The latest report from your
Fund's management team
ANNUAL REPORT
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[GRAPHIC OMITTED]
Patriot Preferred
Dividend Fund
MAY 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-----------------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
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
INDEPENDENT AUDITORS
Deloitte & Touche llp
200 Berkeley Street
Boston, Massachusetts 02116
Listed New York Stock Exchange Symbol: PPF
For shareholder assistance, refer to page 15
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===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
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[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
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As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
These modifications and replacements are nearly done, and the tests of all our
systems are on schedule for completion by the end of July. The rest of 1999 will
be spent testing with our business partners and continuing to participate in
industry testing. We have also established additional contingency plans beyond
our regular ones to prepare for any challenges that the Year 2000 might present.
In the end, John Hancock will spend approximately $90-$95 million to ensure we
make a successful transition to the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
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By Gregory K. Phelps for the Portfolio Management Team
John Hancock Patriot
Preferred Dividend Fund
Preferred stocks languish amidst changing economic environment
--------------------------------------------------------------
Preferred stocks turned in a tepid performance for the past 12 months. During
the first half of the period, they came under pressure when investors worried
that a weakening global economy would derail corporate earnings growth.
Furthermore, economic and financial market turmoil prompted investors to shun
nearly all but ultra-safe U.S. Treasury securities from August through October.
The result was a liquidity crunch that forced the Federal Reserve to lower
interest rates three times between September and November. By December, however,
a shift away from Treasuries back into stocks and other fixed-income-paying
securities was well underway. Despite expectations to the contrary, U.S.
economic growth remained quite strong and many troubled foreign economies
appeared to have hit bottom. Preferred stocks were a temporary beneficiary of
renewed investor confidence. But the tide shifted once again in 1999. Stronger
than-expected U.S. economic growth, coupled with warnings from the Federal
Reserve Board that its next move was likely to be an interest-rate hike, weighed
heavily on preferred stocks which, with their fixed dividend income, often move
in the same direction as bonds.
Performance and strategy review
For the 12 months ended May 31, 1999, John Hancock Patriot Preferred Dividend
Fund had a total return of 2.71% at net asset value. That performance compared
to the average income
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Patriot
Preferred Dividend Fund. Caption below reads "Fund management team members
(l-r): Sylvester Marquardt, Mark Maloney, Beverly Cleathero and Gregory
Phelps."]
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"Preferred stocks turned in a tepid performance..."
3
<PAGE>
================================================================================
John Hancock Funds - Patriot Preferred Dividend Fund
"...the Fund was forced to surrender to calls some of its higher-yielding
preferred stocks..."
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[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into five sections (from top to left): Financials 50%, Media
2%, Oil & Gas 8%, Short-Term Investments & Other 8% and Utilities 32%. A note
below the chart reads "As a percentage of net assets on May 31, 1999."]
- --------------------------------------------------------------------------------
and preferred closed-end equity fund's return of 3.35% for the same period,
according to Lipper, Inc. By comparison, the Merrill Lynch 30-Year Treasury
Index rose 2.51%.
Throughout the period, we maintained our long-term focus on
DRD-eligible preferred stocks, which offer distinct tax advantages to corporate
investors. We also continued to focus on finding securities with good call
protection, which means issuers can't redeem, or "call," them before a specified
date. Call protection is important because it allows us to hang on to stocks
with higher-than-average dividend yields when interest rates are falling.
A word about dividends
Issuers exercising their call provisions to benefit from last year's falling
interest rates caused the supply of DRD-eligible preferred stocks to shrink by
about 22% in 1998, according to one
- --------------------------------------------------------------------------------
[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 Lasmo America
followed by an up arrow with the phrase "Helped by spike in oil prices." The
second listing is BEC Energy followed by an up arrow with the phrase "Lifted by
buyback program; growing telecom business." The third listing is AMERCO followed
by a sideways arrow with the phrase "High coupon limits progress." A note below
the table reads "See `Schedule of Investments.' Investment holdings are subject
to change."]
