ITEM 1. REPORT TO STOCKHOLDERS.
--------------------------------------------------------------------------------
John Hancock
Preferred
INCOME FUND
------
ANNUAL
REPORT
------
7.31.03
John Hancock [LOGO]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[A photo of Maureen Ford Goldfarb, Chairman and Chief Executive Officer, flush
left next to first paragraph.]
--------------------------------------------------------------------------------
Table of contents
------------------------------
Your fund at a glance
page 1
------------------------------
Managers' report
page 2
------------------------------
Fund's investments
page 6
------------------------------
Financial statements
page 12
------------------------------
Trustees & officers
page 25
------------------------------
For your information
page 29
------------------------------
Dear Fellow Shareholders,
The stock market made a strong recovery in the first half of 2003. Historically
low interest rates, improving corporate earnings and government stimulus in the
form of tax cuts gave investors hope that the economy would soon begin to
strengthen. The market's move up began in April and the breadth of the rally was
enormous. As a result, the major indexes were able to wipe out their
first-quarter losses and post solid gains for the first seven months of the
year. With technology leading the way, the tech-heavy Nasdaq Composite Index
rose 29.91% through July, while the Dow Jones Industrial Average was up 12.25%
and the Standard & Poor's 500 Index returned 13.72%. With falling interest
rates, bonds also did well, although they began to reverse course in July.
High-yield bonds led the pack, returning 17.18% through July, as measured by the
Lehman High Yield Index.
After the jarring stock-market losses of the last three years, it's a welcome
relief for investors to be reminded that the market is indeed cyclical, and does
move up - not just down. And mutual fund investors finally liked what they saw
in their second-quarter statements: positive results. With the exception of bear
funds, which bet on the market going down, every fund category tracked by
Morningstar, Inc. and Lipper, Inc. posted double-digit gains in the second
quarter.
Whether this rally can be sustained depends in large part on whether the economy
actually does rebound, and by how much, and how corporate earnings fare. It will
also depend on how soon a lot of the investors still sitting on the sidelines
decide to get back into the stock market.
No matter what happens next, the dramatic reversal in the stock market's
fortunes, and other economic improvements, could be signals that it's time for
investors to review their portfolios with their investment professionals to make
sure they are well positioned to meet their long-term investment objectives.
Sincerely,
/s/Maureen Ford Goldfarb
------------------------
Maureen Ford Goldfarb,
Chairman and Chief Executive Officer
This commentary reflects the chairman's views as of July 31, 2003. They are
subject to change at any time.
-----------
YOUR FUND
AT A GLANCE
-----------
The Fund seeks to provide a high level of current income, consistent with
preservation of capital, by investing in a diversified portfolio of securities
that, in the opinion of the Adviser, may be undervalued relative to similar
securities in the marketplace. Under normal market conditions, the Fund invests
at least 80% of its assets in preferred stocks and other preferred securities.
Over the last eleven months
[] Preferred stocks performed well as interest rates fell and dividend tax cuts
loomed.
[] Utility common stocks posted a second-half rally as demand strengthened.
[] The Fund benefited from good security selection.
--------------------------------------------------------------------------------
[Bar chart with heading "John Hancock Preferred Income Fund". Under the heading
is a note that reads "Fund performance from inception August 27, 2002 through
July 31, 2003." The chart is scaled in increments of 7% with 0% at the bottom
and 14% at the top. The first bar represents the 13.46% total return for John
Hancock Preferred Income Fund. A note below the chart reads "The total return
for the Fund is at net asset value with all distributions reinvested and
assuming a purchase at the offering price of $25.00 per share less the $1.125
per share sales load on the inception date, and a sale at the net asset value on
the last day of the period."]
--------------------------------------------------------------------------------
Top 10 issuers
2.7% DPL, Inc.
2.7% Shaw Communications, Inc.
2.5% Interstate Power & Light Co.
2.4% General Motors Corp.
2.4% Nexen, Inc.
2.0% AT&T Capital Corp.
1.9% KeySpan Corp.
1.9% Public Storage, Inc.
1.8% J.P. Morgan Chase Capital X
1.5% ING Groep N.V.
As a percentage of net assets plus the value of preferred shares on
July 31, 2003.
1
BY GREGORY K. PHELPS AND MARK T. MALONEY, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Preferred Income
Fund
---------
MANAGERS'
REPORT
---------
Preferred stocks have performed well amid mostly favorable conditions from the
inception of John Hancock Preferred Income Fund on August 27, 2002, through July
31, 2003. Much of what was behind the preferred-stock rally was action by the
Federal Reserve Board, which lowered interest rates on two separate occasions
during the year. Also boosting preferred stocks was demand from income-seeking
individual investors and income-oriented mutual funds looking for significantly
higher yields than what companies paid on their bonds and common stocks. The
yields on many preferred stocks - which generally ranged from 6% to 7.5% -
continued to outstrip 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 advance of, and in response to, President Bush's dividend
tax-cut package, which was passed in June. The final month of the Fund's fiscal
year saw a dramatic rise in interest rates and bond yields that tempered an
otherwise favorable backdrop for fixed-income-oriented investments, including
preferreds. That said, rising interest rates offered a silver lining, providing
us an opportunity to add preferred stocks we liked at more reasonable levels
than had existed in prior months.
"Preferred stocks have performed well amid mostly favorable conditions from the
inception of John Hancock Preferred Income Fund..."
FUND PERFORMANCE
From its inception on August 27, 2002, through July 31, 2003, John Hancock
Preferred Income Fund returned 13.46% at net asset value (with all distributions
reinvested and assuming a purchase at the offering price of $25.00 per share
less the $1.125 per share sales load on the inception date, and a sale at the
net asset value on the last day of the period). Over the same period, the
2
--------------------------------------------------------------------------------
[Photos of Greg Phelps and Mark Maloney flush right next to first paragraph.]
--------------------------------------------------------------------------------
average income and preferred stock closed-end fund returned 13.07%, according to
Lipper, Inc., and the Dow Jones Utility Average - which tracks the performance
of 15 electric and natural gas utilities - returned 1.24%. The broad market, as
measured by the Standard & Poor's 500 Index, returned 9.92%.
UTILITIES SHINE
Preferred stocks issued by utility companies were some of the Fund's best
performers during the period. When the Fund began operations in 2002, utility
stocks remained under pressure, mired in the remnants of the Enron debacle. We
took advantage of that weakness by adding companies we liked at attractive
prices. That strategy began to pay off by early 2003, when utility stocks began
an encouraging rally that extended through the end of the period. A return of
investor confidence in utilities was set off by a growing sense that the sector
had become undervalued relative to the market as a whole and relative to its
historic value. Dividend tax relief also helped. Utilities historically have
offered consistently high dividends, positioning them to benefit once tax relief
was enacted. Furthermore, investors liked the fact that many utility companies
had begun to clean up their balance sheets, renewing or extending financing and
ridding themselves of money-losing unregulated subsidiaries - such as energy
trading - that caused them pain in the post-Enron environment.
"Preferred stocks issued by utility companies were some of the Fund's best
performers..."
