ITEM 1. REPORT TO STOCKHOLDERS
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John Hancock
Patriot
Premium
DIVIDEND FUND II
SEMI
ANNUAL
REPORT
4.30.03
[LOGO] John Hancock
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JOHN HANCOCK FUNDS
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[A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left
next to first paragraph.]
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Table of contents
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Your fund at a glance
page 1
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Managers' report
page 2
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Fund's investments
page 6
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Financial statements
page 9
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For your information
page 21
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Dear Fellow Shareholders,
After a strong start to 2003, the stock market succumbed to the pressures of a
weak economy, rising oil prices, concerns about corporate earnings and
uncertainties about the war in Iraq. The tide turned in April, when the war
ended and first-quarter corporate earnings came in better than expected. As a
result, the major indexes all gained some ground year to date through April 30,
2003, with the Dow Jones Industrial Average returning 2.50%, the Standard &
Poor's 500 Index returning 4.82% and the tech-heavy Nasdaq Composite Index up
9.64%. Bonds, which have outperformed stocks for the last three years, continued
their upward trend this year, as investors still sought their relative safety.
After the jarring stock market losses of the last three years, it's a relief for
investors to be reminded that the market is indeed cyclical, and does eventually
move up - not just down. But while the stock market has been clawing its way
back, the ride has been extremely volatile. Uncertainty still abounds about the
strength of the economy, geopolitical issues, corporate governance problems,
rising unemployment and the sustainability of corporate earnings growth. And
despite rallies late last year and in April, many investors are still so bruised
and skeptical that they have remained on the sidelines. Even though the
statistics suggest we might be emerging from this long, difficult bear market,
we're not quite ready to call it history.
While no one can predict when this bear market cycle will turn, investors can
take charge of how they maneuver through such uncertain times. First, take a
look at how your portfolio is allocated among stocks, bonds and cash to make
sure it's in the proper balance. Work with your investment professional, who
knows your long-term goals and can help keep you on the right track, rather than
being lured by today's stars, which could wind up tomorrow's laggards. And as
always, keep a long-term investment horizon. We believe this offers the best way
for you to survive the tough times and reach your investment objectives.
Sincerely,
/s/Maureen R. Ford
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Maureen R. Ford,
Chairman and Chief Executive Officer
This commentary reflects the chairman's views as of April 30, 2003. They are
subject to change at any time.
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YOUR FUND
AT A GLANCE
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The Fund seeks to provide high current income, consistent with modest growth of
capital, for holders of its common shares by investing in a diversified
portfolio of dividend-paying preferred and common equity securities.
Over the last six months
[ ] Preferred stocks performed relatively well as interest rates fell.
[ ] The Fund benefited from its oil- and natural gas-related holdings.
[ ] Utility common stocks stumbled early, but showed strength in spring 2003.
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[Bar chart with heading "John Hancock Patriot Premium Dividend Fund II". Under
the heading is a note that reads "Fund performance for the six months ended
April 30, 2003." The chart is scaled in increments of 4% with 0% at the bottom
and 8% at the top. The first bar represents the 7.74% total return for John
Hancock Patriot Premium Dividend Fund II. A note below the chart reads "The
total return for the Fund is at net asset value with all distributions
reinvested."]
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Top 10 issuers
5.1% Puget Energy, Inc.
4.5% Bear Stearns Cos., Inc.
4.0% Citigroup, Inc.
3.5% Lehman Brothers Holdings, Inc.
3.1% CH Energy Group, Inc.
2.5% TXU US Holdings Co.
2.4% DTE Energy Co.
2.4% Energy East Corp.
2.3% NSTAR
2.3% Alabama Power Co.
As a percentage of net assets plus value of preferred shares on April 30, 2003.
1
BY GREGORY K. PHELPS AND MARK T. MALONEY, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock Patriot Premium Dividend Fund II
MANAGERS' REPORT
Preferred stocks - which make up the bulk of John Hancock Patriot Premium
Dividend Fund II - performed reasonably well during the six months ended April
30, 2003. Falling interest rates, punctuated by a surprise half-percentage-point
rate cut by the Federal Reserve Board in November 2002, provided some of the
fuel powering preferred stocks' gains. Because they pay dividends at a fixed
rate, like the interest on a bond, preferred stocks tend to rally when interest
rates drop, just as bonds do. Another factor that helped was stronger demand
from income-seeking investors looking for significantly higher yields than what
companies paid on their bonds and common stocks. Many preferred stocks continued
to yield between 7% and 9%, outstripping by a fairly wide margin the yields
available on Treasury and corporate bonds, as well as the dividends paid on
common stocks. Demand also strengthened in response to President Bush's proposed
dividend tax-cut package, which is designed to eliminate taxes that individuals
pay on most stock dividends. Even though the proposal had not been approved by
Congress by the end of April 2003, the anticipation that at least some form of
dividend tax relief ultimately would be adopted was enough for investors to bid
preferred stock prices higher. And even though the types of preferred stocks
that are the Fund's focus - those that pay dividends in pretax dollars - won't
benefit from tax relief, their prices tended to be lifted by the development as
well.
