UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7590
John Hancock Patriot Preferred Dividend Fund
(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip code)
Susan S. Newton, Secretary
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-375-1702
Date of fiscal year end: May 31
Date of reporting period: November 30, 2004
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Patriot Preferred
Dividend Fund
11.30.2004
Semiannual Report
[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 James A. Shepherdson, Chief Executive Officer, flush left next
to first paragraph.]
CEO CORNER
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 10
For more information
page 21
Dear Fellow Shareholders,
The stock market made little, if any, headway for much of 2004, before
finally rallying in November. After a strong start in January, the
market faded and remained dull as it wrestled with a variety of
uncertainties. Questions about the continuing strength of the economy,
the effects of rising interest rates, and expectations for corporate
earnings growth kept investors jittery. In addition, record high crude
oil prices, terrorism and the uncertainty of a closely contested U.S.
presidential race all weighed on the market. The picture brightened in
early November with the election behind us and oil prices moderating
somewhat. With one month left to go, the market seems poised to produce
single-digit returns for 2004, barring some major negative occurrence.
Year-to-date through November 30, 2004, the Standard & Poor's 500 Index
was up 7.23%, while the Dow Jones Industrial Average advanced 1.67% and
the Nasdaq Composite Index rallied from its negative stance in October
to return 4.66% through November 30. Despite the Federal Reserve's four
hikes in short-term interest rates, bonds still produced positive
results, with the Lehman Brothers Aggregate Bond Index up 3.39%.
The way this year has played out in the financial markets serves as a
good reminder of why keeping a long-term perspective is such a critical
element of successful investing. Getting caught up in the day-to-day
twists and turns of the market and trying to act on them can wreak havoc
with your portfolio and derail progress toward meeting your overall
financial objectives.
Since no one can predict the market's moves, the best way to reach your
goals is to stay invested and stick to your plan. Investing should be a
marathon, not a sprint. Do not try to time the market, and make sure you
work with your investment professional to ensure that your portfolio
remains properly diversified to meet your long-term objectives. For
example, after several years of dominance, small-cap stocks and value
stocks could now represent higher percentages of your portfolio than you
may want. If you are comfortable with your financial plan, it becomes
easier to ride out the market's daily ups and downs. It could also
provide you with a greater chance of success over time.
Sincerely,
/S/ JAMES A. SHEPHERDSON
James A. Shepherdson
Chief Executive Officer
This commentary reflects the CEO's views as of November 30, 2004. 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 normally
investing at least
80% of its assets in
dividend-paying
securities.
Over the last six months
* Despite rising interest rates, preferred stocks posted good gains in
response to strong demand, weak supply and hopes that dividend tax cuts
would be made permanent.
* The Fund outpaced its peer group due to solid security selection.
* High-quality, tax-advantaged preferred and utility common stocks 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, 2004." The chart is scaled in increments of 6% with 0%
at the bottom and 18% at the top. The first bar represents the 11.48% net
asset value of the fund. The second bar represents the 17.05% market value
of the fund. A note below the chart reads "The total returns for the Fund
include the reinvestment of all dividends. The performance data contained
within this material represents past performance, which does not guarantee
future results."]
Top ten issuers
4.9% Citigroup, Inc.
4.8% Lehman Brothers Holdings, Inc.
4.8% Bear Stearns Cos.
4.6% HSBC USA, Inc.
4.3% El Paso Tennessee Pipeline Co.
4.0% Anadarko Petroleum Corp.
4.0% Alabama Power Co.
3.7% SLM Corp.
3.5% Bank of America Corp.
3.5% J.P. Morgan Chase & Co.
As a percentage of net assets plus the value of preferred shares on
November 30, 2004.
1
BY GREGORY K. PHELPS AND MARK T. MALONEY FOR THE PORTFOLIO MANAGEMENT
TEAM
MANAGERS'
REPORT
JOHN HANCOCK
Patriot Preferred
Dividend Fund
Preferred stocks -- which are the primary emphasis of John Hancock
Patriot Preferred Dividend Fund -- posted strong gains during the
six-month period that ended November 30, 2004. The period began on
somewhat of a sour note following a spring Treasury market sell-off that
was triggered by robust economic reports which fanned fears of higher
inflation and interest rates. Because preferreds make fixed-income
payments in the form of dividends, their prices, like bond prices, tend
to move in the opposite direction of interest rates. Even though the
Federal Reserve Board did raise rates a quarter of a percentage point on
each of four separate occasions during the period, the bond and
preferred markets continued to rally. That rally in the face of rising
interest rates was based on investors' confidence that further Fed rate
hikes would be small and measured, given the potential weakening
economic conditions in response to higher interest rates themselves,
rising oil prices and the lack of inflation pressures. Investors also
viewed the reelection of President George Bush as a positive for
tax-advantaged preferred stocks. The president vowed to make permanent
the tax cut provisions Congress enacted in 2003, including the provision
that reduced the tax rate most individuals pay on many stock dividends.