One of our best-performing holdings in the utilities category was Dominion
Resources. It benefited from a combination of factors including increased
profitability in its oil and natural gas operations as energy prices remained at
sustained high levels. The company also enjoyed strong performance in its
regulated electric and gas utility operations. Public Service Enterprise
3
--------------------------------------------------------------------------------
[Table at top left-hand side of page entitled "Top five industry groups1." The
first listing is Utilities 56%, the second is Banks-United States 8%, the third
Finance 5%, the fourth Oil & gas 5%, and the fifth REIT 3%.]
--------------------------------------------------------------------------------
Group, another of our largest utility holdings, also performed well. It
benefited from rising electricity prices during a colder-than-normal winter in
its service area during the fourth quarter of 2002 and the first quarter of
2003. We also saw good returns from Cinergy Corp., a low-cost provider of
coal-fueled energy, whose focus on cost-cutting aided the company's better
financial results.
Some of our larger holdings in the financial services arena also topped our
best-performers list. J.P. Morgan, for example, benefited from an increase in
growth in the private banking business, as well as in their market share in
underwriting stock and bond offerings. Merrill Lynch also performed well, thanks
to its strong credit rating compared with its brokerage services group peers,
--------------------------------------------------------------------------------
[Pie chart in middle of page with heading "Portfolio diversification1" The chart
is divided into five sections (from top to left): Preferred stocks 82%, Capital
preferred securities 7%, Corporate bonds 3%, Short-term investments 4%, and
Common stocks 4%.]
--------------------------------------------------------------------------------
as well as its success in diversifying across a broad range of financial
services and investor categories.
In contrast, our holdings in TECO Energy Inc. were a disappointment. The
company's credit rating was downgraded in response to its unsuccessful
investment in non-regulated gas-fired electric generating plants. Despite this
development, we continued to hold onto our stake in TECO because we believe
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 Dominion Resources followed by
an up arrow with the phrase "High energy prices help boost profits." The second
listing is J.P. Morgan followed by an up arrow with the phrase "Uptick in
high-net-worth client/security underwriting." The third listing is TECO Energy
followed by a down arrow with the phrase "Credit rating downgrade fosters
concern over company's prospects."]
--------------------------------------------------------------------------------
that most of the pain associated with the company's disappointing investment is
behind it. In addition, it has very solid regulated electric and gas utilities
in Florida and good longer-term prospects given its above-average customer
growth rate and supportive regulatory environment.
OUTLOOK
For the balance of 2003, we remain optimistic about the outlook for preferred
and utility common stocks. Much of our optimism stems from our macroeconomic
outlook, which calls for a continually sluggish economy coupled with sustained
low interest rates, which should continue to prompt strong demand for relatively
high-yielding preferred and utility common stocks. In our view, the steep
increase in interest rates and bond yields that occurred from about mid-June
through the end of July was more a reaction to technical factors in the bond
markets than it was anticipation of a stronger economy and inflation. We're also
heartened by the fact that the dividend tax relief plan enacted in June also
could help boost demand for many stocks that pay high dividends.
"For the balance of 2003, we remain optimistic about the outlook for preferred
and utility common stocks."
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. The team's statements reflect
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.
The Fund normally will invest at least 25% of its managed assets in securities
of companies in the utilities industry. Such an investment concentration makes
the Fund more susceptible than a broader diversified fund to factors adversely
affecting the utilities industry. Sector investing is subject to greater risks
than the market as a whole.
1 As a percentage of the Fund's portfolio on July 31, 2003.
5
FINANCIAL STATEMENTS
-----------
FUND'S
INVESTMENTS
-----------
Securities owned by the Fund on July 31, 2003
This schedule is divided into five main categories: common stocks, preferred
stocks, capital preferred securities, corporate bonds and short-term
investments. The common stocks, preferred stocks, capital preferred securities
and corporate bonds are further broken down by industry group. Short-term
investments, which represent the Fund's cash position, are listed last.
SHARES ISSUER, DESCRIPTION VALUE
-----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 5.48% $35,384,175
-----------------------------------------------------------------------------------------------------------------------
(Cost $33,789,140)
Utilities 5.48% 35,384,175
236,100 Alliant Energy Corp. 4,795,191
150,000 Duke Energy Corp. 2,632,500
560,000 NiSource, Inc. 10,808,000
271,600 Peoples Energy Corp. 11,132,884
20,000 Progress Energy, Inc. 814,800
220,000 Scottish Power Plc, American Depositary Receipts
(United Kingdom) 5,200,800
-----------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 116.07% $749,251,808
-----------------------------------------------------------------------------------------------------------------------
(Cost $731,300,333)
Agricultural Operations 1.97% 12,727,000
143,000 Ocean Spray Cranberries, Inc., 6.25%, Ser A (R) 12,727,000
Automobiles/Trucks 3.69% 23,823,238
50,000 Ford Motor Co., 7.50% 1,185,000
89,000 General Motors Corp., 7.25% 2,200,080
378,700 General Motors Corp., 7.25% 9,308,446
254,300 General Motors Corp., 7.25% 6,128,630
134,325 General Motors Corp., 7.375% 3,307,082
70,000 General Motors Corp., 7.375% 1,694,000
Banks - Foreign 3.89% 25,092,151
25,000 Abbey National Plc, 7.00% (United Kingdom) 631,750
32,000 Abbey National Plc, 7.25% (United Kingdom) 824,960
See notes to
financial statements.
6
SHARES ISSUER, DESCRIPTION VALUE
Banks - Foreign (continued)
350,000 Abbey National Plc, 7.375% (United Kingdom) $9,208,500
150,000 ABN AMRO Capital Funding Trust V, 5.90% 3,486,000
475,900 Royal Bank of Scotland Group Plc, 5.75%,
Ser B (United Kingdom) 10,940,941
Banks - United States 10.16% 65,564,106
25,000 BAC Capital Trust IV, 5.875% 607,500
20,500 Bank One Capital Trust V, 8.00% 551,860
55,500 Bank One Capital Trust VI, 7.20% 1,429,125
40,000 BNY Capital V, 5.95%, Ser F 978,400
71,000 Chase Capital VII, 7.00%, Ser G 1,792,750
171,400 Comerica Capital Trust I, 7.60% 4,555,812
292,500 Fleet Capital Trust VII, 7.20% 7,499,700
454,750 Fleet Capital Trust VIII, 7.20% 11,673,433
61,000 J.P. Morgan Chase Capital IX, 7.50% 1,586,000
577,100 J.P. Morgan Chase Capital X, 7.00%, Ser J 14,802,615
30,000 J.P. Morgan Chase Capital XI, 5.875% 698,100
28,900 NAB Exchangeable Preferred Trust, 8.00% 731,170
80,300 National Commerce Capital Trust II, 7.70% 2,139,995
46,856 Regions Financing Trust I, 8.00% 1,251,055
327,100 USB Capital III, 7.75% 8,468,619
165,700 USB Capital IV, 7.35% 4,250,205
62,199 USB Capital V, 7.25% 1,577,367
40,000 Wells Fargo Capital Trust VII, 5.85% 970,400
Broker Services 3.68% 23,748,778
93,400 Bear Stearns Capital Trust II, 7.50% 2,363,020
40,600 Bear Stearns Capital Trust III, 7.80% 1,072,652
175,600 Lehman Brothers Holdings, Inc., 5.94%,
Depositary Shares, Ser C 8,964,380
85,200 Lehman Brothers Holdings Capital Trust II,
7.875%, Ser J 2,203,272
204,500 Merrill Lynch & Co., Inc., 9.00%, Depositary Shares,
Ser A 5,726,000
49,452 Merrill Lynch Preferred Capital Trust IV, 7.12% 1,273,389
82,700 Merrill Lynch Preferred Capital Trust V, 7.28% 2,146,065
Diversified Operations 0.96% 6,223,092
231,600 Grand Metropolitan Delaware, L.P., 9.42%, Ser A 6,223,092
Finance 7.33% 47,322,757
418,328 AT&T Capital Corp., 8.125% 10,558,599
322,600 AT&T Capital Corp., 8.25% 8,168,232
67,000 Citigroup Capital VII, 7.125% 1,746,690
50,000 Citigroup Capital IX, 6.00% 1,241,000
315,600 Ford Motor Credit Co., 7.60% 7,968,900
79,650 Household Finance Corp., 6.875% 1,991,250
240,200 Morgan Stanley Capital Trust II, 7.25% 6,141,914
47,000 Morgan Stanley Capital Trust IV, 6.25% 1,141,160
317,000 Morgan Stanley Capital Trust V, 5.75% 7,608,000
30,208 Transamerica Finance Corp., 7.10% 757,012
See notes to
financial statements.
