John Hancock
Patriot
Select
Dividend Trust
SEMI
ANNUAL
REPORT
12.31.02
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Maureen R. Ford, Chairman and Chief Executive Officer,
flush left next to first paragraph.]
WELCOME
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 9
For your information
page 21
Dear Fellow Shareholders,
Investors were probably never happier to close out a year than they were
in 2002, since it was the third consecutive year that the stock market
declined -- something that hadn't occurred in 60 years. Driving the fall
were fears of war, a weak economy, disappointing profits, rising oil
prices and a string of corporate scandals. All market sectors and
investment styles suffered. As a result, the broad Standard & Poor's 500
Index fell by 22.09% for the year, while the Dow Jones Industrial
Average lost 15.04% and the technology laden Nasdaq Composite Index lost
31.53%.
Despite a fourth-quarter rally, only 3.8% of U.S. stock mutual funds
made money last year, and the average U.S. stock fund lost 22.42%,
according to Lipper, Inc. Bond funds provided the only bright spot,
producing mostly positive results, with the average long-term bond fund
rising 7.9%. It was the third year in which bonds outperformed stocks
and gained ground, confirming yet again 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, as the good news seen in
signs of improving economic and corporate data, and efforts by
Washington to stimulate the economy, are offset by the possibility of
war and other geopolitical risks.
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
Maureen R. Ford,
Chairman and Chief Executive Officer
YOUR FUND
AT A GLANCE
The Fund seeks
to provide high
current income,
consistent with
modest growth of
capital, by invest-
ing in a diversified
portfolio of divi-
dend-paying
securities. The
Fund will normally
invest more than
65% of its total
assets in securities
of companies in
the utilities
industry.
Over the last six months
* Preferred stocks held up relatively well amid a common-stock bear
market, anemic economy and corporate scandals.
* The Fund benefited from oil- and natural gas-related preferred
holdings as prices of both commodities soared on concerns of war.
* Most utility common stocks stumbled, although the Fund's focus on
basic transmission and distribution companies helped it avoid problems.
[Bar chart with heading "John Hancock Patriot Select Dividend Trust."
Under the heading is a note that reads "Fund performance for the six
months ended December 31, 2002." The chart is scaled in increments of 2%
with -8% at the bottom and 0% at the top. The first bar represents the
-7.17% total return for John Hancock Patriot Select Dividend Trust. A
note below the chart reads "The total returns for the Fund is at net
asset value with all distributions reinvested."]
Top 10 issuers
4.7% Energy East Corp.
4.7% Puget Energy, Inc.
3.8% NSTAR
3.5% Citigroup
3.5% TDS Capital
3.4% CH Energy Group, Inc.
3.4% El Paso Tennessee Pipeline Co., 8.25%, Ser A
3.3% DTE Energy Co.
3.2% Lehman Brothers
3.1% TXU U.S. Holdings
As a percentage of net assets on December 31, 2002.
BY GREGORY K. PHELPS, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Patriot Select Dividend Trust
MANAGERS'
REPORT
Despite all the economic turmoil, a diminished lack of confidence in
corporate America and a persistently weak stock market, preferred stocks
-- which account for more than half of John Hancock Patriot Select
Dividend Trust -- turned in reasonably good performances for the second
half of 2002. Their relative success hinged primarily on falling
interest rates amid a surprisingly weak economy. Preferred stocks pay
dividends, just like bonds pay regular interest and, because of those
dividends, their stock prices tend to rise when interest rates fall,
just as bond prices do. Furthermore, preferreds offer yields that are
often significantly higher than what companies pay on their bonds and
common stock. Many preferred stocks continued to yield between 7% and
9%, outstripping by a fairly wide margin the yields paid by corporate
and other bonds and the dividends paid by common stocks.
"Despite all the economic
turmoil...preferred
stocks...turned in
reasonably good perfor-
mances for the second
half of 2002."
UTILITY COMMON STOCKS SHORT CIRCUIT
Utility common stocks were bitter disappointments during most of 2002.
