John Hancock
Income
Securities Trust
ANNUAL
REPORT
12.31.02
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Maureen R. Ford, Vice Chairman and Chief Executive Officer,
in upper left-hand corner.]
WELCOME
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 17
Trustees & officers
page 31
For your information
page 37
Dear Fellow Shareholders,
Investors were probably never happier to close out a year than they were
in 2002, since it was the third consecutive year that the stock market
declined -- something that hadn't occurred in 60 years. Driving the fall
were fears of war, a weak economy, disappointing profits, rising oil
prices and a string of corporate scandals. All market sectors and
investment styles suffered. As a result, the broad Standard & Poor's 500
Index fell by 22.09% for the year, while the Dow Jones Industrial
Average lost 15.05% and the technology laden Nasdaq Composite Index lost
31.53%.
Despite a fourth-quarter rally, only 3.8% of U.S. stock mutual funds
made money last year, and the average U.S. stock fund lost 22.42%,
according to Lipper, Inc. Bond Funds provided the only bright spot,
producing mostly positive results, with the average long-term bond fund
rising 7.9%. It was the third year in which bonds outperformed stocks
and gained ground, confirming yet again the importance of having a
portfolio well-diversified among stocks, bonds and cash.
In fact, the disparity between stock and bond results over the last
three years means that many investors' portfolios may have shifted
substantially in their mix between stocks and bonds. We recommend
working with your investment professional to rebalance your assets
according to your long-term goals.
After three down years, no one can predict when the bear market cycle
will turn. Currently, uncertainties abound, as the good news seen in
signs of improving economic and corporate data, and efforts by
Washington to stimulate the economy, are offset by the possibility of
war and other geopolitical risks.
While all these factors are beyond our control, investors can take
charge of how they maneuver through the inevitable bull and bear market
cycles. We've said it before, but it bears repeating: the key is to keep
a long-term perspective and work with your investment professional to
develop and maintain a properly diversified portfolio. We believe this
offers the best protection in the tough times and the best means to
reach your long-term goals.
Sincerely,
/S/ MAUREEN R. FORD
Maureen R. Ford,
Chairman and Chief Executive Officer
YOUR FUND
AT A GLANCE
The Fund seeks
a high level of
current income
consistent with
prudent invest-
ment risk by
investing in a
diversified
portfolio of debt
securities.
Over the last twelve months
* Bonds gained ground for the third straight year as the U.S. economy
weakened and interest rates declined.
* Treasury and government bonds were the best performers, followed by
corporate and mortgage-backed securities.
* The Fund added mortgage-backed securities and lower-quality corporate
bonds, which offered the best relative values and attractive yields.
[Bar chart with heading "John Hancock Income Securities Trust." Under
the heading is a note that reads "Fund performance for the year ended
December 31, 2002." The chart is scaled in increments of 2% with 0% at
the bottom and 8% at the top. The first bar represents the 8.00% total
return for John Hancock Income Securities Trust. A note below the chart
reads "The total return for the Fund is at net asset value with all
distributions reinvested."]
Top 10 issuers
20.3% Federal National Mortgage Assn.
12.8% United States Treasury
4.7% Federal Home Loan Mortgage Corp.
2.9% Government National Mortgage Assn.
1.6% Financing Corp.
1.2% CIT Group, Inc.
1.1% Ford Motor Credit Co.
1.1% NiSource Finance Corp.
1.1% Household Finance Corp.
0.9% Midland Funding Corp. II
As a percentage of net assets on December 31, 2002.
BY BARRY H. EVANS, CFA, JEFFREY N. GIVEN, CFA, AND DAWN M. BAILLIE,
PORTFOLIO MANAGERS
John Hancock
Income Securities Trust
MANAGERS'
REPORT
With the recent retirement of James Ho, the Fund's day-to-day management
has been assumed by other members of the team, including John Hancock's
chief fixed-income officer Barry Evans, and Jeff Given and Dawn Baillie,
both of whom have been with John Hancock for more than 10 years managing
fixed-income investments.