"Preferred stocks...performed reasonably well during the six months ended April
30, 2003."
Utility common stocks - the Fund's other primary area of emphasis - were still
mired in the remnants of the Enron debacle when the period began and their
performance was quite disappointing. But conditions began to improve in early
2003, and by mid-February, utility stocks staged a heartening rally through the
end of the period. Some of the improvement was
2
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[Photos of Greg Phelps and Mark Maloney flush right next to first paragraph.]
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due to investors' recognition that the sector had become undervalued relative to
the market as a whole and relative to its historic value. Also aiding the group
was the dividend tax-relief proposal. Through the years, utilities have offered
consistently high dividends and are poised to benefit if tax relief is enacted.
Finally, the utility companies did their part to boost confidence. They began to
face reality, cleaning up their balance sheets and ridding themselves of the
types of unregulated subsidiaries - such as energy trading - that caused them
the most pain in the post-Enron environment.
FUND PERFORMANCE
For the six months ended April 30, 2003, John Hancock Patriot Premium Dividend
Fund II returned 7.74% at net asset value. By comparison, the average income and
preferred stock closed-end fund returned 13.01%, according to Lipper, Inc. We
believe the Fund's relative underperformance versus its peers was due to the
fact that we are unable to buy the below-investment-grade, or junk, credits that
had a big rally off of very low bases. In the same period, the Dow Jones Utility
Average, which tracks the performance of 15 electric and natural gas utilities,
returned 16.19%, surpassing the Fund's result because it includes deeply
distressed energy merchants, which rebounded off of low bases. We own few to
none of these companies.
"...the run-up in oil prices... helped boost our preferred- stock holdings whose
issuers are involved in the production and distribution of oil and natural gas."
LEADERS AND LAGGARDS
The run-up in oil prices - which also helped pump up natural gas prices - helped
boost our preferred-stock holdings whose issuers are involved in the production
and distribution of oil and natural gas. Energy prices climbed steadily in
response to concerns about disrupted oil supplies stemming from the oil strike
3
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[Table at top left-hand side of page entitled "Top five industry groups." The
first listing is Utilities 66%, the second is Broker services 9%, the third Oil
& gas 6%, the fourth Banks-United States 6%, and the fifth Finance 6%.]
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in Venezuela, the escalation of tensions in the Middle East and, ultimately, the
U.S.-led war on Iraq. Some standout holdings included Anadarko Petroleum, Apache
Corp. and Devon Energy.
Despite the utility common stock sector's overall disappointing returns for the
period, we did benefit from our continued emphasis on companies that transmit
and distribute electricity located in states with favorable regulatory
environments, and from our avoidance of companies with large energy trading
operations. Two good examples were NSTAR and CH Energy, both of which
outperformed the overall utility group during the period.
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[Pie chart in middle of page with heading "Portfolio diversification 1." The
chart is divided into three sections (from top to left): Preferred stocks 71%,
Common stocks 26%, and Short-term investments & other 3%.]
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Our single biggest disappointment during the period was El Paso Tennessee
Pipeline Co. That stock came under pressure when a judge ruled that the company
had manipulated pipeline capacity during the 2001 California power crisis. In
late March, the company settled those allegations out of court. In our view,
this was a positive, albeit costly, development because it allows the company to
put some lingering problems behind it and move ahead with its business plan. We
also like the fact that the company has made a series of other positive moves,
including selling assets, securing new bank financings and exiting energy
trading.
4
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[Table at top of page entitled "SCORECARD". The header for the left column is
"INVESTMENT" and the header for the right column is "PERIOD'S PERFORMANCE...AND
WHAT'S BEHIND THE NUMBERS." The first listing is Anadarko Petroleum followed by
an up arrow with the phrase "Oil prices spike amid fears of war with Iraq." The
second listing is Energy East followed by an up arrow with the phrase "Demand
for high-yielding stocks boosts price." The third listing is El Paso Tennessee
Pipeline Co. followed by a down arrow with the phrase "Uncertainty dogs
company."]
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OUTLOOK
Our outlook calls for continued lackluster economic growth, which we believe
will preclude the need for interest-rate hikes for the foreseeable future. Low
interest rates should continue to prompt strong demand for preferred stocks. If
some form of dividend tax relief is enacted by Congress, we believe that, too,
could help preferreds. As for utility common stocks, we're encouraged that many
companies spent the last year reducing debt, which could foster more stable
rating-agency outlooks and, potentially, a continued rebound in their stock
prices. Furthermore, utility common stocks remain attractively valued relative
to the stock market overall. And given the colder-than-normal winter, there is
reason to believe utilities' year-over-year earnings comparisons could improve.
Further positives for the group include the potential enactment of dividend tax
relief and the possible elimination of an anachronistic law limiting utility
mergers.