Much of their poor performance stemmed from the pain of the
investigation and collapse of energy-trading company Enron plus
subsequent investigations of similar companies. Questions about
corporate accounting practices, accountability and ethics at these rogue
companies cast a pall over the entire utility common stock group. In the
late summer, even the most "plain vanilla" utilities that transmit and
distribute electricity came under pressure, as mutual fund managers sold
their strongest utility performers in order to meet the swell of
shareholder redemptions that resulted from a weak overall stock market
environment. The year ended, however, on a more upbeat note when the
onset of winter, coupled with rising oil and natural gas prices, set off
a bit of a rebound in the utility common-stock sector in December.
[A photo of Greg Phelps flush right next to first paragraph.]
FUND PERFORMANCE
For the six months ended December 31, 2002, John Hancock Patriot Select
Dividend Trust returned -7.17% at net asset value. By comparison, the
average income and preferred closed-end fund returned -4.84%, according
to Lipper, Inc. Over the same six-month period, the broad Standard &
Poor's 500 Index returned -10.30% and the Dow Jones Utility Average,
which tracks the performance of 15 electric and natural gas utilities,
returned -19.48%.
"Many preferred stocks
continued to yield
between 7% and 9%..."
RISING ENERGY PRICES BOOST OIL/GAS
The run-up in oil prices -- which also helped pump up natural gas prices
-- caused our holdings in companies involved in the production and
distribution of oil and natural gas to be among our best performers in
the period. Despite relatively anemic global demand for energy, oil and
natural gas prices skyrocketed as the year wore on, due to growing
concerns that the escalation of tensions in the Middle East and a
possible U.S. attack on Iraq would disrupt oil supplies. Some standout
holdings included Anadarko Petroleum, Apache and Devon Energy. Another
preferred stock holding with decent returns was Energy East, which was
helped by the fact that it yielded 8.25% -- a very attractive yield in a
low interest-rate environment.
[Table at top left-hand side of page entitled "Top five industry
groups1." The first listing is Utilities 67%, the second is Broker
services 7%, the third Finance 7%, the fourth Oil & gas 6%, and the
fifth Banks-United States 5%.]
But there were some notable disappointments among our preferred-stock
holdings. El Paso Tennessee Pipeline Co. and its wholly owned subsidiary
Coastal came under pressure when a judge ruled that the company had
manipulated pipeline capacity during the 2001 California power crisis. We
think the company will be exonerated in its appeal to the Federal Energy
Regulatory Commission. Our holdings in Sierra Pacific also came under
pressure due to what we believe to be an unfair rate decision, which
resulted in a substantial downgrade of the company's credit quality.
Despite that development, we continue to hang onto the stock because the
company has a very strong management team, and the demand for the
electricity it provides is growing much faster than most of its
counterparts across the country. In addition, our holdings in Acquila and
Xcel Energy also were hurt in part because they were forced to sell
assets under distressed market conditions in order to placate credit
rating agencies.
[Pie chart in middle of page with heading "Portfolio diversification1"
The chart is divided into three sections (from top to left): Preferred
stock 69%, Common stock 29% and Short-term investments & other 2%.]
BORING DOES BETTER
Our emphasis on utility companies that do rather mundane things like
transmit and distribute electricity, mostly in regulated markets, helped
us avoid the most put-upon electric trading companies such as Enron.
Holdings such as NSTAR held up better than most in part due to the
favorable regulatory environment in its service area. Investors also
liked the company's reputation for paying reliable dividends. Other
holdings that did better than the utility common stock group overall
included companies such as DTE Energy, Key Span and Northeast Utilities.
Their resilience was due to their lack of energy trading operations and
their location in favorable regulatory environments that are enjoying
strong and growing demand.
[Table at top of page entitled "SCORECARD." The header for the left
column is "INVESTMENT" and the header for the right column is "RECENT
PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is
Anadarko followed by an up arrow with the phrase "Oil prices spike amid
fears of Iraq war." 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 followed by a down arrow with the phrase
"Company's role in California power crisis questioned."]
OUTLOOK
Our view is that continued lackluster economic growth will preclude the
need for interest-rate hikes for the foreseeable future. Low interest
rates should continue to prompt strong demand for preferred stocks.
Another factor that is likely to ignite demand is President Bush's
proposal -- revealed in early January 2003 -- to eliminate taxes on
dividends. If that proposal passes, the demand for preferred stocks
eligible for the Dividends Received Deduction (DRD) should increase. As
for utility common stocks, we think that most of the trouble associated
with the Enron scandal is behind them. In our view, utility common
stocks are very attractive given their earnings growth prospects and
their low prices. Even if the economy starts to grow faster, we don't
think that preferred stocks and utility common stocks -- two sectors
that historically have lagged in a strong economy -- will be left out in
the cold.