Finally, preferreds benefited from favorable supply and demand
conditions. Supply dwindled as companies redeemed their higher coupon
preferred stock as a way of reducing their financing costs, and there
wasn't much in the way of new issuance. Meanwhile, demand for preferred
stocks was persistently strong as investors continued to seek out the
relatively high dividends and quality of many preferred stocks.
"Preferred stocks ... posted
strong gains during the
six-month period..."
Utilities shine
Although the performance of preferred stocks was impressive for the
six-month period, utility common stocks posted even stronger
2
gains. Investors continued to pour money into the group, attracted by two
main factors. First was the lure of high dividends, many of which were
tax-advantaged. Second was the group's continued fundamental improvement,
evidenced by reduced debt levels, improved balance sheets and the sale or
closure of money-losing unregulated subsidiaries.
[Photos of Greg Phelps and Mark Maloney, flush right next to first
paragraph.]
Performance
For the six months ended November 30, 2004, John Hancock Patriot
Preferred Dividend Fund returned 11.48% at net asset value and 17.05% at
market value. The difference in the Fund's net asset value (NAV)
performance and its market performance stems from the fact that the
market share price is subject to the dynamics of secondary market
trading, which could cause it to trade at a discount or premium to the
Fund's NAV share price at any time. By comparison, the average income
and preferred stock closed-end fund returned 10.67% at net asset value,
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 20.17%, and the broader stock market,
as measured by the Standard & Poor's 500 Index, returned 5.68%.
"Many of our utility common
stock holdings also were our best
performers for the period."
Utility common stock holdings: top performers
Many of our utility common stock holdings also were among our best
performers for the period. Among the best was KeySpan Corp., the largest
natural gas distributor in the Northeast United States. The stock
already had a lot going for it because it had an attractive yield. But
it really got a boost from the success of its growing customer base. DTE
Energy also performed well, hitting a 52-week high during the period.
The stock offered an attractive dividend yield and was further aided by
the favorable resolution of a major utility rate case in its home state,
Michigan. Another top gainer was TECO Energy, buoyed by a combination of
above-average growth in its customer base and its ability to put the
problems associated with is merchant energy plants behind it.
3
Tax-advantaged preferred stocks do well
Given expectations that the 2003 tax reform bill would be made permanent
because of the reelection of President Bush and the larger Republican
majority in both the House and Senate, tax-advantaged preferred stocks were
in heavy demand and turned in good gains during the period. A good example
was Southern Union, which also was helped by investors' expectations that
the company would receive a credit rating upgrade. Sierra Pacific Power
benefited from its efforts to repair its balance sheet. AMERCO posted a
significant rebound during the period, thanks to its decision to pay a
special dividend, which investors took as indicative of the company's
ongoing financial recovery. In the financial sector, our holdings in Bear
Stearns did well thanks to the combination of its attractive dividend and
the strong financial performance of the company. On the flip side, we
continued to be disappointed by our holdings in multi-state energy provider
Aquila, an electric and gas energy company that has been punished by
investors after retreating from the wholesale energy-trading markets.
Despite the company's ongoing challenges in regaining its footing, we were
reluctant to sell it at low prices.
[Table at top left-hand side of page entitled "Top five industry groups1."
The first listing is Electric utilities 14%, the second is Multi-utilities
& unregulated power 13%, the third is Oil & gas exploration & production
12%, the fourth is Investment banking & brokerage 12% and the fifth is Gas
utilities 11%.]
[Pie chart in middle of page with heading "Portfolio diversification1." The
chart is divided into three sections (from top to right): Preferred stocks
85%, Common stocks 13%, and Short-term investments & other 2%.]
Furthermore, we were encouraged by the company's efforts to
rebuild its balance sheet by extracting itself from money-losing gas
supply contracts and executing a common and preferred stock offer, the
proceeds of which were used to retire high-cost debt and lower interest
costs.
