year 1997.
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, 02110, as agent for
the common shareholders unless an election is made to receive cash.
Holders of Common Shares who elect not to participate in the Plan will
receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the Common Shares are held in street or
other nominee name then to the nominee) by the Plan Agent, as dividend
disbursing agent. Shareholders whose shares are held in the name of a
broker or nominee should contact the broker or nominee to determine
whether and how they may participate in the Plan.
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 shareholders' 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).
Notes
John Hancock Funds - Patriot Preferred Dividend Fund
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