January 28, 2004
EDGAR
United States Securities and
Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form N-CSR
John Hancock Patriot Preferred Dividend Fund (the "Registrant")
File No. 811-7590
Ladies and Gentlemen:
Enclosed herewith for filing pursuant to the Investment Company Act of 1940 and
the Securities Exchange Act of 1934 is the Registrant's Form N-CSR filing for
the period ending November 30, 2003.
If you have any questions or comments regarding this filing, please contact the
undersigned at (617) 375-1513.
Sincerely,
/s/Alfred P. Ouellette
Alfred P. Ouellette
Senior Attorney and Assistant Secretary
ITEM 1. REPORT TO STOCKHOLDERS.
John Hancock
Patriot
Preferred
Dividend Fund
SEMI
ANNUAL
REPORT
11.30.03
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Maureen R. Ford, Chairman and Chief Executive Officer,
flush left next to first paragraph.]
WELCOME
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 9
For your information
page 21
Dear Fellow Shareholders,
The stock market has made a strong recovery in 2003. Historically low
interest rates, improving corporate earnings and government stimulus
in the form of tax cuts gave investors hope that the economy would
begin to strengthen, which it did. The market's move up began in April
and the breadth of the rally was enormous. As a result, the major
indexes were able to wipe out their first-quarter losses and post
solid gains year-to-date through November 30. With technology leading
the way, the tech-heavy Nasdaq Composite Index rose 47.46% through
November, while the Dow Jones Industrial Average was up 19.80% and the
Standard & Poor's 500 Index returned 22.26%. With falling interest
rates, bonds also did well, although they began to reverse course in
July. High yield bonds led the pack, returning 26.11% through
November, as measured by the Lehman Brothers High Yield Index.
In other news, we are pleased to inform you that on September 28,
2003, the Boards of Directors of Canada-based Manulife Financial
Corporation and Boston-based John Hancock Financial Services, Inc.,
the parent company of John Hancock Funds, unanimously voted to merge
the two companies.
Please be assured that the completion of the merger -- anticipated to
occur in the first half of 2004 -- will have no effect on your
investment in our John Hancock mutual funds. Your fund's adviser and
board of trustees will remain the same, as will your relationship with
your financial adviser.
The merger is subject to customary closing conditions, including
receipt of required regulatory approvals and approval by John Hancock
stockholders. If you only own shares in a John Hancock mutual fund you
are not affected and will not receive a proxy.
Additional information on this transaction is available on our
Web site: www.jhfunds.com. If you have questions about the merger, you
may also call 800-732-5543. Separately, for information about your
investments in John Hancock funds, please contact your financial
adviser or our Customer Service representatives at 800-225-5291.
Sincerely,
/S/ MAUREEN FORD GOLDFARB
Maureen Ford Goldfarb,
Chairman and Chief Executive Officer
This commentary reflects the chairman's views as of November 30, 2003.
They are subject to change at any time.
YOUR FUND
AT A GLANCE
The Fund seeks
to provide high
current income,
consistent with
preservation of
capital, by invest-
ing at least 80%
of its assets in
dividend-paying
securities.
Over the last six months
* A dividend tax cut helped buoy demand for preferred and utility
common stocks.
* The Fund benefited from advantageous security selection
among preferreds.
* A significant stake in utility common stocks also aided performance.
[Bar chart with heading "John Hancock Patriot Preferred Dividend Fund."
Under the heading is a note that reads "Fund performance for the six
months ended November 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
6.75% total return for John Hancock Patriot Preferred dividend Fund. A
note below the chart reads "The total return for the Fund is at net
asset value with all distributions reinvested."]
Top 10 issuers
5.1% Lehman Brothers Holdings, Inc.
5.1% Citigroup, Inc.
5.0% Bear Stearns Cos., Inc.
4.6% HSBC USA, Inc.
4.1% Alabama Power Co.
4.0% Anadarko Petroleum Corp.
3.9% SLM Corp.
3.7% FleetBoston Financial Corp.
3.6% J.P. Morgan Chase & Co.
3.5% AMERCO
As a percentage of net assets plus the value of preferred shares
on November 30, 2003.
