SEMIANNUAL Report
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[GRAPHIC OMITTED]
Patriot Preferred
Dividend Fund
NOVEMBER 30, 1998
[JHF LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
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TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin
William H. Cunningham*
Ronald R. Dion*
Harold R. Hiser, Jr.
Anne C. Hodsdon
Charles L. Ladner
Leo E. Linbeck, Jr.
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
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
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 02109-1803
Listed New York Stock Exchange Symbol: PPF
For Shareholder Assistance Refer to Page 14
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term
is a roller coaster. That is because, while long-term history suggests the
market's general direction is up, its swings over the short term can be dra-
matic and, at times, violent. In1998, the market gave us several stark examples
of this phenomenon. From the new highs set in mid-July, the major indices
plunged by 19% through the end of August. It was the worst such fall since 1990.
Seeking safety in a world of global economic uncertainties, investors everywhere
converged on U.S. Treasury bonds and pushed their yields to historic lows.
Then in early October, the stock market began a remarkable rebound that
was sparked by the Federal Reserve's moves to lower interest rates. The Dow
Jones Industrial Average reached a new high and ended November actually up by
17% year-to-date.
Investors have been understandably shaken by these dramatic twists and
turns, but we are pleased to report that most individual investors did not
panic, and we hope that means they've taken our words to heart. Over the long
term, markets do not move up or down in a straight line. That's why after
watching the market charge ahead almost uninterrupted for so many years, we have
been striking a more cautionary stance in this space over the last several
months.
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[A 1" x 1 1/4" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
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Analysts are still pondering the implications of global turmoil and the
potential for slower U.S. economic and corporate earnings growth. While we don't
make a practice of opining on what the market will do next, we continue to
believe it would be wise for investors to set more realistic expectations. Over
the long term, the market's historical results have been more in the 10% per
year range, which is still a solid result, considering it has been produced
despite wars, depressions and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the divergence in performance of
stocks and high-quality bonds earlier this year is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/Edward J. Boudreau, Jr.
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EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Gregory K. Phelps for the Portfolio Management Team
John Hancock Patriot
Preferred Dividend Fund
Concerns over economic slowdown mute preferred-stock performance
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Persistent fears over economic problems overseas, coupled with growing concerns
that the U.S. economy was headed for a slowdown, put pressure on preferred
stocks during the last six months. Because of their relatively fixed and high
dividends, preferred stocks - which made up the vast majority of the Fund's net
assets - generally move in the same direction as fixed-income-paying bonds. That
is, preferred-stock and bond prices typically rise when interest rates fall, and
fall when rates rise. But in spite of falling interest rates and a robust U.S.
Treasury bond market, preferred stocks were plagued by fears that a weakening
economy would curtail corporate earnings. As Treasury bonds rallied, preferred
stock prices weakened.
Electric utility common stocks, which made up a growing portion of the
Fund's assets throughout the period, enjoyed a better fate. The Federal
Reserve's three interest rate cuts between September and November were a
positive for electric utility common stocks. They also benefited from their
reputation as a safe haven in times of market turmoil.
Performance and strategy review
For the six-month period ended November 30, 1998, John Hancock Patriot Preferred
Dividend Fund had a total return of 0.98% at net asset value. That performance
compared to the average preferred stock closed-end equity fund's return of 1.79%
for the same period, according to Lipper Analytical Services, Inc. By
comparison, the Merrill Lynch 30-Year Treasury Index rose 12.79%. The Fund's
requirement to hold 80% of its assets in preferred stocks held us back against
our peers in the period.
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[A 3" x 2 1/2" photo of fund management team members under second column. (l-r):
"Susan Kelly, Gregory Phelps and Mark Maloney."]