"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 December 31, 2002.
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
December 31, 2002
(unaudited)
This schedule is divided into three main categories: preferred stocks,
common stocks and short-term investments. Preferred and common stocks
are further broken down by industry group. Short-term investments, which
represent the Fund's cash position, are listed last.
SHARES ISSUER VALUE
PREFERRED STOCKS 108.96% $132,460,988
(Cost $144,694,175)
Agricultural Operations 2.67% $3,240,000
40,000 Ocean Spray Cranberries, Inc., 6.25%, Ser A (R) 3,240,000
Banks -- United States 8.45% 10,266,390
99,000 FleetBoston Financial Corp., 6.75%, Depositary
Shares, Ser VI 5,049,990
108,000 HSBC USA, Inc., $2.8575 5,216,400
Broker Services 11.64% 14,144,545
116,400 Bear Stearns Companies, Inc., 5.49%, Ser G 4,848,060
23,000 Bear Stearns Companies, Inc., 6.15%, Ser E 1,053,400
129,689 Lehman Brothers Holdings, Inc., 5.67%,
Depositary Shares, Ser D 5,511,782
13,000 Lehman Brothers Holdings, Inc., 5.94%, Ser C 568,750
77,650 Merrill Lynch & Co., Inc., 9.00%, Depositary Shares, Ser A 2,162,553
Diversified Operations 0.70% 852,822
30,600 Grand Metropolitan Delaware, L.P., 9.42%, Gtd Ser A 852,822
Finance 11.02% 13,401,940
44,000 Citigroup, Inc., 6.213%, Ser G 2,178,000
92,400 Citigroup, Inc., 6.231%, Depositary Shares, Ser H 4,550,700
56,000 Household International, Inc., 7.50%, Depositary Shares,
Ser 2001-A 1,374,240
100,000 SLM Corp., 6.97%, Ser A 5,299,000
Leasing Companies 0.90% 1,094,100
105,000 AMERCO, 8.50%, Ser A 1,094,100
Media 2.36% 2,874,690
67,500 Shaw Communications, Inc., 8.45%, Ser A (Canada) 1,140,750
102,600 Shaw Communications, Inc., 8.50% (Canada) 1,733,940
Oil & Gas 9.06% 11,017,910
25,900 Anadarko Petroleum Corp., 5.46%, Depositary Shares 2,266,250
40,174 Apache Corp., 5.68%, Depositary Shares, Ser B 3,615,660
53,500 Devon Energy Corp., 6.49%, Ser A 5,136,000
Telecommunications 2.49% 3,030,000
50,500 Touch America Holdings, Inc., $6.875 3,030,000
Utilities 59.67% 72,538,591
225,000 Alabama Power Co., 5.20% 4,837,500
40,000 Baltimore Gas & Electric Co., 6.99%, Ser 1995 4,055,000
44,240 Boston Edison Co., 4.25% 3,028,228
78,300 Coastal Finance I, 8.375% 1,041,390
183,500 El Paso Tennessee Pipeline Co., 8.25%, Ser A 6,422,500
147,000 Energy East Capital Trust I, 8.25% 3,835,230
87,100 Energy Gulf States Capital 1, 8.75%, Ser A 2,220,179
25,000 Florida Power & Light Co., 6.75%, Ser U 2,518,750
50,000 Hawaiian Electric Industries Capital Trust I, 8.36% 1,257,500
13,500 Massachusetts Electric Co., 6.99% 1,380,375
50,000 Monongahela Power Co., 7.73%, Ser L 3,400,000
48,000 PSI Energy, Inc., 6.875% 4,665,600
26,375 Public Service Electric & Gas Co., 6.92% 2,637,500
205,140 Puget Sound Energy, Inc., 7.45%, Ser II 5,128,500
205,600 Sierra Pacific Power Co., 7.80%, Ser 1 (Class A) 3,803,600
55,000 South Carolina Electric & Gas Co., 6.52% 5,486,250
59,000 Southern Union Financing I, 9.48% 1,481,490
196,700 TDS Capital Trust I, 8.50% 4,897,830
70,500 TDS Capital Trust II, 8.04% 1,713,150
106,000 TXU US Holdings Co., $1.875, Depositary Shares, Ser A 2,568,380
16,000 TXU US Holdings Co., $1.805 391,200
29,200 TXU US Holdings Co., $7.98 3,024,939
10,500 Virginia Electric & Power Co., $6.98 1,065,750
10,000 Virginia Electric & Power Co., $7.05 1,021,250