1
MANAGERS'
REPORT
BY GREGORY K. PHELPS AND MARK T. MALONEY FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Patriot Preferred
Dividend Fund
Preferred stocks -- which are the primary emphasis of John Hancock
Patriot Preferred Dividend Fund -- posted solid returns during the
six-month period ended November 30, 2003, fueled in large part by
favorable supply and demand conditions. An increasing number of
companies that had issued preferred stocks in years when interest
rates were higher redeemed these older preferred stocks to take
advantage of the lower interest rates that prevailed during much of
the current period. Those redemptions resulted in a reduced net supply
of preferred stocks. At the same time, demand burgeoned as individual
and institutional investors increasingly sought out higher-yielding
alternatives to most fixed-income securities and common stocks. Demand
got an added boost from the passage of President Bush's dividend
tax-cut package, which greatly reduced the taxes individuals pay on
most stock dividends. A dramatic rise in interest rates and bond
yields in the summer months briefly tempered an otherwise favorable
backdrop for fixed-income investments, including preferreds. But they
quickly regained their footing in the final months of the period when
inflation concerns cooled, the Fed rushed to reassure investors that
it wasn't poised to raise interest rates any time soon, and favorable
supply and demand conditions trumped macroeconomic concerns.
"Preferred stocks...posted
solid returns during the
six-month period ended
November 30, 2003..."
Utility common stocks -- the Fund's other primary area of focus --
also staged a significant rally during the period. Part of investors'
renewed optimism was in reaction to efforts by utilities to reduce
debt, improve their financing and shed money-losing unregulated
subsidiaries. Like preferreds, utility common stocks also benefited
from strong demand in response to dividend tax relief. Utilities
traditionally have offered consis-
2
tently high dividends over the years, and those with dividends subject to
tax relief benefited most.
[Photos of Greg Phelps and Mark Maloney flush right next to first
paragraph.]
PERFORMANCE
For the six months ended November 30, 2003, John Hancock Patriot
Preferred Dividend Fund returned 6.79% at net asset value. By
comparison, the average income and preferred stock closed-end fund
returned 5.23%, according to Lipper, Inc. In the same six-month
period, the Dow Jones Utility Average -- which tracks the performance
of 15 electric and natural gas utilities -- returned 3.96%, and the
broader stock market, as measured by the Standard & Poor's 500 Index,
returned 10.80%. We believe our outperformance resulted from
advantageous security selection, particularly in the preferred-stock
group, and from our significant holdings in utility stocks, which gave
the Fund an added boost when that group rebounded.
LEADERS AND LAGGARDS
Within the preferred-stock category, some of our best-performing
holdings were those issued by financial services companies. J.P.
Morgan Chase, for example, benefited from growth in its private
banking business, as well as in its market share in underwriting stock
and bond offerings. Merrill Lynch also performed well, thanks to its
strong credit rating compared with its brokerage services group peers,
and enhanced earnings consistency resulting from what the company
termed "a diversity of revenues from multiple asset classes, client
segments and geographic regions." Bear Stearns benefited from
increased revenues and cost controls, which resulted in substantial
improvement in the company's profitability.
"We believe our out
performance resulted
from advantageous
security selection,
particularly in the
preferred-stock group..."
OIL & GAS SHINES
Preferred stocks issued by oil and natural gas companies
also posted strong returns during the period. In the post-
September 11 era, energy prices stayed high in part because
of a so-called "risk premium" for potential attacks both here
and abroad. Those high energy prices, in turn, helped boost
3
the fortunes of holdings such as Anadarko Petroleum, Apache,
Devon Energy and Nexen.
[Table at top left-hand side of page entitled "Top five industry
groups1." The first listing is Utilities 38%, the second is Finance 13%,
the third Broker services 12%, the fourth Oil & gas 12%, and the fifth
Banks-United States 8%.]
High energy prices also helped some of our utility common stocks,
particularly Dominion Resources, which has significant oil and gas
operations. It also enjoyed strong results from its regulated electric
operation. The common stock of electric utility Alliant Energy also
performed well, boosted in large part by investors' enthusiasm over
the company's back-to-basics approach.
One disappointment during the period was Kansas City-based Aquila, a
multinational energy provider that has been trying to regain financial
stability after retreating from the wholesale energy-trading markets
that caused so many utilities pain in 2002. Despite these problems, we
continued to hold onto our stake in Aquila because we believe the
company is making significant and positive steps toward reducing its
debt, strengthening its balance sheet and putting its energy-trading
problems behind it.