"Low interest rates should continue to prompt strong demand for preferred
stocks."
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. The team's statements reflect
its own opinions. As such, they are in no way guarantees of future events, and
are not intended to be used as investment advice or a recommendation regarding
any specific security. They are also subject to change at any time as market and
other conditions warrant.
1 As a percentage of the Fund's portfolio on April 30, 2003.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
April 30, 2003
(unaudited)
This schedule is divided into three main categories: preferred stocks, common
stocks and short-term investments. The preferred and common stocks are further
broken down by industry group. Short-term investments, which represent the
Fund's cash position, are listed last.
SHARES ISSUER, DESCRIPTION VALUE
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PREFERRED STOCKS 118.45% $180,205,458
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(Cost $183,246,415)
Agricultural Operations 2.43% 3,690,000
45,000 Ocean Spray Cranberries, Inc., 6.25% (R) 3,690,000
Banks - United States 9.98% 15,179,755
97,000 FleetBoston Financial Corp., 6.75%, Depositary Shrs, Ser VI 5,092,500
93,900 HSBC USA, Inc., $2.8575 4,737,255
100,000 J.P. Morgan Chase & Co., 6.625%, Depositary Shares, Ser H 5,350,000
Broker Services 14.66% 22,320,018
50,650 Bear Stearns Cos., Inc., 5.49%, Ser G 2,393,213
95,300 Bear Stearns Cos., Inc., 5.72%, Ser F 4,745,940
84,000 Bear Stearns Cos., Inc., 6.15%, Ser E 4,275,600
125,000 Lehman Brothers Holdings, Inc., 5.67%,
Depositary Shares, Ser D 6,187,500
53,000 Lehman Brothers Holdings, Inc., 5.94%, Ser C 2,689,750
72,300 Merrill Lynch & Co., Inc., 9.00%, Depositary Shares, Ser A 2,028,015
Diversified Operations 0.75% 1,140,300
42,000 Grand Metropolitan Delaware, L.P., 9.42%, Ser A 1,140,300
Finance 9.86% 14,996,600
96,000 Citigroup, Inc., 6.213%, Ser G 5,136,000
64,500 Citigroup, Inc., 6.231%, Depositary Shares, Ser H 3,386,250
28,500 Citigroup, Inc., 6.365%, Depositary Shares, Ser F 1,524,750
92,000 SLM Corp., 6.97%, Ser A 4,949,600
See notes to
financial statements
6
SHARES ISSUER, DESCRIPTION VALUE
Leasing Companies 0.97% $1,472,250
90,600 AMERCO, 8.50%, Ser A 1,472,250
Media 2.95% 4,488,236
199,300 Shaw Communications, Inc., 8.50% (Canada) 4,488,236
Oil & Gas 10.15% 15,438,206
47,450 Anadarko Petroleum Corp., 5.46%, Depositary Shares 4,602,650
51,500 Apache Corp., 5.68%, Depositary Shares, Ser B 5,201,500
55,645 Devon Energy Corp., 6.49%, Ser A 5,634,056
Telecommunications 1.64% 2,500,000
50,000 Touch America Holdings, Inc., $6.875* 2,500,000
Utilities 65.06% 98,980,093
229,475 Alabama Power Co., 5.20% 5,716,222
19,450 Baltimore Gas & Electric Co., 6.70%, Ser 1993 2,013,075
30,000 Baltimore Gas & Electric Co., 6.99%, Ser 1995 3,112,500
67,342 Boston Edison Co., 4.78% 5,454,702
220,000 Coastal Finance I, 8.375% 4,371,400
186,000 El Paso Tennessee Pipeline Co., 8.25%, Ser A 4,873,200
180,700 Energy East Capital Trust I, 8.25% 4,803,006
33,000 Florida Power & Light Co., 6.75%, Ser U 3,432,000
52,000 Hawaiian Electric Industries Capital Trust I, 8.36% 1,367,600
14,000 Idaho Power Co., 7.07% 1,435,000
16,500 Massachusetts Electric Co., 6.99% 1,707,750
20,411 Monongahela Power Co., $6.28, Ser D 1,255,277
55,500 Monongahela Power Co., 7.73%, Ser L 4,231,875
49,260 PSI Energy, Inc., 6.875% 5,120,577
47,998 Public Service Electric & Gas Co., 6.92% 4,763,801
381,511 Puget Energy, Inc., 7.45%, Ser II 10,148,193
220,986 Sierra Pacific Power Co., 7.80%, Ser 1 (Class A) 4,088,241
55,000 South Carolina Electric & Gas Co., 6.52% 5,610,000
184,215 TDS Capital I, 8.50% 4,633,007
122,700 TDS Capital II, 8.04% 3,080,997
53,200 TXU US Holdings Co., $7.98 5,506,200
123,180 TXU US Holdings Co., $1.875, Depositary Shares, Ser A 3,104,136
34,000 TXU US Holdings Co., $1.805, Depositary Shares, Ser B 843,200
35,000 Virginia Electric & Power Co., $6.98 3,613,750
10,000 Virginia Electric & Power Co., $7.05 1,035,000
35,528 Wisconsin Public Service Corp., 6.76% 3,659,384
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COMMON STOCKS 43.66% $66,422,912
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(Cost $82,505,704)
Telecommunications 0.00% 8,265
57,000 Touch America Holdings, Inc. 8,265
Utilities 43.66% 66,414,647
199,900 Alliant Energy Corp. 3,510,244
247,500 Aquila, Inc. 688,050
182,700 CH Energy Group, Inc. 7,682,535
79,700 Dominion Resources, Inc. 4,716,646
107,000 DPL, Inc. 1,480,880
See notes to
financial statements
7
SHARES ISSUER, DESCRIPTION VALUE
Utilities (continued)
148,500 DTE Energy Co. $5,987,520
90,000 Duke Energy Corp. 1,583,100
325,000 Energy East Corp. 5,921,500
