JOHN HANCOCK
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Patriot Premium
DIVIDEND FUND I
SEMI ANNUAL
REPORT
3. 31. 03
[LOGO](R)
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JOHN HANCOCK FUNDS
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[A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left
next to first paragraph.]
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Table of contents
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Your fund at a glance
page 1
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Managers' report
page 2
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Fund's investments
page 6
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Financial statements
page 9
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For your information
page 21
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Dear Fellow Shareholders,
After a robust start to 2003, the stock market quickly gave in to the continuing
pressures that plagued it throughout 2002. A weak economy, rising oil prices and
concerns about corporate earnings combined with uncertainties about the war in
Iraq to produce volatility. Once the war began in mid-March, it dominated
investors' thinking, and the financial markets moved largely based on
war-related emotions. The result was a sideways market that produced slight
losses for two of the major indexes in the first three months of 2003. The Dow
Jones Industrial Average returned -3.57%, the Standard & Poor's 500 Index
returned -3.15% and the Nasdaq Composite Index was relatively flat, at 0.42%.
Bonds advanced in the same period as investors sought safety.
The market's results in the first quarter of 2003 seem fairly tame after the
jarring losses of the last three years, in which stock mutual funds lost ground
every year as the economy stalled, corporate spending and profits were
lackluster and investor confidence plunged amid corporate scandals. Bonds, on
the other hand, have continued to outperform stocks and produced positive
results in 2002, while 96% of U.S. diversified stock mutual funds lost money.
These results only confirm the importance of having a portfolio well diversified
among stocks, bonds and cash.
In fact, the disparity between stock and bond results over the last three years
means that many investors' portfolios may have shifted substantially in their
mix between stocks and bonds. We recommend working with your investment
professional to rebalance your assets according to your long-term goals.
After three down years, no one can predict when the bear market cycle will turn.
Currently, uncertainties abound, with ongoing concerns about the economy,
corporate profits and geopolitical issues.
While all these factors are beyond our control, investors can take charge of how
they maneuver through the inevitable bull and bear market cycles. We've said it
before, but it bears repeating: the key is to keep a long-term perspective and
work with your investment professional to develop and maintain a properly
diversified portfolio. We believe this offers the best protection in the tough
times and the best means to reach your long-term goals.
Sincerely,
/s/Maureen R. Ford
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Maureen R. Ford,
Chairman and Chief Executive Officer
Over the last six months
o Preferred stocks performed relatively well as interest rates fell.
o The Fund benefited from its oil- and natural gas-related holdings.
o Utility common stocks stumbled early, but showed strength in spring 2003.
John Hancock Patriot Premium Dividend Fund I
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[Bar chart with heading "John Hancock Patriot Premium Dividend Fund I". Under
the heading is a note that reads "Fund performance for the six months ended
March 31, 2003." The chart is scaled in increments of .5% with -1.0% at the
bottom and 0.0% at the top. The first bar represents the -0.07% total return for
John Hancock Patriot Premium Dividend Fund I. A note below the chart reads "The
total return for the Fund is at net asset value with all distributions
reinvested."]
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Top 10 issuers
5.9% Puget Energy, Inc.
5.5% NSTAR
5.1% Energy East Corp.
5.1% Lehman Brothers Holdings, Inc.
4.5% TDS Capital Trust
4.3% Shaw Communications, Inc.
3.9% TXU US Holdings Co.
3.1% CH Energy Group, Inc.
2.9% South Carolina Electric & Gas Co.
2.9% Alabama Power Co.
As a percentage of net assets plus value of preferred shares on March 31, 2003.
YOUR FUND AT A GLANCE
The Fund seeks to provide high current income, consistent with modest growth of
capital, for holders of its common shares by investing in a diversified
portfolio of dividend-paying preferred and common equity securities.
