UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21202
John Hancock Preferred Income Fund II
(Exact name of registrant as specified in charter)
601 Congress Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip code)
Alfred P. Ouellette
Senior Attorney and Assistant Secretary
601 Congress Street
Boston, Massachusetts 02110
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4324
Date of fiscal year end: July 31
Date of reporting period: July 31, 2005
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Preferred Income Fund II
7.31.2005
Annual Report
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Keith F. Hartstein, President and Chief Executive Officer of
John Hancock Funds, LLC, flush left next to first paragraph.]
CEO CORNER
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 12
Trustees & officers
page 30
For more information
page 33
To Our Shareholders,
I am pleased to be writing to you as the new President and Chief Executive
Officer of John Hancock Funds, LLC, following the departure of James A.
Shepherdson to pursue other opportunities. In addition, on July 25, 2005,
your fund's Board of Trustees appointed me to the roles of President and
Chief Executive Officer of your fund.
As a means of introduction, I have been involved in the mutual fund
industry since 1985. I have been with John Hancock Funds for the last 15
years, most recently as executive vice president of retail sales and
marketing and a member of the company's executive and investment
committees. In my former capacity, I was responsible for all aspects of the
distribution and marketing of John Hancock Funds' open-end and closed-end
mutual funds. Outside of John Hancock, I have served as Chairman of the
Investment Company Institute (ICI) Sales Force Marketing Committee since
September 2003.
It is an exciting time to be at John Hancock Funds, and I am grateful for
the opportunity to lead and shape its future growth. With the acquisition
of John Hancock by Manulife Financial Corporation in April 2004, we are
receiving broad support toward the goal of providing our shareholders with
excellent investment opportunities and a more complete lineup of choices
for the discerning investor.
As you may have read, John Hancock recently entered into an agreement with
GMO, a Boston-based institutional money manager, to acquire eight of their
mutual funds. In addition, we are in the process of adding five "Lifestyle
Portfolio" funds-of-funds that blend multiple fund offerings from internal
and external money managers to create a broadly diversified asset
allocation portfolio. Look for more information about these exciting
additions to the John Hancock family of funds in your fourth quarter
shareholder newsletter.
Although there has been a change in executive-level management, rest
assured that the one thing that never wavers is John Hancock Funds'
commitment to placing the needs of shareholders above all else. We are all
dedicated to the task of working with you and your financial advisors to
help you reach your long-term financial goals.
Sincerely,
/S/ Keith F. Hartstein
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEO's views as of July 31, 2005. 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 port-
folio of securities
that, in the opinion
of the Adviser, may
be undervalued rela-
tive to similar
securities in the mar-
ketplace. Under
normal market con-
ditions, the Fund
invests at least 80%
of its assets in
preferred stocks
and other preferred
securities.
Over the last twelve months
* Preferred stocks posted strong gains, overcoming scattered bouts of
weakness during the year.
* Convertible-preferred-stock holdings aided performance.
* An influx of supply of newly issued preferred stocks presented
opportunities.
[Bar chart with heading "John Hancock Preferred Income Fund II." Under the
heading is a note that reads "Fund performance for the year ended July 31,
2005." The chart is scaled in increments of 4% with 0% at the bottom and
16% at the top. The first bar represents the Fund's 13.74% net asset value.
The second bar represents the Fund's 5.55% market value. The third bar
represents the Fund's 7.86% yield on closing market price. The first note
below the chart reads "The total returns for the Fund include all
distributions reinvested. The performance data contained within this
material represents past performance, which does not guarantee future
results." The second note below the chart reads "The yield on closing
market price is calculated by dividing the current annualized distribution
per share by the closing market price."]
Top 10 issuers
3.5% DPL Capital Trust II
3.3% Nexen, Inc.
3.0% Interstate Power & Light Co.
2.5% MetLife, Inc.
2.5% ING Groep N.V.
2.5% ONEOK, Inc.
2.4% Telephone & Data Systems, Inc.
2.3% PSEG Funding Trust II
2.3% PFGI Capital Corp.
2.2% Duke Realty Corp.
As a percentage of net assets plus the value of preferred shares on
July 31, 2005.
1
BY GREGORY K. PHELPS AND MARK T. MALONEY FOR THE PORTFOLIO
MANAGEMENT TEAM
MANAGERS'
REPORT
JOHN HANCOCK
Preferred Income Fund II
Preferred stocks -- which are the primary emphasis of John Hancock
Preferred Income Fund II -- posted strong gains for the 12-month period
ended July 31, 2005, overcoming scattered bouts of weakness during the
year. They began the period just after the Federal Reserve Board started to
raise short-term interest rates, which triggered an early summer Treasury
market sell-off that put pressure on preferred-stock prices. Because
preferreds make fixed payments in the form of dividends, their prices tend
to follow those of U.S. Treasury securities. Despite evidence of a
strengthening economy and additional short-term interest rate hikes by the
Federal Reserve Board, preferred-stock prices generally moved higher
throughout the remainder of 2004, mirroring a somewhat positive tone in the
U.S. Treasury market. That rally was based on investors' confidence that
even though the Fed might continue to raise rates, those rate hikes would
be small and measured, given the potential for record-high oil prices and
higher interest rates themselves to dampen economic growth. Preferred
stocks were further boosted by the combination of constrained supply and
strong demand. Supply was muted throughout most of the period, as fewer
companies issued new preferred securities, while others bought back their
outstanding shares. That said, supply ticked higher in the final months of
the period, putting some pressure on the preferred-stock marketplace.
Demand, meanwhile, remained strong throughout the year, fueled by
investors' appetite for yield, particularly in light of the fact that
changes in the tax code in 2003 helped to make ownership of certain
dividend-yielding stocks more attractive.
"Preferred stocks...posted strong
gains for the 12-month period
ended July 31, 2005..."
Performance
For the 12 months ended July 31, 2005, John Hancock Preferred Income Fund
II returned 13.74% at net asset value and 5.55% at market value. The
difference in the Fund's net asset value (NAV)
2
performance and its market performance stems from the fact that the market
share price is subject to the dynamics of secondary market trading, which
could cause it to trade at a discount or premium to the Fund's NAV share
price at any time. By comparison, the average income and preferred-stock
closed-end fund returned 16.94% at net asset value, according to Lipper,
Inc. In the same 12-month period, the Dow Jones Utility Average -- which
tracks the performance of 15 electric and natural gas utilities -- returned
46.29%, and the broader stock market, as measured by the Standard & Poor's
500 Index, gained 14.05%.
[Photos of Greg Phelps and Mark Maloney flush right next to first
paragraph.]
Leaders and laggards
Among our best-performing holdings during the year were some
convertible-preferred stocks, which will be converted into common stocks at
a set date. For example, ONEOK, a diversified energy company involved in
oil and gas production, natural gas processing, gathering, storage and
transmission in the mid-continent areas of the United States, performed
very well. It continued to reap the benefits of a well-executed business
strategy and its ability to pass on price increases in the wake of higher
commodities prices. Other winners among convertibles included Public
Service Enterprise Group, which was boosted largely by the fact that it
will be acquired by Exelon Corp., and Great Plains Energy, a solid Midwest
utility company that was lifted by the nearly year-long rally of utility
stocks and by a growing appetite for preferred stocks with high coupons.
"Among our best performing hold
ings during the year were some
convertible-preferred stocks..."
Among non-convertible preferred stocks, we enjoyed strong performance from
our holdings in cable company Comcast, which benefited from an upgrade in
its credit rating to investment grade. Our holdings in DPL Capital Trust II
also worked out well. They were boosted by the company's making a tender
offer for the specific security we owned. On the flip side, our holdings in
the preferred stock of General Motors proved disappointing throughout the
period as the company struggled amid flagging demand for its cars and a
credit-rating downgrade to below-investment-grade. Despite its recent
travails, we continue to maintain our stake in GM because
3
we like its attractive yields and we believe the company is taking some
positive steps toward addressing its problems, such as cutting costs and
reducing production.