In 2002, U.S. bonds gained ground for the third consecutive year as
interest rates declined sharply. Bonds advanced as a blossoming economic
recovery sputtered during the summer and hit another rough patch in the
fourth quarter, prompting the Federal Reserve to cut interest rates for
the 12th time in the past two years. Demand for bonds also got a boost
from the faltering stock market, where depressed earnings and fraudulent
financial reporting weakened investor confidence and chased many into
the relative safety of bonds.
"In 2002, U.S. bonds
gained ground for the
third consecutive year
as interest rates
declined sharply."
High-quality bonds benefited the most from the flight to safety. In
particular, Treasury bonds were the best performers as yields fell to
their lowest levels in more than 40 years. Corporate bonds struggled
early in the year as corporate scandals and poor earnings led to some
concerns about creditworthiness, but they outperformed during the last
half of the year. Mortgage- backed securities trailed the rest of the
bond market thanks to a huge wave of mortgage refinancing.
FUND PERFORMANCE
For the year ended December 31, 2002, John Hancock Income Securities
Trust produced a total return of 8.00% at net asset value. The average
closed-end BBB-rated corporate debt fund returned 7.53%, according to
Lipper, Inc., while the Lehman Brothers Government/Credit Bond Index
returned 11.04%.
[Photos of Barry Evans, Jeffrey Given and Dawn Baillie flush right next
to first paragraph.]
PORTFOLIO THEMES
In the first half of the year, the Fund was positioned for an economic
recovery that failed to materialize. More than half of the portfolio was
invested in corporate bonds, with an emphasis on companies that would
benefit the most from a rebounding economy, such as utilities,
telecommunications and media. However, these sectors wrestled with
overcapacity, competitive pressures, declining earnings and lingering
fallout from the high-profile scandals at Enron, WorldCom and Adelphia.
"We were also able to add to
the portfolio's yield by invest-
ing in preferred stocks."
In the summer and fall, we began to lower the portfolio's overall credit
quality in anticipation of a recovery in the credit cycle. This strategy
also allowed us to capture higher yields in a declining interest-rate
environment and make some favorable relative-value trades -- selling
bonds that had performed well in the first half of the year and buying
securities that had underperformed. Accordingly, we reduced the Fund's
holdings of Treasury bonds and higher-quality corporate bonds, and
replaced them with lower-rated corporate bonds and mortgage-backed
securities.
FINDING VALUE AMONG CORPORATE BONDS
As part of our trade down in the credit quality of the Fund's corporate
bonds, we boosted the percentage of below-investment- grade securities
(rated BB or lower) to 15% of the portfolio, up from around 10% at the
beginning of the year. These "high-yield" bonds were the performance
leaders in the bond market during the last few months of the year.
We found some of the best values in beaten-down sectors that were
already prominently featured in the portfolio, such as utilities and
telecom. Examples include Calpine and Mirant, two energy-trading
companies, and some of the more liquid lower-rated telecom bonds, like
Telus and Citizens Communications.
[Table at top left-hand side of page entitled "Top five sectors." The
first listing is U.S. government agencies 30%, the second is U.S.
government 13%, the third Utilities 8%, the fourth Finance 7%, and the
fifth Media 5%.]
We also added to our cyclical and financial holdings. Cyclical bonds
underperformed as the economy lost momentum at mid-year, so we snapped
up the bonds of paper company Abitibi- Consolidated, nickel producer
Inco, and petrochemical company Nova Chemicals, as well as TFM, a
Mexican railroad company. Among financial companies, we added CIT Group,
a diversified financial services firm that was spun off by Tyco in July,
and Capital One, a bank with a sizable credit-card business.
[Pie chart in middle of page with heading "Portfolio diversification As
a percentage of net assets on 12-31-02." The chart is divided into four
sections (from top to left): Corporate bonds 53%, U.S. government &
agency bonds 42%, Preferred stocks 4% and Short-term investments & other 1%.]
