John Hancock
Preferred
Income Fund
SEMI
ANNUAL
REPORT
1.31.03
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush
left next to first paragraph.]
WELCOME
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 11
For your information
page 21
Dear Fellow Shareholders,
After starting 2003 with a bang, the stock market quickly gave in to the
continuing pressures that plagued it throughout 2002. The threat of war
with Iraq increased and terrorism fears grew. The uncertainty surrounding
these and other geopolitical issues became uppermost in investors' minds
and caused the market to continue the tumble that marked 2002. In the month
of January, the Dow Jones Industrial Average returned -3.24%, the Standard
& Poor's 500 Index lost 2.61% and the Nasdaq Composite Index lost 1.09%.
Bonds remained essentially flat in January, with the exception of
lower-grade high-yield bonds, which continued a rally they began in the
fourth quarter of 2002.
January's results matched the trend of the last three years, in which
stocks lost ground every year as the economy stalled, corporate spending
and profits were lackluster and investor confidence plunged amid
corporate scandals. Bonds, on the other hand, outperformed stocks for a
third straight year and produced positive results in 2002, while 96% of
U.S. diversified stock mutual funds lost money. These results only
confirm the importance of having a portfolio well-diversified among
stocks, bonds and cash.
In fact, the disparity between stock and bond results over the last
three years means that many investors' portfolios may have shifted
substantially in their mix between stocks and bonds. We recommend
working with your investment professional to rebalance your assets
according to your long-term goals.
After three down years, no one can predict when the bear market cycle
will turn. Currently, uncertainties abound, with ongoing concerns about
the economy and 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 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 a high
level of current
income, consistent
with preservation
of capital, by
investing in a
diversified portfo-
lio of securities
that, in the opin-
ion of the Adviser,
may be underval-
ued relative to
similar securities
in the marketplace.
Under normal mar-
ket conditions, the
Fund invests at
least 80% of assets
in preferred stocks
and other pre-
ferred securities.
Over the last six months
* Preferred stocks performed relatively well, driven by falling interest
rates and strong demand.
* Since the Fund's inception in August 2002, the investment team has
been assembling a diversified portfolio of stocks offering value and
strong fundamentals.
* Oil and natural gas-related holdings performed best as prices of both
commodities soared.
[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 January 31, 2003." The chart is scaled in increments of 1%
with 0% at the bottom and 3% at the top. The first bar represents the
2.22% 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."]
Top 10 issuers
2.5% Nexen, Inc.
2.4% General Motors
2.4% DPL, Inc.
2.3% Shaw Communications, Inc.
2.1% AT&T Capital Corp.
2.0% Interstate P&L Co.
1.8% Public Storage, Inc.
1.8% Keyspan Corp.
1.7% Duke Capital Finance
1.7% J.P. Morgan Chase Capital
As a percentage of net assets plus value of preferred shares on
January 31, 2003.
MANAGERS'
REPORT
BY GREGORY K. PHELPS, MARK T. MALONEY AND BARRY H. EVANS, CFA, FOR THE
PORTFOLIO MANAGEMENT TEAM
John Hancock
Preferred Income Fund
From the inception of John Hancock Preferred Income Fund on August 27,
2002, through January 31, 2003, preferred stocks turned in relatively
good performances compared to U.S. common stocks. Much of preferred
stocks' gains were driven by falling interest rates, which continued to
drift lower in late summer and early fall 2002 in response to a weak
economy. That trend continued throughout the remainder of the period,
fueled by a surprise half percentage point rate cut by the Federal
Reserve Board in November. Preferred stocks pay dividends, just like
bonds pay regular interest, and, like bonds, their prices tend to rise
when interest rates fall.
"...preferred stocks turned
in relatively good perfor
mances compared to U.S.
common stocks."
Another factor helping the preferred-stock market was strengthening
demand from income-seeking investors looking for significantly higher
yields than what companies were paying on their bonds and common stocks.
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. Demand further strengthened in
December and January when a number of newly launched mutual funds
focusing on preferred stocks began to invest their assets. In the final
month of the period, the preferred market got an added boost from
President Bush's proposal to eliminate the double taxation of dividends.