[Pie chart in middle of page with heading "Portfolio diversification1."
The chart is divided into three sections (from top to left): Preferred
stocks 85%, Common stocks 14%, and Short-term investments & other 1%.]
OUTLOOK
In our view, the first half of 2004 likely will continue to favor
preferred and utility stocks. First, we believe that both sectors will
keep on benefiting from the favorable supply and demand conditions that
boosted their prospects over the past six months. We also believe interest
rates will continue to remain low, and that could help preferreds because
they pay dividends at a fixed rate like the interest on a bond. As such,
they tend to perform best when rates decline or stabilize at relatively
low levels, just as bonds do. Although the economy has heated up, we don't
think the Federal Reserve Board will raise interest rates until the
current recovery deepens and sustains itself for a longer period of
4
time. Granted, longer-term bond yields could rise as investors worry about
the prospects of future inflation, but the expected lack of an
interest-rate hike would keep short-term interest rates low, thereby
making preferred stocks an attractive alternative to shorter-term,
lower-yielding money market and Treasury bond investments. Furthermore, we
believe it's likely that investors' appetite for preferred stocks, and for
that matter, utility common stocks -- both of which benefit from tax cuts
- -- could remain strong. In addition to strong demand, utility common
stocks appear to have other factors working in their favor. Chief among
them are the potential for more stable credit ratings and continued
attractive -- albeit higher than at the beginning of 2003 -- valuations
relative to the stock market overall. Recent acquisitions of utility
companies by deep-pocketed private equity investors may signal that more
acquisition activity is in the offing in 2004, a trend that could also
help boost utilities.
[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 J.P.
Morgan Chase followed by an up arrow with the phrase "Uptick in several
lines of business." The second listing is Dominion Resources followed by
an up arrow with the phrase "High energy prices help boost profits." The
third listing is Aquila followed by a down arrow with the phrase
"Lingering problems with energy trading causes concern."]
"In our view, the first half
of 2004 likely will continue
to favor preferred and
utility stocks."
This commentary reflects the views of the portfolio managers through
the end of the Fund's period discussed in this report. The managers'
statements reflect their 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 November 30, 2003.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
November 30, 2003
(unaudited)
This schedule is divided into three main categories: preferred stocks,
common stocks and short-term investments. Stocks are further broken
down by industry group. Short-term investments, which represent the
Fund's cash position, are listed last.
CREDIT
ISSUER, DESCRIPTION RATING* SHARES VALUE
PREFERRED STOCKS 130.40% $127,627,131
(Cost $126,972,549)
Agricultural Operations 4.49% 4,395,000
Ocean Spray Cranberries, Inc., 6.25%, Ser A (R) BBB 60,000 4,395,000
Banks -- Foreign 2.25% 2,196,000
Royal Bank of Scotland Group Plc, 5.75%,
Ser B (United Kingdom) A 90,000 2,196,000
Banks -- United States 12.77% 12,501,050
FleetBoston Financial Corp., 6.75%, Depositary Shares,
Ser VI BBB+ 102,100 5,615,500
HSBC USA, Inc., $2.8575 A1 133,700 6,885,550
Broker Services 18.86% 18,461,454
Bear Stearns Companies, Inc., 6.15%, Depositary Shares,
Ser E BBB 100,600 5,402,220
Bear Stearns Companies, Inc., 5.72%, Depositary Shares,
Ser F A3 40,000 2,038,000
Lehman Brothers Holdings, Inc., 5.94%, Depositary Shares,
Ser C BBB+ 102,500 5,227,500
Lehman Brothers Holdings, Inc., 5.67%, Depositary Shares,
Ser D A3 48,000 2,460,000
Merrill Lynch & Co., Inc., 9.00%, Depositary Shares, Ser A A- 120,700 3,333,734
Chemicals 3.27% 3,203,550
Du Pont (E.I.) de Nemours & Co., $4.50, Ser B A 33,900 3,203,550
Diversified Operations 2.35% 2,303,080
Grand Metropolitan Delaware, L.P., 9.42%, Gtd Ser A BBB+ 86,000 2,303,080
Finance 19.29% 18,880,624
Citigroup, Inc., 6.213%, Depositary Shares, Ser G Aa3 52,000 2,817,880
Citigroup, Inc., 6.231%, Depositary Shares, Ser H Aa3 88,700 4,800,444
J.P. Morgan Chase & Co., 6.625%, Depositary Shares, Ser H A1 100,000 5,475,000
SLM Corp., 6.97%, Ser A BBB+ 101,000 5,787,300
Leasing Companies 5.41% 5,291,000
AMERCO, 8.50%, Ser A D 220,000 5,291,000
See notes to
financial statements.