6,500 Wisconsin Public Service Corp., 6.76% 656,500
COMMON STOCKS 45.84% 55,728,318
(Cost $66,378,073)
Telecommunications 0.06% 76,752
196,800 Touch America Holdings, Inc.* 76,752
Utilities 45.78% 55,651,566
158,000 Alliant Energy Corp. 2,614,900
190,000 Aquila, Inc. 336,300
139,800 CH Energy Group, Inc. 6,518,874
46,000 Dominion Resources, Inc. 2,525,400
99,000 DPL, Inc. 1,518,660
133,900 DTE Energy Co. 6,212,960
70,000 Duke Energy Corp. 1,367,800
232,000 Energy East Corp. 5,124,880
129,000 KeySpan Corp. 4,545,960
34,000 NiSource, Inc. 680,000
207,000 Northeast Utilities 3,140,190
91,000 NSTAR 4,039,490
93,092 OGE Energy Corp. 1,638,419
27,500 Peoples Energy Corp. 1,062,875
54,000 Progress Energy, Inc. 2,340,900
20,000 Progress Energy, Inc. (Contingent Value Obligation) 3,000
170,500 Puget Energy, Inc. 3,759,525
271,500 Sierra Pacific Resources 1,764,750
176,750 TECO Energy, Inc. 2,734,323
48,000 WPS Resources Corp. 1,863,360
169,000 Xcel Energy, Inc. 1,859,000
INTEREST PAR VALUE
ISSUER, DESCRIPTION, MATURITY DATE RATE (000s OMITTED) VALUE
SHORT-TERM INVESTMENTS 2.33% $2,825,914
(Cost $2,825,914)
Commercial Paper 2.33%
Chevron USA, Inc., Due 01-02-03 1.10% $2,826 2,825,914
TOTAL INVESTMENTS 157.13% $191,015,220
OTHER ASSETS AND LIABILITIES, NET (57.13%) ($69,448,848)
TOTAL NET ASSETS 100.00% $121,566,372
* Non-income producing security
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $3,240,000 or 2.67% of
net assets as of December 31, 2002.
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.
ASSETS AND
LIABILITIES
December 31, 2002
(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 $213,898,162) $191,015,220
Cash 550
Dividends receivable 843,052
Other assets 46,344
Total assets 191,905,166
LIABILITIES
Payable to affiliates 163,531
Other payables and accrued expenses 111,969
Total liabilities 275,500
Auction Market Preferred Shares (AMPS), at value, unlimited
number of shares of beneficial interest authorized with no
par value, 700 shares issued, liquidation preference of
$100,000 per share 70,063,294
NET ASSETS
Common shares capital paid-in 142,073,200
Accumulated net realized loss on investments (452,373)
Net unrealized depreciation of investments (22,882,942)
Accumulated net investment income 2,828,487
Net assets applicable to common shares $121,566,372
NET ASSET VALUE PER COMMON SHARE
Based on 9,920,759 shares of beneficial interest
outstanding -- unlimited number of shares authorized
with no par value $12.25
See notes to
financial statements.
OPERATIONS
For the period ended
December 31, 2002
(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 $6,582,196
Interest 12,901
Total investment income 6,595,097
EXPENSES
Investment management fee 783,723
Administration fee 146,948
AMPS auction fee 94,676
Auditing fee 27,415
Custodian fee 25,665
Printing 22,656
Miscellaneous 20,799
Transfer agent fee 19,905
Trustees' fee 5,728
Legal fee 1,406
Interest expense 118
Total expenses 1,149,039
Net investment income 5,446,058
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized loss on investments (189,351)
Change in net unrealized appreciation (depreciation)
of investments (14,316,228)
Net realized and unrealized loss (14,505,579)
Distributions to AMPS (577,110)
Decrease in net assets from operations ($9,636,631)
1 Semiannual period from 7-1-02 through 12-31-02.
See notes to
financial statements.