Even though most of the preferred stocks that the Fund focuses on won't
enjoy tax relief from this proposal, since their dividends are paid in
pre-tax dollars, their prices were lifted by the development.
FUND PERFORMANCE
From its inception on August 27, 2002 through January 31, 2003, John
Hancock Preferred Income Fund returned 2.22% at net asset value. Over
the same period, the Standard & Poor's 500 Index returned -7.74% and
the average income and preferred stock closed-end fund returned 0.56%.
[Photos of Greg Phelps, Mark Maloney and Barry Evans flush right next to
first paragraph.]
OUR INVESTMENT PROCESS
Our investment philosophy is a fairly straightforward, time-tested
process guided by our experienced team of portfolio managers and
security analysts. The Fund's primary objective is to provide a high
level of current income consistent with preservation of capital. We seek
to produce superior results by focusing on the business cycle and
individual security fundamentals. This focus on fundamentals means we
don't just chase yield. High yield often suggests additional risk --
particularly a heightened sensitivity to interest-rate changes or lower
credit quality. We prefer to avoid making bets on the direction of
interest rates by altering the Fund's interest-rate sensitivity, and we
keep a minimum of 80% of the Fund's investments in investment-grade
preferred stocks and bonds. In structuring the portfolio, we seek to add
investment value in two ways. First, we try to anticipate broader, more
gradual changes in the business cycle, and then invest in those
industries and sectors that are expected to benefit from the changes.
Second, we look within those industries and sectors for issuers and
companies that are undervalued and mispriced relative to the market
overall.
"...we have found some of
the best combinations of
value and good fundamen-
tals primarily in the utility,
financial services and oil
and gas industry groups..."
DIVERSIFICATION IS KEY
We also put a premium on diversifying the portfolio among a number of
industry groups. Since the Fund began operations, we have found some of
the best combinations of value and good fundamentals primarily in the
utility, financial services and oil and gas industry groups. Among
utilities, we favored domestic, regionally based utility companies that
have little or no unregulated operations. One of our larger holdings in
this area at the end of the period was Dominion Resources. We like the
company because of its large, core base of regulated gas and electric
utility operations, its major natural gas pipeline operations and its
very profitable oil and natural gas production capabilities. Among
financial institutions, we emphasized large domestic money center banks
and large broker service companies such ING Groep, an international
financial services company with a strong track record of successfully
entering new markets.
[Table at top left-hand side of page entitled "Top five industry
groups 1." The first listing is Utilities 55%, the second is Banks--United
States 8%, the third Finance 6%, the fourth Oil & gas 5%, and the fifth
REITs 3%.]
[Pie chart in middle of page with heading "Portfolio diversification 1"
The chart is divided into four sections (from top to left): Common
stocks 3%, Preferred stocks 88%, Corporate bonds 2% and Short-term
investments & other 7%.]
LEADERS AND LAGGARDS
As for oil and gas producers, our favorite and one of our best
performers during the period was Nexen, Inc., a Canadian oil and natural
gas production company with significant international oil production.
The run-up in oil prices -- which also helped pump up natural gas prices
-- caused 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 about the oil
strike in Venezuela and a possible U.S. attack on Iraq that may disrupt
oil supplies.
[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
Nexen, Inc. 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 Tennessee Pipeline followed by a
down arrow with the phrase "Company's role in California power crisis
questioned."]
On the flip side was El Paso Corp. and its wholly owned subsidiary
Coastal. Those holdings 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.
"Low interest rates
should continue to
prompt strong demand
for preferred stocks..."
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 from
all types of investors seeking alternatives to low-yielding money market
investments and higher-yielding, but more risky, types of taxable bonds.
Another factor likely to ignite demand is President Bush's proposal to
eliminate taxes on some dividends. In the weeks following that
announcement, many investors started to put higher values on many
dividend-producing 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 1-31-03.