- --------------------------------------------------------------------------------
estimate. So far in 1999, issuers have announced plans to call an additional $1
billion of preferred stocks in the near future. From a technical standpoint,
calls largely have been beneficial for the DRD-eligible preferred market because
they have reduced available supply. By the same token, however, the Fund was
forced to surrender to calls some of its higher-yielding preferred stocks and
reinvest the proceeds in securities that offered lower dividend yields. The
resulting downward pressure on the Fund's dividend caused the Fund to reduce its
monthly dividend last December.
Redeploying assets
In many cases, we used the proceeds from preferred stocks called away from us to
buy other call-protected - albeit, lower-yielding - preferred stocks. We also
looked for opportunities to buy attractively priced utility common stocks. In
January, for example, utility stock yields were relatively high - although still
lower than the preferred stocks we had called away. Historically speaking,
utility common stocks' price-to-earnings ratios (P/Es) have run about 65% to 70%
of the P/E for the average Standard & Poor's 500 Index stock. P/Es measure how
much you're paying for earnings. Recently, the P/E of the average utility stock
was only about 50% of the S&P index. That's the cheapest utility stocks have
been in about 20 years. Furthermore, the relative cheapness came amid a good
backdrop for utility stocks, as more and more utilities announced stock
buybacks, merger and acquisition activity accelerated and the regulatory
environment remained favorable.
Leaders and laggards
Among our best-performing preferred stocks was oil and gas producer Lasmo
America, which
4
<PAGE>
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John Hancock Funds - Patriot Preferred Dividend Fund
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[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended May 31, 1999." The chart is
scaled in increments of 1% with 0% at the bottom and 4% at the top. The first
bar represents the 2.71% total return for John Hancock Patriot Preferred
Dividend Fund. The second bar represents the 3.35% total return for Average
income and preferred closed-end equity fund. The third bar represents the 2.51%
total return for Merrill Lynch 30-Year Treasury Index. A note below the chart
reads "Total returns for John Hancock Patriot Preferred Dividend Fund are at net
asset value with all distributions reinvested. The average income and preferred
closed-end fund is tracked by Lipper, 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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was helped by its DRD eligibility, good call protection and a surge in energy
prices. Among our standout utility common stock holdings was BEC Energy, which
rebounded over the past several months. The company announced plans for a large
stock buyback and it successfully sold off its electric generating plants at
attractive prices. In addition, the company partnered with RCN Corporation to
develop fast-growing cable, Internet access and local telephone service.
Likewise, Potomac Electric generated a lot of excitement thanks to its joint
venture with RCN to serve the greater Washington, D.C. area. Another good common
stock performer was Conectiv, which owns a growing competitive local exchange
company that provides low-cost telephone, data transmission and Internet access
service to small and mid-sized companies. The company recently announced a stock
buyback plan and its intention to sell its electric generating plants.
Our main disappointment during the past year was that our broad
category of preferred stocks, which account for 83% of the Fund's net assets,
didn't do as well as we had hoped for. We were fortunate that none of our
holdings materially underperformed the preferred-stock market as a whole. That
said, some of our preferred holdings made little progress. Amerco, for example,
was flat not because of problems with the company, but rather because of the
stock's structure. As a "cushion" preferred stock, it carries a very high coupon
that essentially limits its price gains and losses.
Outlook
We believe that current worry over higher interest rates may be overblown. Many
areas across the world - including Europe and Latin America - continue to
struggle against weak economic trends. To prevent causing protracted weakness in
those areas, the Fed will likely refrain from raising interest rates
aggressively. Furthermore, the Fed's revelation that it was biased toward
raising interest rates may have accomplished the equivalent of an interest-rate
hike as well.
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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 changes as market and other conditions warrant.
"...current worry over higher interest rates may be overblown."
5
<PAGE>
=============================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 May 31, 1999. You'll also
find the net asset value as of that date.