1
BY GREGORY K. PHELPS, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Patriot Premium
Dividend Fund I
MANAGERS' REPORT
Preferred stocks -- which make up the bulk of John Hancock Patriot Premium
Dividend Fund I -- performed reasonably well during the six months ended March
31, 2003. Falling interest rates, punctuated by a surprise half-percentage-point
rate cut by the Federal Reserve Board in November 2002, provided some of the
fuel powering preferred stocks' gains. Because preferreds pay dividends at a
fixed rate, like the interest on a bond, preferred stocks tend to rally when
interest rates drop, just as bonds do. Another factor that helped was stronger
demand from income-seeking investors looking for significantly higher yields
than what companies paid on their bonds and common stocks. Many preferred stocks
continued to yield between 7% and 9%, outstripping by a fairly wide margin the
yields available on Treasury and corporate bonds, as well as the dividends paid
on common stocks. Demand also strengthened in response to President Bush's
proposed dividend tax-cut package, which is designed to eliminate taxes that
individuals pay on most stock dividends. Even though the proposal had not been
approved by Congress by the end of March 2003, the anticipation that at least
some form of dividend tax relief ultimately would be adopted was enough for
investors to bid preferred stock prices higher. And even though the types of
preferred stocks that are the Fund's focus -- those that pay dividends in pretax
dollars -- won't benefit from tax relief, their prices tended to be lifted by
the development as well.
"Preferred stocks...performed reasonably well during the six months ended
March 31, 2003."
Utility common stocks -- the Fund's other primary area of emphasis -- were still
mired in the remnants of the Enron debacle when the period began and their
performance was quite disappointing. But conditions began to improve in early
2003, and by mid-February, utility stocks staged a heartening rally
2
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[Photo of Greg Phelps]
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through the end of the period. Some of the improvement was due to investors'
recognition that the sector had become undervalued relative to the market as a
whole and relative to its historic value. Also aiding the group was the dividend
tax-relief proposal. Through the years, utilities have offered consistently high
dividends and are poised to benefit if tax relief is enacted. Finally, the
utility companies did their part to boost confidence. They began to face
reality, cleaning up their balance sheets and ridding themselves of the types of
unregulated subsidiaries --such as energy trading -- that caused them the most
pain in the post-Enron environment.
FUND PERFORMANCE
For the six months ended March 31, 2003, John Hancock Patriot Premium Dividend
Fund I returned -0.07% at net asset value. By comparison, the average income and
preferred stock closed end fund returned 4.70%, according to Lipper, Inc. The
Fund's relative underperformance stemmed from its relatively large weighting in
utility common stocks. The Dow Jones Utility Average, which tracks the
performance of 15 electric and natural gas utilities, returned -0.81%. Even
though our stake in utility common stocks didn't reward us as we had hoped
during the period, we continued to maintain it based on our view that the sector
is undervalued and that over the longer term the group is poised to outperform
once more investors recognize its value.
"...the run-up in oil prices... helped boost our preferred-stock holdings whose
issuers are involved in the production and distribution of oil and natural gas."
LEADERS AND LAGGARDS
The run-up in oil prices -- which also helped pump up natural gas prices --
helped boost our preferred-stock holdings whose
3
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[Table at top left-hand side of page entitled "Top five industry groups1." The
first listing is Utilities 72%, the second is Broker services 8%, the third Oil
& gas 5%, the fourth Media 4%, and the fifth Finance 2%.]
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issuers are involved in the production and distribution of oil and natural gas.
Energy prices climbed steadily in response to concerns about disrupted oil
supplies stemming from the oil strike in Venezuela, the escalation of tensions
in the Middle East and, ultimately, the U.S. war on Iraq. Some standout holdings
included Anadarko Petroleum and Devon Energy.
Despite the utility common stock sector's overall disappointing returns for the
period, we did benefit from our continued emphasis on companies that transmit
and distribute electricity located in states with favorable regulatory
environments, and from our avoidance of companies with large energy trading
operations. Two good examples were NSTAR and CH Energy, both of which
outperformed the overall utility group during the period.
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[Pie chart in middle of page with heading "Portfolio diversification1" The chart
is divided into three sections (from top to left): Preferred stocks 69%, Common
stocks 27% and Short-term investments & other 4%.]