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
January 31, 2003
(unaudited)
This schedule is divided into five main categories: common stocks,
preferred stocks and securities, corporate bonds, U.S. government
securities, and short-term investments. The common stocks, preferred
stocks and 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/PAR ISSUER VALUE
COMMON STOCKS 4.19% $25,403,455
(Cost $26,519,478)
Utilities 4.19% 25,403,455
226,100 Alliant Energy Corp. 3,660,559
150,000 Duke Energy Corp. 2,554,500
480,000 NiSource, Inc. 8,529,600
271,600 Peoples Energy Corp. 9,997,596
60,000 Xcel Energy, Inc. 661,200
PREFERRED STOCKS AND SECURITIES 129.21% $783,483,322
(Cost $786,282,526)
Agricultural Operations 1.74% 10,560,000
120,000 Ocean Spray Cranberries, Inc., 6.25%, Ser A (R) 10,560,000
Automobiles/Trucks 3.53% 21,395,133
378,700 General Motors Corp., 7.25%, 4-15-41 9,501,583
89,000 General Motors Corp., 7.25%, 7-15-41 2,233,010
254,300 General Motors Corp., 7.25%, 2-15-52 6,286,296
134,325 General Motors Corp., 7.375%, 10-01-51 3,374,244
Banks -- Foreign 2.09% 12,703,550
25,000 Abbey National Plc, 7.00% (United Kingdom) 635,500
20,000 Abbey National Plc, 7.25% (United Kingdom) 519,000
400,500 Abbey National Plc, 7.375% (United Kingdom) 10,493,100
12,300 ANZ Exchangable Preferred Trust, 8.00% 316,110
28,900 NAB Exchangable Preferred Trust, 8.00% 739,840
Banks -- United States 11.69% 70,860,744
75,500 ABN AMRO Capital Funding Trust II, 7.125% 1,935,065
20,500 Bank One Capital Trust V, 8.00% 553,500
55,500 Bank One Capital Trust VI, 7.20% 1,449,105
71,000 Chase Capital VII, 7.00%, Ser G 1,817,600
171,400 Comerica Capital Trust I, 7.60% 4,485,538
292,500 Fleet Capital Trust VII, 7.20% 7,590,375
454,750 Fleet Capital Trust VIII, 7.20% 11,800,762
61,000 J.P. Morgan Chase Capital IX, 7.50% 1,599,420
577,100 J.P. Morgan Chase Capital X, 7.00%, Ser J 14,906,493
84,800 National Commerce Capital Trust II, 7.70% 1,844,970
46,856 Regions Finance Trust I, 8.00% 1,251,992
6,500 Summit Capital Trust I, 8.40% 03-15-27
Capital Security, Ser B 6,920,076
327,100 USB Capital III, 7.75% 8,743,383
165,700 USB Capital IV, 7.35% 4,329,741
62,199 USB Capital V, 7.25% 1,632,724
Broker Services 3.89% 23,562,986
93,400 Bear Stearns Capital Trust II, 7.50% 2,374,228
40,600 Bear Stearns Capital Trust III, 7.80% 1,081,990
175,600 Lehman Brothers Holdings, Inc., 5.94%,
Depositary Shares, Ser C 8,604,400
85,200 Lehman Brothers Holdings Capital Trust II, 7.875%, Ser J 2,219,460
204,500 Merrill Lynch & Co., Inc., 9.00%, Depositary Shares, Ser A 5,785,305
49,452 Merrill Lynch Preferred Capital Trust IV, 7.12% 1,298,610
82,700 Merrill Lynch Preferred Capital Trust V, 7.28% 2,198,993
Diversified Operations 1.05% 6,369,000
231,600 Grand Metropolitan Delaware, L.P., 9.42%, Ser A 6,369,000
Finance 8.56% 51,886,142
418,328 AT&T Capital Corp., 8.125% 10,658,997
322,600 AT&T Capital Corp., 8.25% 8,287,594
67,000 Citigroup Capital VII, 7.125% 1,778,180
315,600 Ford Motor Credit Co., 7.60% 7,924,716
200,000 Household International, Inc., 7.60%, Depositary Shares 5,030,000
240,200 Morgan Stanley Capital Trust II, 7.25% 6,290,838
206,600 MSDW Capital Trust I, 7.10% 5,247,640