166,000 KeySpan Corp. 5,622,420
44,000 NiSource, Inc. 831,600
255,100 Northeast Utilities 3,806,092
135,000 NSTAR 5,832,000
134,632 OGE Energy Corp. 2,416,644
44,500 Peoples Energy Corp. 1,728,825
69,000 Progress Energy, Inc. 2,882,820
176,250 Progress Energy, Inc. (Contingent Value Obligation) * 21,150
130,400 Puget Energy, Inc. 2,754,048
369,000 Sierra Pacific Resources * 1,361,610
221,750 TECO Energy, Inc. 2,392,683
52,400 WPS Resources Corp. 2,111,720
228,000 Xcel Energy, Inc. 3,082,560
INTEREST CREDIT PAR VALUE
ISSUER, MATURITY DATE RATE RATING** (000S OMITTED) VALUE
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SHORT-TERM INVESTMENTS 3.84% $5,839,000
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(Cost $5,839,000)
Commercial Paper (3.84%)
ChevronTexaco Corp., 05-01-03 1.15% A-1+ $5,839 5,839,000
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TOTAL INVESTMENTS 165.95% $252,467,370
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OTHER ASSETS AND LIABILITIES, NET (65.95%) ($100,335,162)
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TOTAL NET ASSETS 100.00% $152,132,208
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* Non-income-producing security.
** Credit ratings are unaudited and rated by Standard & Poor's.
(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 $3,690,000 or 2.43% of net assets as of April 30, 2003.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer.
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
8
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
April 30, 2003
(unaudited)
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ASSETS
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Investments at value (cost $271,591,119) $252,467,370
Cash 372
Dividends receivable 976,700
Other assets 58,754
Total assets 253,503,196
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LIABILITIES
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Common shares dividends payable 977,128
Payable to affiliates 237,129
Other payables and accrued expenses 78,856
Total liabilities 1,293,113
Dutch Auction Rate Transferrable Securities preferred
shares (DARTS) Series A, at value, unlimited number
of shares of beneficial interest authorized with no
par value, 500 shares issued, liquidation preference
of $100,000 per share 50,044,334
DARTS Series B, at value, unlimited number of shares of
beneficial interest authorized with no par value, 500
shares issued, liquidation preference of $100,000
per share 50,033,541
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NET ASSETS
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Common shares capital paid-in 168,373,225
Accumulated net realized loss on investments (147,765)
Net unrealized depreciation of investments (19,123,749)
Accumulated net investment income 3,030,497
Net assets applicable to common shares $152,132,208
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NET ASSET VALUE PER COMMON SHARE
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Based on 15,032,734 shares of beneficial interest
outstanding - unlimited number of shares
authorized with no par value $10.12
See notes to
financial statements
9
FINANCIAL STATEMENTS
OPERATIONS
For the period ended
April 30, 2003
(unaudited)1
This 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.
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INVESTMENT INCOME
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Dividends $8,355,062
Interest 18,764
Total investment income 8,373,826
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EXPENSES
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Investment management fee 1,032,252
DARTS auction fee 133,581
Administration fee 122,966
Federal excise tax 93,891
Auditing fee 29,753
Custodian fee 27,470
Printing 23,813
Transfer agent fee 18,631
Registration and filing fee 17,463
Miscellaneous 11,310
Trustees' fee 8,562
Legal fee 1,423
Interest expense 675
Total expenses 1,521,790
Net investment income 6,852,036
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REALIZED AND UNREALIZED GAIN
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Net realized gain on investments 395,598
Change in net unrealized appreciation (depreciation)
of investments 4,516,681
Net realized and unrealized gain 4,912,279
Distributions to DARTS Series A (363,813)
Distributions to DARTS Series B (354,753)
(718,566)
Net increase in net assets from operations $11,045,749
1 Semiannual period from 11-01-02 through 4-30-03.
See notes to
financial statements
10
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
This Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, if any, and any increase due to the sale of common shares.