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We kept the vast majority of our preferred-stock holdings in securities
eligible for the dividends-received deduction (DRD), which generally experience
strong demand because they offer tax advantages to corporate investors. In
addition, many companies that issue DRD-eligible securities have retired them as
a way to reduce their financing costs in light of lower interest rates. As a
result, the available supply of DRD-eligible securities has contracted
considerably over the last several years. Although they proved to be rather
lackluster performers over the past six months, we held on to them based on our
conviction that the continued favorable supply and demand conditions will
provide positive underpinnings to the DRD-eligible securities market.
"...we continued to add to our utility preferred- and common-stock holdings..."
3
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John Hancock Funds - Patriot Preferred Dividend Fund
"Our preferred-stock holdings in the financial sector... also were
disappointments."
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[Pie Chart at the top left hand column with the heading "Portfolio
Diversification". The chart is divided into four sections (from top to left):
Oil & Gas 7%, Short-Term Investments & Other 10%, Utilities 33% and Financials
50%. A note below the chart reads "As a percentage of net assets on November 30,
1998."]
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Throughout the period, we continued to add to our utility preferred-
and common-stock holdings, concentrating our purchases during periods when their
prices were weak. Thanks to the strong performance of utility stocks
particularly our common stocks - our increased stake in them was a plus for the
Fund's performance, as the Dow Jones Utilities Index continued to hit new highs.
More recently, however, we bought preferred stocks in a number of other
industries based on their relatively cheap prices.
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[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Ocean Spray
Cranberries followed by an up arrow with the phrase "High yield, quality and
call protection." The second listing is Houston Industries followed by an up
arrow with the phrase "Record summer heat powers electricity demand." The third
listing is Anadarko Petroleum followed by a down arrow with the phrase "Collapse
of oil prices." A note below the table reads "See `Schedule of Investments.'
Investment holdings are subject to change."]
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Energy, financials lag; utilities advance
Among our holdings hurt most by the unfavorable backdrop for preferred stocks
was Anadarko Petroleum. Not only did it get swept up in some of the negative
sentiment that hung over the preferred market, but Anadarko also suffered from a
collapse in oil prices to near 12-year lows. We held on to our position in the
company, however, because we believe that oil prices may be near a bottom and
our Anadarko holdings are relatively high-quality, DRD-eligible securities with
an attractive 5.46% yield. Another attractive feature was good call protection,
which shields us for a stated period of time from being forced to surrender
high-yielding securities to issuers prematurely and potentially leaving us to
reinvest the proceeds at lower prevailing interest rates.
Our preferred-stock holdings in the financial sector - our largest
grouping - also were disappointments. Despite leading the preferred-stock market
earlier this year, Lehman Brothers Holdings and Bear Stearns Companies lost
ground from August through October. That's when investors grew increasingly
concerned about losses stemming from brokerage companies' exposure to Russian
debt, hedge funds and other weak investments. In those cases, too, we kept our
stakes because we felt the challenges were short-term and were outweighed by
their attractive yields, DRD-eligibility and good call protection. Lehman and
Bear Stearns gained some ground toward the end of the period when investors
became more optimistic that brokerage firms could weather the challenges that
faced them in fairly good shape. Our holdings in banks posted mixed results that
were in line with investors' perceptions of any given bank's exposure to
overseas problems. ABN AMRO North America, for example, came under pressure
because of concerns about its Dutch parent company's exposure to Russian debt.
Fleet Financial Group, on the other hand, performed well in large part because
of its almost exclusive focus on domestic business. The turmoil surrounding
financial and banking stocks afforded us an opportunity to buy high-quality,
high-yielding, well call-protected securities at very inexpensive prices. One
recent example was our purchase of Republic New York Corp., which we added in
mid-October after its price had fallen in response to its indirect exposure to
Russian debt. The company's one-time write-down of this exposure in the third
quarter should put this issue behind it.
4
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John Hancock Funds - Patriot Preferred Dividend Fund
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[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the six months ended November 30, 1998".