Statement of Assets and Liabilities
May 31, 1999
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Assets:
Investments at value - Note C:
Preferred stocks (cost - $125,272,797) ..................... $126,565,069
Common stocks (cost - $21,322,849) ......................... 23,449,236
Short-term investments (cost- $1,425,004) .................. 1,425,004
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151,439,309
Cash ........................................................ 2,493,300
Receivable for investments sold ............................. 2,453,128
Dividends receivable ........................................ 544,395
Other assets ................................................ 23,777
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Total Assets .......................... 156,953,909
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Liabilities:
Auction Rate Preferred Shares
dividend payable - Note A .................................. 104,062
Payable for investments purchased ........................... 3,665,068
Common shares dividend payable .............................. 35,306
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 162,565
Accounts payable and accrued expenses ....................... 68,130
--------------
Total Liabilities ..................... 4,035,131
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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
--------------
Common Shares - Without par value, unlimited
number of shares of beneficial interest authorized,
7,257,200 shares issued and outstanding ..................... 99,356,009
Accumulated net realized loss on investments ................ (2,340,276)
Net unrealized appreciation of investments .................. 3,418,659
Distributions in excess of net investment income ............ (15,614)
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Net Assets Applicable to Common Shares:
($13.84 per share based on 7,257,200
shares outstanding).......................................... 100,418,778
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Net Assets............................. $152,918,778
=======================================================
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, 1999
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Investment Income:
Dividends (net of foreign withholding taxes of $9,832)....... $10,608,235
Interest .................................................... 175,182
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10,783,417
--------------
Expenses:
Investment management fee - Note B ......................... 1,241,980
Administration fee - Note B ................................ 232,871
Auction rate preferred shares and auction fees ............. 149,197
Custodian fee .............................................. 58,023
Miscellaneous .............................................. 57,556
Auditing fee ............................................... 55,110
Printing ................................................... 35,258
Transfer agent fee ......................................... 31,491
Federal excise tax ......................................... 19,346
Trustees' fees ............................................. 7,837
Legal fees ................................................. 865
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Total Expenses......................... 1,889,534
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Net Investment Income ................. 8,893,883
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ....................... 2,209,544
Change in net unrealized appreciation/depreciation
of investments ............................................. (6,598,442)
--------------
Net Realized and Unrealized
Loss on Investments ................... (4,388,898)
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Net Increase in Net Assets
Resulting from Operations ............. 4,504,985
=======================================================
Distribution to Auction Rate
Preferred Shares ...................... (2,104,344)
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Net Increase in Net Assets
Applicable to Common
Shareholders Resulting from
Operations Less Auction Rate
Preferred Shares Distribution ......... $2,400,641
=======================================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Patriot Preferred Dividend Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1998 1999
---------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income............................................................................ $9,909,044 $8,893,883
Net realized gain on investments sold ........................................................... 1,473,003 2,209,544
Change in net unrealized appreciation/depreciation of investments ............................... 6,389,783 (6,598,442)
------------ -------------
Net Increase in Net Assets Resulting from Operations ........................................... 17,771,830 4,504,985
------------ -------------
Distributions to Shareholders:
Auction Rate Preferred Shares
($4,133 and $4,008 per share, respectively) - Note A ........................................... (2,169,753) (2,104,344)
Common Shares - Note A
Dividends from net investment income ($1.1500 and $1.0290 per share, respectively) ............ (8,380,658) (7,467,748)