[Table at top left-hand side of page entitled "Industry distribution1." The
first listing is Electric utilities 22%, the second is Multi-utilities &
unregulated power 17%, the third is Diversified banks 8%, the fourth is
Investment banking & brokerage 8%, the fifth is Diversified financial services
6%, the sixth is Gas utilities 6%, the seventh is Oil & gas exploration &
production 5%, the eighth is Real estate investment trusts 4%, the ninth is
Life & Health insurance 4%, the tenth is Integrated telecommunication services
4%, the eleventh is Multi-line insurance 3%, the twelfth is Regional banks 3%,
the thirteenth is Automobile manufacturers 2%, the fourteenth is Consumer
finance 2% and the fifteenth is All others 5%.]
Supply glut = opportunity
In the final months of the period, there was a glut of newly issued
preferred stocks as companies rushed to lock in low interest rates. That
influx of supply temporarily weighed on preferred-stock prices and afforded
us the opportunity to buy some attractively valued, tax-advantaged issues
with relatively high coupons. Among our purchases was insurance giant
MetLife, which carried a coupon of 6.50%, and performed quite well from the
point at which we bought it through the end of the period. It was buoyed by
strong demand from investors seeking high-yielding, tax-advantaged
securities issued by high-quality companies.
[Pie chart at middle of page with heading "Portfolio diversification1."
The chart is divided into five sections (from top to right): Preferred
stocks 83%, Capital preferred securities 13%, Common stocks 2%, Bonds 1%
and Short-term investments 1%.]
Outlook
In our view, the Fed probably hasn't yet reached the end of its campaign to
raise short-term interest rates to cool economic growth and potential
inflationary pressures. This could pose periodic short-term challenges for
dividend-producing securities. Over the longer term, however, we're more
upbeat, especially given the fact that we believe a good portion, if not
all, of future interest rate hikes have already been factored into
preferred-stock prices. Furthermore, there are already some tangible signs
that economic growth has cooled as rates have moved higher. Record-high oil
prices will also probably act as a drag on economic growth, most likely by
reducing consumers' disposable income and raising corporate America's cost
4
of doing business. Economic weakness in Japan and Europe could also act as
a drag on the U.S. economy by limiting U.S. companies' ability to export
goods and services to those regions. We believe that a slower-growth,
low-inflationary environment will provide a favorable backdrop for
preferred stocks. Given that high-quality, high-coupon preferred issues
have come to market recently and in anticipation of similar issuance in the
near future, it will be easier to find attractive replacements for our
holdings that are redeemed or called by the issuer. Finally, we believe
that as the Baby Boomers age, their long-term demand for income-producing
investments such as preferred stocks will continue to rise, providing a
favorable underpinning for the group.
[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 ONEOK
followed by an up arrow with the phrase "Well-executed business strategy
and price increases boost price." The second listing is MetLife followed by
an up arrow with the phrase "Strong demand for high-yielding,
tax-advantaged securities." The third listing is General Motors followed by
a down arrow with the phrase "Credit quality downgrade."]
"We believe that a slower-growth,
low-inflationary environment will
provide a favorable backdrop for
preferred stocks."
This commentary reflects the views of the portfolio management team through
the end of the Fund's period discussed in this report. The teams'
statements reflect its 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 more broadly
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, 2005.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
July 31, 2005
This schedule is divided into five main categories: bonds, capital
preferred securities, common stocks, preferred securities and short-term
investments. Bonds, capital preferred securities, common stocks and
preferred securities are further broken down by industry group. Short-term
investments, which represent the Fund's cash position, are listed last.
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Bonds 1.88% $10,294,930
(Cost $9,972,722)
Electric Utilities 1.88% 10,294,930
Black Hills Corp.,
Note 6.500% 05-15-13 BBB- $5,000 5,237,430
Entergy Gulf States, Inc.,
1st Mtg Bond 6.200 07-01-33 BBB+ 5,000 5,057,500
Credit Par value
Issuer, description, maturity date rating (A) (000) Value
Capital preferred securities 18.66% $102,303,513
(Cost $91,594,145)
Asset Management & Custody Banks 0.92% 5,067,601
BNY Capital, 7.97%, Ser B, 12-31-26 A- $4,700 5,067,601
Diversified Banks 0.76% 4,140,268
Lloyds TSB Bank Plc, 6.90%, 11-29-49 (United Kingdom) A+ 4,000 4,140,268
Diversified Financial Services 2.34% 12,843,828
JPM Capital Trust I, 7.54%, 01-15-27 A- 12,000 12,843,828
Electric Utilities 5.07% 27,798,250
DPL Capital Trust II, 8.125%, 09-01-31 B+ 22,150 27,798,250
Gas Utilities 4.22% 23,144,091
KN Capital Trust I, 8.56%, Ser B, 04-15-27 BB+ 10,000 10,875,670
KN Capital Trust III, 7.63%, 04-15-28 BB+ 10,673 12,268,421
Integrated Telecommunication Services 1.87% 10,221,621
TCI Communications Financing Trust III, 9.65%, 03-31-27 BB+ 9,243 10,221,621
See notes to
financial statements.
6
FINANCIAL STATEMENTS
Credit Par value
Issuer, description, maturity date rating (A) (000) Value
Multi-Utilities & Unregulated Power 2.83% $15,509,383
Dominion Resources Capital Trust I, 7.83%, 12-01-27 BBB- $8,450 9,279,368
Dominion Resources Capital Trust III, 8.40%, 01-15-31 BBB- 5,000 6,230,015
Regional Banks 0.65% 3,578,471
Summit Capital Trust I, 8.40%, Ser B, 03-15-27 A 3,300 3,578,471
Issuer Shares Value
Common stocks 3.20% $17,527,222
(Cost $13,035,721)
Electric Utilities 2.11% 11,548,600
Alliant Energy Corp. 220,000 6,402,000
CH Energy Group, Inc. 40,000 1,966,000
Scottish Power Plc, American Depositary Receipt (ADR)
(United Kingdom) 90,000 3,180,600
Gas Utilities 1.09% 5,978,622
KeySpan Corp. 146,931 5,978,622
Credit
Issuer, description rating (A) Shares Value
Preferred securities 120.69% $661,451,015
(Cost $636,750,911)
Agricultural Products 2.50% 13,710,000
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) BB+ 160,000 13,710,000
Asset Management & Custody Banks 0.18% 995,600
BNY Capital V, 5.95%, Ser F A- 40,000 995,600
Automobile Manufacturers 3.49% 19,101,202
Ford Motor Co., 7.50% BB+ 50,000 1,085,000
General Motors Corp., 7.25%, Ser 02-15-52 BB 447,300 9,245,691
General Motors Corp., 7.25%, Ser 04-15-41 BB 87,900 1,845,900
General Motors Corp., 7.25%, Ser 07-15-41 BB 233,500 4,917,510
General Motors Corp., 7.375%, Ser 10-01-51 BB 91,025 2,007,101
Broadcasting & Cable TV 1.03% 5,671,512
Shaw Communications, Inc., 8.50% (Canada) B+ 223,200 5,671,512
Consumer Finance 3.16% 17,319,565
CIT Group, Inc., 6.35%, Ser A BBB+ 60,000 1,494,378
Ford Motor Credit Co., 7.375% BBB- 30,000 669,600
See notes to
financial statements.