YEAR PERIOD
ENDED ENDED
10-31-02 4-30-031
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INCREASE IN NET ASSETS
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From operations
Net investment income $14,788,081 $6,852,036
Net realized gain (loss) (535,880) 395,598
Change in net unrealized
appreciation (depreciation) (31,436,761) 4,516,681
Distributions to DARTS Series A and B (1,765,801) (718,566)
Increase (decrease) in net assets
resulting from operations (18,950,361) 11,045,749
Distributions to common shareholders
From net investment income (11,701,834) (9,457,951)
From Fund share transactions - 294,824
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NET ASSETS APPLICABLE TO COMMON SHARES
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Beginning of period 180,901,781 150,249,586
End of period2 $150,249,586 $152,132,208
1 Semiannual period from 11-1-02 through 4-30-03. Unaudited.
2 Includes accumulated net investment income of $6,354,978 and $3,030,947,
respectively.
See notes to
financial statements.
11
FINANCIAL
HIGHLIGHTS
COMMON SHARES
The Financial Highlights show how the Fund's net asset value for a share has
changed since the end of the previous period.
PERIOD ENDED 10-31-98 10-31-99 10-31-00 10-31-01 10-31-02 4-30-03 1
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PER SHARE OPERATING PERFORMANCE
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Net asset value, beginning of period $12.34 $13.23 $12.09 $12.24 $12.06 $10.01
Net investment income2 1.09 1.07 1.06 1.05 0.99 0.46
Net realized and unrealized
gain (loss) on investments 0.97 (1.10) 0.21 (0.20) (2.14) 0.33
Distributions to DARTS (0.27) (0.26) (0.31) (0.25) (0.12) (0.05)
Total from investment operations 1.79 (0.29) 0.96 0.60 (1.27) 0.74
Less distributions to
common shareholders
From net investment income (0.90) (0.84) (0.81) (0.78) (0.78) (0.63)
In excess of net investment income - (0.01) - - - -
(0.90) (0.85) (0.81) (0.78) (0.78) (0.63)
Net asset value, end of period $13.23 $12.09 $12.24 $12.06 $10.01 $10.12
Per share market value,
end of period $12.13 $9.75 $10.13 $10.93 $9.40 $10.20
Total return at market value3 (%) 13.51 (13.16) 12.56 15.22 (7.55) 15.61
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RATIOS AND SUPPLEMENTAL DATA
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Net assets applicable to common
shares, end of period (in millions) $199 $181 $184 $181 $150 $152
Ratio of expenses to average
net assets4 (%) 1.72 1.74 1.85 1.78 1.91 2.07
Ratio of net investment income
to average net assets5 (%) 8.24 8.29 9.13 8.46 8.66 9.34
Portfolio turnover (%) 27 26 18 27 10 0
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SENIOR SECURITIES
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Total DARTS Series A Outstanding
(in millions) $50 $50 $50 $50 $50 $50
Total DARTS Series B Outstanding
( in millions) $50 $50 $50 $50 $50 $50
Involuntary liquidation preference
DARTS A per unit (in thousands) $100 $100 $100 $100 $100 $100
Involuntary liquidation preference
DARTS B per unit (in thousands) $100 $100 $100 $100 $100 $100
Approximate market value per unit
(in thousands) $100 $100 $100 $100 $100 $100
Asset coverage per unit6 $302,763 $286,177 $283,629 $283,166 $247,689 $247,168
1 Semiannual period from 11-01-02 through 4-30-03. Unaudited.
2 Based on the average of the shares outstanding.
3 Assumes dividend reinvestment.
4 Ratios calculated on the basis of expenses relative to the average net assets
for common shares. Without the exclusion of preferred shares, the annualized
ratio of expenses would have been 1.14%, 1.14%, 1.17%, 1.16%, 1.20% and 1.24%,
respectively.
5 Ratios calculated on the basis of net investment income relative to the average
net assets for common shares. Without the exclusion of preferred shares, the
annualized ratio of net investment income would have been 5.48%, 5.46%, 5.80%,
5.50%, 5.46% and 5.57%, respectively.
6 Calculated by subtracting the Fund's total liabilities from the Fund's total
assets and dividing such amount by the number of DARTS outstanding as of the
applicable 1940 Act Evaluation Date, which may differ from the financial
reporting date.
See notes to
financial statements.
12
NOTES TO
STATEMENTS
Unaudited
NOTE A
Accounting policies
John Hancock Patriot Premium Dividend Fund II (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.
Expenses
The majority of the expenses are directly identifiable to an individual fund.
Expenses that are not readily identifiable to a specific fund will be allocated
in such a manner as deemed equitable, taking into consideration, among other
things, the nature and type of expense and the relative sizes of the funds.
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 that is distributed to shareholders.