6
FINANCIAL STATEMENTS
CREDIT
ISSUER, DESCRIPTION RATING* SHARES VALUE
Media 5.30% $5,186,700
Shaw Communications, Inc., 8.45%, Ser A (Canada) B+ 203,400 5,186,700
Oil & Gas 18.83% 18,431,961
Anadarko Petroleum Corp., 5.46%, Depositary Shares, Ser B BBB- 60,989 6,037,911
Apache Corp., 5.68%, Depositary Shares, Ser B BBB 52,200 5,233,050
Devon Energy Corp., 6.49%, Ser A B 50,000 5,125,000
Nexen, Inc., 7.35% (Canada) BBB- 80,000 2,036,000
Utilities 37.58% 36,776,712
Alabama Power Co., 5.20% BBB+ 251,400 6,197,010
Baltimore Gas & Electric Co., 6.99%, Ser 1995 Baa1 20,000 2,165,000
Boston Edison Co., 4.78% A3 15,790 1,369,783
Coastal Finance I, 8.375% CCC+ 199,800 4,265,730
El Paso Tennessee Pipeline Co., 8.25%, Ser A CCC+ 136,600 5,190,800
Energy East Capital Trust I, 8.25% BBB- 168,000 4,519,200
Northern Indiana Public Service Co., 7.44% BB+ 15,150 1,558,556
PSEG Funding Trust II, 8.75% BB+ 30,000 837,600
PSI Energy, Inc., 6.875% BBB- 14,350 1,465,135
Public Service Electric & Gas Co., 6.92% BB+ 19,000 1,952,250
Rochester Gas & Electric Corp., 4.95%, Ser K Ba1 15,034 1,211,647
Sierra Pacific Power Co., 7.80%, Ser 1 (Class A) CCC+ 110,000 2,420,000
Southern Union Co., 7.55%, Ser A BB+ 55,000 1,432,750
Southwest Gas Capital Trust II, 7.70% BB 60,000 1,596,000
Wisconsin Public Service Corp., 6.76% A 5,703 595,251
SHARES ISSUER, DESCRIPTION VALUE
COMMON STOCKS 21.05% $20,604,660
(Cost $22,728,051)
Utilities 21.05%
60,000 Alliant Energy Corp. 1,467,000
88,000 Aquila, Inc.** 315,040
5,900 CH Energy Group, Inc. 259,010
27,500 Dominion Resources, Inc. 1,657,425
30,000 DTE Energy Co. 1,131,300
81,000 KeySpan Corp. 2,853,630
34,000 NiSource, Inc. 705,500
113,000 Northeast Utilities 2,254,350
50,000 NSTAR 2,382,500
28,000 Peoples Energy Corp. 1,125,600
37,500 Progress Energy, Inc., Contingent Value Obligation (I)** 3,750
73,500 Puget Energy, Inc. 1,708,875
234,000 Sierra Pacific Resources** 1,621,620
62,000 TECO Energy, Inc. 804,760
30,000 WPS Resources Corp. 1,329,000
59,000 Xcel Energy, Inc. 985,300
See notes to
financial statements.
7
FINANCIAL STATEMENTS
INTEREST PAR VALUE
ISSUER, DESCRIPTION, MATURITY DATE RATE (000s OMITTED) VALUE
SHORT-TERM INVESTMENTS 2.15% $2,108,000
(Cost $2,108,000)
Commercial Paper 2.15%
ChevronTexaco Corp., 12-01-03 0.80% $2,108 2,108,000
TOTAL INVESTMENTS 153.60% $150,339,791
OTHER ASSETS AND LIABILITIES, NET (53.60%) ($52,466,008)
TOTAL NET ASSETS 100.00% $97,873,783
* Credit ratings are unaudited and are rated by Moody's Investors
Service, unless indicated otherwise.
* * Non-income-producing security.
(I) This security is valued in good faith under procedures established
by the Board of Trustees.