The chart is scaled in increments of 3% with 0% at the bottom and 15% at the
top. The first bar represents the 0.98% total return for John Hancock Patriot
Preferred Dividend Fund. The second bar represents the 1.79% total return for
Average preferred stock closed-end equity fund. The third bar represents 12.79%
total return for Merrill Lynch 30-Year Treasury Index. A note below the chart
reads "The total return for John Hancock High 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 that measures the
performance of the 30-Year Treasury bond.
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The Fund's strongest performers came primarily from our common-stock
holdings, although there were a few preferred-stock standouts. One was Ocean
Spray Cranberries, which performed well in large part because of a combination
of the securities' high DRD-eligible yield, good credit quality, healthy call
protection and the company's domestic focus. Our best performers among common
stocks were utility companies such as Houston Industries, which advanced in
large part because of the Houston area's extremely hot summer and unusually high
need for electricity to run air conditioning. Another was Dominion Resources,
the parent company of Virginia Electric, which benefited from a combination of a
favorable regulatory environment and the sale of its United Kingdom electric
subsidiary at an attractive profit.
Outlook
We're optimistic about the prospects for both preferred and common utility
stocks. Although it wasn't the case over the past six months, we believe that
lower interest rates will eventually benefit preferred stocks. Lower interest
rates are also very good for utility companies because they can refinance debt
at lower costs. Furthermore, the price of most fuels - a large expense for
utility companies - continues to fall. Finally, we believe that the recent
strength in the stock market, coupled with lower interest rates, will provide a
favorable backdrop for the capital-intensive brokerage and banking preferred
stocks. The end of the period saw a rally in the common stocks of brokers and
banks, and we think it's just a matter of time until their preferred-stock
counterparts follow suit.
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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.
"...lower interest rates will eventually benefit preferred stocks."
5
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==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Patriot Preferred Dividend Fund
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 November 30, 1998. You'll
also find the net asset value as of that date.
Statement of Assets and Liabilities
November 30, 1998 (Unaudited)
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Assets:
Investments at value - Note C:
Preferred stocks (cost - $126,663,533) ................... $ 130,015,764
Common stocks (cost - $22,960,510) ....................... 24,654,250
Short-term investments (cost - $342,860) ................. 342,860
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155,012,874
Receivable for investments sold ............................ 1,272,458
Dividends receivable ....................................... 340,632
Other assets ............................................... 18,745
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Total Assets ...................... 156,644,709
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Liabilities:
Auction Rate Preferred Shares dividend
payable - Note A .......................................... 215,192
Payable for investments purchased .......................... 1,190,394
Common shares dividend payable ............................. 54,671
Payable to John Hancock Advisers, Inc. .....................
and affiliates - Note B ................................... 158,168
Accounts payable and accrued expenses ...................... 57,637
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Total Liabilities ................. 1,676,062
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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
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Common Shares - Without par value,
unlimited number of shares of beneficial interest
authorized, 7,257,200 shares issued and outstanding........ 99,374,474
Accumulated net realized loss on investments ............... (1,854,045)
Net unrealized appreciation of investments ................. 5,047,564
Distributions in excess of net investment income ........... (99,346)
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Net Assets Applicable to Common Shares
($14.12 per share based on 7,257,200 shares
outstanding) .............................................. 102,468,647
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Net Assets ........................ $ 154,968,647