4
[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 KeySpan
Corp., followed by an up arrow with the phrase "Attractive dividend,
growing customer base." The second listing is AMERICO, followed by an up
arrow with the phrase "Investors cheer special dividend payment and
improving financials." The third listing is Aquila followed by a down arrow
with the phrase "Lingering negative effects of energy trading business."]
Outlook
In our view, the late November decline in oil prices and reports of
better economic data suggest that the Fed will continue on a measured
path to raise short-term interest rates. Although the rate hikes that
were enacted throughout the period haven't yet hurt the prices of
preferred stocks, it's possible that potentially higher long-term
interest rates could dampen their performance over the near term. As for
utility stocks, we wouldn't be altogether surprised if they are poised
for a breather or even a pullback over the short term, given their rapid
and recent impressive gains. Over the longer term, however, there are a
couple of factors we believe will continue to work in favor of both
preferred and utility common stocks. Making permanent the recently
reduced dividend tax rate, along with strong demand from an aging
American population potentially more intent on shifting assets to
high-quality income-producing securities, should provide some support
for the group even if long-term bond yields rise.
"...the late November decline in oil
prices and reports of better economic
data suggest that the Fed will
continue on a measured path to
raise short-term interest rates."
This commentary reflects the views of the portfolio management team 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, 2004.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
November 30, 2004
(unaudited)
This schedule is divided into three main categories: common stocks,
preferred 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.
Issuer Shares Value
Common stocks 19.86% $20,166,025
(Cost $20,151,857)
Electric Utilities 6.59% 6,691,340
Alliant Energy Corp. 60,000 1,636,800
NSTAR 50,000 2,532,500
Progress Energy, Inc. (Contingent Value Obligation) (B)(I) 37,500 6,000
WPS Resources Corp. 30,000 1,450,500
Xcel Energy, Inc. 59,000 1,065,540
Gas Utilities 5.11% 5,191,340
KeySpan Corp. 81,000 3,201,120
NiSource, Inc. 34,000 740,860
Peoples Energy Corp. 28,000 1,249,360
Multi-Utilities & Unregulated Power 8.16% 8,283,345
Aquila, Inc. (I) 88,000 308,000
Dominion Resources, Inc. 27,500 1,800,425
DTE Energy Co. 30,000 1,316,400
Puget Energy, Inc. 73,500 1,727,250
Sierra Pacific Resources (I) 215,000 2,203,750
TECO Energy, Inc. 62,000 927,520
Credit
Issuer, description rating (A) Shares Value
Preferred stocks 128.28% $130,244,358
(Cost $127,543,120)
Agricultural Products 4.47% 4,539,000
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) BB+ 60,000 4,539,000
Broadcasting & Cable TV 5.08% 5,160,673
Shaw Communications, Inc., 8.45%, Ser A (Canada) B+ 202,300 5,160,673
See notes to
financial statements.
6
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Consumer Finance 5.66% $5,746,900
SLM Corp., 6.97%, Ser A BBB+ 101,000 5,746,900
Diversified Banks 7.28% 7,395,950
Bank of America Corp., 6.75%, Depositary Shares, Ser VI A- 102,100 5,462,350
Royal Bank of Scotland Group Plc, 5.75%, Ser L (United Kingdom) A 80,000 1,933,600
Diversified Chemicals 2.95% 2,991,675
Du Pont (E.I.) de Nemours & Co., $4.50, Ser B A 33,900 2,991,675
Electric Utilities 15.11% 15,344,868
Alabama Power Co., 5.20% BBB+ 251,400 6,109,020
Boston Edison Co., 4.78% BBB+ 18,790 1,648,823
Duquesne Light Co., 6.50% BB+ 54,000 2,833,380
PSI Energy, Inc., 6.875% BBB- 14,350 1,478,050
Sierra Pacific Power Co., 7.80%, Ser 1 (Class A) CCC+ 110,000 2,640,000
Wisconsin Public Service Corp., 6.76% A 6,095 635,595
Gas Utilities 11.95% 12,129,495
El Paso Tennessee Pipeline Co., 8.25%, Ser A CCC- 136,600 6,642,175
Southern Union Co., 7.55% BB+ 139,700 3,820,795
Southwest Gas Capital II, 7.70% BB 62,300 1,666,525
Integrated Oil & Gas 4.88% 4,953,042
Coastal Finance I, 8.375% CCC- 199,800 4,953,042