CHANGES IN
NET ASSETS
This Statement
of Changes in
Net Assets
shows how the
value of the
Fund's net assets
has changed
since the end of
the previous
period. The dif-
ference reflects
earnings less
expenses, any
investment gains
and losses,
distributions
paid to share-
holders, if any,
and any increase
due to the sale of
common shares.
YEAR PERIOD
ENDED ENDED
6-30-02 12-31-02 1
INCREASE IN NET ASSETS
From operations
Net investment income $11,662,019 $5,446,058
Net realized loss (211,634) (189,351)
Change in net unrealized appreciation
(depreciation) (15,801,539) (14,316,228)
Distributions to AMPS (1,449,527) (577,110)
Decrease in net assets
resulting from operations (5,800,681) (9,636,631)
Distributions to common shareholders
From net investment income (10,678,061) (5,351,425)
From Fund share transactions 212,653 268,085
NET ASSETS APPLICABLE TO COMMON SHARES
Beginning of period 152,552,432 136,286,343
End of period 2 $136,286,343 $121,566,372
1 Semiannual period from 7-1-02 through 12-31-02. Unaudited.
2 Includes accumulated net investment income of $3,310,964 and
$2,828,487, respectively.
See notes to
financial statements.
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 6-30-98 6-30-99 6-30-00 6-30-01 6-30-02 12-31-02 1
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.60 $17.07 $16.00 $13.97 $15.43 $13.77
Net investment income 2 1.38 1.26 1.27 1.34 1.18 0.55
Net realized and unrealized
gain (loss) on investments 1.62 (0.80) (1.91) 1.52 (1.61) (1.47)
Dividends to AMPS shareholders (0.29) (0.29) (0.31) (0.32) (0.15) (0.06)
Total from investment operations 2.71 0.17 (0.95) 2.54 (0.58) (0.98)
Less distributions to
common shareholders
From net investment income (1.24) (1.13) (1.08) (1.08) (1.08) (0.54)
Distributions in excess of net
investment income -- (0.11) -- -- -- --
(1.24) (1.24) (1.08) (1.08) (1.08) (0.54)
Net asset value, end of period $17.07 $16.00 $13.97 $15.43 $13.77 $12.25
Per share market
value, end of period $15.50 $13.81 $12.38 $14.80 $13.69 $13.06
Total return at market value 3 (%) 17.26 (3.56) (2.46) 29.40 (0.45) (0.45)4
RATIOS AND SUPPLEMENTAL DATA
Net assets applicable to common shares,
end of period (in millions) $169 $159 $138 $153 $136 $122
Ratio of expenses to average
net assets 6 (%) 1.68 1.72 1.74 1.77 1.77 1.83 5
Ratio of net investment income
to average net assets 7 (%) 8.38 7.51 8.57 8.22 7.99 8.69 5
Portfolio turnover (%) 41 30 20 13 15 1
SENIOR SECURITIES
Total AMPS outstanding
(in millions) $70 $70 $70 $70 $70 $70
Involuntary liquidation
preference per unit (in thousands) $100 $100 $100 $100 $100 $100
Approximate market value per unit
(in thousands) $100 $100 $100 $100 $100 $100
Asset coverage per unit 8 $338,876 $329,508 $299,106 $316,086 $290,311 $271,662
1 Semiannual period from 7-1-02 through 12-31-02. Unaudited.
2 Based on the average of the shares outstanding.
3 Assumes dividend reinvestment.
4 Not annualized.
5 Annualized.
6 Ratios calculated on the basis of expenses applicable to the common
shares relative to the average net assets of common shares. Without the
exclusion of preferred shares, the ratio of expenses would have been
1.18%, 1.21%, 1.18%, 1.21%, 1.20%, and 1.17%, respectively.
7 Ratios calculated on the basis of net investment income applicable to
common shares relative to the average net assets of common shares.
Without the exclusion of preferred shares, the ratio of net investment
income would have been 5.86%, 5.28%, 5.79%, 5.61%, 5.40%, and 5.56%,
respectively.
8 Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of AMPS outstanding
as of the applicable 1940 Act Evaluation Date.
See notes to
financial statements.