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The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended November 30, 1998 (Unaudited)
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Investment Income:
Dividends (net of foreign withholding taxes of $9,832)...... $ 5,342,346
Interest ................................................... 86,211
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5,428,557
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Expenses:
Investment management fee - Note B ........................ 629,741
Administration fee - Note B ............................... 118,076
Auction rate preferred shares and auction fees ............ 71,629
Custodian fee ............................................. 28,874
Auditing fee .............................................. 25,768
Printing .................................................. 19,388
Transfer agent fee ........................................ 15,619
Miscellaneous ............................................. 12,591
Trustees' fees ............................................ 1,115
Legal fees ................................................ 637
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Total Expenses ...................... 923,438
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Net Investment Income ............... 4,505,119
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ..................... 2,696,300
Change in net unrealized appreciation/depreciation
of investments ............................................ (4,969,537)
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Net Realized and Unrealized Loss
on Investments ........................... (2,273,237)
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Net Increase in Net Assets
Resulruting from Operations .............. 2,231,882
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Distribution to Auction Rate
Preferred Shares ......................... (1,092,079)
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Net Increase in Net Assets
Applicable to Common
Shareholders Resulting from
Operations Less Auction Rate
Preferred Shares Distributions ........... $ 1,139,803
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SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Patriot Preferred Dividend Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1998
MAY 31, 1998 (UNAUDITED)
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<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................... $ 9,909,044 $ 4,505,119
Net realized gain on investments sold ..................................... 1,473,003 2,696,300
Change in net unrealized appreciation/depreciation of investments ......... 6,389,783 (4,969,537)
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Net Increase in Net Assets Resulting from Operations .................... 17,771,830 2,231,882
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Distributions to Shareholders:
Auction Rate Preferred Shares ($4,133 and $2,080 per share,
respectively) - Note A .................................................... (2,169,753) (1,092,079)
Common Shares - Note A
Dividends from net investment income ($1.15 and $0.58 per
share, respectively)..................................................... (8,380,658) (4,190,595)
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Total Distributions to Shareholders ..................................... (10,550,411) (5,282,674)
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Net Assets:
Beginning of period ....................................................... 150,798,020 158,019,439
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End of period (including undistributed net investment income of $678,209
and distributions in excess of net investment income
of $99,346, respectively).................................................. $ 158,019,439 $ 154,968,647
============= =============
Analysis of Common Shareholder Transactions:
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1998
MAY 31, 1998 (UNAUDITED)
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SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Shares outstanding, beginning of period ......... 7,257,200 $ 99,512,018 7,257,200 $ 99,374,474
Reclassification of capital accounts - Note D ... -- (137,544) -- --
--------- ------------- --------- -------------
Shares outstanding, end of period ............... 7,257,200 $ 99,374,474 7,257,200 $ 99,374,474
========= ============ ========= ============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses and distributions paid
to shareholders. The footnote illustrates any reclassification of capital
amounts, 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
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===============================FINANCIAL STATEMENTS=============================