7
SHARES ISSUER, DESCRIPTION VALUE
Insurance 3.05% $19,694,480
27,200 Great-West Life & Annuity Insurance Capital I,
7.25%, Ser A 692,240
552,000 ING Groep N.V., 7.05% (Netherlands) 14,076,000
186,600 PLC Capital Trust IV, 7.25% 4,926,240
Leasing Companies 0.08% 530,100
34,200 AMERCO, 8.50%, Ser A 530,100
Leisure 0.33% 2,119,881
83,100 Hilton Hotels Corp., 8.00% 2,119,881
Media 4.48% 28,959,401
173,044 Newscorp Overseas Ltd., 8.625%, Ser A (Cayman Islands) 4,386,665
328,418 Shaw Communications, Inc., 8.45%, Ser A (Canada) 8,144,766
665,100 Shaw Communications, Inc., 8.50% (Canada) 16,427,970
Oil & Gas 6.41% 41,348,827
43,800 EnCana Corp., 9.50% 1,171,650
352,704 Nexen, Inc., 9.375%, Ser 1 (Canada) 9,110,344
517,300 Nexen, Inc., 9.75% (Canada) 13,113,555
538,600 OXY Capital Trust I, 8.16% 13,685,826
97,300 Talisman Energy, Inc., 8.90% (Canada) 2,504,502
69,000 Talisman Energy, Inc., 9.00% (Canada) 1,762,950
REIT 4.69% 30,249,555
251,830 Duke Realty Corp., 7.99%, Ser B 12,693,819
497,643 Public Storage, Inc., 7.50%, Depositary Shares, Ser V 13,187,540
129,390 Public Storage, Inc., 8.00%, Depositary Shares, Ser R 3,439,186
34,600 Public Storage, Inc., 8.60% 929,010
Telecommunications 1.40% 9,023,461
343,620 Telephone & Data Systems, Inc., 7.60%, Ser A 9,023,461
Utilities 63.95% 412,824,981
69,700 ALLETE Capital I, 8.05% 1,781,532
480,000 Ameren Corp., 9.75%, Conv 13,593,600
200,000 American Electric Power Co., Inc., 9.25%, Conv 9,280,000
512,507 Aquila, Inc., 7.875% 9,496,755
30,700 Atlantic Capital II, 7.375%, Ser C 774,254
40,000 Baltimore Gas & Electric Co., 6.99%, Ser 1995 4,100,000
174,000 BGE Capital Trust I, 7.16% 4,376,100
15,143 Boston Edison Co., 4.78% 1,250,812
230,000 Cinergy Corp., 9.50%, Conv 13,558,500
116,400 Coastal Finance I, 8.375% 2,316,360
42,800 Consumers Energy Co. Financing I, 8.36% 1,082,840
136,200 Consumers Energy Co. Financing II, 8.20% 3,439,050
115,200 Consumers Energy Co. Financing III, 9.25% 3,012,480
117,600 Consumers Energy Co. Financing IV, 9.00% 3,104,640
210,435 Detroit Edison Co., 7.375% 5,368,197
74,600 Detroit Edison Co., 7.54% 1,879,920
253,476 Dominion CNG Capital Trust I, 7.80% 6,691,766
100,000 Dominion Resources, Inc., 9.50%, Conv 5,615,000
25,400 DQE Capital Corp., 8.375% 668,782
220,000 DTE Energy Co., 8.75%, Conv 5,750,800
85,700 DTE Energy Trust I, 7.80% 2,228,200
See notes to
financial statements.
8
SHARES ISSUER, DESCRIPTION VALUE
Utilities (continued)
140,400 Duke Capital Financing Trust II, 7.375%, Ser U $3,522,636
349,100 Duke Capital Financing Trust III, 8.375% 8,996,307
242,000 Duke Energy Capital Trust I, 7.20%, Ser Q 6,071,780
142,439 Duke Energy Capital Trust II, 7.20% 3,643,590
220,000 Duke Energy Corp., 8.25%, Conv 3,040,400
34,400 Duquesne Light, 7.375%, Ser E 859,656
231,500 El Paso Tennessee Pipeline Co., 8.25%, Ser A 9,723,000
417,200 Energy East Capital Trust I, 8.25% 11,085,004
57,700 Entergy Arkansas Capital I, 8.50%, Ser A 1,465,580
70,400 Entergy Gulf States Capital I, 8.75%, Ser A 1,788,160
346,000 Entergy Mississippi, Inc., 7.25% 9,220,900
391,600 Enterprise Capital Trust I, 7.44%, Ser A 9,790,000
190,000 Enterprise Capital Trust III, 7.25%, Ser C 4,740,500
464,585 FPC Capital I, 7.10%, Ser A 11,856,209
120,000 FPL Group, Inc., 8.00%, Conv 6,510,000
37,400 HECO Capital Trust I, 8.05% 942,854
128,883 HECO Capital Trust II, 7.30%, Ser 1998 3,241,407
50,000 Idaho Power Co., 7.07% 5,193,750
36,547 Indiana Michigan Power Co., 6.875% 3,674,801
700,000 Interstate Power & Light Co., 8.375%, Ser B 23,310,000
145,900 KCPL Financing I, 8.30% 3,720,450
335,000 KeySpan Corp., 8.75%, Conv 17,604,250
94,400 MCN Financing II, 8.625% 2,429,856
168,400 Met-Ed Capital Trust, 7.35% 4,302,620
45,000 Monongahela Power Co., $7.73, Ser L 4,005,000
235,000 Northern States Power Co., 8.00% 6,375,550
234,400 OGE Energy Capital Trust I, 8.375% 6,138,936
31,000 ONEOK, Inc., 8.50%, Conv 902,100
67,500 Penelec Capital Trust, 7.34% 1,738,125
91,700 Pennsylvania Power Co., 7.75% 9,301,819
108,400 Potomac Electric Power Co. Trust I, 7.375% 2,744,688
200,000 PSEG Funding Trust II, 8.75% 5,394,000
399,347 PSO Capital I, 8.00%, Ser A 10,071,531
7,900 Public Service Electric & Gas Co., 4.18%, Ser B 569,195
170,000 Public Service Enterprise Group, Inc., 10.25%, Conv 9,928,000
297,000 Puget Energy, Inc., 7.45%, Ser II 7,722,000
103,900 Puget Sound Energy Capital Trust II, 8.40% 2,784,520
404,600 SEMCO Capital Trust I, 10.25% 10,640,980
39,800 Southern Co. Capital Trust VI, 7.125% 1,044,352
12,000 Southern Union Co., 5.75%, Conv 614,640
264,100 Southwestern Public Service, 7.85%, Ser A 6,700,217
330,000 SWEPCO Capital I, 7.875%, Ser A 8,322,600
57,600 TDS Capital I, 8.50% 1,457,280
452,000 TDS Capital II, 8.04% 11,390,400
469,800 TECO Capital Trust I, 8.50% 12,261,780
500,000 TECO Energy, Inc., 9.50%, Conv 8,855,000
32,800 TransCanada Pipelines Ltd., 8.25% (Canada) 834,760
200,000 TXU Corp., 8.125%, Conv 6,590,000
410,000 Virginia Power Capital Trust, 7.375% 10,742,000
306,500 WEC Capital Trust I, 6.85% 7,742,190
See notes to
financial statements.