Therefore, no federal income tax provision is required. For federal income tax
purposes, the Fund has $533,811 of a capital loss carryforward available, to the
extent provided by regulations, to offset future net realized capital gains. To
the extent that such carryforward is used by the Fund, no capital gain
distributions will be made. The entire loss carryforward expires October 31,
2010.
13
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend date or,
in the case of some foreign securities, on the date thereafter when the Fund
identifies the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding taxes,
which are accrued as applicable.
The Fund records distributions to common and preferred shareholders from net
investment income and realized gains on the ex-dividend date. Distributions to
common shareholders, on a tax basis, are determined in conformity with income
tax regulations, which may differ from accounting principles generally accepted
in the United States of America. Distributions in excess of tax basis earnings
and profits, if any, are reported in the Fund's financial statements as a return
of capital.
Use of estimates
The preparation of these financial statements, in accordance with accounting
principles generally accepted in the United States of America, incorporates
estimates made by management in determining the reported amount of assets,
liabilities, revenues and expenses of the Fund. Actual results could differ from
these estimates.
NOTE B
Management fee and transactions with affiliates and others
The Fund has an investment management contract with John Hancock Advisers, LLC
(the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC.
Under the investment management contract, the Fund pays a monthly management fee
to the Adviser at an annual rate of 0.50% of the Fund's average weekly net
assets and the value attributable to the DARTS, plus 5.00% of the Fund's weekly
gross income. The Adviser's total fee is limited to a maximum amount equal to
1.00% annually of the Fund's average weekly net assets and the value
attributable to the DARTS. For the period ended April 30, 2003, the advisory fee
incurred did not exceed the maximum advisory fee allowed.
The Fund has an administrative agreement with the Adviser under which the
Adviser oversees the custodial, auditing, valuation, accounting, legal, stock
transfer and dividend disbursing services and maintains Fund communications with
the shareholders. The Fund pays the Adviser a monthly administration fee at an
annual rate of 0.10% of the Fund's average weekly net assets and the value
attributable to the DARTS.
Ms. Maureen R. Ford and Mr. John M. DeCiccio 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
investments as well as any unrealized gains or losses. The Deferred Compensation
Plan investments had no impact on the operations of the Fund.
14
NOTE C
Fund share transactions
Common shares
This listing illustrates the Fund's common shares distributions reinvested,
reclassification of the Fund's capital accounts and the number of common shares
outstanding at the beginning and end of the last two periods, along with the
corresponding dollar value.
YEAR ENDED 10-31-02 PERIOD ENDED 4-30-031
SHARES AMOUNT SHARES AMOUNT
Beginning of period 15,002,724 $168,272,712 15,002,724 $168,078,401
Distributions reinvested - - 30,010 294,824
Reclassification of
capital accounts - (194,311) - -
End of period 15,002,724 $168,078,401 15,032,734 $168,373,225
1 Semiannual period from 11-1-02 through 4-30-03. Unaudited.
Dutch Auction Rate Transferable Securities preferred shares Series A and Series
B
The Fund issued Dutch Auction Rate Transferable Securities preferred shares
("DARTS"), 598 shares of Series A and 598 shares of Series B, in a public
offering. The underwriting discount was recorded as a reduction of the capital
of common shares. During the year ended October 31, 1990, the Fund retired 98
shares of DARTS from both Series A and Series B.
Dividends on the DARTS, which accrue daily, are cumulative at a rate that was
established at the offering of the DARTS and has been reset every 49 days
thereafter by an auction. Dividend rates on DARTS Series A ranged from 1.14% to
1.76% and on Series B from 1.15% to 1.85%, during the period ended April 30,
2003. Accrued dividends on DARTS are included in the value of DARTS on the
Fund's statement of assets and liabilities.
The DARTS are redeemable at the option of the Fund, at a redemption price equal
to $100,000 per share, plus accumulated and unpaid dividends on any dividend
payment date. The DARTS are also subject to mandatory redemption at a redemption
price equal to $100,000 per share, plus accumulated and unpaid dividends, if the
Fund is in default on its asset coverage requirements with respect to the DARTS,
as defined in the Funds' by-laws. If the dividends on the DARTS shall remain
unpaid in an amount equal to two full years' dividends, the holders of the
DARTS, as a class, have the right to elect a majority of the Board of Trustees.
In general, the holders of the DARTS and the common shareholders have equal
voting rights of one vote per share, except that the holders of the DARTS, as a
class, vote to elect two members of the Board of Trustees, and separate class
votes are required on certain matters that affect the respective interests of
the DARTS and common shares.
NOTE D
Investment
transactions
Purchases and proceeds from sales and maturities of securities, other than
short-term securities and obligations of the U.S. government, during the period
ended April 30, 2003, aggregated none and $6,581,098, respectively.
The cost of investments owned on April 30, 2003, including short-term
investments, for federal income tax purposes was $271,600,675. Gross unrealized
appreciation and depreciation of investments aggregated $15,950,454 and
$35,083,759, respectively, resulting in net
15
unrealized depreciation of $19,133,305. The difference between book basis and
tax basis net unrealized depreciation of investments is attributable primarily
to the tax deferral of losses on wash sales.