7
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Consumer Finance (continued)
Ford Motor Credit Co., 7.60% A3 100,000 $2,295,000
Household Finance Corp., 6.00% A 72,200 1,817,274
Household Finance Corp., 6.875% A 349,100 9,087,073
HSBC Finance Corp., 6.36%, Depositary Shares, Ser B BBB+ 76,000 1,956,240
Diversified Banks 11.30% 61,933,095
BAC Capital Trust IV, 5.875% A 46,150 1,149,135
Comerica Capital Trust I, 7.60% BBB+ 120,400 3,095,484
Fleet Capital Trust VII, 7.20% A 459,900 11,883,816
Fleet Capital Trust VIII, 7.20% A 310,000 8,103,400
Republic New York Corp., 6.25%, Ser HSBC A 50,000 1,257,815
Royal Bank of Scotland Group Plc, 5.75%, Ser L
Santander Finance Preferred S.A., Unipersonal, 6.41%,
Ser 1 (Spain) BBB+ 225,000 5,906,250
USB Capital III, 7.75% A- 134,300 3,438,080
USB Capital IV, 7.35% A- 152,800 3,940,712
USB Capital V, 7.25% A- 252,000 6,526,800
Wells Fargo Capital Trust IV, 7.00% A 140,800 3,634,048
Wells Fargo Capital Trust VI, 6.95% A- 50,000 1,295,500
Diversified Financial Services 6.62% 36,266,470
ABN AMRO Capital Funding Trust V, 5.90% A 312,400 7,722,528
ABN AMRO Capital Funding Trust VII, 6.08% A 265,000 6,704,500
Citigroup Capital VII, 7.125% A 61,700 1,599,264
Citigroup Capital VIII, 6.95% A 339,000 8,712,300
Citigroup Capital IX, 6.00% A 90,000 2,284,200
General Electric Capital Corp., 6.10% AAA 22,863 590,780
JPMorgan Chase Capital IX, 7.50%, Ser I A- 73,800 1,882,638
JPMorgan Chase Capital X, 7.00%, Ser J A1 259,000 6,770,260
Electric Utilities 22.12% 121,248,202
American Electric Power Co., Inc., 9.25%, Conv BBB 135,000 6,467,850
Boston Edison Co., 4.78% BBB+ 15,143 1,383,313
Cleveland Electric Financing Trust I, 9.00% BB 210,000 5,628,000
Entergy Mississippi, Inc., 7.25% A- 66,000 1,733,160
FPC Capital I, 7.10%, Ser A BB+ 559,503 14,183,401
FPL Group Capital Trust I, 5.875% BBB+ 436,800 10,928,736
FPL Group, Inc., 8.00%, Conv A- 140,000 9,146,200
Georgia Power Capital Trust V, 7.125% BBB+ 207,300 5,391,873
Georgia Power Capital Trust VII, 5.875% BBB+ 116,500 2,910,170
See notes to
financial statements.
8
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Electric Utilities (continued)
Great Plains Energy, Inc., 8.00%, Conv BBB- 544,100 $14,758,712
HECO Capital Trust III, 6.50% BBB- 120,000 3,132,000
Interstate Power & Light Co., 8.375%, Ser B BBB- 700,000 23,800,000
Monongahela Power Co., $7.73, Ser L B 55,500 5,550,000
Northern States Power Co., 8.00% BBB- 175,800 4,686,828
NVP Capital III, 7.75% CCC+ 108,500 2,755,900
Southern Co. Capital Trust VI, 7.125% BBB+ 30,000 789,300
Virginia Power Capital Trust, 7.375% BBB- 304,519 8,002,759
Gas Utilities 3.36% 18,399,645
AGL Capital Trust II, 8.00% BBB 41,000 1,051,650
SEMCO Capital Trust I, 10.25% B- 152,847 3,974,022
Southern Union Co., 7.55% BB+ 197,200 5,373,700
Southwest Gas Capital II, 7.70% BB 248,900 6,551,048
Vectren Utility Holdings, Inc., 7.25% A- 56,500 1,449,225
Hotels, Resorts & Cruise Lines 0.60% 3,283,750
Hilton Hotels Corp., 8.00% BBB- 125,000 3,283,750
Integrated Telecommunication Services 4.27% 23,393,744
Telephone & Data Systems, Inc., 6.625% A- 150,000 3,765,000
Telephone & Data Systems, Inc., 7.60%, Ser A A- 605,967 15,724,844
Verizon New England, Inc., 7.00%, Ser B A2 150,150 3,903,900
Investment Banking & Brokerage 11.35% 62,178,579
Bear Stearns Cos., Inc. (The), 6.15%, Depositary Shares, Ser E BBB 248,600 12,678,600
Lehman Brothers Holdings Capital Trust III, 6.375%, Ser K BBB+ 170,000 4,328,200
Lehman Brothers Holdings Capital Trust V, 6.00%, Ser M BBB+ 40,000 990,400
Lehman Brothers Holdings, Inc., 5.94%, Depositary Shares, Ser C BBB+ 145,200 7,296,300
Merrill Lynch Preferred Capital Trust III, 7.00% A- 360,400 9,428,064
Merrill Lynch Preferred Capital Trust IV, 7.12% A- 167,400 4,397,598
Merrill Lynch Preferred Capital Trust V, 7.28% A- 273,200 7,275,316
Morgan Stanley Capital Trust III, 6.25% A- 248,779 6,326,450
Morgan Stanley Capital Trust IV, 6.25% A- 57,000 1,444,380
Morgan Stanley Capital Trust V, 5.75% A1 329,900 8,013,271
Life & Health Insurance 5.44% 29,811,845
MetLife, Inc., 6.375%, Ser B, Conv BBB+ 8,390 232,151
MetLife, Inc., 6.50%, Ser B BBB 799,550 20,196,633
PLC Capital Trust IV, 7.25% BBB+ 331,075 8,637,747
Prudential Plc, 6.50% (United Kingdom) A 30,000 745,314
See notes to
financial statements.
9
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Multi-Line Insurance 4.17% $22,849,646
AEGON N.V., 6.375% (Netherlands) A- 100,000 2,568,000
ING Groep N.V., 7.05% (Netherlands) A- 774,700 20,281,646
Multi-Utilities & Unregulated Power 21.23% 116,356,712
Baltimore Gas & Electric Co., 6.99%, Ser 1995 Baa1 39,870 4,168,907
BGE Capital Trust II, 6.20% BBB- 525,000 13,471,500
Consumers Energy Co. Financing IV, 9.00% Ba2 217,000 5,611,620
Dominion CNG Capital Trust I, 7.80% BBB- 150,000 3,864,000
DTE Energy Co., 8.75%, Conv BBB- 224,200 5,685,712
DTE Energy Trust I, 7.80% BB+ 253,000 6,583,060
Energy East Capital Trust I, 8.25% BBB- 424,800 10,947,096
Enterprise Capital Trust I, 7.44%, Ser A BB+ 35,400 895,266
ONEOK, Inc., 8.50%, Conv BBB+ 470,000 19,942,100
PSEG Funding Trust II, 8.75% BB+ 680,000 18,434,800
Public Service Electric & Gas Co., 4.18%, Ser B BB+ 7,900 647,800
Public Service Enterprise Group, Inc., 10.25%, Conv BBB- 75,450 6,116,731
Puget Sound Energy Capital Trust II, 8.40% BB 232,060 5,998,751
South Carolina Electric & Gas Co., 6.52% Baa1 15,000 1,532,345
TECO Capital Trust I, 8.50% B 490,434 12,457,024
Oil & Gas Exploration & Production 7.06% 38,716,369
Anadarko Petroleum Corp., 5.46%, Depositary Shares, Ser B BBB- 62,000 6,085,691
Apache Corp., 5.68%, Depositary Shares, Ser B BBB 25,000 2,537,500
Devon Energy Corp., 6.49%, Ser A BB+ 32,355 3,359,866
Nexen, Inc., 7.35% (Canada) BB+ 1,018,800 26,733,312
Real Estate Investment Trusts 6.52% 35,757,307
Duke Realty Corp., 6.50%, Depositary Shares, Ser K BBB 110,000 2,776,400
Duke Realty Corp., 6.60%, Depositary Shares, Ser L BBB 109,840 2,759,181
Duke Realty Corp., 6.625%, Depositary, Shares, Ser J BBB 449,400 11,401,278
Duke Realty Corp., 7.99%, Depositary Shares, Ser B BBB 10,650 549,474
Kimco Realty Co., 6.65%, Depositary Shares, Ser F BBB+ 37,030 945,376
Public Storage, Inc., 6.45%, Depositary Shares, Ser X BBB+ 30,000 756,000
Public Storage, Inc., 7.50%, Depositary Shares, Ser V BBB+ 307,100 7,993,813
Public Storage, Inc., 8.00%, Depositary Shares, Ser R BBB+ 304,500 7,889,595
Public Storage, Inc., 8.60%, Depositary Shares, Ser Q BBB+ 26,700 686,190
Regional Banks 3.36% 18,393,375
PFGI Capital Corp., 7.75% A3 686,000 18,393,375
Reinsurance 0.17% 930,000
RenaissanceRe Holdings Ltd., 6.08%, Ser C (Bermuda) BBB+ 40,000 930,000
See notes to
financial statements.