Investment Banking & Brokerage 17.70% 17,967,850
Bear Stearns Cos., Inc. (The), 5.72%, Depositary Shares, Ser F BBB+ 102,500 5,125,000
Bear Stearns Cos., Inc. (The), 5.72%, Depositary Shares, Ser F BBB 40,000 2,110,000
Bear Stearns Cos., Inc. (The), 6.15%, Depositary Shares, Ser E BBB 100,600 5,331,800
Lehman Brothers Holdings, Inc., 5.67%, Depositary Shares, Ser D BBB+ 48,000 2,323,200
Merrill Lynch & Co., Inc., 9.00%, Depositary Shares, Ser A A- 120,700 3,077,850
Multi-Utilities & Unregulated Power 10.81% 10,975,426
Baltimore Gas & Electric Co., 6.99%, Ser 1995 Baa1 20,000 2,118,750
Energy East Capital Trust I, 8.25% BBB- 168,000 4,472,160
Northern Indiana Public Service Co., 7.44% BB+ 15,150 1,557,609
PSEG Funding Trust II, 8.75% BB+ 30,000 832,500
Public Service Electric & Gas Co., 6.92% BB+ 19,000 1,994,407
Oil & Gas Exploration & Production 18.39% 18,671,964
Anadarko Petroleum Corp., 5.46% BBB- 60,989 6,119,868
Apache Corp., 5.68%, Depositary Shares, Ser B BBB 52,200 5,218,371
Devon Energy Corp., 6.49%, Ser A BB+ 50,000 5,228,125
Nexen, Inc., 7.35% (Canada) BB+ 80,000 2,105,600
See notes to
financial statements.
7
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Other Diversified Financial Services 12.66% $12,853,665
Citigroup, Inc., 6.213%, Depositary Shares, Ser G A 52,000 2,782,000
Citigroup, Inc., 6.231%, Depositary Shares, Ser H A 88,700 4,696,665
J.P. Morgan Chase & Co., 6.625%, Depositary Shares, Ser H A- 100,000 5,375,000
Regional Banks 6.91% 7,019,250
HSBC USA, Inc., $2.8575 A2 133,700 7,019,250
Trucking 4.43% 4,494,600
AMERCO, 8.50%, Ser A CCC+ 180,000 4,494,600
Interest Par value
Issuer, maturity date rate (000)
Short-term investments 3.10% $3,150,000
(Cost $3,150,000)
Commercial Paper 3.10% 3,150,000
ChevronTexaco Corp., 09-01-04 1.970% $3,150 3,150,000
Total investments 151.24% $153,560,383
Other assets and liabilities, net (51.24%) ($52,027,065)
Total net assets 100.00% $101,533,318
(A) Credit ratings are unaudited and are rated by Moody's Investors Service
where Standard & Poor's ratings are not available.
(B) This security is fair valued in good faith under procedures established
by the Board of Trustees.
(I) Non-income-producing security.
(S) This security is exempt from registration under rule 144A of the
Securities Act of 1933. Such security may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $4,539,000 or 4.47% of the Fund's net assets as of
November 30, 2004.
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
PORTFOLIO
CONCENTRATION
November 30, 2004
(unaudited)
This table shows the
percentages of the
Fund's investments
as aggregated by
various industries.
Industry distribution Value as a percentage of Fund's total investments
- -------------------------------------------------------------------------------
Agricultural products 2.96%
Broadcasting & cable TV 3.36
Consumer finance 3.74
Diversified banks 4.82
Diversified chemicals 1.95
Electric utilities 14.35
Gas utilities 11.28
Integrated oil & gas 3.22
Investment banking & brokerage 11.70
Multi-utilities & unregulated power 12.54
Oil & gas exploration & production 12.16
Other diversified financial services 8.37
Regional banks 4.57
Trucking 2.93
Short-term investments 2.05
Total investments 100.00%
See notes to
financial statements.
9
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
November 30, 2004
(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 $150,844,977) $153,560,383
Cash 519
Dividends receivable 725,486
Other assets 29,628
Total assets 154,316,016
Liabilities
Payable to affiliates
Management fees 106,964
Other 20,056
Other payables and accrued expenses 90,931
Total liabilities 217,951
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 52,564,747
Net assets
Common shares capital paid-in 98,893,650
Accumulated net realized loss on investments (2,665,531)
Net unrealized appreciation of investments 2,715,406
Accumulated net investment income 2,589,793
Net assets applicable to common shares $101,533,318
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 $13.99
See notes to
financial statements.