Distributions in excess of net investment income (none and $0.0046 per share, respectively) ... -- (33,554)
------------ -------------
Total Distributions to Shareholders ........................................................... (10,550,411) (9,605,646)
------------ -------------
Net Assets:
Beginning of period ............................................................................. 150,798,020 158,019,439
------------ -------------
End of period (including undistributed net investment income of $678,209
and distributions in excess of net investment income of $15,614, respectively) ................. $158,019,439 $152,918,778
============ =============
Analysis of Common Shareholder Transactions:
YEAR ENDED MAY 31,
--------------------------------------------------------
1998 1999
------------------------- -------------------------
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) -- (18,465)
---------- ------------ ---------- -------------
Shares outstanding, end of period ................................. 7,257,200 $99,374,474 7,257,200 $99,356,009
========== ============ ========== =============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses and distributions paid
to shareholders. The footnote illustrates any reclassification of capital
amounts and the number of Common Shares outstanding at the beginning and the end
of the period for the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Patriot Preferred Dividend Fund
Financial Highlights Selected data for a share of beneficial interest
outstanding throughout each period indicated, investment returns, key ratios and
supplemental data are listed as follows:
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<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Common Shares
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................................... $12.25 $12.96 $12.99 $13.54 $14.54
-------- -------- --------- ------- --------
Net Investment Income ..................................................... 1.52 1.46 1.42 1.37 1.23
Net Realized and Unrealized Gain (Loss) on Investments .................... 0.65 0.05 0.58 1.08 (0.61)
-------- -------- --------- ------- --------
Total from Investment Operations ......................................... 2.17 1.51 2.00 2.45 0.62
-------- -------- --------- ------- --------
Less Distributions:
Dividends to Auction Rate Preferred Shareholders ......................... (0.30) (0.32) (0.29) (0.30) (0.29)
Dividends from Net Investment Income to Common Shareholders .............. (1.16) (1.16) (1.16) (1.15) (1.03)
Distributions in excess of Net Investment Income to Common Shareholders... -- -- -- -- (0.00)(5)
-------- -------- --------- ------- --------
Total Distributions ..................................................... (1.46) (1.48) (1.45) (1.45) (1.32)
-------- -------- --------- ------- --------
Net Asset Value, End of Period ............................................ $12.96 $12.99 $13.54 $14.54 $13.84
======== ======== ========= ======= ========
Per Share Market Value, End of Period ..................................... $12.250 $12.500 $13.750 $14.563 $11.500
Total Investment Return at Market Value ................................... 7.18% 11.58% 19.87% 14.72% (14.79%)
Ratios and Supplemental Data
Net Assets Applicable to Common Shares, End of Period
(000s omitted) ........................................................... $94,023 $94,249 $98,298 $105,519 $100,419
Ratio of Expenses to Average Net Assets (1) ............................... 2.08% 1.99% 1.96% 1.89% 1.84%
Ratio of Net Investment Income to Average Net Assets (2) .................. 12.73% 11.14% 10.67% 9.72% 8.66%
Portfolio Turnover Rate ................................................... 88% 33% 38% 64% 30%
Senior Securities Total Auction Rate Preferred Shares (000s omitted) ..... $52,500 $52,500 $52,500 $52,500 $52,500
Asset Coverage per Unit (3) ............................................... $274,463 $277,555 $283,817 $296,903 $290,113
Involuntary Liquidation Preference per Unit (4) ........................... $100,000 $100,000 $100,000 $100,000 $100,000
Approximate Market Value per Unit (4) ..................................... $100,000 $100,000 $100,000 $100,000 $100,000
</TABLE>
(1) 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 1.30%, 1.29%,
1.27%, 1.25% and 1.22%, respectively.
(2) 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 7.93%, 7.19%, 6.91%, 6.42% and 5.73%, respectively.
(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) Less than $0.01 per share.
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
May 31, 1999
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The Schedule of Investments is a complete list of all securities owned by the
Patriot Preferred Dividend Fund on May 31, 1999. 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 (4.01%)
Ocean Spray Cranberries, Inc.,
6.25% (R)................................. 60,000 $6,135,000
----------
Automobile/Trucks (1.35%)
General Motors Corp., 9.12%,
Depositary Shares, Ser G ................. 74,700 2,068,256
----------
Banks - Foreign (1.16%)
Banco Bilbao Vizcaya International, Ltd.,
9.75%, American Depositary Receipt
(ADR), Gtd Ser A (Spain) ................. 65,750 1,775,250