9
SHARES ISSUER, DESCRIPTION VALUE
Utilities (continued)
37,400 Western Resources Capital I, 7.875%, Ser A $927,520
36,900 Western Resources Capital II, 8.50%, Ser B 922,500
ISSUER, DESCRIPTION, PAR VALUE
MATURITY DATE (000S OMITTED) VALUE
-----------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED SECURITIES 9.45% $60,992,320
-----------------------------------------------------------------------------------------------------------------------
(Cost $55,846,326)
Banks - Foreign 0.76% 4,929,440
Lloyds TSB Bank Plc,
Sub Bond Tier I (United Kingdom) 11-29-49 $5,000 4,929,440
Banks - United States 1.10% 7,096,115
Summit Capital Trust I,
Gtd Cap Trust Pass-Thru Security Ser B 03-15-27 6,500 7,096,115
Telecommunications 1.02% 6,597,750
TCI Communications Financing Trust III,
Gtd Cap Security 03-31-27 5,700 6,597,750
Utilities 6.57% 42,369,015
DPL, Inc.,
Gtd Cap Security 09-01-31 24,000 25,260,000
KN Capital Trust I,
Gtd Cap Trust Pass-Thru Security Ser B 04-15-27 11,500 12,964,295
KN Capital Trust III,
Gtd Cap Security 04-15-28 4,000 4,144,720
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000S OMITTED) VALUE
-----------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 4.15% $26,759,476
-----------------------------------------------------------------------------------------------------------------------
(Cost $26,493,544)
Banks - United States 0.34% 2,178,470
Capital One Bank,
Sr Note 06-15-05 8.25% BBB- 2,000 2,178,470
Utilities 3.81% 24,581,006
Black Hills Corp.,
Note 05-15-13 6.50 BBB- 5,000 4,697,400
Entergy Gulf States, Inc.,
1st Mtg Bond 07-01-33 (R) 6.20 BBB- 5,000 4,419,425
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.75 BB- 9,623 10,392,451
NiSource Finance Corp.,
Gtd Sr Note 11-15-03 7.50 BBB 5,000 5,071,730
See notes to
financial statements.
10
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000S OMITTED) VALUE
-----------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 5.86% $37,800,000
-----------------------------------------------------------------------------------------------------------------------
(Cost $37,800,000)
Government - U.S. Agencies 5.86%
Federal National Mortgage Assn.,
Disc Note 08-01-03 1.00% AAA $37,800 37,800,000
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 141.01% $910,187,779
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES, NET (41.01%) ($264,694,933)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS 100.00% $645,492,846
-----------------------------------------------------------------------------------------------------------------------
* Credit ratings are unaudited and are rated by Moody's Investors Service or
John Hancock Advisers, LLC, where Standard & Poor's ratings are not available.
(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 $17,146,425 or 2.66% of net assets as of July 31, 2003.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, the security is
U.S.-dollar-denominated.
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.
11
FINANCIAL STATEMENTS
-----------
ASSETS AND
LIABILITIES
-----------
July 31, 2003
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 $885,229,343) $910,187,779
Cash 63,254
Cash segregated for futures contracts 500,500
Receivable for investments sold 9,007,267
Dividends and interest receivable 3,226,926
Unrealized appreciation of swap contracts 3,936,437
Variation margin receivable 597,188
Other assets 40,708
Total assets 927,560,059
--------------------------------------------------------------------------------
LIABILITIES
--------------------------------------------------------------------------------
Payable for investments purchased 1,706,250
Payable for swap contracts 136,636
Payable to affiliates
Management fee 14,025
Other 23,943
Other payables and accrued expenses 172,793
Total liabilities 2,053,647
Auction Preferred Shares (APS), at value, unlimited number of
shares of beneficial interest authorized with no par value,
11,200 shares issued, liquidation preference of $25,000
per share 280,013,566
--------------------------------------------------------------------------------
NET ASSETS
--------------------------------------------------------------------------------
Common shares capital paid-in 608,692,402
Accumulated net realized gain on investments
and financial futures contracts 1,614,366
Net unrealized appreciation of investments,
financial futures contracts and swap contracts 31,973,603
Accumulated net investment income 3,212,475
Net assets applicable to common shares $645,492,846
--------------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARE
--------------------------------------------------------------------------------
Based on 25,661,053 shares of beneficial interest
outstanding - unlimited number of shares
authorized with no par value $25.15
See notes to
financial statements.
12
FINANCIAL STATEMENTS
----------
OPERATIONS
----------
For the period ended July 31, 2003 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 $49,649,791
Interest 7,247,156
Total investment income 56,896,947
--------------------------------------------------------------------------------
EXPENSES
--------------------------------------------------------------------------------
Investment management fee 5,840,055
APS auction fee 476,029
Accounting and legal services fee 233,602
Federal excise tax 150,459
Custodian fee 142,427
Auditing fee 58,200
Trustees' fee 56,892
Organization expense 53,000
Transfer agent fee 50,434
Printing 45,398
Registration and filing fee 45,320
Miscellaneous 17,101
Legal fee 14,449
Interest expense 1,500
Total expenses 7,184,866
Less expense reductions (1,557,348)
Net expenses 5,627,518
Net investment income 51,269,429
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
Net realized gain (loss) on
Investments 3,596,394
Financial futures contracts (1,039,550)
Change in net unrealized appreciation (depreciation) of
Investments 24,958,436
Financial futures contracts 3,078,730
Swap contracts 3,936,437
Net realized and unrealized gain 34,530,447
Distributions to APS (3,051,520)
Increase in net assets from operations $82,748,356
1 Inception period from 8-27-02 through 7-31-03.
See notes to
financial statements.