SHIFTING INTO MORTGAGES
The other main shift occurred within the highest-quality portion of the
portfolio. We took profits in some of the Fund's top-rated securities --
including Treasury bonds, asset-backed securities, and high-grade
corporate bonds -- and invested the proceeds in mortgage-backed
securities.
Mortgage-backed securities became attractive in late summer after
struggling for much of the year. Mortgage bonds tend to perform best
when interest rates are stable, but interest-rate volatility was high in
2002. In addition, the general decline in rates sparked a mortgage
refinancing boom that also weighed on mortgage-backed securities.
[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
NiSource followed by an up arrow with the phrase "Indiana utility
reduced leverage by issuing equity." The second listing is Household
Finance followed by an up arrow with the phrase "Sub-prime lender
acquired by HSBC." The third listing is Calpine followed by a down arrow
with the phrase "Energy generator hurt by high debt and excess
capacity."]
We also traded into mortgage-backed securities carrying current interest
rates, which are historically low. Emphasizing lower-coupon mortgages
enabled the Fund to maintain its income stream and avoid any adverse
impact from the heavy refinancing activity that occurred in the fall.
"We expect interest rates to
rise slightly but remain in a
fairly narrow range during
the first half of 2003."
ADDING YIELD WITH PREFERRED STOCKS
We were also able to add to the portfolio's yield by investing in
preferred stocks. In recent months, the preferred shares of many
companies offered dividend yields that were two to three percentage
points higher than prevailing corporate bond yields. Although the Fund's
position in preferred stocks is small, it has boosted the Fund's income
level. We focused on the preferred stocks of utilities and financial
companies.
OUTLOOK
We expect interest rates to rise slightly but remain in a fairly narrow
range during the first half of 2003. Although economic conditions are
likely to improve, we think growth will be moderate and that inflation
will remain low, keeping the Fed out of the picture. With corporate
scandals fading and a potential U.S.-Iraq war already factored into the
market, the flight-to-quality demand for Treasury bonds is likely to run
dry. Our strategy emphasizing mortgage-backed securities and
higher-yielding corporate bonds would fare well in a stable rate
environment.
This commentary reflects the views of the portfolio managers through the
end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
FUND'S
INVESTMENTS
Securities owned
by the Fund on
December 31, 2002
This schedule is divided into three main categories: publicly traded
bonds, preferred stocks and short-term investments. Publicly traded
bonds are further broken down by industry group. Short-term investments,
which represent the Fund's cash position, are listed last.