10
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Thrifts & Mortgage Finance 1.96% $10,741,086
Abbey National Plc, 7.25% (United Kingdom) A- 275,620 7,033,822
Abbey National Plc, 7.375% (United Kingdom) A- 140,800 3,707,264
Wireless Telecommunication Services 0.80% 4,393,311
United States Cellular, 7.50% A- 165,100 4,393,311
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Short-term investments 0.90% $4,900,000
(Cost $4,900,000)
Government U.S. Agency 0.90% 4,900,000
Federal Home Loan Bank, Disc Note Zero 08-01-05 AAA $4,900 4,900,000
Total investments 145.33% $796,476,680
Other assets and liabilities, net 1.03% $5,661,279
Fund preferred shares and accrued dividends (46.36%) ($254,084,069)
Total net assets 100.00% $548,053,890
(A) Credit ratings are unaudited and are rated by Moody's Investors Service
where Standard & Poor's ratings are not available.
(S) This security is 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 $13,710,000 or 2.50% of the Fund's net
assets as of July 31, 2005.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, 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, 2005
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 $756,253,499) $796,476,680
Cash 62,398
Cash segregated for futures contracts 600,000
Receivable for investments sold 406,406
Dividends and interest receivable 4,995,444
Receivable for swap contracts 82,744
Unrealized appreciation of swap contracts 3,188,479
Receivable for futures variation margin 525,000
Other assets 47,131
Total assets 806,384,282
Liabilities
Payable for investments purchased 3,933,503
Payable to affiliates
Management fees 36,284
Other 16,978
Other payables and accrued expenses 259,558
Total liabilities 4,246,323
Auction Preferred Shares (APS) including accrued
dividends, unlimited number of shares of beneficial
interest authorized with no par value, 10,160 shares
issued, liquidation preference of $25,000 per share 254,084,069
Net assets
Common shares capital paid-in 498,932,024
Accumulated net realized gain on investments,
financial futures contracts and swap contracts 4,352,502
Net unrealized appreciation of investments,
financial futures contracts and swap contracts 43,887,192
Accumulated net investment income 882,172
Net assets applicable to common shares $548,053,890
Net asset value per common share
Based on 21,059,736 shares of beneficial interest
outstanding -- unlimited number of shares
authorized with no par value $26.02
See notes to
financial statements.
12
FINANCIAL STATEMENTS
OPERATIONS
For the year ended
July 31, 2005
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 $46,808,399
Interest 8,192,636
Total investment income 55,001,035
Expenses
Investment management fees 5,962,695
APS auction fees 731,887
Miscellaneous 204,742
Accounting and legal services fees 186,277
Custodian fees 130,432
Printing fees 92,356
Professional fees 54,880
Trustees' fees 52,137
Transfer agent fees 36,319
Registration and filing fees 23,767
Total expenses 7,475,492
Less expense reductions (1,590,052)
Net expenses 5,885,440
Net investment income 49,115,595
Realized and unrealized gain (loss)
Net realized gain (loss) on
Investments 6,698,125
Financial futures contracts (4,216,122)
Swap contracts (50,972)
Change in net unrealized appreciation (depreciation) of
Investments 19,208,029
Financial futures contracts 2,384,379
Swap contracts 272,799
Net realized and unrealized gain 24,296,238
Distributions to APS (6,222,877)
Increase in net assets from operations $67,188,956
See notes to
financial statements.
13
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
These Statements
of Changes in Net
Assets show how
the value of the
Fund's net assets
has changed
during the last
two periods. The
difference reflects
earnings less
expenses, any
investment
gains and losses,
distributions, if
any, paid to
shareholders and
the net of Fund
share transactions.
Year Year
ended ended
7-31-04 7-31-05
Increase (decrease) in net assets
From operations
Net investment income $48,547,423 $49,115,595
Net realized gain 4,156,898 2,431,031
Change in net unrealized
appreciation (depreciation) (7,447,283) 21,865,207
Distributions to APS (3,051,495) (6,222,877)
Increase in net assets resulting
from operations 42,205,543 67,188,956
Distributions to common shareholders
From net investment income (45,472,348) (42,330,069)
From net realized gain (4,579,007) --
(50,051,355) (42,330,069)
From Fund share transactions 404,312 --
Net assets
Beginning of period 530,636,503 523,195,003
End of period 1 $523,195,003 $548,053,890
1 Includes accumulated net investment income of $326,300 and $882,172,
respectively.
See notes to
financial statements.
14
FINANCIAL HIGHLIGHTS
FINANCIAL
HIGHLIGHTS
COMMON SHARES
The Financial Highlights show how the Fund's net asset value for a share
has changed since the end of the previous period.
Period ended 7-31-03 1 7-31-04 7-31-05
Per share operating performance
Net asset value,
beginning of period $23.88 2 $25.22 $24.84
Net investment income 3 1.30 2.31 2.33
Net realized and unrealized
gain (loss) on investments 1.55 (0.17) 1.16
Distributions to APS (0.08) (0.14) (0.30)
Total from investment operations 2.77 2.00 3.19
Less distributions to common shareholders
From net investment income (1.26) (2.16) (2.01)
From net realized gain -- (0.22) --
(1.26) (2.38) (2.01)
Capital charges
Offering costs related to common shares (0.03) -- --
Offering costs and underwriting
discounts related to APS (0.14) -- --
(0.17) -- --
Net asset value, end of period $25.22 $24.84 $26.02
Per share market value, end of period $24.51 $24.35 $23.67
Total return at market value 4,5 (%) 1.78 6,7 9.17 5.55
Ratios and supplemental data
Net assets applicable to common shares,
end of period (in millions) $531 $523 $548
Ratio of expenses to average net assets 8 (%) 1.01 9 1.07 1.09
Ratio of adjusted expenses
to average net assets 10 (%) 1.28 9 1.37 1.38
Ratio of net investment income
to average net assets 11 (%) 7.84 9 9.11 9.08
Portfolio turnover (%) 147 14 15
Senior securities
Total value of APS outstanding (in millions) $254 $254 $254
Involuntary liquidation preference
per unit (in thousands) $25 $25 $25
Average market value per unit (in thousands) $25 $25 $25
Asset coverage per unit 12 $78,821 $75,218 $78,290
See notes to
financial statements.