13
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 inception of the Fund. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase due to the sale of common shares.
PERIOD
ENDED
7-31-03 1
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
--------------------------------------------------------------------------------
From operations
Net investment income $51,269,429
Net realized gain 2,556,844
Change in net unrealized appreciation (depreciation) 31,973,603
Distributions to APS (3,051,520)
Increase in net assets resulting from operations 82,748,356
Distributions to common shareholders
From net investment income (46,126,277)
From Fund share transactions 608,870,767
--------------------------------------------------------------------------------
NET ASSETS
--------------------------------------------------------------------------------
End of period2 $645,492,846
1 Inception period from 8-27-02 through 7-31-03.
2 Includes accumulated net investment income of $3,212,475.
See notes to
financial statements.
14
----------
FINANCIAL
HIGHLIGHTS
----------
COMMON SHARES
The Financial Highlights show how the Fund's net asset value for a share has
changed since the inception of the Fund.
PERIOD ENDED 7-31-03 1
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
--------------------------------------------------------------------------------
Net asset value, beginning of period $23.882
Net investment income3 2.02
Net realized and unrealized gain on investments 1.32
Distributions to APS (0.12)
Total from investment operations 3.22
Less distributions to common shareholders
From net investment income (1.80)
Capital charges
Offering costs related to common shares (0.02)
Offering costs and underwriting discounts related to APS (0.13)
(0.15)
Net asset value, end of period $25.15
Per share market value, end of period $24.32
Total return at market value4,5 (%) 4.78 6
--------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Net assets applicable to common shares,
end of period (in millions) $645
Ratio of expenses to average net assets7 (%) 1.00 8
Ratio of adjusted expenses to average net assets9 (%) 1.28 8
Ratio of net investment income to
average net assets10 (%) 9.11 8
Portfolio turnover (%) 20
--------------------------------------------------------------------------------
SENIOR SECURITIES
--------------------------------------------------------------------------------
Total value of APS outstanding (in millions) $280
Involuntary liquidation preference per unit (in thousands) $25
Approximate market value per unit (in thousands) $25
Asset coverage per unit11 $83,686
1 Inception period from 8-27-02 through 7-31-03.
2 Reflects the deduction of a $1.125 per share sales load.
3 Based on the average of common shares outstanding.
4 Assumes dividend reinvestment and a purchase at the offering price of $25.00
per share on the inception date and a sale at the current market price on the
last day of the period.
5 Total return would have been lower had certain expenses not been reduced
during the period shown.
6 Not annualized.
7 Ratio 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 0.72%.
8 Annualized.
9 Ratio calculated on the basis of expenses applicable to common shares
relative to the average net assets of common shares and does not take into
consideration expense reductions during the period shown. Without the exclusion
of preferred shares, the annualized adjusted ratio of expenses would have been
0.92%.
10 Ratio calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred shares,
the annualized ratio of net investment income would have been 6.59%.
11 Calculated by subtracting the Fund's total liabilities from the Fund's total
assets and dividing that amount by the number of APS outstanding as of the
applicable 1940 Act Evaluation Date, which may differ from the financial
reporting date.
See notes to
financial statements.
15
----------
NOTES TO
STATEMENTS
----------
NOTE A
Accounting policies
John Hancock Preferred Income Fund (the "Fund") is a diversified closed-end
management investment company registered under the Investment Company Act of
1940.
Significant accounting policies of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services or at fair value as
determined in good faith in accordance with procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized
cost, which approximates market value. The Fund determines the net asset value
of the common shares each business day.
Investment transactions
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are determined
on the identified cost basis.
Discount and premium on securities
The Fund accretes discount and amortizes premium from par value on securities
from either the date of issue or the date of purchase over the life of the
security.
Expenses
The majority of 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.
Organization expenses and offering costs
Expenses incurred in connection with the organization of the Fund, which
amounted to $53,000, have been borne by the Fund. Offering costs of $617,673
related to common shares and offering costs of $385,442 incurred in connection
with the preferred shares were charged to the Fund's capital paid-in.
16
Financial futures contracts
The Fund may buy and sell financial futures contracts. Buying futures tends to
increase the Fund's exposure to the underlying instrument. Selling futures tends
to decrease the Fund's exposure to the underlying instrument or hedge other
Fund's instruments. At the time the Fund enters into a financial futures
contract, it is required to deposit with its custodian a specified amount of
cash or U.S. government securities, known as "initial margin," equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price of the
board of trade or U.S. commodities exchange on which it trades. Subsequent
payments to and from the broker, known as "variation margin," are made on a
daily basis as the market price of the financial futures contract fluctuates.
Daily variation margin adjustments, arising from this "mark to market," are
recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into financial futures contracts include the possibility that there may
be an illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out financial futures positions because of position limits or limits on daily
price fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the Fund's
gains and/or losses can be affected as a result of financial futures contracts.
On July 31, 2003, the Fund had deposited $500,500 in a segregated account to
cover margin requirements on open futures contracts.
The Fund had the following open financial futures contracts on July 31, 2003:
--------------------------------------------------------------------------------
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION APPRECIATION
--------------------------------------------------------------------------------
U.S. 10-Yr Note 455 Short SEP 03 $3,078,730
--------------------------------------------------------------------------------
Interest rate swaps
The Fund may enter into swap transactions in order to hedge the value of the
Fund's portfolio against interest rate fluctuations or to enhance the Fund's
income. Interest rate swaps represent an agreement between two counterparties to
exchange cash flows based on the difference in the two interest rates, applied
to a notional principal amount for a specified period. The payment flows are
usually netted against each other, with the difference being paid by one party
to the other.
Accrued interest receivable or payable on the swap contracts is recorded daily
as interest income or as an offset to interest income. The Fund settles accrued
net receivable or payable under the swap contracts on a periodic basis. The Fund
records changes in the value of the swaps as unrealized gains or losses on swap
contracts. The Fund records realized gains or losses at the time the swap
contracts are closed out.
Swap contracts are subject to risks related to the counterparty's ability to
perform under the contract, and may decline in value if the counterparty's
creditworthiness deteriorates. The risks may arise from unanticipated movement
in interest rates. The Fund may also suffer losses if it is unable to terminate
outstanding swap contracts or reduce its exposure through offsetting
transactions.
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
17
The Fund had the following open interest rate swap contracts on July 31, 2003:
--------------------------------------------------------------------------------
RATE TYPE
--------------------------
PAYMENT
NOTIONAL PAYMENT MADE RECEIVED TERMINATION UNREALIZED
AMOUNT BY FUND BY FUND DATE APPRECIATION
--------------------------------------------------------------------------------
$70,000,000 2.56% (a) 3-month LIBOR JUN 08 $3,936,437
--------------------------------------------------------------------------------
(a) Fixed rate
federal income tax on taxable income that is distributed to shareholders.
Therefore, no federal income tax provision is required.
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend date or,
in the case of some foreign securities, on the date thereafter when the Fund
identifies the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding taxes,
which are accrued as applicable.