194,200 SSBH Capital I, 7.20% 4,886,072
70,300 Transamerica Finance Corp., 7.10% 1,782,105
Insurance 3.16% 19,157,232
27,200 Great-West Life & Annuity Insurance Capital I, 7.25%, Ser A 695,232
552,000 ING Groep N.V., 7.05% 14,076,000
170,000 PLC Capital Trust IV, 7.25% 4,386,000
Leasing Companies 0.05% 325,242
34,200 AMERCO, 8.50%, Ser A 325,242
Leisure 0.34% 2,089,134
83,100 Hilton Hotels Corp., 8.00% 2,089,134
Media 4.04% 24,476,894
173,044 Newscorp Overseas Ltd., 8.625%, Ser A (Cayman Islands) 4,334,752
328,418 Shaw Communications, Inc., 8.45%, Ser A (Canada) 6,640,612
665,100 Shaw Communications, Inc., 8.50% (Canada) 13,501,530
Oil & Gas 7.54% 45,711,022
43,800 EnCana Corp., 9.50% 1,176,030
352,704 Nexen, Inc., 9.375%, Ser 1 (Canada) 9,082,128
517,300 Nexen, Inc., 9.75% (Canada) 13,346,340
538,600 OXY Capital Trust I, 8.16% 13,912,038
97,300 Talisman Energy, Inc., 8.90% (Canada) 2,549,260
69,000 Talisman Energy, Inc., 9.00% (Canada) 1,790,550
152,600 UDS Capital I, 8.32% 3,854,676
REIT 4.78% 28,968,942
251,830 Duke Realty Corp., 7.99%, Ser B 12,733,154
458,743 Public Storage, Inc., 7.50%, Depositary Shares, Ser V 11,863,094
129,390 Public Storage, Inc., 8.00%, Depositary Shares, Ser R 3,439,186
34,600 Public Storage, Inc., 8.60% 933,508
Telecommunications 2.18% 13,229,058
4,700 TCI Communications Financing III, 9.65%
03-31-27 Capital Security 4,818,355
330,220 Telephone & Data Systems, Inc., 7.60%, Ser A 8,410,703
Utilities 74.57% 452,188,243
69,700 ALLETE Capital I, 8.05% 1,785,017
480,000 Ameren Corp., 9.75%, Conv 12,672,000
200,000 American Electric Power Co., Inc., 9.25%, Conv 7,212,000
34,000 Appalachian Power Co., 7.30%, Ser B 850,680
512,507 Aquila, Inc., 7.875% 7,093,097
30,700 Atlantic Capital II, 7.375%, Ser C 777,017
40,000 Baltimore Gas & Electric Co., 6.99%, Ser 1995 4,160,000
151,100 BGE Capital Trust I, 7.16% 3,803,187
230,000 Cinergy Corp., 9.50%, Conv 12,323,400
116,400 Coastal Finance I, 8.375% 2,045,148
26,000 Consumers Energy Co. Financing I, 8.36% 570,700
94,000 Consumers Energy Co. Financing II, 8.20% 2,021,000
81,000 Consumers Energy Co. Financing III, 9.25% 1,911,600
91,000 Consumers Energy Co. Financing IV, 9.00% 2,093,000
195,435 Detroit Edison Co., 7.375% 4,944,505
56,100 Detroit Edison Co., 7.54% 1,419,891
253,476 Dominion CNG Capital Trust I, 7.80% 6,666,419
100,000 Dominion Resources, Inc., 9.50%, Conv 5,379,000
24,000 DPL, Inc. 8.13% 09-01-31 Capital Security 21,120,000
25,400 DQE Capital Corp., 8.375% 657,860
210,000 DTE Energy Co., 8.75%, Conv 5,405,400
85,700 DTE Energy Trust I, 7.80% 2,266,765
100,900 Duke Capital Finance Trust I, 7.375%, Ser T 2,475,077
140,400 Duke Capital Finance Trust II, 7.375%, Ser U 3,460,860
349,100 Duke Capital Finance Trust III, 8.375% 9,024,235
109,500 Duke Energy Capital Trust I, 7.20%, Ser Q 2,730,930
142,439 Duke Energy Capital Trust II, 7.20% 3,559,551
220,000 Duke Energy Corp., 8.25%, Conv 3,179,000
34,400 Duquesne Light, 7.375%, Ser E 860,000
231,500 El Paso Tennessee Pipeline Co., 8.25%, Ser A 7,871,000
399,600 Energy East Capital Trust I, 8.25% 10,533,456
57,700 Entergy Arkansas Capital I, 8.50%, Ser A 1,470,773
70,400 Entergy Gulf States Capital I, 8.75%, Ser A 1,770,560