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
PUBLICLY TRADED BONDS 95.08% $169,797,084
(Cost $164,622,713)
Aerospace 0.69% $1,226,269
Jet Equipment Trust,
Equipment Trust Ctf Ser 95B2 08-15-14 (R) 10.910% CC $550 37,626
Raytheon Co.,
Note 03-01-10 8.300 BBB- 1,000 1,188,643
Automobile / Trucks 0.62% 1,115,415
ERAC USA Finance Co.,
Note 06-15-08 (R) 7.350 BBB+ 320 360,310
Note 12-15-09 (R) 7.950 BBB+ 340 392,382
Hertz Corp.,
Sr Note 06-01-12 7.625 BBB 380 362,723
Banks 3.10% 5,531,107
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 650 701,384
Barclays Bank Plc,
Perpetual Bond (6.86% to 6-15-32 then variable)
(United Kingdom) 06-15-49 ( R) 6.860 A+ 520 532,740
Capital One Bank,
Note 07-30-04 6.500 BBB- 1,015 992,662
Sr Note 02-01-06 6.875 BBB- 570 551,448
Royal Bank of Scotland Group Plc,
Bond (United Kingdom) 03-31-49 8.817 A- 380 426,498
Perpetual Bond (7.648% to 09-30-31 then variable)
(United Kingdom) 08-31-49 7.648 A- 440 509,265
UBS Preferred Funding Trust I,
Perpetual Bond (8.622% to 10-01-10 then variable)
10-01-49 8.622 AA- 1,085 1,311,486
Zions Financial Corp.,
Gtd Note (6.95% to 05-15-06 then variable)
05-15-11 6.950 BBB- 475 505,624
Building 0.19% 344,995
Toll Brothers, Inc.,
Note 11-15-12 ( R) 6.875 BBB- 335 344,995
Business Services -- Misc. 0.48% 861,259
Cendant Corp.,
Note 08-15-06 6.875 BBB 830 861,259
Chemicals 0.31% 551,100
Equistar Chemicals L.P./Equistar Funding Corp.,
Note 02-15-04 8.500 BB 350 346,500
Lyondell Chemical Co.,
Sr Sec Note 12-15-08 9.500 BB 220 204,600
Computers 0.23% 405,845
NCR Corp.,
Note 06-15-09 (R) 7.125 BBB- 390 405,845
Electronics 0.38% 687,675
UCAR Finance, Inc.,
Gtd Sr Note 02-15-12 10.250 B 865 687,675
Energy 0.74% 1,315,463
CalEnergy Co., Inc.,
Sr Bond 09-15-28 8.480 BBB- 550 647,226
Sr Note 10-15-07 7.630 BBB- 250 280,593
P&L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 9.625 B+ 367 387,644
Finance 7.19% 12,846,444
CIT Group, Inc.,
Med Term Note 12-08-03 5.570 A 1,460 1,484,763
Sr Note 04-02-07 7.375 A 525 572,360
Conseco Finance Securitizations Corp.,
Pass Thru Ctf Ser 2002-A Class A-3 04-15-32 5.330 AAA 870 889,904
Ford Motor Credit Co.,
Note 02-01-06 6.875 BBB 745 746,305
Note 10-28-09 7.375 BBB 1,290 1,278,212
General Motors Acceptance Corp.,
Note 08-28-07 6.125 BBB 515 521,113
Note 08-28-12 6.875 BBB 375 370,913
Household Finance Corp.,
Note 07-15-06 7.200 A- 405 438,185
Note 05-15-11 6.750 A- 965 1,028,872
Note 11-27-12 6.375 A- 440 459,330
ING Capital Funding Trust III,
Perpetual Bond (8.439% to 12-31-10
then variable) 12-31-49 8.439 A- 1,015 1,180,279
MBNA America Bank N.A.,
Sub Note 11-15-12 7.125 BBB 1,135 1,187,790
MDP Acquisitions Plc,
Sr Note (Ireland) 10-01-12 (R) 9.625 B 250 260,000
Morgan Stanley & Co., Inc.,
Traded Custody Receipts 06-15-12 (R) 6.799 Baa1 990 1,089,782
Newcourt Credit Group, Inc.,
Note Ser B (Canada) 02-16-05 6.875 A 425 446,715
PDVSA Finance Ltd.,
Note (Cayman Islands) 11-16-12 8.500 BB 360 284,400
Sears Roebuck Acceptance Corp.,