16
INVESTMENT
OBJECTIVE
AND POLICY
The Fund's investment objective is to provide high current income consistent
with modest growth of capital for holders of its common shares of beneficial
interest. The Fund will pursue its objective by investing in a diversified
portfolio of dividend paying preferred and common stocks.
The Fund's non-fundamental investment policy, with respect to the quality of
ratings of its portfolio investments, was changed by a vote of the Fund's
Trustees on September 13, 1994. The new policy, which became effective October
15, 1994, stipulates that preferred stocks and debt obligations in which the
Fund will invest will be rated investment-grade (at least "BBB" by S&P or "Baa"
by Moody's) at the time of investment or will be preferred stocks of issuers of
investment grade senior debt, some of which may have speculative
characteristics, or, if not rated, will be of comparable quality as determined
by the Adviser. The Fund will invest in common stocks of issuers whose senior
debt is rated investment grade or, in the case of issuers that have no rated
senior debt outstanding, whose senior debt is considered by the Adviser to be of
comparable quality. This policy supersedes the requirement that at least 80% of
the Fund's total assets consist of preferred stocks and debt obligations rated
"A" or higher and dividend paying common stocks whose issuers have senior debt
rated "A" or higher.
On November 20, 2001, the Fund's Trustees approved the following investment
policy investment restriction change, effective December 15, 2001. Under normal
circumstances the Fund will invest at least 80% of its assets in dividend-paying
securities. The "Assets" are defined as net assets including the liquidation
preference amount of the DARTS plus borrowings for investment purposes. The Fund
will notify shareholders at least 60 days prior to any change in this 80%
investment policy.
In November 2002, the Board of Trustees adopted several amendments to the Fund's
by-laws, including provisions relating to the calling of a special meeting and
requiring advance notice of shareholder proposals or nominees for Trustee. The
advance notice provisions in the by-laws require shareholders to notify the Fund
in writing of any proposal which they intend to present at an annual meeting of
shareholders, including any nominations for Trustee, between 90 and 120 days
prior to the first anniversary of the mailing date of the notice from the prior
year's annual meeting of shareholders. The notification must be in the form
prescribed by the by-laws. The advance notice provisions provide the Fund and
its Trustees with the opportunity to thoughtfully consider and address the
matters proposed before the Fund prepares and mails its proxy statement to
shareholders. Other amendments set forth the procedures, which must be followed
in order for a shareholder to call a special meeting of shareholders. Please
contact the Secretary of the Fund for additional information about the advance
notice requirements or the other amendments to the by-laws.
DIVIDEND
REINVESTMENT PLAN
The Fund offers its shareholders a Dividend Reinvestment Plan (the "Plan"),
which offers the opportunity to earn compounded yields. Each holder of common
shares may elect to have all distributions of dividends and capital gains
reinvested by Mellon Investor Services, as plan agent for the common
shareholders (the "Plan Agent"). Holders of common shares who do not elect 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
17
in street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent.
Shareholders may join the Plan by filling out and mailing an authorization card,
by notifying the Plan Agent by telephone, or by visiting the Plan Agent's Web
site at www.melloninvestor.com. Shareholders must indicate an election to
reinvest all or a portion of dividend payments. If received in proper form by
the Plan Agent before the record date of a dividend, the election will be
effective with respect to all dividends paid after such record date.
Shareholders whose shares are held in the name of a broker or nominee should
contact the broker or nominee to determine whether and how they may participate
in the Plan.
If the Fund declares a dividend payable either in common shares or in cash,
nonparticipants will receive cash and participants in the Plan will receive the
equivalent in common shares. If the market price of the common shares on the
payment date of the dividend is equal to or exceeds their net asset value as
determined on the payment date, participants will be issued common shares (out
of authorized but unissued shares) at a value equal to the higher of net asset
value or 95% of the market price. If the net asset value exceeds the market
price of the common shares at such time, or if the Board of Trustees declares a
dividend payable only in cash, the Plan Agent will, as agent for Plan
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participant's accounts. Such purchases will be made promptly
after the payable date for such dividend and, in any event, prior to the next
ex-dividend date after such date, except where necessary to comply with federal
securities laws. If, before the Plan Agent has completed its purchases, the
market price exceeds the net asset value of the common shares, the average per
share purchase price paid by the Plan Agent may exceed the net asset value of
the common shares, resulting in the acquisition of fewer shares than if the
dividend had been paid in shares issued by the Fund.
Each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and distributions. In each case, the cost per share of
the shares purchased for each participant's account will be the average cost,
including brokerage commissions, of any shares purchased on the open market plus
the cost of any shares issued by the Fund. There will be no brokerage charges
with respect to common shares issued directly by the Fund. There are no other
charges to participants for reinvesting dividends or capital gain distributions.