John Hancock Funds - Patriot Preferred Dividend Fund
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:
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<TABLE>
<CAPTION>
PERIOD FROM JUNE 1, 1993 YEAR ENDED MAY 31, SIX MONTHS ENDED
(commencement of Operations)--------------------------------- NOVEMBER 30, 1998
to MAY 31, 1994 1995 1996 1997 1998 (UNAUDITED)
--------------- ---- ---- ---- ---- -----------
<S> <C> <C> <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 $ 3.54 $ 14.54
---------- ------- ------- ------- ------ -------
Net Investment Income ................................... 1.13 1.52 1.46 1.42 1.37 0.62
Net Realized and Unrealized Gain (Loss) on Investments .. (1.48) 0.65 0.05 0.58 1.08 (0.31)
------ ---- ---- ---- ---- ------
Total from Investment Operations ........................ (0.35) 2.17 1.51 2.00 2.45 0.31
------ ---- ---- ---- ---- ----
Less Distributions:
Dividends to Auction Rate Preferred Shareholders ........ (0.18) (0.30) (0.32) (0.29) (0.30) (0.15)
Dividends from Net Investment Income
to Common Shareholders .................................. (0.95) (1.16) (1.16) (1.16) (1.15) (0.58)
Distributions in Excess of Net Investment Income
to Common Shareholders .................................. (0.01) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions ..................................... (1.14) (1.46) (1.48) (1.45) (1.45) (0.73)
------ ------ ------ ------ ------ ------
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 $ 3.54 $ 14.54 $ 14.12
======== ======== ======== ======= ======== ========
Per Share Market Value, End of Period ................... $ 12.625 $ 12.250 $ 12.500 $ 13.750 $ 14.563 $ 14.688
Total Investment Return at Market Value ................. (9.68%) 7.18% 11.58% 19.87% 14.72% 4.87%(6)
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period
(000s omitted) .......................................... $ 88,902 $ 94,023 $ 94,249 $ 98,298 $105,519 $102,469
Ratio of Expenses to Average Net Assets (2) 1.92% 2.08% 1.99% 1.96% 1.89% 1.76%(7)
Ratio of Net Investment Income to Average Net Assets (3) 9.25% 12.73% 11.14% 10.67% 9.72 8.60%(7)
Portfolio Turnover Rate.................................. 90% 88% 33% 38% 64% 21%
Senior Securities Total Auction Rate Preferred
Shares (000s omitted) ................................... $ 52,500 $ 52,500 $ 52,500 $ 52,500 $ 52,500 $ 52,500
Asset Coverage per Unit (4).............................. $266,908 $274,463 $277,555 $283,817 $296,903 $293,889
Involuntary Liquidation Preference per Unit (5).......... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Approximate Market Value per Unit (5).................... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
</TABLE>
(1) Initial price to commence operations.
(2) Ratios calculated on the basis of expenses applicable to common shares
relative to the average net assets of common shares. Without the exclusion
of preferred shares, the ratio of expenses would have been 1.24%, 1.30%,
1.29%, 1.27%, 1.25% and 1.17%, respectively.
(3) Ratios calculated on the basis of net investment income applicable to common
shares relative to the average net assets of common shares. Without the
exclusion of preferred shares, the ratio of net investment income would have
been 5.81%, 7.93%, 7.19%, 6.91%, 6.42% and 5.73%, respectively.
(4) 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.
(5) Plus accumulated and unpaid dividends.
(6) Not annualized.
(7) Annualized.
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: the net investment income, gains
(losses), dividends and total investment return of the Fund. It shows how the
Fund's net asset value for a share has changed since the end of the previous
period. Additionally, important relationships between some items presented in
the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Patriot Preferred Dividend Fund
Schedule of Investments
November 30, 1998 (Unaudited)
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The Schedule of Investments is a complete list of all securities owned by the
Patriot Preferred Dividend Fund on November 30, 1998. 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.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
PREFERRED STOCKS
Agricultural Operations (3.88%)
Ocean Spray Cranberries, Inc.,
6.25% (R) .................................. 60,000 $ 6,015,000
-----------
Automobile/Trucks (1.36%)
General Motors Corp., 9.12%,
Depositary Shares, Ser G ................... 74,700 2,110,275
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Banks - Foreign (1.18%)
Banco Bilbao Vizcaya International, Ltd.,
9.75%, American Depositary Receipt
(ADR), Gtd Ser A (Spain) ................... 65,750 1,832,781
-----------
Banks - United States (16.29%)
ABN AMRO North America, Inc., 6.59%,
Ser H (R)................................... 5,000 5,400,000
ABN AMRO North America, Inc., 8.75%,