Note 04-15-12 6.700 A- 405 384,432
Yanacocha Receivables Master Trust,
Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 221 223,089
Food 0.52% 928,910
ConAgra Foods, Inc.,
Sub Note 09-15-04 7.400 BBB 145 157,120
Corn Products International, Inc.,
Sr Note 08-15-09 8.450 BBB- 760 771,790
Government -- U.S. 12.75% 22,762,787
United States Treasury,
Bond 08-15-17 8.875 AAA 1,215 1,775,750
Bond 05-15-18 9.125 AAA 495 741,533
Bond 08-15-25 6.875 AAA 4,430 5,603,086
Bond 02-15-31 5.375 AAA 9,615 10,481,850
Note 08-15-09 6.000 AAA 2,305 2,679,922
Note 11-15-12 4.000 AAA 1,460 1,480,646
Government -- U.S. Agencies 29.54% 52,748,073
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 11.250 AAA 83 93,018
30 Yr Pass Thru Ctf 08-01-32+ 6.500 AAA 2,075 2,161,907
30 Yr Pass Thru Ctf 09-01-32 6.500 AAA 461 480,529
CMO REMIC 2479-TB 11-15-11 5.000 AAA 895 931,178
CMO REMIC 2479-PM 07-15-21 5.000 AAA 1,275 1,315,893
CMO REMIC 2496-PE 07-15-31 5.500 AAA 645 663,544
CMO REMIC 2469-PB 12-15-25 6.000 AAA 1,420 1,484,080
CMO REMIC 2367-PJ 03-15-27 6.000 AAA 371 383,121
CMO REMIC 2469-PD 12-15-30 6.000 AAA 855 894,606
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 17 18,272
15 Yr Pass Thru Ctf 09-01-10 7.000 AAA 182 193,803
15 Yr Pass Thru Ctf 09-01-12 7.000 AAA 44 46,954
15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 871 911,852
15 Yr Pass Thru Ctf 01-01-16+ 5.500 AAA 6,630 6,868,269
15 Yr Pass Thru Ctf 04-01-17 7.000 AAA 203 216,255
15 Yr Pass Thru Ctf 01-01-18+ 5.000 AAA 1,120 1,146,949
30 Yr Pass Thru Ctf 10-01-23 7.000 AAA 205 217,144
30 Yr Pass Thru Ctf 01-01-30+ 6.000 AAA 12,860 13,290,013
30 Yr Pass Thru Ctf 02-01-32 7.000 AAA 359 377,628
30 Yr Pass Thru Ctf 04-01-32 7.000 AAA 1,456 1,531,732
30 Yr Pass Thru Ctf 05-01-32 7.000 AAA 2,200 2,313,715
30 Yr Pass Thru Ctf 06-01-32 6.500 AAA 1,494 1,555,778
30 Yr Pass Thru Ctf 07-01-32 6.500 AAA 1,609 1,676,355
30 Yr Pass Thru Ctf 07-01-32 6.500 AAA 905 942,643
30 Yr Pass Thru Ctf 11-01-32 6.500 AAA 1,136 1,190,930
30 Yr Pass Thru Ctf 01-01-33+ 5.500 AAA 85 86,673
30 Yr Pass Thru Ctf 02-01-33+ 5.500 AAA 350 355,359
CMO REMIC 2002-55-QB 08-25-12 5.500 AAA 1,320 1,384,229
CMO REMIC 2002-73-PE 10-25-31 5.500 AAA 1,575 1,618,313
Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 282 294,980
Financing Corp.,
Bond 02-08-18 9.400 AAA 2,000 2,910,324
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 01-15-32+ 6.000 AAA 1,080 1,123,200
30 Yr Pass Thru Ctf 09-15-28 to 12-15-31 6.500 AAA 2,151 2,260,188
30 Yr Pass Thru Ctf 07-15-31 to 03-15-32 7.000 AAA 1,415 1,499,856
30 Yr Pass Thru Ctf 04-15-21 9.000 AAA 93 102,959
30 Yr Pass Thru Ctf 11-15-19 to 02-15-25 9.500 AAA 121 136,253
30 Yr Pass Thru Ctf 11-15-20 10.000 AAA 60 69,571
Insurance 1.41% 2,513,966
Equitable Life Assurance Society USA,
Surplus Note 12-01-05 (R) 6.950 A+ 250 271,904
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 485 544,501
MONY Group, Inc. (The),
Sr Note 12-15-05 7.450 BBB+ 500 520,742