NOTES TO
STATEMENTS
Unaudited
NOTE A
Accounting policies
John Hancock Patriot Select Dividend Trust (the "Fund") is a diversified
closed-end investment management company registered under the Investment
Company Act of 1940.
Significant accounting policies of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at
fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60
days are valued at amortized cost, which approximates market value. The
Fund determines the net asset value of the common shares each business
day.
Investment transactions
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are
determined on the identified cost basis.
Federal income taxes
The Fund qualifies as a "regulated investment company" by complying with
the applicable provisions of the Internal Revenue Code and will not be
subject to federal income tax on taxable income that is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $118,315 of a capital loss
carryforward available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent that such carryforward
is used by the Fund, no capital gain distributions will be made. The
entire amount of the loss carryforward expires June 30, 2010.
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend
date or, in the case of some foreign securities, on the date thereafter
when the Fund identifies the dividend. Interest income on investment
securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes, which are accrued as applicable.
The Fund records distributions to shareholders from net investment income
and net realized gains on the ex-dividend date. Such distributions on a
tax basis, are determined in conformity with income tax regulations,
which may differ 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.
Auction Market Preferred Shares Series A
The Fund issued 700 shares of Auction Market Preferred Shares Series A
("AMPS") on August 30, 1990 in a public offering. The underwriting
discount was recorded as a reduction of the capital of common shares.
Dividends on the AMPS, which accrue daily, are cumulative at a rate that
was established at the offering of the AMPS and has been reset every 49
days thereafter by an auction. Dividend rates on AMPS ranged from 1.54%
to 1.65% during the period ended December 31, 2002. Accrued dividends on
AMPS are included in the value of AMPS on the Fund's statement of assets
and liabilities.
The AMPS 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 AMPS 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 AMPS as defined in the Fund's by-laws.
If the dividends on the AMPS shall remain unpaid in an amount equal to
two full years' dividends, the holders of the AMPS, as a class, have the
right to elect a majority of the Board of Trustees. In general, the
holders of the AMPS and the common shareholders have equal voting rights
of one vote per share, except that the holders of the AMPS, 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 AMPS and common shares. The AMPS have a liquidation
preference of $100,000 per class, plus accumulated and unpaid dividends.
The Fund is required to maintain certain asset coverage with respect to
the AMPS, as defined in the Fund's by-laws.
Use of estimates
The preparation of these financial statements, in accordance with
accounting principles generally accepted in the United States of America,
incorporates estimates made by management in determining the reported
amount of assets, liabilities, revenues and expenses of the Fund. Actual
results could differ from these estimates.
NOTE B
Management fee and transactions with affiliates and others
The Fund has an investment management contract with John Hancock
Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley
Financial Group, LLC. Under the investment management contract, the Fund
pays a monthly management fee to the Adviser at an annual rate of 0.80%
of the Fund's average weekly net assets plus the value attributable to
the AMPS.
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 approximately 0.15% of
the Fund's average weekly net assets plus the value attributable to the
AMPS.
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.
NOTE C
Fund common share transactions
This listing illustrates the number of Fund's common shares reinvested,
reclassification of the Fund's capital accounts and the number of common
shares outstanding at the beginning and end of the last two periods,
along with the corresponding dollar value.
YEAR ENDED 6-30-02 PERIOD ENDED 12-31-02 1
SHARES AMOUNT SHARES AMOUNT
Beginning of period 9,885,027 $141,701,513 9,899,636 $141,805,115
Distributions reinvested 14,609 212,653 21,123 268,085
Reclassification of
capital accounts -- (109,051) -- --
End of period 9,899,636 $141,805,115 9,920,759 $142,073,200
1 Semiannual period from 7-1-02 through 12-31-02. Unaudited.
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 December 31, 2002, aggregated $2,224,730 and $2,461,919,
respectively.
The cost of investments owned on December 31, 2002, including short-term
investments, for federal income tax purposes was $213,926,048. Gross
unrealized appreciation and depreciation of investments aggregated
$8,031,572 and $30,942,400, respectively, resulting in net unrealized
depreciation of $22,910,828. 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.
INVESTMENT OBJECTIVE AND POLICY
The Fund's investment objective is to provide a high current income,
consistent with modest growth of capital. The Fund seeks to achieve its
investment objective by investing in preferred stocks that, in the
opinion of the Adviser, may be undervalued relative to similar
securities in the marketplace.