15
Notes to Financial Highlights
1 Inception period from 11-29-02 through 7-31-03.
2 Reflects the deduction of a $1.125 per share sales load.
3 Based on the average of the shares outstanding.
4 Assumes dividend reinvestment.
5 Total returns would have been lower had certain expenses not been
reduced during the periods shown.
6 Not annualized.
7 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.
8 Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
annualized ratios of expenses would have been 0.74%, 0.73% and 0.74%,
respectively.
9 Annualized.
10 Ratios calculated on the basis of expenses relative to the average
net assets of common shares that do not take into consideration expense
reductions during the periods shown. Without the exclusion of preferred
shares, the annualized adjusted ratios of expenses would have been
0.94%, 0.93% and 0.94%, respectively.
11 Ratios calculated on the basis of net investment income relative to
the average net assets of common shares. Without the exclusion of
preferred shares, the annualized ratios of net investment income would
have been 5.71%, 6.17% and 6.18%, respectively.
12 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.
16
NOTES TO
STATEMENTS
Note A
Accounting policies
John Hancock Preferred Income Fund II (the "Fund") is a diversified
closed-end management investment company registered under the Investment
Company Act of 1940.
Significant accounting policies
of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at fair
value as determined in good faith in accordance with procedures approved by
the Trustees. Short-term debt investments which have a remaining maturity
of 60 days or less may be valued at amortized cost, which approximates
market value. The Fund determines the net asset value of the common shares
each business day.
Investment transactions
Investment transactions are 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.
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.
17
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, 2005, the Fund had deposited $600,000 in a segregated account
to cover margin requirements on open financial futures contracts.
The Fund had the following financial futures contracts open on July 31, 2005:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION APPRECIATION
------------------------------------------------------------------------------
U.S. 10-year Treasury Note 239 Short Sep 05 $69,085
U.S. 10-year Treasury Note 240 Short Sep 05 77,069
U.S. 10-year Treasury Note 241 Short Sep 05 88,688
U.S. 10-year Treasury Note 80 Short Sep 05 240,690
$475,532
Swap contracts
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 the 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. 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. Accrued interest receivable or payable on the
swap contracts is recorded as realized gain (loss).
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.
The Fund had the following interest rate swap contracts open on July 31, 2005:
RATE TYPE
-----------------------------
PAYMENTS
NOTIONAL PAYMENTS MADE RECEIVED TERMINATION
AMOUNT BY FUND BY FUND DATE APPRECIATION
------------------------------------------------------------------------------
$63,500,000 2.56% (a) 3-month LIBOR June 08 $3,188,479
(a) Fixed rate
18
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 iden tifies 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 gain on the ex-dividend date. During the year ended July
31, 2004, the tax character of distributions paid was as follows: ordinary
income $52,089,473 and long-term capital gains $1,013,377. During the year
ended July 31, 2005, the tax character of distributions paid was as
follows: ordinary income $48,552,946.
As of July 31, 2005, the components of distributable earnings on a tax
basis included $1,597,877 of undistributed ordinary income and $4,235,205
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 John Hancock
Financial Services, Inc. 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 asset value and the value attributable to the
Auction Preferred Shares (collectively "managed assets").
The Adviser has contractually agreed to limit the Fund's management fee, on
an annual basis, 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 expense reductions related to the
reduction in manage ment fees amounted to $1,590,052 for the year ended
July 31, 2005. 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 year
amounted to $186,277. The Fund also paid the Adviser the amount of $7 for
certain publishing services, included in the printing fees and the amount
of $11,982 for certain compliance costs, included in the miscellaneous
expenses.
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
19
Fund makes investments into other John Hancock funds, as applicable, to
cover its liability for the deferred compensation. Investments to cover the
Fund's deferred compensation liability are recorded on the Fund's books as
an other asset. The deferred compensation liability and the related other
asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investments, as well as any unrealized
gains or losses. The Deferred Compensation Plan investments had no impact
on the operations of the Fund.
The Fund is listed for trading on the New York Stock Exchange ("NYSE") and
has filed with the NYSE its chief executive officer certification regarding
compliance with the NYSE's listing standards. The Fund also files with the
Securities and Exchange Commission the certification of its chief executive
officer and chief accounting officer required by Section 302 of the
Sarbanes-Oxley Act.
Note C
Fund share transactions
Common shares
This listing illustrates the Fund's distributions reinvested,
reclassification of the Fund's capital accounts and the number of common
shares outstanding at the beginning and end of the last two periods, along
with the corresponding dollar value.
Year ended 7-31-04 Year ended 7-31-05
Shares Amount Shares Amount
Beginning of period 21,044,196 $498,485,121 21,059,736 $498,945,163
Distributions reinvested 15,540 404,312 -- --
Reclassification of
capital accounts -- 55,730 -- (13,139)
End of period 21,059,736 $498,945,163 21,059,736 $498,932,024
Auction preferred shares
The Fund issued total of 10,160 Auction Preferred Shares (2,032 shares of
Series M, 2,032 shares of Series T, 2,032 shares of series W, 2032 shares
of Series TH and 2,032 shares of Series F) (collectively, the "APS") on
January 29, 2003, in a public offering. The underwriting discount of
$2,540,000 has been charged to capital paid-in of common shares during the
period ended July 31, 2003. Offering costs of $698,787 related to common
shares and $324,856 incurred in connection with the preferred shares were
charged to the Fund's capital paid-in during the period ended July 31,
2003.
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 Series W, which reset its rate on July
28, 2005, at which time the Fund elected a Special Dividend Payment of 182
days for the subsequent distributions). During the year ended July 31,
2005, dividend rates on APS ranged as follows: Series M ranged from 1.20%
to 3.25%, Series T from 1.50% to 3.50%, Series W from 2.05% to 3.90%,
Series TH from 1.25% to 3.40% and Series F from 1.55% to 3.45%. 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
20
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
shareholders.
Note D
Investment
transactions
Purchases and proceeds from sales or maturities of securities, other than
short-term securities and obligations of the U.S. government, during the
year ended July 31, 2005, aggregated $148,267,070 and $118,197,626,
respectively.
The cost of investments owned on July 31, 2005, including short-term
investments, for federal income tax purposes was $756,430,482. Gross
unrealized appreciation and depreciation of investments aggregated
$50,530,125 and $10,483,927, respectively, resulting in net unrealized
appreciation of $40,046,198. The difference between book basis and tax
basis net unrealized appreciation of investments is attributable primarily
to the tax deferral of losses on amortization of premiums on debt
securities and financial future contracts.
Note E
Reclassification
of accounts
During the year ended July 31, 2005, the Fund reclassified amounts to
reflect an increase in accumulated net realized gain on investments of
$19,916, a decrease in accumulated net investment income of $6,777 and a
decrease in capital paid-in of $13,139. This represents the amounts
necessary to report these balances on a tax basis, excluding certain
temporary differences, as of July 31, 2005. 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, non-deductible organizational costs,
amortization of premium and swap contracts. The calculation of net
investment income per share in the Fund's Financial Highlights excludes
these adjustments.
Change in
Independent Auditor
(unaudited)
Based on the recommendation of the Audit Committee of the Fund, the Board
of Trustees has determined not to retain Deloitte & Touche LLP as the
Fund's Independent Registered Public Accounting Firm and voted to appoint
PricewaterhouseCoopers LLP for the fiscal year ending July 31, 2006. During
the two most recent fiscal years, Deloitte & Touche LLP's audit reports
contained no adverse opinion or disclaimer of opinion; nor were their
reports qualified as to uncertainty, audit scope or accounting principles.