Sun Canada Financial Co.,
Sub Note 12-15-07 (R) 6.625 AA- 725 768,862
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 AA 355 407,957
Leisure 1.61% 2,882,794
Argosy Gaming Co.,
Sr Sub Note 09-01-11 9.000 B+ 210 222,338
Harrah's Operating Co., Inc.,
Sr Sub Note 12-15-05 7.875 BB+ 745 789,700
HMH Properties, Inc.,
Sr Note Ser A 08-01-05 7.875 BB- 345 339,825
Hyatt Equities LLC,
Note 06-15-07 (R) 6.875 BBB 310 308,756
Waterford Gaming LLC
Sr Note 03-15-10 (R) 9.500 B+ 205 212,175
Wynn Las Vegas LLC,
2nd Mtg Note 11-01-10 12.000 CCC+ 1,000 1,010,000
Machinery 0.24% 429,735
Kennametal, Inc.,
Sr Note 06-15-12 7.200 BBB 405 429,735
Media 5.38% 9,608,124
AOL Time Warner, Inc.,
Deb 04-15-31 7.625 BBB+ 640 657,782
AT&T Broadband Corp.,
Gtd Note 03-15-13 8.375 BBB 625 709,951
British Sky Broadcasting Group Plc,
Sr Note (United Kingdom) 07-15-09 8.200 BB+ 945 1,020,600
Clear Channel Communications, Inc.,
Note 06-15-05 7.875 BBB- 650 711,632
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 BBB 595 644,556
Cox Communications, Inc.,
Note 08-15-04 7.500 BBB 675 717,190
CSC Holdings, Inc.,
Sr Sub Deb 05-15-16 10.500 B+ 285 282,506
EchoStar DBS Corp.,
Sr Note 02-01-09 9.375 B+ 325 343,687
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 275 277,750
Grupo Televisa SA,
Note (Mexico) 09-13-11 8.000 BBB- 215 224,138
Sr Note (Mexico) 03-11-32 8.500 BBB- 640 608,000
Lenfest Communications, Inc.,
Sr Note 11-01-05 8.375 BBB 345 373,399
News America Holdings, Inc.,
Gtd Sr Deb 02-15-05 8.500 BBB- 525 567,676
Gtd Sr Deb 08-10-18 8.250 BBB- 540 591,800
Rogers Cablesystems Ltd.,
Gtd Note (Canada) 12-01-07 10.000 BBB- 80 81,600
Sr Note Ser B (Canada) 03-15-05 10.000 BBB- 445 458,350
TCI Communications, Inc.,
Sr Deb 02-01-12 9.800 BBB 235 282,475
Sr Deb 02-15-26 7.875 BBB 365 370,219
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 434 509,029
USA Interactive,
Note 01-15-13 (R) 7.000 BBB- 170 175,784
Medical 0.87% 1,549,823
Columbia/HCA Healthcare Corp.,
Note 07-01-07 7.000 BBB- 170 180,499
HCA - The Healthcare Co.,
Note 06-01-06 7.125 BBB- 495 524,570
Note 09-01-10 8.750 BBB- 235 270,461
Quest Diagnostics, Inc.,
Sr Note 07-12-06 6.750 BBB- 355 386,824
Triad Hospitals, Inc.,
Sr Note 05-01-09 8.750 B- 175 187,469
Metal 0.85% 1,521,649
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 8.875 BBB- 690 686,550
Inco Ltd.,
Bond (Canada) 09-15-32 7.200 BBB- 490 484,609
Newmont Mining Corp.,
Note 05-15-11 8.625 BBB 300 350,490
Mortgage Banking 2.95% 5,264,512
Commercial Mortgage Acceptance Corp.,
Commercial Mtg Pass Thru Ctf Ser 1999-C1
Class A-1 06-15-31 6.790 Aaa 535 587,631
ContiMortgage Home Equity Loan Trust,
Home Equity Pass Thru Ctf Ser 1995-2
Class A-5 08-15-25 8.100 AAA 458 457,359
Credit Suisse First Boston Mortgage Securities Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-C1
Class A-1A 05-17-40 6.260 AAA 843 893,521
Deutsche Mortgage & Asset Receiving Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-C1