----------
Banks - United States (18.19%)
ABN AMRO North America, Inc., 6.59%,
Ser H (R) 5,000 5,280,000
ABN AMRO North America, Inc., 8.75%,
Ser A (R) 1,900 2,129,900
Chase Manhattan Corp., 9.76%, Ser B ....... 49,900 1,316,113
Chase Manhattan Corp., 10.84%, Ser C ...... 119,500 3,540,188
Fleet Financial Group, Inc., 6.75%,
Ser VI ................................... 51,000 2,830,500
Fleet Financial Group, Inc., 9.35%,
Depositary Shares ........................ 177,000 4,646,250
J.P. Morgan & Company, Inc., 6.625%,
Depositary Shares, Ser H ................. 60,000 3,240,000
Republic New York Corp., $2.8575 .......... 93,700 4,825,550
----------
27,808,501
----------
Broker Services (15.70%)
Bear Stearns Companies, Inc., 5.72%,
Ser F .................................... 40,000 1,810,000
Bear Stearns Companies, Inc., 6.15%,
Ser E .................................... 100,600 4,866,525
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Broker Services (continued)
Lehman Brothers Holdings, Inc., 5.67%,
Depositary Shares, Ser D ................. 48,000 $2,052,000
Lehman Brothers Holdings, Inc., 5.94%,
Ser C .................................... 100,000 4,575,000
Merrill Lynch & Co., Inc., 9.00%,
Depositary Shares, Ser A ................. 180,700 5,612,994
Morgan Stanley Group, Inc., 7.75%,
Depositary Shares ........................ 95,000 5,094,375
----------
24,010,894
----------
Conglomerates (0.83%)
Grand Metropolitan Delaware, L.P., 9.42%,
Gtd Ser A ................................ 45,000 1,268,438
----------
Equipment Leasing (3.72%)
AMERCO, 8.50%, Ser A ...................... 220,000 5,692,500
----------
Financial Services (10.88%)
Citigroup, Inc., 6.213%, Ser G ............ 52,000 2,626,000
Citigroup, Inc., 6.231%,
Depositary Shares, Ser H ................. 88,700 4,523,700
Citigroup, Inc., 8.40%,
Depositary Shares, Ser K ................. 156,000 4,280,250
Coastal Finance I, 8.375% ................. 35,000 888,125
Household International, Inc., 8.25%,
Dep Shares, Ser 92-A ..................... 86,100 2,453,850
SI Financing Trust I, 9.50%,
Gtd Pfd Sec & Purchase Contract .......... 70,000 1,868,125
----------
16,640,050
----------
Media (2.39%)
Shaw Communications, Inc., 8.45%,
Ser A (Canada) ........................... 145,500 3,655,688
----------
Oil & Gas (7.74%)
Anadarko Petroleum Corp., 5.46%,
Depositary Shares ........................ 60,139 5,284,715
Lasmo America Ltd., 8.15% (R) ............. 20,000 2,040,000
PennzEnergy Co., 6.49%, Ser A ............. 50,000 4,500,000
----------
11,824,715
----------
Utilities (16.80%)
Alabama Power Co., 5.20% .................. 240,000 5,685,000
Avista Corp., $1.24, Ser L, Conv .......... 133,700 2,440,024
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
=============================FINANCIAL STATEMENTS===============================
John Hancock Funds - Patriot Preferred Dividend Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
Baltimore Gas & Electric Co., 6.99%,
Ser 1995 ................................. 10,000 $1,140,000
El Paso Tennessee Pipeline Co., 8.25%,
Ser A .................................... 136,600 7,547,150
Entergy London Capital, L.P., 8.625%,
Ser A .................................... 40,000 1,027,500
Massachusetts Electric Co., 6.99% ......... 10,500 1,165,500
MidAmerican Energy Co., $7.80 ............. 9,125 978,655
PSI Energy, Inc., 6.875% .................. 14,350 1,571,324
Public Service Electric & Gas Co., 6.92% .. 19,000 2,113,750
South Carolina Electric & Gas Co., 6.52% .. 5,000 551,874
TDS Capital Trust II, 8.04% ............... 58,600 1,465,000
----------
25,685,777
----------
TOTAL PREFERRED STOCKS
(Cost $125,272,797) (82.77%) 126,565,069
------ -----------
COMMON STOCKS
Utilities (15.33%)
Alliant Energy Corp. ...................... 60,000 1,811,250
BEC Energy ................................ 50,000 2,200,000
Conectiv, Inc. (Class A) .................. 35,850 1,310,766
Dominion Resources, Inc. .................. 42,000 1,813,875
Florida Progress Corp. .................... 67,000 2,809,813
KeySpan Energy ............................ 38,000 1,026,000
PacifiCorp ................................ 44,000 800,250
Potomac Electric Power Co. ................ 70,000 2,161,250
Public Service Enterprise Group, Inc. ..... 17,000 712,938
Puget Sound Energy, Inc. .................. 61,000 1,589,813
Reliant Energy, Inc. ...................... 46,000 1,403,000
Sempra Energy ............................. 104,000 2,236,000
UtiliCorp United, Inc. .................... 39,000 972,563
Western Resources, Inc. ................... 67,500 1,961,718
WPS Resources Corp. ....................... 20,000 640,000
----------
23,449,236
----------
TOTAL COMMON STOCKS
(Cost $21,322,849) (15.33%) 23,449,236
------ ----------
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
SHORT-TERM INVESTMENTS
Commercial Paper (0.93%)
Chevron USA, Inc.,
06-01-99 .................... 4.72% $1,425 $1,425,004
-----------
TOTAL SHORT-TERM INVESTMENTS (0.93%) 1,425,004
------- -----------
TOTAL INVESTMENTS (99.03%) 151,439,309
------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.97%) 1,479,469
------- -----------
TOTAL NET ASSETS (100.00%) $152,918,778
======== ============
(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 $15,584,900 or 10.19% of
net assets as of May 31, 1999.