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Our single biggest disappointment during the period was El Paso Tennessee
Pipeline. That stock came under pressure when a judge ruled that the company had
manipulated pipeline capacity during the 2001 California power crisis. In late
March, the company settled those allegations out of court. In our view, this was
a positive, albeit costly, development because it allows the company to put some
lingering problems behind it and move ahead with its business plan. We also like
the fact that the
4
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[Table at top of page entitled "SCORECARD". The header for the left column is
"INVESTMENT" and the header for the right column is "PERIOD'S PERFORMANCE...AND
WHAT'S BEHIND THE NUMBERS." The first listing is Anadarko Petroleum followed by
an up arrow with the phrase "Oil prices spike amid fears of war with Iraq." The
second listing is Energy East followed by an up arrow with the phrase "Demand
for high-yielding stocks boosts price." The third listing is El Paso Tennessee
Pipeline followed by a down arrow with the phrase "Uncertainty dogs company."]
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company has made a series of other positive moves, including sales of assets and
securing bank financings.
OUTLOOK
Our outlook calls for continued lackluster economic growth, which we believe
will preclude the need for interest-rate hikes for the foreseeable future. Low
interest rates should continue to prompt strong demand for preferred stocks. If
some form of dividend tax relief is enacted by Congress, that, too, could help
preferreds. As for utility common stocks, we're encouraged that many companies
spent the last year reducing debt, which could foster more stable rating-agency
outlooks and, potentially, a continued rebound in their stock prices.
Furthermore, utility common stocks remain attractively valued relative to the
stock market overall. And given the colder-than-normal winter, we would expect
utilities' year-over-year earnings comparisons to improve. Further positives for
the group include the potential enactment of dividend tax relief and the
possible elimination of an anachronistic law limiting utility mergers.
"Low interest rates should continue to prompt strong demand for preferred
stocks."
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
(1) As a percentage of the Fund's portfolio on March 31, 2003.
5
FINANCIAL STATEMENTS
FUND'S INVESTMENTS
This schedule is divided into three main categories: preferred stocks, common
stocks and short-term investments. The stocks are further broken down by
industry group. Short-term investments, which represent the Fund's cash
position, are listed last.
Securities owned by
the Fund on March 31,
2003 (unaudited)
SHARES ISSUER, DESCRIPTION VALUE
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PREFERRED STOCKS 108.70% $130,795,187
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(Cost $139,492,413)
Agricultural Operations 2.41% 2,905,000
35,000 Ocean Spray Cranberries, Inc.,
6.25%, Ser A (R) 2,905,000
Broker Services 12.63% 15,194,441
62,460 Bear Stearns Cos., Inc. (The), 5.72%, Ser F 3,129,246
102,700 Lehman Brothers Holdings, Inc., 5.67%,
Depositary Shares, Ser D 5,160,675
90,400 Lehman Brothers Holdings, Inc., 5.94%,
Depositary Shares, Ser C 4,411,520
90,000 Merrill Lynch & Co., Inc., 9.00%, Depositary
Shares, Ser A 2,493,000
Diversified Operations 1.11% 1,332,034
48,420 Grand Metropolitan Delaware, L.P., 9.42%,
Gtd Ser A 1,332,034
Finance 3.77% 4,532,400
72,000 J.P. Morgan Chase & Co., 6.625%, Depositary
Shares, Ser H 3,888,000
12,000 SLM Corp., 6.97%, Ser A 644,400
Leasing Companies 0.97% 1,166,400
96,000 AMERCO, 8.50%, Ser A 1,166,400
Media 6.82% 8,202,255
200,453 Shaw Communications, Inc., 8.45%, Ser A (Canada) 4,125,323
199,361 Shaw Communications, Inc., 8.50% (Canada) 4,076,932
Oil & Gas 7.76% 9,344,327
45,278 Anadarko Petroleum Corp., 5.46%, Depositary
Shares, Ser B 4,369,327
50,000 Devon Energy Corp., 6.49%, Ser A 4,975,000
See notes to
financial statements.