328,000 Entergy Mississippi, Inc., 7.25% 8,528,000
391,600 Enterprise Capital Trust I, 7.44%, Ser A 9,594,200
190,000 Enterprise Capital Trust III, 7.25%, Ser C 4,560,000
36,500 Equitable Resources Capital Trust, 7.35% 917,975
449,585 FPC Capital I, 7.10%, Ser A 11,509,376
120,000 FPL Group, Inc., 8.00%, Conv 6,322,800
33,400 HECO Capital Trust I, 8.05% 844,686
128,883 HECO Capital Trust II, 7.30%, Ser 1998 3,276,206
50,000 Idaho Power Co., 7.07% 5,175,000
40,000 Indiana Michigan Power Co., 6.875% 4,000,000
70,100 Indiana Michigan Power Co., 7.60%, Ser B 1,759,510
700,000 Interstate Power & Light Co., $8.375 (R) 17,434,410
145,900 KCPL Financing I, 8.30% 3,656,254
310,000 KeySpan Corp., 8.75%, Conv 15,664,300
6,000 KN Capital Trust I, 8.56% 04-15-27 Capital Security, Ser B 6,632,064
4,000 KN Capital Trust III, 7.63% 04-15-28 Capital Security 4,035,160
83,700 MCN Financing II, 8.625% 2,155,275
154,700 Met-Ed Capital Trust, 7.35% 3,867,500
215,800 NIPSCO Capital Markets, Inc., 7.75%, Ser A 5,397,158
235,000 Northern States Power Co., 8.00% 5,957,250
398,000 NSP Financing I, 7.875% 9,631,600
222,900 OGE Energy Capital Trust I, 8.375% 5,828,835
133,000 PacifiCorp Capital I, 8.25%, Ser A 3,343,620
204,800 PacifiCorp Capital II, 7.70%, Ser B 5,150,720
62,700 Penelec Capital Trust, 7.34% 1,580,040
91,700 Pennsylvania Power Co., 7.75% 9,390,658
98,400 Potomac Electric Power Co. Trust I, 7.375% 2,504,280
66,200 PSCO Capital Trust I, 7.60% 1,605,350
200,000 PSEG Funding Trust II, 8.75% 5,160,000
399,347 PSO Capital I, 8.00%, Ser A 10,051,564
170,000 Public Service Enterprise Group, Inc., 10.25%, Conv 9,154,500
96,900 Puget Sound Energy Capital Trust II, 8.40% 2,555,253
297,000 Puget Sound Energy, Inc., 7.45%, Ser II 7,659,630
20,000 SCE&G Trust I, 7.55%, Ser A 503,200
404,600 SEMCO Capital Trust I, 10.25% 10,924,200
39,800 Southern Co. Capital Trust VI, 7.125% 1,050,720
264,100 Southwestern Public Service, 7.85%, Ser A 6,602,500
330,000 SWEPCO Capital I, 7.875%, Ser A 8,296,200
57,600 TDS Capital I, 8.50% 1,444,032
452,000 TDS Capital II, 8.04% 11,173,440
469,800 TECO Capital Trust I, 8.50% 12,214,800
500,000 TECO Energy, Inc., 9.50%, Conv 8,950,000
32,800 TransCanada Pipelines Ltd., 8.25% (Canada) 841,648
200,000 TXU Corp., 8.125%, Conv 5,750,000
286,065 TXU US Holdings Co., $1.875, Depositary Shares, Ser A 7,123,019
410,000 Virginia Power Capital Trust, 7.375% 10,778,900
262,000 WEC Capital Trust I, 6.85% 6,646,940
431,100 Yorkshire Capital Trust I, 8.08% 10,872,342
ISSUER, DESCRIPTION INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s omitted) VALUE
CORPORATE BONDS 3.00% $18,178,783
(Cost $17,336,003)
Banks -- United States 0.34% 2,049,558
Capital One Bank,
Sr Note 06-15-05 8.25% BBB- $2,000 2,049,558
Utilities 2.66% 16,129,225
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.75 BB- 10,500 11,025,000
Nisource Finance Corp.,
Gtd Sr Note 11-15-03 7.50 BBB 5,000 5,104,225
U.S. GOVERNMENT SECURITIES 0.71% $4,297,032
(Cost $4,341,445)
United States Treasury,
Note 05-15-04 7.25 AAA 4,000 4,297,032
SHORT-TERM INVESTMENTS 10.30% $62,495,380
(Cost $62,491,282)
Government -- U.S. Agencies 10.30% 62,495,380