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 Prferred Dividend Fund
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. The Fund
determines the net asset value of the Common Shares each business day.
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 $1,828,416 of
capital loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforwards are used by the
Fund, no capital gains distributions will be made. The Fund's carryforwards
expire May 31, 2003. Additionally, net capital losses of $360,323 attributable
to security transactions incurred after October 31, 1998 are treated as arising
on the first day (June 1, 1999) of the Fund's next taxable year.
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, 1999, which have 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 3.58% to 4.34%, during
the year ended May 31, 1999.
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
11
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Patriot Prferred Dividend Fund
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, 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., Mr. Stephen L. Brown, 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. The investment had no
impact on the operations of the Fund.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities during the year ended May 31,
1999, aggregated $46,330,228 and $48,340,342, respectively.
The cost of investments owned at May 31, 1999 (including the short-term
investments) for federal income tax purposes was $148,172,187. Gross unrealized
appreciation and depreciation of investments aggregated $7,130,042 and
$3,862,920, respectively, resulting in net unrealized appreciation of
$3,267,122.
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1999, the Fund has reclassified amounts to reflect
a decrease in accumulated net realized loss on investments of $525, a decrease
in distributions in excess of net investment income of $17,940 and a decrease in
capital paid-in of $18,465. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of May 31,
1999. 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. The calculation of net
investment income in the financial highlights excludes these adjustments.
12
<PAGE>
================================================================================
John Hancock Funds - Patriot Prferred Dividend Fund
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, 1999, the related statement of operations for the
year then ended, the statements of changes in net assets for the years ended May
31, 1999 and 1998 and the financial highlights for each of the years in the
five-year period ended May 31, 1999. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at May 31,
1999 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 audits provide 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, 1999, the results of its operations, the changes in its net assets, and
its financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 8, 1999
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,
1999.
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 1999 U.S. Treasury Department Form
1099-DIV in January 2000. This will reflect the tax character of all
distributions for calendar year 1999.
13
<PAGE>
================================================================================
John Hancock Funds - Patriot Prferred 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).
14
<PAGE>
================================================================================
John Hancock Funds - Patriot Prferred Dividend Fund
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.
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.
SHAREHOLDER MEETING
On March 18, 1999, the Annual Meeting of John Hancock Patriot Preferred Dividend
Fund (the "Fund") was held to elect five Trustees and to ratify the action of
the Trustees in selecting independent auditors for the Fund.
The common shareholders elected the following Trustees to serve until
their respective successors are duly elected and qualified, with the votes
tabulated as follows:
WITHHELD
FOR AUTHORITY
--------- ---------
Stephen L. Brown 6,230,680 150,999
James F. Carlin 6,237,515 144,165
William H. Cunningham 6,227,575 154,105
John P. Toolan 6,224,025 157,655
The preferred shareholders elected Harold R. Hiser, Jr. to serve until
his successor is duly elected and qualified, with the votes tabulated as
follows: 290 FOR and 0 WITHHELD AUTHORITY.
The shareholders also ratified the Trustees' selection of Deloitte &
Touche LLP as the Fund's independent auditors for the fiscal year ending May 31,
1999, with the votes tabulated as follows: 6,275,905 FOR, 47,558 AGAINST and
58,507 ABSTAINING.
15
<PAGE>
================================================================================
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