6
SHARES ISSUER, DESCRIPTION VALUE
Telecommunications 2.11% $2,542,500
50,850 Touch America Holdings, Inc., $6.875 2,542,500
Utilities 71.12% 85,575,830
225,000 Alabama Power Co., 5.20% 5,411,250
34,000 Baltimore Gas & Electric Co., 6.99%,
Ser 1995 3,485,000
47,029 Boston Edison Co., 4.25% 3,350,816
215,000 Coastal Finance I, 8.375% 3,719,500
156,400 El Paso Tennessee Pipeline Co., 8.25%, Ser A 4,066,400
200,000 Energy East Capital Trust I, 8.25% 5,306,000
42,000 Florida Power & Light Co., 6.75%, Ser U 4,284,000
100,000 Hawaiian Electric Industries Capital
Trust I, 8.36% 2,600,000
13,000 Idaho Power Co., 7.07% 1,326,000
64,200 MCN Financing II, 8.625% 1,639,668
13,500 Massachusetts Electric Co., 6.99% 1,390,500
34,500 Monongahela Power Co., 7.73%, Ser L 2,484,000
60,000 PSEG Funding Trust II, 8.75% 1,560,000
37,000 PSI Energy, Inc., 6.875% 3,811,000
26,800 Public Service Electric & Gas Co., 6.92% 2,653,200
254,000 Puget Sound Energy, Inc., 7.45%, Ser II 6,604,000
210,000 Sierra Pacific Power Co., 7.80%, Ser 1
(Class A) 3,885,000
55,000 South Carolina Electric & Gas Co., 6.52% 5,555,000
185,000 Southern Union Financing I, 9.48% 4,680,500
195,035 TDS Capital Trust I, 8.50% 4,895,379
141,400 TDS Capital Trust II, 8.04% 3,518,032
39,800 TECO Capital Trust I, 8.50% 967,140
109,121 TXU US Holdings Co., $1.805, Depositary
Shares, Ser B 2,706,201
41,600 TXU US Holdings Co., $1.875, Depositary
Shares, Ser A 1,043,744
36,000 TXU US Holdings Co., $ 7.98 3,613,500
10,000 Virginia Electric & Power Co., $7.05 1,020,000
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COMMON STOCKS 41.98% $50,511,859
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(Cost $65,875,945)
Telecommunications 0.02% 19,494
216,600 Touch America Holdings, Inc.* 19,494
Utilities 41.96% 50,492,365
150,380 Alliant Energy Corp. 2,416,607
180,000 Aquila, Inc. 374,400
140,300 CH Energy Group, Inc. 5,850,510
101,000 DTE Energy Co. 3,903,650
64,300 Dominion Resources, Inc. 3,560,291
40,000 Duke Energy Corp. 581,600
247,000 Energy East Corp. 4,396,600
126,000 KeySpan Corp. 4,063,500
44,000 NiSource, Inc. 800,800
215,000 Northeast Utilities 2,992,800
175,000 NSTAR 7,003,500
42,500 Peoples Energy Corp. 1,520,225
See notes to
financial statements.
7
SHARES ISSUER VALUE
Utilities (continued)
52,500 Progress Energy, Inc. $2,055,375
69,000 Progress Energy, Inc.
(Contingent Value Obligation) 10,350
216,900 Puget Energy, Inc. 4,622,139
246,600 Sierra Pacific Resources* 784,188
173,000 TECO Energy, Inc. 1,838,990
40,400 WPS Resources Corp. 1,616,000
164,000 Xcel Energy, Inc. 2,100,840
INTEREST PAR VALUE
ISSUER, DESCRIPTION, MATURITY DATE RATE (000s OMITTED) VALUE
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SHORT-TERM INVESTMENTS 5.96% $7,171,000
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(Cost $7,171,000)
Oil & Gas 5.96%
Chevron USA, Inc., Discount Commercial
Paper, 04-01-03 1.14% $7,171 7,171,000
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TOTAL INVESTMENTS 156.64% $188,478,046
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OTHER ASSETS AND LIABILITIES, NET
(56.64%) ($68,151,505)
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TOTAL NET ASSETS 100.00% $120,326,541
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*Non-income-producing security.