Ser A (R)................................... 1,900 2,204,000
Chase Manhattan Corp., 9.76%, Ser B ......... 49,900 1,334,825
Chase Manhattan Corp., 10.84%, Ser C ........ 119,500 3,570,063
Fleet Financial Group, Inc., 6.75%,
Ser VI ..................................... 51,000 2,805,000
Fleet Financial Group, Inc., 9.35%,
Depositary Shares .......................... 177,000 4,756,875
J.P. Morgan & Company, Inc., 6.625%,
Depositary Shares, Ser H ................... 60,000 3,300,000
Republic New York Corp., $2.8575 ............ 36,700 1,871,700
-----------
25,242,463
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Broker Services (15.21%)
Bear Stearns Companies, Inc., 5.72%,
Ser F ...................................... 40,000 1,845,000
Bear Stearns Companies, Inc., 6.15%,
Ser E ...................................... 100,600 4,979,700
Broker Services (continued)
Lehman Brothers Holdings, Inc., 5.67%,
Depositary Shares, Ser D ................... 48,000 $ 2,088,000
Lehman Brothers Holdings, Inc., 5.94%,
Ser C ...................................... 100,000 4,450,000
Merrill Lynch & Co., Inc., 9.00%,
Depositary Shares, Ser A ................... 160,700 5,031,919
Morgan Stanley Group, Inc., 7.75%,
Depositary Shares .......................... 95,000 5,177,500
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23,572,119
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Conglomerates (0.82%)
Grand Metropolitan Delaware, L.P., 9.42%,
Gtd Ser A .................................. 45,000 1,268,438
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Equipment Leasing (3.66%)
AMERCO, 8.50%, Ser A ........................ 220,000 5,665,000
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Financial Services (13.39%)
ARM Financial Group, Inc., 9.50% ............ 100,000 2,493,750
Citigroup, Inc., 6.213% ..................... 52,000 2,756,000
Citigroup, Inc., 6.231%,
Depositary Shares, Ser H ................... 88,700 4,756,538
Citigroup, Inc., 8.40%,
Depositary Shares, Ser K ................... 156,000 4,280,250
Coastal Finance I, 8.375% ................... 35,000 870,625
Entergy London Capital, L.P., 8.625%,
Ser A ...................................... 40,000 1,030,000
Household International, Inc., 8.25%,
Depositary Shares, Ser 92-A ................ 54,200 1,551,475
SI Financing Trust I, 9.50%, Gtd Pfd Sec &
Purchase Contract .......................... 70,000 1,863,750
Source One Mortgage Services Corp.,
8.42%, Ser A ............................... 45,300 1,149,488
-----------
20,751,876
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Media (2.96%)
Lasmo America, Ltd., 8.15% (R) .............. 20,000 2,000,000
Shaw Communications, Inc., 8.45%,
Ser A (Canada) ............................. 105,500 2,591,344
-----------
4,591,344
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SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Patriot Preferred Dividend Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Oil & Gas (6.90%)
Anadarko Petroleum Corp., 5.46%,
Depositary Shares .......................... 60,139 $ 5,562,858
Pennzoil Co., 6.49% ......................... 50,000 5,125,000
-------------
10,687,858
-------------
Paper Products & Containers (1.23%)
Bowater, Inc., 8.40%,
Depositary Shares, Ser C ................... 74,900 1,909,950
-------------
Utilities (17.02%)
Alabama Power Co., 5.20% .................... 240,000 5,940,000
Baltimore Gas & Electric Co., 6.99%,
Ser 1995 ................................... 10,000 1,165,000
Commonwealth Edison Co., $8.40,
Ser A ...................................... 30,850 3,142,843
El Paso Tennessee Pipeline Co., 8.25%,
Ser A ...................................... 136,600 7,495,924
Massachusetts Electric Co., 6.99% ........... 10,500 1,187,812
MidAmerican Energy Co., $7.80 ............... 9,125 983,218
PSI Energy, Inc., 6.875% .................... 14,350 1,607,200
Public Service Electric & Gas Co.,
6.92%....................................... 19,000 2,132,750
South Carolina Electric & Gas Co.,
6.52%....................................... 5,000 557,500
TDS Capital Trust II, 8.04% .................. 40,000 970,000
Washington Water Power Co., $1.24,
Ser L ...................................... 63,700 1,186,413
-------------
26,368,660
-------------
TOTAL PREFERRED STOCKS
(Cost $126,663,533) (83.90%) 130,015,764
------------- -------------
COMMON STOCKS
Utilities (15.91%)
BEC Energy .................................. 50,000 $ 2,062,500
Conectiv, Inc. (Class A) .................... 54,500 2,043,750
Conectiv, Inc.* ............................. 92,500 2,127,500
Dominion Resources, Inc. .................... 42,000 1,939,875
Florida Progress Corp. ...................... 67,000 2,864,250
Houston Industries, Inc. .................... 46,000 1,454,750
KeySpan Energy Corp. ........................ 86,080 2,555,500