Further, there were no disagreements between the Fund and Deloitte & Touche
LLP on accounting principles, financial statements disclosures or audit
scope, which, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused them to make reference to the disagreement in their
reports.
21
AUDITORS'
REPORT
Report of Deloitte
& Touche LLP,
Independent
Registered Public
Accounting Firm
To the Board of Trustees and Shareholders of John Hancock Preferred Income
Fund II,
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of John Hancock Preferred Income
Fund II (the "Fund"), including the schedule of investments as of July 31,
2005, and the related statement of operations for the year then ended, and
the statements of changes in net assets for the years ended July 31, 2004
and 2005 and the the financial highlights for each of the years in the
two-year period ended July 31, 2005 and from the period from November 29,
2002 through 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 audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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. The Fund is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned at July 31, 2005, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of the Fund as of July 31, 2005, and the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 12, 2005
22
TAX
INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund, if any, paid during its
taxable year ended July 31, 2005.
With respect to the long-term dividends paid by the Fund for the fiscal
year ended July 31, 2005, 35.44% 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 2005.
Shareholders will be mailed a 2005 U.S. Treasury Department Form 1099-DIV
in January 2006. This will reflect the total of all distributions that are
taxable for calendar year 2005.
23
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.
By-laws
On December 16, 2003, the Trustees approved the following change to the
Fund's by-laws. The auction preferred shares section of the Fund's
by-laws was changed to update the rating agency requirements in keeping
with recent changes to the agencies' basic maintenance reporting
requirements for leveraged closed-end funds. By-laws now require an
independent accountant's confirmation only once per year, at the Fund's
fiscal year end, and changes to the agencies' basic maintenance reporting
requirements that include modifications to the eligible assets and their
respective discount factors. These revisions bring the Fund's by-laws in
line with current rating agency requirements.
On September 14, 2004, the Trustees approved an amendment to the Fund's
by-laws increasing the maximum ap plicable dividend rate ceiling on the
preferred shares to con form with the modern calculation methodology used
by the industry and other John Hancock funds.
Dividends and
distributions
During the year ended July 31, 2005, dividends from net investment income
totaling $2.010 per share were paid to shareholders. The dates of payments
and the amounts per share are as follows:
INCOME
PAYMENT DATE DIVIDEND
---------------------------------
September 1, 2004 $0.180
October 1, 2004 0.180
November 1, 2004 0.180
December 1, 2004 0.180
December 31, 2004 0.180
February 1, 2005 0.180
March 1, 2005 0.155
April 1, 2005 0.155
May 2, 2005 0.155
June 1, 2005 0.155
June 30, 2005 0.155
July 29, 2005 0.155
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.
24
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 participants'
accounts. Such purchases will be made promptly after the payable date for
such dividend and, in any event, prior to the next ex-dividend date after
such date, except where necessary to comply with federal securities laws.
If, before the Plan Agent has completed its purchases, the market price
exceeds the net asset value of the common shares, the average per share
purchase price paid by the Plan Agent may exceed the net asset value of the
common shares, resulting in the acquisition of fewer shares than if the
dividend had been paid in shares issued by the Fund.
Each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends and distributions. The cost
per share of the shares purchased for each participant's account will be
the average cost, including brokerage commissions, of any shares purchased
on the open market plus the cost of any shares issued by the Fund. There
will be no brokerage charges with respect to common shares issued directly
by the Fund. There are no other charges to participants for reinvesting
dividends or capital gain distributions.
Participants in the Plan may withdraw from the Plan at any time by
contacting the Plan Agent by telephone, in writing or by visiting the Plan
Agent's Web site at www.melloninvestor.com. Such withdrawal will be
effective immediately if received not less than ten days prior to a
dividend record date; otherwise, it will be effective for all subsequent
dividend record dates. When a participant withdraws from the Plan or upon
termination of the Plan, as provided below, certificates for whole common
shares credited to his or her account under the Plan will be issued and a
cash payment will be made for any fraction of a share credited to such
account.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the
accounts, including information needed by the shareholders for personal and
tax 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
25
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.
Shareholder meeting (unaudited)
On March 7, 2005, the Annual Meeting of the Fund was held to elect five
Trustees and to ratify the actions of the Trustees in selecting independent
auditors for the Fund.
Proxies covering 20,554,644 shares of beneficial interest were voted at the
meeting. The common shareholders elected the following Trustees to serve
until their respective successors are duly elected and qualified, with the
votes for each Trustee tabulated as follows:
WITHHELD
FOR AUTHORITY
---------------------------------------------------------
James F. Carlin 20,376,783 168,058
William H. Cunningham 20,377,228 167,613
Richard P. Chapman, Jr. 20,372,754 172,087
James A. Shepherdson* 20,381,471 163,370
* Mr. James A. Shepherdson resigned effective July 15, 2005.
The preferred shareholders elected Patti McGill Peterson to serve as the
Fund's Trustee until her successor is duly elected and qualified, with the
votes tabulated as follows: 9,780 FOR, 0 AGAINST, 23 ABSTAINING.
The common and preferred shareholders ratified the Trustees' selection of
Deloitte & Touche LLP as the Fund's independent auditor for the fiscal year
ending July 31, 2005, with the votes tabulated as follows: 20,361,952 FOR,
81,414 AGAINST and 111,278 ABSTAINING.
26
Board Consideration
of and Continuation
of Investment
Advisory Agreement:
John Hancock
Preferred Income Fund II
Section 15(c) of the Investment Company Act of 1940 (the "1940 Act")
requires the Board of Trustees (the "Board") of John Hancock Preferred
Income Fund II (the "Fund"), including a majority of the Trustees who have
no direct or indirect interest in the investment advisory agreement and are
not "interested persons" of the Fund, as defined in the 1940 Act (the
"Independent Trustees"), annually to review and consider the continuation
of the investment advisory agreement (the "Advisory Agreement") with John
Hancock Advisers, LLC (the "Adviser") for the Fund.
At meetings held on May 19-20 and June 6-7, 2005, the Board, including the
Independent Trustees, considered the factors and reached the conclusions
described below relating to the selection of the Adviser and the
continuation of the Advisory Agreement. During such meetings, the Board's
Contracts/Operations Committee and the Independent Trustees also met in
executive sessions with their independent legal counsel. In evaluating the
Advisory Agreement, the Board, including the Contracts/Operations Committee
and the Independent Trustees, reviewed a broad range of information
requested for this purpose by the Independent Trustees, including but not
limited to the following: (i) the investment performance of the Fund and a
broader universe of relevant funds (the "Universe") selected by Lipper Inc.
("Lipper"), an independent provider of investment company data, for a range
of periods, (ii) advisory and other fees incurred by, and the expense
ratios of, the Fund and a peer group of comparable funds selected by Lipper
(the "Peer Group"), (iii) the advisory fees of comparable portfolios of
other clients of the Adviser, (iv) the Adviser's financial results and
condition, including its and certain of its affiliates' profitability from
services performed for the Fund, (v) breakpoints in the Fund's and the Peer
Group's fees and a study undertaken at the direction of the Independent
Trustees as to the allocation of the benefits of economies of scale between
the Fund and the Adviser, (vi) the Adviser's record of compliance with
applicable laws and regulations, with the Fund's investment policies and
restrictions, and with the Fund's Code of Ethics and the structure and
responsibilities of the Adviser's compliance department, (vii) the
background and experience of senior management and investment
professionals, and (viii) the nature, cost and character of advisory and
non-investment management services provided by the Adviser and its
affiliates.