(R) This security is exempt from registration under Rule 144A of the
Securities Act of 1933. This security may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $2,905,000, or 2.41%
of net assets, as of March 31, 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
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ASSETS
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Investments at value (cost $212,539,358) $188,478,046
Cash 9,901
Dividends receivable 600,122
Other assets 44,461
Total assets 189,132,530
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LIABILITIES
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Payable to affiliates 187,385
Other payables and accrued expenses 64,258
Total liabilities 251,643
Dutch Auction Rate Transferrable Securities
preferred shares
Series A (DARTS), at value, unlimited number
of shares of beneficial interest authorized
with no par value, 685 shares issued,
liquidation preference of $100,000 per share 68,554,346
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NET ASSETS
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Common shares capital paid-in 141,550,578
Accumulated net realized loss on investments (507,469)
Net unrealized depreciation of investments (24,061,312)
Accumulated net investment income 3,344,744
Net assets applicable to common shares $120,326,541
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NET ASSET VALUE PER COMMON SHARE
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Based on 15,081,484 shares of beneficial interest
outstanding -- unlimited number of shares
authorized with no par value $ 7.98
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ASSETS AND LIABILITIES
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March 31, 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.
See notes to
financial statements.
9
FINANCIAL STATEMENTS
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OPERATIONS
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For the period ended
March 31, 2003
(unaudited)(1)
This Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
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INVESTMENT INCOME
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Dividends $6,663,884
Interest 32,492
Total investment income 6,696,376
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EXPENSES
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Investment management fee 807,329
Federal excise tax 135,621
Administration fee 94,502
DARTS auction fee 90,034
Auditing fee 26,973
Printing 23,822
Transfer agent fee 20,617
Custodian fee 19,948
Registration and filing fee 16,872
Miscellaneous 9,756
Trustees' fee 6,296
Legal fee 1,132
Total expenses 1,252,902
Net investment income 5,443,474
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REALIZED AND UNREALIZED GAIN (LOSS)
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Net realized gain on investments 82,969
Change in net unrealized appreciation
(depreciation) of investments (5,007,210)
Net realized and unrealized loss (4,924,241)
Distributions to DARTS (518,753)
Increase in net assets from operations $480
(1) Semiannual period from 10-1-02 through 3-31-03.
See notes to
financial statements.
10
FINANCIAL STATEMENTS
YEAR PERIOD
ENDED ENDED
9-30-02 3-31-03(1)
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INCREASE IN NET ASSETS
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From operations
Net investment income $ 11,737,244 $ 5,443,474
Net realized gain (loss) (331,608) 82,969
appreciation (depreciation) (22,050,939) (5,007,210)
Distributions to DARTS (1,262,310) (518,753)
Increase (decrease) in net assets
resulting from operations (11,907,613) 480
Distributions to common shareholders
From net investment income (9,713,863) (4,877,888)
From Fund share transactions 350,897 533,602
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NET ASSETS APPLICABLE TO COMMON SHARES
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Beginning of period 145,940,926 124,670,347
End of period(2) $ 124,670,347 $ 120,326,541
(1) Semiannual period from 10-1-02 through 3-31-03. Unaudited.
(2) Includes accumulated net investment income of $3,297,911 and $3,344,744,
respectively.
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CHANGES IN NET ASSETS
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This Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions, if any,
paid to shareholders and any increase due to the sales of common shares.
See notes to
financial statements.
11
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FINANCIAL HIGHLIGHTS
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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 9-30-98 9-30-99 9-30-00 9-30-01 9-30-02 3-31-03(1)
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PER SHARE OPERATING PERFORMANCE
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Net asset value,
beginning of period $ 9.88 $ 10.85 $ 9.91 $ 10.13 $ 9.74 $ 8.30
Net investment income(2) 0.87 0.83 0.85 0.83 0.78 0.36
Net realized and unrealized
gain (loss) on investments 0.99 (0.90) 0.23 (0.39) (1.49) (0.33)
Distribution to DARTS (0.19) (0.18) (0.21) (0.18) (0.08) (0.03)
Total from investment operations 1.67 (0.25) 0.87 0.26 (0.79) --
Less distributions to
common shareholders
From net investment income (0.70) (0.66) (0.64) (0.65) (0.65) (0.32)
In excess of net investment income --(3) (0.03) (0.01) -- -- --
(0.70) (0.69) (0.65) (0.65) (0.65) (0.32)
Net asset value, end of period $ 10.85 $ 9.91 $ 10.13 $ 9.74 $ 8.30 $ 7.98
Per share market value,
end of period $ 10.19 $ 8.81 $ 8.25 $ 8.75 $ 9.15 $ 8.99
Total return at market value(4)(%) 16.57 (7.01) 1.19 13.79 12.03 2.12(5)
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RATIOS AND SUPPLEMENTAL DATA
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Net assets applicable to common
shares, end of period (in millions) $ 163 $ 148 $ 152 $ 146 $ 125 $ 120
Ratio of expenses to average net
assets(6)(%) 1.65 1.66 1.75 1.72 1.79 2.08(7)
Ratio of net investment income to
average net assets(8)(%) 8.26 7.92 8.94 8.35 8.42 9.02(7)
Portfolio turnover(%) 32 18 19 23 11 3
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SENIOR SECURITIES
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Total value of DARTS outstanding
(in millions) $ 68 $ 68 $ 68 $ 68 $ 68 $ 69
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(9) $330,525 $323,124 $315,176 $318,208 $280,462 $274,530
(1) Semiannual period from 10-1-02 through 3-31-03. Unaudited.