10
FINANCIAL STATEMENTS
OPERATIONS
For the period ended
November 30, 2004
(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.
Investment income
Dividends $5,183,244
Interest 22,776
Total investment income 5,206,020
Expenses
Investment management fees 602,475
Administration fees 112,964
ARPS auction fees 70,447
Miscellaneous 26,699
Professional fees 20,242
Transfer agent fees 17,025
Custodian fees 15,552
Printing 14,075
Registration and filing fees 12,177
Trustees' fees 4,038
Total expenses 895,694
Net investment income 4,310,326
Realized and unrealized gain
Net realized gain on investments 7,963
Change in net unrealized appreciation (depreciation)
of investments 6,635,168
Net realized and unrealized gain 6,643,131
Distributions to ARPS (432,930)
Increase in net assets from operations $10,520,527
1 Semiannual period from 6-1-04 to 11-30-04.
See notes to
financial statements.
11
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
difference reflects
earnings less
expenses, any
investment
gains and losses
and distributions,
if any, paid to
shareholders.
Year Period
ended ended
5-31-04 11-30-04 1
Increase (decrease) in net assets
From operations
Net investment income $7,406,617 $4,310,326
Net realized gain 263,572 7,963
Change in net unrealized
appreciation (depreciation) 392,661 6,635,168
Distributions to ARPS (574,495) (432,930)
Increase in net assets resulting
from operations 7,488,355 10,520,527
Distributions to common shareholders
From net investment income (8,084,520) (3,135,110)
Net assets
Beginning of period 94,744,066 94,147,901
End of period 2 $94,147,901 $101,533,318
1 Semiannual period from 6-1-04 through 11-30-04. Unaudited.
2 Includes accumulated net investment income of $1,847,507 and
$2,589,793, respectively.
See notes to
financial statements.
12
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 5-31-00 5-31-01 5-31-02 5-31-03 5-31-04 11-30-04 1
Per share operating performance
Net asset value,
beginning of period $13.84 $11.76 $12.96 $12.39 $13.06 $12.97
Net investment income 2 1.25 1.24 1.18 1.08 1.02 0.59
Net realized and unrealized
gain (loss) on investments (2.16) 1.16 (0.73) 0.56 0.08 0.92
Distributions to ARPS (0.31) (0.34) (0.16) (0.11) (0.08) (0.06)
Total from
investment operations (1.22) 2.06 0.29 1.53 1.02 1.45
Less distributions to
common shareholders
From net investment income (0.86) (0.86) (0.86) (0.86) (1.11) (0.43)
Net asset value, end of period $11.76 $12.96 $12.39 $13.06 $12.97 $13.99
Per share market value,
end of period $10.25 $11.75 $12.47 $13.07 $12.00 $13.59
Total return at market value 3 (%) (3.37) 23.81 13.76 12.50 (0.24) 17.05 4
Ratios and supplemental data
Net assets applicable to common
shares, end of period (in millions) $85 $94 $90 $95 $94 $102
Ratio of expenses to average
net assets 5 (%) 1.96 1.91 1.96 2.11 1.88 1.83 6
Ratio of net investment income to
average net assets 7 (%) 9.97 9.89 9.09 9.21 7.60 8.80 6
Portfolio turnover (%) 22 10 16 9 7 3
Senior securities
Total value of ARPS outstanding
(in millions) $53 $53 $53 $53 $53 $53
Involuntary liquidation preference
per unit (in thousands) $100 $100 $100 $100 $100 $100
Average market value per unit
(in thousands) $100 $100 $100 $100 $100 $100
Asset coverage per unit 8 $260,212 $276,853 $270,318 $277,801 $276,094 $293,250
See notes to
financial statements.
13
FINANCIAL HIGHLIGHTS
Notes to Financial Highlights
1 Semiannual period from 6-1-04 to 11-30-04. 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
ratio of expenses would have been 1.24%, 1.21%, 1.26%, 1.30%, 1.22 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 ratio of net investment income would have been 6.31%, 6.27%,
5.84%, 5.70%, 4.94% and 5.72%, respectively.
8 Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such 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.
14
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 which have a remaining maturity
of 60 days or less may be 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 re corded 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 $2,381,886 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, May 31, 2011
- -- $1,075,016 and May 31, 2012 -- $79,976.
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. During the year ended May 31,
15
2004, the tax character of distributions paid was as follows: ordinary
income $8,659,015.