Class C 06-15-31 6.861 A2 415 456,578
First Union National Bank-Chase Manhattan Bank
Commercial Mortgage Trust,
Commercial Mtg Pass Thru Ctf Ser 1999-C2
Class A-1 06-15-31 6.360 Aaa 459 492,052
GMAC Commercial Mortgage Securities, Inc.,
Mtg Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.853 Aaa 1,169 1,240,585
LB Commercial Mortgage Trust,
Commercial Mtg Pass Thru Ctf Ser 1999-C1
Class A-1 06-15-31 6.410 Aaa 578 624,831
UCFC Home Equity Loan Trust,
Home Equity Pass Thru Ctf Ser 1996-D1 Class A6
02-15-25 7.180 AAA 495 511,955
Oil & Gas 4.41% 7,877,013
Alberta Energy Co. Ltd.,
Note (Canada) 09-15-30 8.125 A- 370 469,038
Note (Canada) 11-01-31 7.375 A- 355 416,675
Colonial Pipeline Co.,
Sr Note 04-15-32 (R) 7.630 A 510 608,690
Forest Oil Corp.,
Sr Note 06-15-08 8.000 BB 210 221,550
Louis Dreyfus Natural Gas Corp.,
Sr Note 12-01-07 6.875 BBB+ 345 386,074
Nova Chemicals Corp.,
Sr Note (Canada) 05-15-06 7.000 BB+ 1,280 1,241,600
Occidental Petroleum Corp.,
Sr Deb 09-15-09 10.125 BBB 1,160 1,548,384
Pemex Project Funding Master Trust,
Gtd Note 10-13-10 9.125 BBB- 1,115 1,276,675
Tosco Corp.,
Note 02-15-30 8.125 A- 680 866,801
Valero Energy Corp.,
Note 06-15-05 8.375 BBB 210 224,418
Note 03-15-06 7.375 BBB 380 404,608
XTO Energy, Inc.,
Sr Note 04-15-12 7.500 BB 200 212,500
Paper & Paper Products 2.22% 3,958,474
Abitibi-Consolidated, Inc.,
Bond (Canada) 08-01-05 8.300 BBB- 1,115 1,188,186
Corporacion Durango S.A. de C.V.,
Sr Note (Mexico) 07-15-09 # (R) 13.750 CC 1,250 350,000
Stone Container Corp.,
Sr Note 02-01-11 9.750 B 285 304,950
Sr Note 07-01-12 8.375 B 1,000 1,025,000
Weyerhaeuser Co.,
Note 03-15-12 6.750 BBB 1,000 1,090,338
Real Estate Investment Trusts 0.80% 1,422,827
American Health Properties, Inc.,
Note 01-15-07 7.500 BBB+ 270 289,779
Cabot Industrial Properties, L.P.,
Note 05-01-04 7.125 BBB 380 395,118
Camden Property Trust,
Note 04-15-04 7.000 BBB 525 549,479
Healthcare Realty Trust, Inc.,
Sr Note 05-01-11 8.125 BBB- 175 188,451
Real Estate Operations 0.57% 1,011,822
Socgen Real Estate Co. LLC,
Perpetual Bond Ser A (7.64% to 09-30-07
then variable) 12-31-49 (R) 7.640 A 920 1,011,822
Retail 0.90% 1,608,797
Delhaize America, Inc.,
Gtd Note 04-15-06 7.375 BB+ 510 498,534
Gap, Inc. (The),
Note 12-15-08 10.550 BB+ 515 561,350
Staples, Inc.,
Note 10-01-12 (R) 7.375 BBB- 500 548,913
Telecommunications 5.52% 9,856,738
Citizens Communications Co.,
Note 05-15-06 8.500 BBB 790 874,842
Sr Note 08-15-04 6.375 BBB 335 343,235
Deutsche Telekom International Finance B.V.,
Bond (Coupon rate Step-up/down on rating)
(Netherlands) 06-15-05 7.750 A- 300 328,022
Bond (Coupon rate Step-up/down on rating)
(Netherlands) 06-15-10 8.000 BBB+ 1,005 1,157,493
France Telecom SA,
Note (France) 03-01-11 7.750 BBB- 1,135 1,312,366
PanAmSat Corp.,
Sr Note 02-01-12 8.500 B- 675 644,625
PTC International Finance B.V.,
Gtd Sr Sub Disc Note (Netherlands) 07-01-07 10.750 B+ 170 176,800
PTC International Finance II SA,
Gtd Sr Sub Note (Luxembourg) 12-01-09 11.250 B+ 135 143,100