The Fund records distributions to common and preferred shareholders from net
investment income and net realized gains on the ex- dividend date. During the
period ended July 31, 2003, the tax character of distributions paid was as
follows: ordinary income $49,177,797.
As of July 31, 2003, the components of distributable earnings on a tax basis
included $6,737,145 of undistributed ordinary income and $1,225,035 of
undistributed long-term gain. Such distributions and distributable earnings, 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 daily management fee
to the Adviser at an annual rate of 0.75% of the Fund's average daily net assets
and the value attributable to the Auction Preferred Shares ("managed assets").
The Adviser has contractually agreed to limit the Fund's management fee to the
following: 0.55% of the Fund's average daily managed assets until the fifth
anniversary of the commencement of the Fund's operations, 0.60% of such assets
in the sixth year, 0.65% of such assets in the seventh year and 0.70% of average
daily managed assets in the eighth year. Accordingly, the reduction in the
management fee amounted to $1,557,348 for the period ended July 31, 2003. After
the eighth year the Adviser will no longer waive a portion of the management
fee.
The Fund has an agreement with the Adviser to perform necessary tax, accounting
and legal services for the Fund. The compensation for the period was at an
annual rate of 0.03% of the average managed assets of the Fund.
Ms. Maureen Ford Goldfarb and Mr. John M. DeCiccio are directors and/or officers
of the Adviser and/or its affiliates, as well as Trustees
18
of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The
unaffiliated Trustees may elect to defer for tax purposes their receipt of this
compensation under the John Hancock Group of Funds Deferred Compensation Plan.
The Fund makes investments into other John Hancock funds, as applicable, to
cover its liability for the deferred compensation. Investments to cover the
Fund's deferred compensation liability are recorded on the Fund's books as an
other asset. The deferred compensation liability and the related other asset are
always equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. The Deferred
Compensation Plan investments had no impact on the operations of the Fund.
NOTE C
Fund share transactions
Common shares
The listing illustrates the Fund's common shares sold, offering costs and
underwriting discount charged to capital paid-in, distributions reinvestments,
reclassifications of Fund's capital accounts and the number of common shares
outstanding at the end of the period, along with the corresponding dollar value.
PERIOD ENDED 7-31-031
SHARES AMOUNT
Shares sold 25,590,309 $610,968,628 2
Offering cost related to common shares - (617,673)
Offering costs and underwriting discount
related to Auction Preferred Shares - (3,185,442)
Reclassification of capital accounts - (178,365)
Distributions reinvested 70,744 1,705,254
Net increase 25,661,053 $608,692,402
1 Inception period from 8-27-02 through 7-31-03.
2 Net of $1.125 per share sales load of the initial offering price of $25.00
per share.
Auction Preferred Shares
The Fund issued a total of 11,200 Auction Preferred Shares (2,240 shares of
Series M, 2,240 shares of Series T, 2,240 shares of Series W, 2,240 shares of
Series TH and 2,240 shares of Series F) (collectively, the "APS") on October 23,
2002, in a public offering. The underwriting discount of $2,800,000 has been
charged to capital paid-in of common shares. Dividends on the APS, which accrue
daily, are cumulative at a rate that was established at the offering of the APS
and has been reset every seven days thereafter by an auction (except for the
Series W shares, for which the initial reset date was April 23, 2003, at which
time the Fund elected a Special Dividend Payment of 182 days for the subsequent
distributions). Dividend rates on APS ranged from 0.95% to 1.95% during the
period ended July 31, 2003. Accrued dividends on APS are included in the value
of APS on the Fund's Statement of Assets and Liabilities.
The APS are redeemable at the option of the Fund, at a redemption price equal to
$25,000 per share, plus accumulated and unpaid dividends on any dividend payment
date. The APS are
19
also subject to mandatory redemption at a redemption price equal to $25,000 per
share, plus accumulated and unpaid dividends, if the Fund is in default on its
asset coverage requirements with respect to the APS as defined in the Fund's
by-laws. If the dividends on the APS shall remain unpaid in an amount equal to
two full years' dividends, the holders of the APS, as a class, have the right to
elect a majority of the Board of Trustees. In general, the holders of the APS
and the common shareholders have equal voting rights of one vote per share,
except that the holders of the APS, 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 APS and common shares.
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 July 31, 2003, aggregated $2,401,749,314 and $148,332,448, respectively.
The cost of investments owned on July 31, 2003, including short-term
investments, for federal income tax purposes was $885,255,240. Gross unrealized
appreciation and depreciation of investments aggregated $38,703,575 and
$13,771,036, respectively, resulting in net unrealized appreciation of
$24,932,539. The appreciation of swap contracts for federal tax purposes was
$3,936,437. The difference between book basis and tax basis net unrealized
appreciation of investments is attributable primarily to the tax deferral of
losses on wash sales.
NOTE E
Reclassification of accounts
During the period ended July 31, 2003, the Fund reclassified amounts to reflect
a decrease in accumulated net realized gain on investments of $942,478, an
increase in accumulated net investment income of $1,120,843 and a decrease in
capital paid-in of $178,365. This represents the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
July 31, 2003. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to certain differences in the computation
of distributable income and capital gains under federal tax rules versus
accounting principles generally accepted in the United States of America, book
and tax differences in accounting for deferred compensation, federal excise tax
and non-deductible organization costs. The calculation of net investment income
in the Financial Highlights excludes these adjustments.
20
---------
AUDITORS'
REPORT
---------
Report of Deloitte & Touche LLP, Independent Auditors
To The Board of Trustees and Shareholders of John Hancock Preferred Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of John Hancock Preferred Income Fund (the "Fund")
as of July 31, 2003, and the related statements of operations, changes in net
assets and the financial highlights for the period ended July 31, 2003. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2003, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of July
31, 2003, the results of its operations, the changes in its net assets, and its
financial highlights for the period ended July 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 5, 2003
21
-----------
TAX
INFORMATION
-----------
Unaudited
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund paid during its taxable year ended July
31, 2003.
With respect to the ordinary dividends paid by the Fund for the fiscal year
ended July 31, 2003, 79.05% of the dividends qualify for the corporate
dividends-received deduction.
The Fund hereby designates the maximum amount allowable of its net taxable
income as qualified dividend income as provided in the Jobs and Growth Tax
Relief Reconciliation Act of 2003. This amount will be reflected on Form
1099-DIV for the calendar year 2003.
If the Fund paid dividends during the fiscal year end, shareholders will be
mailed a 2003 U.S. Treasury Department Form 1099-DIV in January 2004. This will
reflect the total of all distributions that are taxable for the calendar year
2003.
22
INVESTMENT
OBJECTIVE
AND POLICY
The Fund's primary objective is to provide a high level of current income,
consistent with preservation of capital. The Fund's secondary objective is to
provide growth of capital to the extent consistent with its primary objective.
The Fund seeks to achieve its objectives by investing in a diversified portfolio
of securities that, in the opinion of the Adviser, may be undervalued relative
to similar securities in the marketplace.
Under normal market conditions, the Fund invests at least: (a) 80% of its assets
in preferred stocks and other preferred securities, including convertible
preferred securities, (b) 25% of its total assets in the industries comprising
the utilities sector and (c) 80% of its total assets in preferred securities or
other fixed income securities which are rated investment grade or higher by
Moody's or Standard & Poor's at the time of investment. "Assets" are defined as
net assets including the liquidation preference of APS plus borrowing for
investment purposes.