(2) Based on the average of the shares outstanding.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) Ratios calculated on the basis of expenses applicable to common shares
relative to the average net assets of common shares. Without the exclusion
of preferred shares, the annualized ratio of expenses would have been
1.15%, 1.15%, 1.18%, 1.18%, 1.20% and 1.33%, respectively.
(7) Annualized.
(8) Ratios calculated on the basis of net investment income applicable to
common shares relative to the average net assets of common shares. Without
the exclusion of preferred shares, the annualized ratio of net investment
income would have been 5.75%, 5.52%, 6.03%, 5.72%, 5.65% and 5.76%,
respectively.
(9) Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of DARTS outstanding
as of the applicable 1940 Act Evaluation Date.
See notes to
financial statements.
12
NOTE A
Accounting policies
John Hancock Patriot Premium Dividend Fund I (the "Fund") is a diversified
closed-end management investment company registered under the Investment Company
Act of 1940.
Significant accounting policies of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services or at fair value as
determined in good faith in accordance with procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized
cost, which approximates market value. The Fund determines the net asset value
of the common shares each business day.
Investment transactions
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are determined
on the identified cost basis.
Expenses
The majority of the expenses are directly identifiable to an individual fund.
Expenses that are not readily identifiable to a specific fund will be allocated
in such a manner as deemed equitable, taking into consideration, among other
things, the nature and type of expense and the relative sizes of the funds.
Federal income taxes
The Fund qualifies as a "regulated investment company" by complying with the
applicable provisions of the Internal Revenue Code and will not be subject to
federal income tax on taxable income that is distributed to shareholders.
Therefore, no federal income tax provision is required. For federal income tax
purposes, the Fund has $188,602 of a capital loss carry-forward available, to
the extent provided by regulations, to offset future net realized capital gains.
To the extent that such carryforward is used by the Fund, no capital gain
distributions will be made. The entire amount of loss carryforward expires
September 30, 2010.
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NOTES TO STATEMENTS
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Unaudited
13
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend date or,
in the case of some foreign securities, on the date thereafter when the Fund
identifies the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding taxes,
which are accrued as applicable.
The Fund records distributions to shareholders from net investment income and
realized gains on the ex-dividend date. 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 The Berkeley Financial Group, LLC.
Under the investment management contract, the Fund pays a monthly management fee
to the Adviser at an annual rate of 0.50% of the Fund's average weekly net
assets and the value attributable to the DARTS, plus 5.00% of the Fund's weekly
gross income. The Adviser's total fee is limited to a maximum amount equal to
1.00% annually of the Fund's average weekly net assets and the value
attributable to the DARTS. For the period ended March 31, 2003, the advisory fee
incurred did not exceed the maximum advisory fee allowed.
The Fund has an administrative agreement with the Adviser under which the
Adviser oversees the custodial, auditing, valuation, accounting, legal, stock
transfer and dividend disbursing services and maintains Fund communications with
the shareholders. The Fund pays the Adviser a monthly administration fee at an
annual rate of approximately 0.10% of the Fund's average weekly net assets plus
the value attributable to the DARTS.
Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of
the Adviser and/or its affiliates, as well as Trustees of the Fund. The
compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated
Trustees may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes
investments into other John Hancock funds, as applicable, to cover its liability
for the deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always equal and
are marked to market on a periodic basis to reflect any income earned by the
investment as well as any unrealized gains or losses. The Deferred Compensation
Plan investments had no impact on the operations of the Fund.