Federal Home Loan Bank,
Disc Note 02-03-03 1.19 AAA 22,500 22,500,000
Disc Note 02-05-03 1.17 AAA 10,000 9,999,340
Federal Home Loan Mortgage Corp.,
Disc Note 02-04-03 1.17 AAA 10,000 9,999,670
Federal National Mortgage Assn.,
Disc Note 02-07-03 1.18 AAA 10,000 9,998,680
Disc Note 02-10-03 1.20 AAA 10,000 9,997,690
TOTAL INVESTMENTS 147.41% $893,857,972
OTHER ASSETS AND LIABILITIES, NET (47.41%) ($287,501,110)
TOTAL NET ASSETS 100.00% $606,356,862
* Credit ratings 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 $27,994,410 or 4.62% of
net assets as of January 31, 2003.
Capital Securities are debt instruments and the amounts shown in the
Shares/Par column are dollar amounts of par value.
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.
ASSETS AND
LIABILITIES
January 31, 2003
(unaudited)
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of
what the Fund
owns, is due
and owes.
You'll also find
the net asset
value for each
common share.
ASSETS
Investments at value (cost $896,970,734) $893,857,972
Dividend and interest receivable 2,715,469
Receivable from affiliates 114,949
Other assets 55
Total assets 896,688,445
LIABILITIES
Due to custodian 12,709
Payable for investments purchased 9,490,529
Other payables and accrued expenses 823,709
Total liabilities 10,326,947
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 280,004,636
NET ASSETS
Common shares capital paid-in 607,420,972
Accumulated net realized gain on investments 728,610
Net unrealized depreciation of investments (3,112,762)
Accumulated net investment income 1,320,042
Net assets $606,356,862
NET ASSET VALUE PER COMMON SHARE
Based on 25,614,022 shares of beneficial interest
outstanding -- unlimited number of shares authorized
with no par value $23.67
See notes to
financial statements.
OPERATIONS
For the period ended
January 31, 2003
(unaudited) 1
This Statement
of Operations
summarizes the
Fund's investment
income earned
and expenses
incurred in
operating the
Fund. It also
shows net gains
(losses) for the
period stated.
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $139,389) $18,653,950
Interest 4,781,439
Total investment income 23,435,389
EXPENSES
Investment management fee 2,461,580
APS auction fee 152,429
Accounting and legal services fee 98,463
Custodian fee 89,146
Printing 87,006
Organization expense 53,000
Miscellaneous 50,395
Transfer agent fee 37,696
Trustees' fee 30,649
Auditing fee 26,866
Registration and filing fee 8,015
Legal fee 5,246
Total expenses 3,100,491
Less expense reductions (656,422)
Net expenses 2,444,069
Net investment income 20,991,320
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments 728,610
Change in net unrealized appreciation (depreciation)
of investments (3,112,762)
Net realized and unrealized loss (2,384,152)
Distribution to APS (1,237,713)
Increase in net assets from operations $17,369,455
1 Inception period from 8-27-02 through 1-31-03. Unaudited.
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 incep-
tion of the Fund.
The difference
reflects earnings
less expenses,
any investment
gains and losses,
distributions
paid to share
holders, if any,
and any increase
or decrease due
to the sale of
common shares
and APS.