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
23
Fund. There are no other charges to participants for reinvesting dividends or
capital gain distributions.
Participants in the Plan may withdraw from the Plan at any time by contacting
the Plan Agent by telephone, in writing or by visiting the Plan Agent's Web site
at www.melloninvestor.com. Such withdrawal will be effective immediately if
received not less than ten days prior to a dividend record date; otherwise, it
will be effective for all subsequent dividend record dates. When a participant
withdraws from the Plan or upon termination of the Plan, as provided below,
certificates for whole common shares credited to his or her account under the
Plan will be issued and a cash payment will be made for any fraction of a share
credited to such account.
The Plan Agent maintains each shareholder's account in the Plan and furnishes
monthly written confirmations of all transactions in the accounts, including
information needed by the shareholders for personal and tax records. The Plan
Agent will hold common shares in the account of each Plan participant in
non-certificated form in the name of the participant. Proxy material relating to
the 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.
24
----------
TRUSTEES
& OFFICERS
----------
This chart provides information about the Trustees and Officers who oversee your
John Hancock fund. Officers elected by the Trustees manage the day-to-day
operations of the Fund and execute policies formulated by the Trustees.
INDEPENDENT TRUSTEES
NUMBER OF
NAME, AGE TRUSTEE JOHN HANCOCK
PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN
DIRECTORSHIPS DURING PAST 5 YEARS SINCE1 BY TRUSTEE
----------------------------------------------------------------------------------------------
James F. Carlin, Born: 1940 1992 32
----------------------------------------------------------------------------------------------
Director and Treasurer, Alpha Analytical Inc. (analytical
laboratory) (since 1985); Part Owner and Treasurer, Lawrence
Carlin Insurance Agency, Inc. (since 1995); Part Owner and
Vice President, Mone Lawrence Carlin Insurance Agency, Inc.
(since 1996); Director and Treasurer, Rizzo Associates
(until 2000); Chairman and CEO, Carlin Consolidated, Inc.
(management/investments) (since 1987); Director and Partner,
Proctor Carlin & Co., Inc. (until 1999); Trustee,
Massachusetts Health and Education Tax Exempt Trust (since
1993); Director of the following: Uno Restaurant Corp.
(until 2001), Arbella Mutual (insurance) (until 2000),
HealthPlan Services, Inc. (until 1999), Flagship Healthcare,
Inc. (until 1999), Carlin Insurance Agency, Inc. (until
1999); Chairman, Massachusetts Board of Higher Education
(until 1999).
----------------------------------------------------------------------------------------------
William H. Cunningham, Born: 1944 1995 32
----------------------------------------------------------------------------------------------
Former Chancellor, University of Texas System and former
President of the University of Texas, Austin, Texas;
Chairman and CEO, IBT Technologies (until 2001); Director of
the following: The University of Texas Investment Management
Company (until 2000), Hire.com (since 2000), STC
Broadcasting, Inc. and Sunrise Television Corp. (until
2001), Symtx, Inc. (since 2001), Adorno/ Rogers Technology,
Inc. (since 2001), Pinnacle Foods Corporation (since 2001),
rateGenius (since 2001), LaQuinta Motor Inns, Inc. (hotel
management company) (until 1998), Jefferson-Pilot
Corporation (diversified life insurance company) (since
1985), New Century Equity Holdings (formerly Billing
Concepts) (until 2001), eCertain (until 2001), ClassMap.com
(until 2001), Agile Ventures (until 2001), LBJ Foundation
(until 2000), Golfsmith International, Inc. (until 2000),
Metamor Worldwide (until 2000), AskRed.com (until 2001),
Southwest Airlines (since 2000) and Introgen (since 2000);
Advisory Director, Q Investments (since 2000); Advisory
Director, Chase Bank (formerly Texas Commerce Bank-D Austin)
(since 1988), LIN Television (since 2002) and WilTel
Communications (since 2002).
25
INDEPENDENT TRUSTEES (CONTINUED)
NUMBER OF
NAME, AGE TRUSTEE JOHN HANCOCK
PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN
DIRECTORSHIPS DURING PAST 5 YEARS SINCE1 BY TRUSTEE
----------------------------------------------------------------------------------------------
Ronald R. Dion, Born: 1946 1998 32
----------------------------------------------------------------------------------------------
Chairman and Chief Executive Officer, R.M. Bradley & Co.,
Inc.; Director, The New England Council and Massachusetts
Roundtable; Trustee, North Shore Medical Center; Director,
BJ's Wholesale Club, Inc. and a corporator of the Eastern
Bank; Trustee, Emmanuel College.
----------------------------------------------------------------------------------------------
Charles L. Ladner,2 Born: 1938 1992 32
----------------------------------------------------------------------------------------------
Chairman and Trustee, Dunwoody Village, Inc. (retirement
services); Senior Vice President and Chief Financial
Officer, UGI Corporation (Public Utility Holding Company)
(retired 1998); Vice President and Director for AmeriGas,
Inc. (retired 1998); Director of AmeriGas Partners, L.P.
(until 1997) (gas distribution); Director, EnergyNorth, Inc.
(until 1995); Director, Parks and History Association (since
2001).
----------------------------------------------------------------------------------------------
Patti McGill Peterson,2 Born: 1943 2002 30
----------------------------------------------------------------------------------------------
Executive Director, Council for International Exchange of
Scholars (since 1998); Vice President, Institute of
International Education (since 1998); Senior Fellow, Cornell
Institute of Public Affairs, Cornell University (until
1997); President Emerita of Wells College and St. Lawrence
University; Director, Niagara Mohawk Power Corporation
(electric utility).
----------------------------------------------------------------------------------------------
John A. Moore,2 Born: 1939 2002 30
----------------------------------------------------------------------------------------------
President and Chief Executive Officer, Institute for
Evaluating Health Risks, (nonprofit institution) (until
2001); Senior Scientist, Sciences International (health
research) (since 1998); Principal, Hollyhouse (consulting)
(since 2000); Director, CIIT (nonprofit research) (since
2002).
----------------------------------------------------------------------------------------------
Steven Pruchansky, Born: 1944 1992 32
----------------------------------------------------------------------------------------------
Chairman and Chief Executive Officer, Mast Holdings, Inc.
(since 2000); Director and President, Mast Holdings, Inc.
(until 2000); Managing Director, JonJames, LLC (real estate)
(since 2001); Director, First Signature Bank & Trust Company
(until 1991); Director, Mast Realty Trust (until 1994);
President, Maxwell Building Corp. (until 1991).
----------------------------------------------------------------------------------------------
Norman H. Smith, Born: 1933 1992 32
----------------------------------------------------------------------------------------------
Lieutenant General, United States Marine Corps; Deputy Chief
of Staff for Manpower and Reserve Affairs, Headquarters
Marine Corps; Commanding General III Marine Expeditionary
Force/3rd Marine Division (retired 1991).