Participants in the Plan may withdraw from the Plan at any time by contacting
the Plan Agent by telephone, in writing or by visiting the Plan Agent's Web site
at www.melloninvestor.com. 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. The Plan
Agent will hold common shares in the account of each Plan participant in
noncertificated form in the name of the participant. Proxy material relating to
the shareholder's meetings of the Fund will include those shares purchased as
18
well as shares held pursuant to the Plan.
The reinvestment of dividends and distributions will not relieve participants of
any federal income tax that may be payable or required to be withheld on such
dividends or distributions. Participants under the Plan will receive tax
information annually. The amount of dividend to be reported on 1099-DIV should
be (1) in the case of shares issued by the Fund, the fair market value of such
shares on the dividend payment date and (2) in the case of shares purchased by
the Plan Agent in the open market, the amount of cash used by the Plan Agent to
purchase shares in the open market, including the amount of cash allocated to
brokerage commissions paid on such purchases.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
dividend or distribution paid subsequent to written notice of the change sent to
all shareholders of the Fund at least 90 days before the record date for the
dividend or distribution. The Plan may be amended or terminated by the Plan
Agent after at least 90 days' written notice to all shareholders of the Fund.
All correspondence or additional information concerning the Plan should be
directed to the Plan Agent, Mellon Bank, N.A., c/o Mellon Investor Services,
P.O. Box 3338, South Hackensack, NJ 07606-1938 (telephone 1-800-852-0218).
SHAREHOLDER COMMUNICATION AND ASSISTANCE
If you have any questions concerning the 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:
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Telephone 1-800-852-0218
19
If your shares are held with a brokerage firm, you should contact that firm,
bank or other nominee for assistance.
SHAREHOLDER MEETING
On March 20, 2003, the Annual Meeting of the Fund was held to elect four
Trustees and to ratify the actions 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
--------------------------------------------------------------------------------
Charles L. Ladner 14,122,075 220,977
Dr. John A. Moore 14,117,897 225,155
Maureen R. Ford 14,176,535 166,517
The preferred shareholders elected Ronald R. Dion to serve until his respective
successor is duly elected and qualified, with the votes tabulated as follows:
741 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 October 31, 2003,
with the votes tabulated as follows: 14,175,132 FOR, 94,861 AGAINST and 73,800
ABSTAINING.
20
FOR YOUR
INFORMATION
TRUSTEES
James F. Carlin
William H. Cunningham
John M. DeCiccio
Ronald R. Dion
Maureen R. Ford
Charles L. Ladner*
Patti McGill Peterson*
Dr. John A. Moore*
Steven R. Pruchansky
Lt. Gen. Norman H. Smith,
USMC (Ret.)
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Maureen R. Ford
Chairman, President
and Chief Executive Officer
William L. Braman
Executive Vice President
and Chief Investment Officer
Richard A. Brown
Senior Vice President
and Chief Financial Officer
Susan S. Newton
Senior Vice President
and Secretary
William H. King
Vice President and Treasurer
Thomas H. Connors
Vice President and
Compliance Officer
INVESTMENT ADVISER
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
The Bank of New York
One Wall Street
New York, New York 10286
TRANSFER AGENT FOR
COMMON SHAREHOLDERS
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
TRANSFER AGENT
FOR DARTS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, New York 10017
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
STOCK SYMBOL
Listed New York Stock Exchange:
PDT
For shareholder assistance
refer to page 19
--------------------------------------------------------------------------------
HOW TO
CONTACT US
On the Internet www.jhfunds.com
By regular mail Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7054
24-hour automated information 1-800-843-0090
TDD Line 1-800-231-5469
--------------------------------------------------------------------------------
21
[LOGO] John Hancock
PRESORTED
STANDARD
U. S. Postage
PAID
MIS
1-800-852-0218
1-800-843-0090
1-800-231-5469 (TDD)
www.jhfunds.com
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this amended Form
N-CSR, the registrant's principal executive officer and principal financial
officer have concluded that those disclosure controls and procedures provide
reasonable assurance that the material information required to be disclosed by
the registrant on this report is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
ITEM 10. EXHIBITS.
(a) Not applicable at this time.
(b)(1) Separate certifications for the registrant's principal executive officer
and principal financial officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of
1940, are attached as Ex99.CERT.
(b)(2) Separate certifications for the registrant's principal executive officer
and principal financial officer, as required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule
30a-2(b) under the Investment Company Act of 1940, are attached as Ex99.CERT.
The certifications furnished pursuant to this paragraph are not deemed to be
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of that section. Such certifications are not
deemed to be incorporated by reference into any filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934, except to the extent that the
Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
By:
-----------------------
Maureen R. Ford
Chairman, President and Chief Executive Officer
Date: June 30, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
-----------------------
Maureen R. Ford
Chairman, President and Chief Executive Officer
Date: June 30, 2003
By:
-----------------------
Richard A. Brown
Senior Vice President and Chief Financial Officer
Date: June 30, 2003
6/03