14
NOTE C
Fund share transactions
Common shares
This listing illustrates the Fund's common shares, dividend reinvestments,
reclassification of the Fund's capital accounts and the number of common shares
outstanding at the beginning and end of the last two periods, along with the
corresponding dollar value.
YEAR ENDED 9-30-02 PERIOD ENDED 3-31-03(1)
SHARES AMOUNT SHARES AMOUNT
Beginning of period 14,979,601 $140,765,350 15,017,782 $141,016,976
Dividends reinvested 38,181 350,897 63,702 533,602
Reclassification of
capital accounts -- (99,271) -- --
End of period 15,017,782 $141,016,976 15,081,484 $141,550,578
(1) Semiannual period from 10-01-02 through 3-31-03. Unaudited.
Dutch Auction Rate Transferable Securities preferred shares Series A
The Fund issued 685 shares of Dutch Auction Rate Transferable Securities
preferred shares Series A ("DARTS") in a public offering. The underwriting
discount was recorded as a reduction of the capital of common shares.
Dividends on the DARTS, which accrue daily, are cumulative at a rate that was
established at the offering of the DARTS and has been reset every 49 days
thereafter by an auction. Dividend rates on DARTS ranged from 1.19% to 1.86%
during the period ended March 31, 2003. Accrued dividends on DARTS are included
in the value of DARTS on the Fund's statement of assets and liabilities.
The DARTS are redeemable at the option of the Fund, at a redemption price equal
to $100,000 per share, plus accumulated and unpaid dividends on any dividend
payment date. The DARTS are also subject to mandatory redemption at a redemption
price equal to $100,000 per share, plus accumulated and unpaid dividends, if the
Fund is in default on its asset coverage requirements with respect to the DARTS,
as defined in the Fund's by-laws. If the dividends on the DARTS shall remain
unpaid in an amount equal to two full years' dividends, the holders of the
DARTS, as a class, have the right to elect a majority of the Board of Trustees.
In general, the holders of the DARTS and the common shareholders have equal
voting rights of one vote per share, except that the holders of the DARTS, as a
class, vote to elect two members of the Board of Trustees, and separate class
votes are required on certain matters that affect the respective interests of
the DARTS and common 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 March
31, 2003, aggregated $5,306,081 and $5,721,594, respectively.
The cost of investments owned on March 31, 2003, including short-term
investments, for federal income tax purposes was $212,562,743. Gross unrealized
appreciation and depreciation of investments aggregated $9,106,662 and
$33,191,359, respectively, resulting in net unrealized depreciation of
$24,084,697. The difference between book basis and tax basis net unrealized
depreciation of investments is attributable primarily to the tax deferral of
losses on wash sales.
15
INVESTMENT OBJECTIVE AND POLICY
The Fund's investment objective is to provide a high current income, consistent
with modest growth of capital, for holders of its common shares of beneficial
interest. The Fund will pursue its objective by investing in a diversified
portfolio of dividend-paying preferred and common stocks.
The Fund's nonfundamental investment policy, with respect to the quality of
ratings of its portfolio investments, was changed by a vote of the Fund's
Trustees on September 13, 1994. The new policy, which became effective October
15, 1994, stipulates that preferred stocks and debt obligations in which the
Fund will invest will be rated investment grade (at least "BBB" by S&P or "Baa"
by Moody's) at the time of investment or will be preferred stocks of issuers of
investment-grade senior debt, some of which may have speculative
characteristics, or, if not rated, will be of comparable quality as determined
by the Adviser. The Fund will invest in common stocks of issuers whose senior
debt is rated investment grade or, in the case of issuers that have no rated
senior debt outstanding, whose senior debt is considered by the Adviser to be of
comparable quality. The new policy supersedes the requirement that at least 80%
of the Fund's total assets consist of preferred stocks and debt obligations
rated "A" or higher and dividend-paying common stocks whose issuers have senior
debt rated "A" or higher.
On November 20, 2001, the Fund's Trustees approved the following investment
policy investment restriction change, which became effective December 15, 2001.