PERIOD
ENDED
1-31-03 1
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $20,991,320
Net realized gain 728,610
Change in net unrealized
appreciation (depreciation) (3,112,762)
Distributions to APS (1,237,713)
Increase in net assets
resulting from operations 17,369,455
Distributions to common shareholders
From net investment income (18,433,565)
From Fund share transactions 607,420,972
NET ASSETS
Beginning of period --
End of period 2 $606,356,862
1 Inception period from 8-27-02 through 1-31-03. Unaudited.
2 Includes accumulated net investment income of $1,320,042.
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 inception of the Fund.
PERIOD ENDED 1-31-03 1
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $23.88 2
Net investment income 3 0.84
Net realized and unrealized
loss on investments (0.12)
Distributions to APS (0.05)
Total from investment operations 0.67
Less distributions to common shareholders
From net investment income (0.72)
Capital charges
Offering costs related to common shares (0.03)
Offering costs and underwriting discount
related to APS (0.13)
(0.16)
Net asset value, end of period $23.67
Per share market value, end of period $24.98
Total return at market value 4 (%) 3.02 5,6
RATIOS AND SUPPLEMENTAL DATA
Net assets applicable to common shares,
end of period (in millions) $606
Ratio of expenses to average net assets 7 (%) 0.97 8
Ratio of adjusted expenses to average net assets 9 (%) 1.23 8
Ratio of net investment income to
average net assets 10 (%) 8.35 8
Portfolio turnover (%) 9
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 unit 11 $78,705
1 Inception period from 8-27-02 through 1-31-03. Unaudited.
2 Initial capitalization, net of offering expenses.
3 Based on the average of the shares outstanding.
4 Assumes dividend reinvestment.
5 Not annualized.
6 Total return would have been lower had certain expenses not been
reduced during the period shown.
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 0.74%.
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 expense ratio
would have been 0.94%.
10 Ratio calculated on the basis of net investment income relative to
the average net assets of common shares. Without the exclusion of
have been 6.40%.
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.
See notes to
financial statements.
NOTES TO
STATEMENTS
Unaudited
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 the expenses are directly identifiable to an individual
fund. Expenses that are not readily identifiable to a specific fund will
be allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and
the relative sizes of the funds.
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
$819,000 related to common shares and offering costs of $482,000
incurred in connection with the preferred shares were charged to the
Fund's common shares capital paid-in.
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.
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.
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 0.75%
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
$656,422 for the period ended January 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 approximately 0.03% of the average
managed assets of the Fund.
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 share transactions
Common shares
The listing illustrates the Fund's common shares sold, offering costs
and underwriting discount charged to capital paid-in, dividend
reinvestments and the number of common shares outstanding at the end of
the period, along with the corresponding dollar value.
PERIOD ENDED 1-31-03 1
SHARES AMOUNT
Shares sold 25,590,309 $610,968,628
Offering costs related
to common shares -- (819,000)
Offering costs and
underwriting discount
related to Auction
Preferred Shares -- (3,282,000)
Distributions reinvested 23,713 553,344
Net increase 25,614,022 $607,420,972
1 Inception period from 8-27-02 through 1-31-03. Unaudited.
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
of 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 7
days thereafter by an auction (except for the Series W, for which the
initial reset date will be April 23, 2003). Dividend rates on APS ranged
from 1.25% to 1.95% during the period ended January 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 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 of securities, other than short-term
securities and obligations of the U.S. government, during the period
ended January 31, 2003, aggregated $2,296,050,877 and $52,574,620,
respectively.
The cost of investments owned on January 31, 2003, including short-term
investments, for federal income tax purposes was $896,970,734. Gross
unrealized appreciation and depreciation of investments aggregated
$15,859,708 and $18,972,470, respectively, resulting in net unrealized
depreciation of $3,112,762.
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 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.
This page intentionally left blank.
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 AND DIVIDEND DISBURSER
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
TRANSFER AGENT FOR APS
Deutsche Bank Trust Company Americas
280 Park Avenue
New York, New York 10017
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
STOCK SYMBOL
Listed New York Stock Exchange: HPI
For shareholder assistance refer to page 19
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 1-800-344-7054
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
P80SA 1/03
3/03