The Fund's non-fundamental investment policy, with respect to the
quality of ratings of its portfolio investments, was changed by a vote
of the Fund's Trustees on September 13, 1994. The new policy, which
became effective October 15, 1994, stipulates that preferred stocks and
debt obligations in which the Fund will invest will be rated investment
grade (at least "BBB" by S&P or "Baa" by Moody's) at the time of
investment or will be preferred stocks of issuers of investment grade
senior debt, some of which may have speculative characteristics, or, if
not rated, will be of comparable quality as determined by the Adviser.
The Fund will invest in common stocks of issuers whose senior debt is
rated investment grade or, in the case of issuers that have no rated
senior debt outstanding, whose senior debt is considered by the Adviser
to be of comparable quality.
On November 20, 2001, the Fund's Trustees approved the following
investment policy investment restriction change, effective December 15,
2001. Under normal circumstances, the Fund will invest at least 80% of
its assets in dividend-paying securities. The "Assets" are defined as
net assets including the liquidation preference amount of the AMPS plus
borrowings for investment purposes. The Fund will notify shareholders at
least 60 days prior to any change in this 80% investment policy.
In November 2002, the Board of Trustees adopted several amendments to the
Fund's by-laws, including provisions relating to the calling of a special
meeting and requiring advance notice of shareholder proposals or nominees
for Trustee. The advance notice provisions in the by-laws require
shareholders to notify the Fund in writing of any proposal which they
intend to present at an annual meeting of shareholders, including any
nominations for Trustee, between 90 and 120 days prior to the first
anniversary of the mailing date of the notice from the prior year's
annual meeting of shareholders. The notification must be in the form
prescribed by the by-laws. The advance notice provisions provide the Fund
and its Trustees with the opportunity to thoughtfully consider and
address the matters proposed before the Fund prepares and mails its proxy
statement to shareholders. Other amendments set forth the procedures,
which must be followed in order for a shareholder to call a special
meeting of shareholders. Please contact the Secretary of the Fund for
additional information about the advance notice requirements or the other
amendments to the by-laws.
DIVIDEND REINVESTMENT PLAN
The Fund offers its shareholders a Dividend Reinvestment Plan (the
"Plan"), which offers the opportunity to earn compounded yields. Each
holder of common shares 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 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, 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. 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, except for
certain brokerage commissions, as described above.
Participants in the Plan may withdraw from the Plan at any time by
contacting the Plan Agent by telephone, in writing or by visiting the
Plan Agent's Web site at www.melloninvestor.com. Such withdrawal will be
effective immediately if received not less than ten days prior to a
dividend record date; otherwise, it will be effective for all subsequent
dividend record dates. When a participant withdraws from the Plan or
upon termination of the Plan, as provided below, certificates for whole
common shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a share
credited to such account.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the
accounts, including information needed by the shareholders for personal
and tax records. The Plan Agent will hold common shares in the account
of each Plan participant in non-certificated form in the name of the
participant. Proxy material relating to the 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.
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FOR YOUR
INFORMATION
TRUSTEES
James F. Carlin*
William H. Cunningham
John M. DeCiccio
Ronald R. Dion
Maureen R. Ford
Charles L. Ladner
Patti McGill Peterson
Dr. John A. Moore
Steven R. Pruchansky*
Lt. Gen. Norman H. Smith, USMC (Ret.)
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Maureen R. Ford
Chairman, President
and Chief Executive Officer
William L. Braman
Executive Vice President
and Chief Investment Officer
Richard A. Brown
Senior Vice President
and Chief Financial Officer
Susan S. Newton
Senior Vice President and Secretary
William H. King
Vice President and Treasurer
Thomas H. Connors
Vice President and Compliance Officer
INVESTMENT ADVISER
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
The Bank of New York
One Wall Street
New York, New York 10286
TRANSFER AGENT FOR COMMON SHAREHOLDERS
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
TRANSFER AGENT FOR AMPS
Bankers Trust Company
4 Albany Street
New York, New York 10005
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
STOCK SYMBOL
Listed New York Stock Exchange:
DIV
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
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
1-800-852-0218
1-800-843-0090
1-800-231-5469 (TDD)
www.jhfunds.com
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
P30SA 12/02
2/03