Such distributions, 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 John Hancock Financial
Services, Inc. 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
Auction Rate Preferred Shares (collectively, "managed assets").
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 shareholders. The Fund pays the Adviser a monthly
administration fee at an annual rate of 0.15% of the Fund's average weekly
managed assets. The compensation for the period amounted to $112,964. The
Fund also paid the Adviser the amount of $637 for certain publishing
services, included in the printing fees.
Mr. James A. Shepherdson is a director and/or officer of the Adviser and/or
its affiliates, as well as Trustee 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.
Note C
Fund share
transactions
Common shares
The Fund had no common share transactions during the last two fiscal
periods.
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 ARPS ranged from 1.15% to
2.02% during the period ended November 30, 2004. Accrued dividends on ARPS
are included in the value of ARPS on the Fund's Statement of Assets and
Liabilities.
16
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 unpaid
dividends, if the Fund is in default on its asset coverage requirements
with respect to the ARPS, as defined in the Fund's 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 or maturities of securities, other than
short-term securities and obligations of the U.S. government, during the
period ended November 30, 2004, aggregated $3,890,827 and $3,804,058,
respectively.
The cost of investments owned on November 30, 2004, including short-term
investments, for federal income tax purposes, was $151,032,151. Gross
unrealized appreciation and depreciation of investments aggregated
$8,621,337 and $6,093,105, respectively, resulting in net unrealized
appreciation of $2,528,232. The difference between book basis and tax basis
net unrealized appreciation of investments is attributable primarily to the
tax deferral of losses on certain sales of securities.
17
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 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.
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 ARPS plus borrowings for investment
purposes. The Fund will notify shareholders at least 60 days prior to any
change in this 80% investment policy.
By-laws
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 December 16, 2003, the Trustees approved the following change to the
Fund's by-laws. The auction preferred section of the Fund's by-laws was
changed to update the rating agency requirements, in keeping with recent
changes to the agencies' basic maintenance reporting requirements for
leveraged closed-end funds. By-laws now require an independent accountant's
confirmation only once per year, at the Fund's fiscal year end, and changes
to the agencies' basic maintenance reporting requirements that include
modifications to the eligible assets and their respective discount factors.
These revisions bring the Fund's by-laws in line with current rating agency
requirements.
On September 14, 2004, the Trustees approved an amendment to the Fund's
by-laws increasing the maximum applicable dividend rate ceiling on the
preferred shares to conform with the modern calculation methodology used by
the industry and other John Hancock funds.
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
18
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 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
19
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 shareholders' 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 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.
20
For more information
The Fund's proxy voting policies, procedures and records are available
without charge, upon request:
By phone On the Fund's Web site On the SEC's Web site
1-800-225-5291 www.jhfunds.com/proxy www.sec.gov
Trustees
Charles L. Ladner, Chairman*
James F. Carlin
William H. Cunningham
Ronald R. Dion
Dr. John A. Moore*
Patti McGill Peterson*
Steven R. Pruchansky
James A. Shepherdson
Lt. Gen. Norman H. Smith, USMC (Ret.)
*Members of the Audit Committee
Officers
James A. Shepherdson
President and
Chief Executive Officer
Susan S. Newton
Senior Vice President and
Secretary
William H. King
Vice President and Treasurer
Investment adviser
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, MA 02199-7603
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer agent for
common shareholders
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Transfer agent for ARPS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, NY 10017
Legal counsel
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109-1803
Stock symbol
Listed New York Stock
Exchange:
PPF
For shareholder assistance
refer to page 20
How to contact us
Internet www.jhfunds.com
Mail Regular mail:
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Phone 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
A listing of month-end portfolio holdings is available on our Web site,
www.jhfunds.com. A more detailed portfolio holdings summary is available on
a quarterly basis 60 days after the fiscal quarter on our Web site or upon
request by calling 1-800-225-5291, or on the Securities and Exchange
Commission'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 11/04
1/05
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.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to previously disclosed John Hancock Funds -
Administration Committee Charter.
ITEM 10. 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
accounting 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 11. EXHIBITS.
(a)(1) Separate certifications for the registrant's principal executive
officer and principal accounting 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 accounting 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) 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.
John Hancock Patriot Preferred Dividend Fund
By:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: January 26, 2005
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:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: January 26, 2005
By:
-----------------------
William H. King
Vice President and Treasurer
Date: January 26, 2005