(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 $4,395,000 or 4.49% of
net assets as of November 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
November 30, 2003
(unaudited)
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of
what the Fund
owns, is due
and owes.
You'll also find
the net asset
value for each
common share.
ASSETS
Investments at value (cost $151,808,600) $150,339,791
Cash 523
Dividends receivable 298,442
Other assets 28,550
Total assets 150,667,306
LIABILITIES
Payable to affiliates
Management fee 98,020
Other 18,379
Other payables and accrued expenses 107,823
Total liabilities 224,222
Auction Rate Preferred Shares (ARPS), at value,
unlimited number of shares of beneficial
interest authorized with no par value,
525 shares issued, liquidation preference of
$100,000 per share 52,569,301
NET ASSETS
Common shares capital paid-in 99,027,349
Accumulated net realized loss on investments (2,850,496)
Net unrealized depreciation of investments (1,468,809)
Accumulated net investment income 3,165,739
Net assets applicable to common shares $97,873,783
NET ASSET VALUE PER COMMON SHARE
Based on 7,257,200 shares of beneficial interest
outstanding -- unlimited number of shares
authorized with no par value $13.49
See notes to
financial statements.
9
FINANCIAL STATEMENTS
OPERATIONS
For the period ended
November 30, 2003
(unaudited) 1
This Statement
of Operations
summarizes the
Fund's investment
income earned
and expenses
incurred in operat-
ing the Fund.
It also shows net
gains (losses) for
the period stated.
INVESTMENT INCOME
Dividends $4,382,865
Interest 21,893
Total investment income 4,404,758
EXPENSES
Investment management fee 591,355
Administration fee 110,879
ARPS auction fee 69,964
Auditing fee 29,878
Printing 19,882
Registration and filing fee 19,673
Transfer agent fee 18,804
Custodian fee 16,253
Trustees' fee 4,688
Legal fee 1,114
Total expenses 882,490
Net investment income 3,522,268
REALIZED AND UNREALIZED GAIN
Net realized gain on investments 171,976
Change in net unrealized appreciation
(depreciation) of investments 2,843,614
Net realized and unrealized gain 3,015,590
Distributions to ARPS (273,031)
Increase in net assets from operations $6,264,827
1 Semiannual period from 6-1-03 through 11-30-03.
See notes to
financial statements.
10
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
These Statements
of Changes in
Net Assets show
how the value
of the Fund's
net assets has
changed during
the last two
periods. The dif-
ference reflects
earnings less
expenses, any
investment gains
and losses and
distributions, if
any, paid to
shareholders.
YEAR PERIOD
ENDED ENDED
5-31-03 11-30-03 1
INCREASE IN NET ASSETS
From operations
Net investment income $7,849,173 $3,522,268
Net realized gain (loss) (1,089,148) 171,976
Change in net unrealized
appreciation (depreciation) 5,149,584 2,843,614
Distributions to ARPS (795,256) (273,031)
Increase in net assets resulting
from operations 11,114,353 6,264,827
Distributions to common shareholders
From net investment income (6,270,221) (3,135,110)
NET ASSETS APPLICABLE TO COMMON SHARES
Beginning of period 89,899,934 94,744,066
End of period 2 $94,744,066 $97,873,783
1 Semiannual period from 6-1-03 through 11-30-03. Unaudited.
2 Includes accumulated net investment income of $3,051,612 and
$3,165,739, respectively.
See notes to
financial statements.