Nevada Power Co. ............................ 30,000 710,625
PacifiCorp .................................. 44,000 825,000
Potomac Electric Power Co. .................. 70,000 1,824,375
Public Service Enterprise Group, Inc. ....... 57,000 2,223,000
Puget Sound Energy, Inc. .................... 61,000 1,654,625
Sempra Energy * ............................. 58,000 1,453,625
UtiliCorp United, Inc. ...................... 26,000 914,875
-------------
TOTAL COMMON STOCKS
(Cost $22,960,510) (15.91%) 24,654,250
------------- -------------
INTEREST PAR VALUE
RATE (000s OMITTED)
------------- -------------
SHORT-TERM INVESTMENTS
Commercial Paper (0.22%)
Chevron USA, Inc.,
12-01-98 ......................... 5.00% $343 342,860
-------------
TOTAL SHORT-TERM INVESTMENTS (0.22%) 342,860
------------- -------------
TOTAL INVESTMENTS (100.03%) 155,012,874
------------- -------------
OTHER ASSETS AND LIABILITIES, NET (0.03%) (44,227)
------------- -------------
TOTAL NET ASSETS (100.00%) $154,968,647
------------- -------------
------------- -------------
(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 $15,619,000 or 10.08%
of net assets as of November 30, 1998.
* Non-income producing security.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, security is U.S. dollar
denominated.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - Patriot Preferred Dividend Fund
(UNAUDITED)
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.
Effective June 1, 1998, the Fund determines the net asset value of the
Common Shares, each business day at the close of regular trading.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. For federal income tax purposes, the Fund has $4,393,425 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, 1998, which has no effect on the Fund's net assets,
net investment income or net realized gains.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund.
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 3.98% to 4.34%, during
the period ended November 30, 1998.
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.
11
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - Patriot Preferred Dividend Fund
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, Inc., 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.
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 November 30, 1998, the Fund's investment to cover the
deferred compensation liability had unrealized appreciation of $1,593.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities during the period ended November
30, 1998, aggregated $27,910,540 and $27,379,015, respectively.
The cost of investments owned at November 30, 1998 (including the
short-term investments) for federal income tax purposes was $150,118,440. Gross
unrealized appreciation and depreciation of investments aggregated $7,953,615
and $3,059,181, respectively, resulting in net unrealized appreciation of
$4,894,434.
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the period ended May 31, 1998, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $1,322, an
increase in undistributed net investment income of $136,222 and a decrease in
capital paid-in of $137,544. This represents the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
May 31, 1998. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to federal excise taxes and partnerships.
12
<PAGE>
================================================================================
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 ("Plan Agent"), 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 to 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).
YEAR 2000 COMPLIANCE
The Adviser and the Fund's service providers are taking steps to address any
year 2000-related computer problems. However, there is some risk that these
problems could disrupt the Fund's operations or financial markets generally.
13
<PAGE>
================================================================================
John Hancock Funds - Patriot Preferred Dividend Fund
SHAREHOLDER COMMUNICATION AND ASSISTANCE
If you have any questions concerning the John Hancock Patriot
Preferred Dividend Fund, we will be pleased to assist you. If you hold shares in
your own name and not with a brokerage firm, please address all notices,
correspondence, questions or other communications regarding the Fund to the
transfer agent at:
State Street Bank & Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
Telephone: (800) 426-5523
If your shares are held with a brokerage firm, you should contact that
firm, bank or other nominee for assistance.
14
<PAGE>
===================================NOTES========================================
John Hancock Funds - Patriot Preferred Dividend Fund
15
<PAGE>
================================================================================
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