Under normal circumstances the Fund will invest at least 80% of its assets in
dividend-paying securities. The "Assets" are defined as net assets including the
liquidation preference amount of the DARTS plus borrowings for investment
purposes. The Fund will notify shareholders at least 60 days prior to any change
in this 80% investment policy.
In November 2002, the Board of Trustees adopted several amendments to the Fund's
by-laws, including provisions relating to the calling of a special meeting and
requiring advance notice of shareholder proposals or nominees for Trustee. The
advance notice provisions in the by-laws require shareholders to notify the Fund
in writing of any proposal that 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.
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 will automatically have all distributions of dividends and capital gains
reinvested by Mellon Investor Services, as Plan agent for the common
shareholders (the "Plan Agent"), unless an election is made to receive cash.
Holders of common shares who elect not to participate in the Plan will receive
all distributions in cash, paid by check mailed directly to the shareholder
16
of record (or if the common shares are held in street or other nominee name,
then to the nominee) by the Plan Agent, as dividend disbursing agent.
Shareholders whose shares are held in the name of a broker or a nominee should
contact the broker or nominee to determine whether and how they may participate
in the Plan.
If the Fund declares a dividend payable either in common shares or in cash,
nonparticipants will receive cash and participants in the Plan will receive the
equivalent in common shares. If the market price of the common shares on the
payment date of the dividend is equal to or exceeds their net asset value as
determined on the payment date, participants will be issued common shares (out
of authorized but unissued shares) at a value equal to the higher of net asset
value or 95% of the market price. If the net asset value exceeds the market
price of the common shares at such time, or if the Board of Trustees declares a
dividend payable only in cash, the Plan Agent will, as agent for Plan
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' 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 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 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
17
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.
18
SHAREHOLDER MEETING (unaudited)
On March 20, 2003, the Annual Meeting of the Fund was held to elect four
Trustees and to ratify the actions of the Trustees in selecting independent
auditors for the Fund.
The 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 R. Ford 13,569,200 225,399
Charles L. Ladner 13,481,391 313,208
John A. Moore 13,482,516 312,083
The preferred shareholders elected Ronald R. Dion to serve until his respective
successor is duly elected and qualified, with the votes tabulated as follows:
495 FOR and 0 WITHHELD AUTHORITY.
The shareholders also ratified the Trustees' selection of Deloitte & Touche LLP
as the Fund's independent auditors for the fiscal period ending September 30,
2003, with the votes tabulated as follows: 13,545,344 FOR, 152,157 AGAINST and
97,097 ABSTAINING.
19
20
TRUSTEES INVESTMENT ADVISER
James F. Carlin John Hancock Advisers, LLC
William H. Cunningham 101 Huntington Avenue
John M. DeCiccio Boston, Massachusetts 02199-7603
Ronald R. Dion
Maureen R. Ford CUSTODIAN
Charles L. Ladner* The Bank of New York
Patti McGill Peterson* One Wall Street
Dr. John A. Moore* New York, New York 10286
Steven R. Pruchansky
Lt. Gen. Norman H. Smith, TRANSFER AGENT FOR
USMC (Ret.) COMMON SHAREHOLDERS
John P. Toolan* Mellon Investor Services
*Members of the Audit Committee 85 Challenger Road
Overpeck Centre
OFFICERS Ridgefield Park, New Jersey 07660 FOR YOUR INFORMATION
Maureen R. Ford
Chairman, President
and Chief Executive Officer TRANSFER AGENT
FOR DARTS
William L. Braman Deutsche Bank Trust
Executive Vice President Company Americas
and Chief Investment Officer 280 Park Avenue
New York, New York 10017
Richard A. Brown
Senior Vice President
and Chief Financial Officer LEGAL COUNSEL
Hale and Dorr LLP
Susan S. Newton 60 State Street
Senior Vice President Boston, Massachusetts 02109-1803
and Secretary
William H. King STOCK SYMBOL
Vice President and Treasurer Listed New York Stock Exchange:
PDF
Thomas H. Connors
Vice President and
Compliance Officer 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, New Jersey 07660
Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7059
24-hour automated information 1-800-843-0090
TDD Line 1-800-231-5469
21
[LOGO](R)
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JOHN HANCOCK FUNDS
1-800-852-0218
1-800-843-0090 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
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