11
FINANCIAL HIGHLIGHTS
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 5-31-99 5-31-00 5-31-01 5-31-02 5-31-03 11-30-03 1
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.54 $13.84 $11.76 $12.96 $12.39 $13.06
Net investment income 2 1.23 1.25 1.24 1.18 1.08 0.49
Net realized and unrealized
gain (loss) on investments (0.61) (2.16) 1.16 (0.73) 0.56 0.41
Distributions to ARPS (0.29) (0.31) (0.34) (0.16) (0.11) (0.04)
Total from
investment operations 0.33 (1.22) 2.06 0.29 1.53 0.86
Less distributions to
common shareholders
From net investment income (1.03) (0.86) (0.86) (0.86) (0.86) (0.43)
Net asset value, end of period $13.84 $11.76 $12.96 $12.39 $13.06 $13.49
Per share market value,
end of period $11.50 $10.25 $11.75 $12.47 $13.07 $13.35
Total return at market value 3 (%) (14.79) (3.37) 23.81 13.76 12.50 5.604
RATIOS AND SUPPLEMENTAL DATA
Net assets applicable to common shares,
end of period (in millions) $100 $85 $94 $90 $95 $98
Ratio of expenses to average net assets 5 (%) 1.84 1.96 1.91 1.96 2.11 1.85 6
Ratio of net investment income
to average net assets 7 (%) 8.66 9.97 9.89 9.09 9.21 7.39 6
Portfolio turnover (%) 30 22 10 16 9 5
SENIOR SECURITIES
Total ARPS outstanding (in millions) $53 $53 $53 $53 $53 $53
Involuntary liquidation preference
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 unit 8 $290,113 $260,212 $276,853 $270,318 $277,801 $285,124
1 Semiannual period from 6-1-03 through 11-30-03. Unaudited.
2 Based on the average of the shares outstanding.
3 Assumes dividend reinvestment.
4 Not annualized.
5 Ratios calculated on the basis of expenses relative to the average
net assets of common shares. Without the exclusion of preferred
shares, the annualized ratio of expenses would have been 1.22%, 1.24%,
1.21%, 1.26%,1.30% and 1.19%, respectively.
6 Annualized.
7 Ratios calculated on the basis of net investment income relative to
the average net assets of common shares. Without the exclusion of
preferred shares, the annualized ratio of net investment income would
have been 5.73%, 6.31%, 6.27%, 5.84%, 5.70% and 4.77%, respectively.
8 Calculated by subtracting the Fund's total liabilities from the
Fund's total assets and dividing that amount by the number of ARPS
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 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.
Expenses
The majority of expenses are directly identifiable to an individual
fund. Expenses that are not readily identifiable to a specific fund
are 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
$2,301,910 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 loss carryforward expires as
follows: May 31, 2010 -- $1,226,894 and May 31, 2011 -- $1,075,016.
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 shareholders from net investment
income and net realized gains on the ex-dividend date. Such
distributions, on a tax basis, are determined in conformity with
income tax regulations, which may differ
13
from accounting principles generally accepted in the United States of
America. Distrib utions 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 0.80% of the Fund's average weekly net asset value and
the value attributable to the preferred shares.
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 0.15% of the Fund's
average weekly net asset value and the value attributable to the
preferred shares.
Ms. Maureen Ford Goldfarb 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 investment as well as any unrealized
gains or losses. The Deferred Compensation Plan investments had no
impact on the operations of the Fund.
NOTE C
Fund share
transactions
Common shares
The Fund had no common share transactions during the period.
Auction Rate
Preferred Shares
The Fund issued 525 shares of Auction Rate Preferred Shares ("ARPS")
on July 29, 1993, in a public offering. The underwriting discount of
$918,750 and the offering costs of $610,007 associated with the
offering of the common shares and ARPS were recorded as a reduction of
the capital of common shares.
Dividends on the ARPS, which accrue daily, are cumulative at a rate
that was established at the offering of the ARPS and has been reset
every 49 days thereafter by an auction. Dividend rates on the ARPS
ranged from 0.95% to 1.18%, during the period ended November 30, 2003.
Accrued dividends on ARPS are included in the value of ARPS on the
Fund's Statement of Assets and Liabilities.
The ARPS 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 ARPS are subject to
mandatory redemption at a redemption price equal to $100,000 per
share, plus accumulated and
14
unpaid dividends, if the Fund is in default on its asset coverage
requirements with respect to the ARPS, as defined in the Funds' by-laws.
If the dividends on the ARPS shall remain unpaid in an amount equal to two
full years' dividends, the holders of the ARPS, as a class, have the right
to elect a majority of the Board of Trustees. In general, the holders of
the ARPS and the common shareholders have equal voting rights of one vote
per share, except that the holders of the ARPS, 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
ARPS and common shareholders.
NOTE D
Investment
transactions
Purchases and proceeds from sales of securities, other than short-term
securities and obligations of the U.S. government, during the period
ended November 30, 2003, aggregated $11,840,734 and $7,117,110,
respectively.