----------------------------------------------------------------------------------------------
John P. Toolan,2 Born: 1930 1993 32
----------------------------------------------------------------------------------------------
Director, The Smith Barney Muni Bond Funds, The Smith Barney
Tax-Free Money Funds, Inc., Vantage Money Market Funds
(mutual funds), The Inefficient-Market Fund, Inc.
(closed-end investment company); Chairman, Smith Barney
Trust Company of Florida (retired 1991); Director, Smith
Barney, Inc., Mutual Management Company and Smith Barney
Advisers, Inc. (investment advisers) (retired 1991); Senior
Executive Vice President, Director and member of the
Executive Committee, Smith Barney, Harris Upham & Co.,
Incorporated (investment bankers) (until 1991).
26
INTERESTED TRUSTEES 3
NUMBER OF
NAME, AGE TRUSTEE JOHN HANCOCK
PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN
DIRECTORSHIPS DURING PAST 5 YEARS SINCE1 BY TRUSTEE
----------------------------------------------------------------------------------------------
John M. DeCiccio, Born: 1948 2001 54
----------------------------------------------------------------------------------------------
Trustee
Executive Vice President and Chief Investment Officer, John
Hancock Financial Services, Inc.; Director, Executive Vice
President and Chief Investment Officer, John Hancock Life
Insurance Company; Chairman of the Committee of Finance of
John Hancock Life Insurance Company; Director, John Hancock
Subsidiaries, LLC (Subsidiaries, LLC), Hancock Natural
Resource Group, Independence Investment LLC, Declaration
Management Research LLC, John Hancock Advisers, LLC (the
"Adviser"), The Berkeley Financial Group, LLC ("The Berkeley
Group"), John Hancock Funds, LLC ("John Hancock Funds") and
Massachusetts Business Develop- ment Corporation; Director,
John Hancock Insurance Agency, Inc. ("Insurance Agency,
Inc.") (until 1999).
----------------------------------------------------------------------------------------------
Maureen Ford Goldfarb, Born: 1955 2000 54
----------------------------------------------------------------------------------------------
Trustee, Chairman, President and Chief Executive Officer
Executive Vice President, John Hancock Financial Services,
Inc., John Hancock Life Insurance Company; Chairman,
Director, President and Chief Executive Officer, the Adviser
and The Berkeley Group; Chairman, Director, President and
Chief Executive Officer, John Hancock Funds; Chairman,
Director and Chief Executive Officer, Sovereign Asset
Management Corporation ("SAMCorp."); Director, Independence
Investment LLC, Subsidiaries, LLC, and Signature Services;
Senior Vice President, MassMutual Insurance Co. (until
1999).
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NAME, AGE
POSITION(S) HELD WITH FUND OFFICER
PRINCIPAL OCCUPATION(S) AND OF FUND
DIRECTORSHIPS DURING PAST 5 YEARS SINCE
----------------------------------------------------------------------------------------------
Richard A. Brown, Born: 1949 2002
----------------------------------------------------------------------------------------------
Senior Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and
Treasurer, the Adviser, John Hancock Funds, and The Berkeley
Group; Second Vice President and Senior Associate
Controller, Corporate Tax Department, John Hancock Financial
Services, Inc. (until 2001).
----------------------------------------------------------------------------------------------
Thomas H. Connors, Born: 1959 2002
----------------------------------------------------------------------------------------------
Vice President and Compliance Officer
Vice President and Compliance Officer, the Adviser and each
of the John Hancock funds; Vice President, John Hancock
Funds.
----------------------------------------------------------------------------------------------
William H. King, Born: 1952 2002
----------------------------------------------------------------------------------------------
Vice President and Treasurer
Vice President and Assistant Treasurer, the Adviser; Vice
President and Treasurer of each of the John Hancock funds;
Assistant Treasurer of each of the John Hancock funds (until
2001).
27
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES (CONTINUED)
NAME, AGE
POSITION(S) HELD WITH FUND OFFICER
PRINCIPAL OCCUPATION(S) AND OF FUND
DIRECTORSHIPS DURING PAST 5 YEARS SINCE
----------------------------------------------------------------------------------------------
Susan S. Newton, Born: 1950 2002
----------------------------------------------------------------------------------------------
Senior Vice President, Secretary and Chief Legal Officer
Senior Vice President, Secretary and Chief Legal Officer,
SAMCorp., the Adviser and each of the John Hancock funds,
John Hancock Funds and The Berkeley Group; Vice President,
Signature Services (until 2000); Director, Senior Vice
President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington Avenue,
Boston, Massachusetts 02199. The Statement of Additional Information of the Fund
includes additional information about members of the Board of Trustees of the
Fund and is available, without charge, upon request, by calling 1-800-225-5291.
1 Each Trustee serves until resignation, retirement age or until his or her
successor is elected.
2 Member of Audit Committee.
3 Interested Trustees hold positions with the Fund's investment adviser,
underwriter and certain other affiliates.
28
-----------
FOR YOUR
INFORMATION
-----------
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 AND
DIVIDEND DISBURSER
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
TRANSFER AGENT
FOR DARTS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, New York 10017
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116-5022
STOCK SYMBOL
Listed New York Stock Exchange:
HPI
For shareholder assistance
refer to page 24
--------------------------------------------------------------------------------
HOW TO
CONTACT US
----------
On the Internet www.jhfunds.com
By regular mail Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7054
24-hour automated information 1-800-843-0090
TDD Line 1-800-231-5469
The Fund's voting policies and procedures are available without charge,
upon request:
By phone 1-800-225-5291
On the Fund's Web site www.jhfunds.com/proxy
On the SEC's Web site www.sec.gov
--------------------------------------------------------------------------------
29
-------------
PRESORTED
STANDARD
U. S. Postage
PAID
MIS
-------------
John Hancock [LOGO]
1-800-852-0218
1-800-843-0090 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
P800A 7/03
ITEM 2. CODE OF ETHICS.
As of the end of the period, July 31, 2003, the registrant has adopted a code of
ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief Executive
Officer, Chief Financial Officer and Treasurer (respectively, the principal
executive officer, the principal financial officer and the principal accounting
officer, the "Senior Financial Officers"). A copy of the code of ethics is filed
as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Charles L. Ladner is the audit committee financial expert and is "independent",
pursuant to general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
See attached Exhibit "Proxy Voting Policies and Procedures".
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form N-CSR,
the registrant's principal executive officer and principal financial officer
have concluded that those disclosure controls and procedures provide reasonable
assurance that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is
attached.
(a)(2) Separate certifications for the registrant's principal executive officer
and principal financial officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(b)(1) Separate certifications for the registrant's principal executive officer
and principal financial officer, as required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule
30a-2(b) under the Investment Company Act of 1940, are attached. The
certifications furnished pursuant to this paragraph are not deemed to be "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of that section. Such certifications are not deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, except to the extent that the Registrant
specifically incorporates them by reference.
(c) Proxy Voting Policies and Procedures are attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
By:
------------------------------
Maureen Ford Goldfarb
Chairman, President and Chief Executive Officer
Date: September 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
-------------------------------
Maureen Ford Goldfarb
Chairman, President and Chief Executive Officer
Date: September 26, 2003
By:
-----------------------
Richard A. Brown
Senior Vice President and Chief Financial Officer
Date: September 26, 2003
9/03