Nature, Extent and Quality
of Services
The Board considered the ability of the Adviser, based on its resources,
reputation and other attributes, to attract and retain qualified investment
professionals, including research, advisory, and supervisory personnel. The
Board further considered the compliance programs and compliance records of
the Adviser. In addition, the Board took into account the administrative
services provided to the Fund by the Adviser and its affiliates.
Based on the above factors, together with those referenced below, the Board
concluded that, within the context of its full deliberations, the nature,
extent and quality of the investment advisory services provided to the Fund
by the Adviser were sufficient to support renewal of the Advisory
Agreement.
Fund Performance
The Board noted that the Fund had less than three full years of operational
history, and considered the performance results for the Fund reported by
Lipper through December 31, 2004. The
27
Board also considered these results in comparison to the performance of the
Universe, as well as the Fund's benchmark indices. Lipper determined the
Universe for the Fund. The Board reviewed with a repre sentative of Lipper
the methodology used by Lipper to select the funds in the Universe and the
Peer Group.
The Board noted that the performance of the Fund was not appreciably below
the median and average performance of its Universe for the time period
under review. The Board also noted that the Fund performed lower than its
benchmark index, the Lipper Closed-End Income and Preferred Funds Index, as
did the Universe. The Board recognized the relatively short operational
history of the Fund and indicated its intent to continue to monitor the
Fund's performance trends.
Investment Advisory Fee
Rates and Expenses
The Board reviewed and considered the contractual investment advisory fee
rate payable by the Fund to the Adviser for investment advisory services
(the "Advisory Agreement Rate"). In addition, the Board reviewed and
considered the existing fee waiver/limit arrangements applicable to the
Advisory Agreement Rate and considered the Advisory Agreement Rate after
taking the waivers/limits into account (the "Net Advisory Rate"). The Board
received and considered information comparing the Advisory Agreement Rate
and the Net Advisory Rate with fees for the Peer Group. The Board noted
that the Advisory Agreement Rate was near the mid-range of other funds in
the Peer Group, but noted that the Peer Group included very few funds. The
Board also noted that the Net Advisory Rate was lower than the median rate
of the Peer Group. The Board concluded that the Advisory Agreement Rate and
the Net Advisory Rate were reasonable in relation to the services provided.
The Board received and considered information regarding the Fund's total
operating expense ratio and its various components, including contractual
advisory fees, actual advisory fees, non-management fees, transfer agent
fees and custodian fees, including and excluding investment-related
expenses. The Board also considered comparisons of these expenses to the
Peer Group and the Universe. The Board noted that the total operating
expense ratio of the Fund was lower than the Peer Group's and Universe's
median total operating expense ratio.
The Adviser also discussed the Lipper data and rankings, and other relevant
information, for the Fund. Based on the above-referenced considerations and
other factors, the Board concluded that the Fund's overall expense results
and performance supported the re-approval of the Advisory Agreement.
Profitability
The Board received and considered a detailed profitability analysis of the
Adviser based on the Advisory Agreement, as well as on other relationships
between the Fund and the Adviser and its affiliates. The Board concluded
that, in light of the costs of providing investment management and other
services to the Fund, the profits and other ancillary benefits reported by
the Adviser were not unreasonable.
Economies of Scale
The Board received and considered general information regarding economies
of scale with respect to the management of the Fund, including the Fund's
ability to appropriately benefit from economies of scale under the Fund's
fee structure. The Board recognized the inherent limitations of any
analysis of economies of scale, stemming largely from the Board's
understanding that most of the Adviser's costs are not specific to
individual Funds, but rather are incurred across a variety of products and
services.
The Board observed that the Advisory Agreement did not offer breakpoints.
However, the Board considered the
28
limited relevance of economies of scale in the context of a closed-end fund
that, unlike an open-end fund, does not continuously offer its shares, and
concluded that the fees were fair and equitable based on relevant factors,
including the Fund's total expenses ranking relative to its Peer Group.
Information About Services to Other Clients
The Board also received information about the nature, extent and quality of
services and fee rates offered by the Adviser to its other clients,
including other registered investment companies, institutional investors
and separate accounts. The Board concluded that the Advisory Agreement Rate
was not unreasonable, taking into account fee rates offered to others by
the Adviser and giving effect to differences in services covered by such
fee rates.
Other Benefits to the Adviser
The Board received information regarding potential "fall-out" or ancillary
benefits received by the Adviser and its affiliates as a result of the
Adviser's relationship with the Fund. Such benefits could include, among
others, benefits directly attributable to the relationship of the Adviser
with the Fund and benefits potentially derived from an increase in the
business of the Adviser as a result of its relationship with the Fund (such
as the ability to market to shareholders other financial products offered
by the Adviser and its affiliates).
The Board also considered the effectiveness of the Adviser's and the Fund's
policies and procedures for complying with the requirements of the federal
securities laws, including those relating to best execution of portfolio
transactions and brokerage allocation.
Other Factors and Broader Review
As discussed above, the Board reviewed detailed materials received from the
Adviser as part of the annual re-approval process under Section 15(c) of
the 1940 Act. The Board also regularly reviews and assesses the quality of
the services that the Fund receives throughout the year. In this regard,
the Board reviews reports of the Adviser at least quarterly, which include,
among other things, a detailed portfolio review, detailed fund performance
reports and compliance reports. In addition, the Board meets with portfolio
managers and senior investment officers at various times throughout the
year.
After considering the above-described factors and based on its
deliberations and its evaluation of the information described above, the
Board concluded that approval of the continuation of the Advisory Agreement
for the Fund was in the best interest of the Fund and its shareholders.
Accordingly, the Board unanimously approved the continuation of the
Advisory Agreement.
29
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
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
Charles L. Ladner, 2 Born: 1938 2002 51
Independent Chairman (since 2004); Chairman and Trustee, Dunwoody
Village, Inc. (retirement services) (until 2003); 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).
James F. Carlin, Born: 1940 2002 51
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 (engineering) (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).
Richard P. Chapman, Jr., 2 Born: 1935 2005 51
President and Chief Executive Officer, Brookline Bancorp Inc. (lending)
(since 1972); Director, Lumber Insurance Co. (insurance) (until 2000);
Chairman and Director, Northeast Retirement Services, Inc. (retirement
administration) (since 1998).
William H. Cunningham, Born: 1944 2002 51
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 (until 2004), STC Broadcasting,
Inc. and Sunrise Television Corp. (electronic manufacturing) (until 2001),
Symtx, Inc. (electronic manufacturing) (since 2001), Adorno/Rogers Technology,
Inc. (until 2004), Pinnacle Foods Corporation (until 2003), rateGenius (Internet
30
Independent Trustees (continued)
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
William H. Cunningham, Born: 1944 (continued) 2002 51
service) (until 2003), 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 (until 2003); Advisory Director, Chase Bank (formerly Texas
Commerce Bank -- Austin) (since 1988), LIN Television (since 2002), WilTel
Communications (until 2003) and Hayes Lemmerz International, Inc.
(diversified automotive parts supply company) (since 2003).
Ronald R. Dion, Born: 1946 2002 51
Chairman and Chief Executive Officer, R.M. Bradley & Co., Inc.; Director,
The New England Council and Massachusetts Roundtable; Trustee, North
Shore Medical Center; Director, Boston Stock Exchange; Director, BJ's
Wholesale Club, Inc. and a corporator of the Eastern Bank; Trustee,
Emmanuel College; Director, Boston Municipal Research Bureau; Member
of the Advisory Board, Carroll Graduate School of Management at
Boston College.
John A. Moore, 2 Born: 1939 2002 51
President and Chief Executive Officer, Institute for Evaluating Health
Risks, (nonprofit institution) (until 2001); Chief Scientist, Sciences
International (health research) (until 2003); Principal, Hollyhouse
(consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002).