The cost of investments owned on November 30, 2003, including short-term
investments, for federal income tax purposes was $151,978,528. Gross
unrealized appreciation and depreciation of investments aggregated
$8,029,894 and $9,668,631, respectively, resulting in net unrealized
depreciation of $1,638,737. The difference between book basis and tax
basis net unrealized depreciation of investments is attributable primarily
to the tax deferral of losses on certain sales of securities.
15
INVESTMENT
OBJECTIVE AND POLICY
The Fund's investment objective is to provide high current income
consistent with preservation of capital. The Fund will pursue its
objective by investing in preferred stocks that, in the opinion of the
Adviser, may be undervalued relative to similar securities in the
marketplace.
The Fund's non-fundamental investment policy, which became effective
October 15, 1994, with respect to the quality of ratings of its
portfolio investments 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.
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 APS plus borrowings
for investment purposes. The Fund will notify shareholders at least 60
days prior to any change in this 80% investment policy.
The Fund's Trustees approved the elimination of the dividend coverage
test, effective October 1, 2001.
Effective December 16, 2003, the Trustees approved additional changes
to the Fund's by-laws. The changes included updating the leveraged
rating agency requirements in keeping with recent changes to the
agencies' basic maintenance reporting requirements for leveraged
closed-end funds. In addition, changes were made to reflect recent
updates that Moody's made to some of their eligible asset and discount
factors. These revisions bring the Fund's by-laws in line with current
rating agency requirements.
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 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
16
whether and how they may participate in the Plan.
If the Fund declares a dividend payable either in common shares or in
cash, non-participants 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 non-certificated form in the
name of the participant. Proxy material relating to the shareholder's
meetings of the Fund will include those shares purchased as 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
17
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
If your shares are held with a brokerage firm, you should contact that
firm, bank or other nominee for assistance.
18
SHAREHOLDER
MEETING
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 that 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.
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.
Proxies covering 6,868,262 shares of beneficial interest were voted at
the meeting.
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
- -----------------------------------------------------------
Maureen Ford Goldfarb 6,788,023 79,814
Charles L. Ladner 6,779,102 88,735
Dr. John Moore 6,781,544 86,293
The preferred shareholders elected Ronald Dion to serve until his
respective successor is duly elected and qualified, with the votes
tabulated as follows: 425 FOR and 0 WITHHELD AUTHORITY.
The common and preferred shareholders also ratified the Trustees'
selection of Deloitte & Touche LLP as the Fund's independent auditors
for the fiscal year ending May 31, 2003, with the votes tabulated as
follows: 6,765,367 FOR, 54,268 AGAINST and 48,627 ABSTAINING.
19
20
FOR YOUR
INFORMATION
TRUSTEES
James F. Carlin
William H. Cunningham
John M. DeCiccio
Ronald R. Dion
Maureen Ford Goldfarb
Charles L. Ladner*
Dr. John A. Moore*
Patti McGill Peterson*
Steven R. Pruchansky
Lt. Gen. Norman H. Smith,
USMC (Ret.)
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Maureen Ford Goldfarb
Chairman, President
and Chief Executive 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 ARPS
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: PPF
For shareholder assistance refer to page 18
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
The Fund's voting policies and procedures are available without
charge, upon request:
By phone 1-800-225-5291
On the Fund's Web site www.jhfunds.com/proxy
On the SEC's Web site www.sec.gov
21
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
1-800-852-0218
1-800-843-0090 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
P70SA 11/03
1/04
22
ITEM 2. CODE OF ETHICS.
As of the end of the period, November 30, 2003, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief
Executive Officer, Chief Financial Officer and Treasurer (respectively, the
principal executive officer, the principal financial officer and the principal
accounting officer, the "Senior Financial Officers"). A copy of the code of
ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Charles L. Ladner is the audit committee financial expert and is "independent",
pursuant to general instructions on Form N-CSR Item 3.
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.
See attached Exhibit "Proxy Voting Policies and Procedures".
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 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 changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) 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.
(b)(1) 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. 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.
(c)(1) Proxy Voting Policies and Procedures are attached.
(d)(1) Contact person at the registrant
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 Ford Goldfarb
Chairman, President and Chief Executive Officer
Date: January 28, 2004
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 Ford Goldfarb
Chairman, President and Chief Executive Officer
Date: January 28, 2004
By:
- -----------------------
Richard A. Brown
Senior Vice President and Chief Financial Officer
Date: January 28, 2004