Patti McGill Peterson, 2 Born: 1943 2002 51
Executive Director, Council for International Exchange of Scholars and
Vice President, Institute of International Education (since 1998);
Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until
1998); Former President of Wells College and St. Lawrence University;
Director, Niagara Mohawk Power Corporation (until 2003); Director, Ford
Foundation, International Fellowships Program (since 2002); Director,
Lois Roth Endowment (since 2002); Director, Council for International
Educational Exchange (since 2003).
Steven R. Pruchansky, Born: 1944 2002 51
Chairman and Chief Executive Officer, Greenscapes of Southwest
Florida, Inc. (since 2000); Director and President, Greenscapes of
Southwest Florida, 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).
31
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
Keith F. Hartstein, Born: 1956 2005
President and Chief Executive Officer
Senior Vice President, Manulife Financial Corporation (since 2004); Director,
President and Chief Executive Officer, John Hancock Advisers, LLC (the
"Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group")
(holding company); Director, President and Chief Executive Officer, John
Hancock Funds, LLC. ("John Hancock Funds"); Director, President and Chief
Executive Officer, Sovereign Asset Management Corporation ("SAMCorp.");
Director, John Hancock Signature Services, Inc.; President, John Hancock Trust;
Chairman and President, NM Capital Management, Inc. (NM Capital) (since
2005); Chairman, Investment Company Institute Sales Force Marketing
Committee (since 2003); Executive Vice President, John Hancock Funds, LLC
(until 2005).
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).
Francis V. Knox, Jr., Born: 1947 2005
Vice President and Chief Compliance Officer
Vice President and Chief Compliance Officer for John Hancock Investment
Company, John Hancock Life Insurance Company (U.S.A.), John Hancock Life
Insurance Company and John Hancock Funds (since 2005); Fidelity Investments --
Vice President and Assistant Treasurer, Fidelity Group of Funds (until 2004);
Fidelity Investments -- Vice President and Ethics & Compliance Officer (until 2001).
The business address for all Trustees and Officers is 601 Congress Street,
Boston, Massachusetts 02210-2805.
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.
32
For more information
The Fund's proxy voting policies, procedures and records are available without
charge, upon request:
By phone On the Fund's Web site On the SEC's Web site
1-800-225-5291 www.jhfunds.com/proxy www.sec.gov
Investment adviser
John Hancock Advisers, LLC
601 Congress Street
Boston, MA 02210-2805
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer agent and
dividend disburser
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Transfer agent for APS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, NY 10017
Legal counsel
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109-1803
Independent registered
public accounting firm
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116-5022
Stock symbol
Listed New York
Stock Exchange:
HPF
For shareholder assistance
refer to page 26
How to contact us
Internet www.jhfunds.com
Mail Regular mail:
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Phone Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7054
24-hour automated information 1-800-843-0090
TDD line 1-800-231-5469
A listing of month-end portfolio holdings is available on our Web site,
www.jhfunds.com. A more detailed portfolio holdings summary is available on
a quarterly basis 60 days after the fiscal quarter on our Web site or upon
request by calling 1-800-225-5291, or on the Securities and Exchange
Commission's Web site, www.sec.gov.
33
[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 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
P110A 7/05
9/05
ITEM 2. CODE OF ETHICS.
As of the end of the period, July 31, 2005, 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.
The code of ethics was amended effective February 1, 2005 to address new
Rule 204A-1 under the Investment Advisers Act of 1940 and to make other
related changes.
The most significant amendments were:
(a) Broadening of the General Principles of the code to cover compliance
with all federal securities laws.
(b) Eliminating the interim requirements (since the first quarter of
2004) for access persons to preclear their personal trades of John Hancock
mutual funds. This was replaced by post-trade reporting and a 30 day hold
requirement for all employees.
(c) A new requirement for "heightened preclearance" with investment
supervisors by any access person trading in a personal position worth
$100,000 or more.
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.
(a) Audit Fees
The aggregate fees billed for professional services rendered by the
principal accountant(s) for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant(s) in
connection with statutory and regulatory filings or engagements amounted to
$32,850 for the fiscal year ended July 31, 2004 and $34,500 for the fiscal
year ended July 31, 2005. These fees were billed to the registrant and were
approved by the registrant's audit committee.
(b) Audit-Related Services
There were no audit-related fees during the fiscal year ended July 31, 2004
and fiscal year ended July 31, 2005 billed to the registrant or to the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the adviser that provides ongoing services to the
registrant ("control affiliates").
(c) Tax Fees
The aggregate fees billed for professional services rendered by the
principal accountant(s) for the tax compliance, tax advice and tax planning
("tax fees") amounted to $2,250 for the fiscal year ended July 31, 2004 and
$2,400 for the fiscal year ended July 31, 2005. The nature of the services
comprising the tax fees was the review of the registrant's income tax
returns and tax distribution requirements. These fees were billed to the
registrant and were approved by the registrant's audit committee. There
were no tax fees billed to the control affiliates.
(d) All Other Fees
The all other fees billed to the registrant for products and services
provided by the principal accountant were $4,000 for the fiscal year ended
July 31, 2004 and $4,000 for the fiscal year ended July 31, 2005. There
were no other fees during the fiscal year ended July 31, 2004 and July 31,
2005 billed to control affiliates for products and services provided by the
principal accountant. The nature of the services comprising the all other
fees was related to the principal accountant's report on the registrant's
Eligible Asset Coverage. These fees were approved by the registrant's audit
committee.
(e)(1) See attachment "Approval of Audit, Audit-related, Tax and Other
Services", with the audit committee pre-approval policies and procedures.
(e)(2) There were no fees that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended July 31,
2004 and July 31, 2005 on behalf of the registrant or on behalf of the
control affiliates that relate directly to the operations and financial
reporting of the registrant.
(f) According to the registrant's principal accountant, for the fiscal year
ended July 31, 2005, the percentage of hours spent on the audit of the
registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons who were not full-time, permanent
employees of principal accountant was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant(s)
for services rendered to the registrant and rendered to the registrant's
control affiliates for each of the last two fiscal years of the registrant
were $24,550.00 for the fiscal year ended July 31, 2004, and $71,400 for
the fiscal year ended July 31, 2005.
(h) The audit committee of the registrant has considered the non-audit
services provided by the registrant's principal accountant(s) to the
control affiliates and has determined that the services that were not
pre-approved are compatible with maintaining the principal accountant(s)'
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee
comprised of independent trustees. The members of the audit committee are
as follows:
Charles L. Ladner - Chairman
Richard P. Chapman, Jr.
Dr. John A. Moore
Patti McGill Peterson
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The registrant has adopted procedures by which shareholders may
recommend nominees to the registrant's Board of Trustees. A copy of the
procedures is filed as an exhibit to this Form N-CSR. See attached
"John Hancock Funds - Administration Committee Charter".
ITEM 11. 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 12. 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)(1) Proxy Voting Policies and Procedures are attached.
(c)(2) Submission of Matters to a Vote of Security Holders is attached. See
attached "John Hancock Funds - Administration Committee Charter".
(c)(3) Approval of Audit, Audit-related, Tax and Other Services is
attached.
(c)(4) Contact person at the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Preferred Income Fund II
By: /s/ Keith F. Hartstein
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Keith F. Hartstein
President and Chief Executive Officer
Date: September 30, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Keith F. Hartstein
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Keith F. Hartstein
President and Chief Executive Officer
Date: September 30, 2005
By: /s/ John G. Vrysen
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John G. Vrysen
Executive Vice President and Chief Financial Officer
Date: September 30, 2005