Qwest Corp.,
Note 03-15-12 (R) 8.875 B- 620 601,400
Sprint Capital Corp.,
Note 11-15-03 5.700 BBB- 1,000 995,000
Note 01-30-06 7.125 Baa3 535 529,650
Telefonos de Mexico S.A. de C.V.,
Sr Note (Mexico) 01-26-06 8.250 BBB- 705 771,975
Telus Corp.,
Note (Canada) 06-01-11 8.000 BBB 895 859,200
Verizon New York, Inc.,
Deb Ser B 04-01-32 7.375 A+ 700 806,330
VoiceStream Wireless Corp.,
Sr Note 09-15-09 11.500 Baa2 295 312,700
Transportation 1.45% 2,594,668
Burlington Northern Santa Fe Corp.,
Deb 08-15-30 7.950 BBB+ 690 865,921
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA- 565 490,294
Humpuss Funding Corp.,
Note 12-15-09 (R) 7.720 B3 280 222,354
Northwest Airlines 1996-1 Pass Through Trusts,
Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BB- 97 66,765
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BB 333 159,866
NWA Trust,
Sr Note Ser A 12-21-12 9.250 AA- 479 451,368
TFM S.A. de C.V.,
Gtd Sr Disc Note (Mexico) 06-15-09 11.750 BB- 345 338,100
Utilities 8.36% 14,933,829
AES Eastern Energy L.P.,
Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BB+ 410 377,565
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 9.000 BBB- 463 512,810
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BBB- 700 742,154
Calpine Canada Energy Finance ULC,
Sr Note (Canada) 05-01-08# 8.500 B+ 260 113,100
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BBB 1,205 1,209,014
CMS Energy Corp.,
Sr Note Ser B 01-15-04 6.750 B+ 400 372,000
Commonwealth Edison Co.,
1st Mtg 02-15-23 8.375 A- 290 302,913
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 BBB- 1,081 1,075,595
GG1B Funding Corp.,
Deb 01-15-11 7.430 BBB- 328 324,472
HQI Transelect Chile SA,
Sr Note (Chile) 04-15-11 7.875 A- 510 564,923
Hydro-Quebec,
Gtd Bond Ser HY (Canada) 01-15-22 8.400 A+ 340 448,719
Indiana Michigan Power Co.,
1st Mtg Note 12-15-22 8.500 BBB+ 240 251,875
Kinder Morgan, Inc.,
Bond 09-01-12 ( R) 6.500 BBB 335 350,098
Long Island Lighting Co.,
Deb 03-15-23 8.200 A- 640 669,322
MidAmerican Energy Holdings,
Sr Note 10-01-12 (R) 5.875 BBB- 215 217,952
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 BB- 1,410 1,438,200
Deb Ser B 07-23-06 13.250 BB- 225 232,875
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 ( R) 9.625 BBB- 140 158,041
Niagara Mohawk Power Corp.,
Sec Fac Bond 01-01-18 8.770 A 735 769,182
NiSource Finance Corp.,
Note 11-15-03 7.500 BBB 1,350 1,360,651
Note 11-15-10 7.875 BBB 580 637,436
Pinnacle Partners,
Sr Note 08-15-04 (R) 8.830 BB+ 480 452,844
Pinnacle West Capital Corp.,
Sr Note 04-01-06 6.400 BBB- 455 463,236
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BBB- 495 550,851
PSEG Energy Holdings, Inc.,
Sr Note 02-15-08 8.625 BBB- 340 283,900
Tiers-MIR-2001-14,
Coll Trust 06-15-04 (R) 7.200 BB 645 277,350
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 8.090 BBB- 720 776,751
Waste Disposal Service & Equipment 0.80% 1,436,971
Allied Waste North America, Inc.,
Sr Sub Note Ser B 08-01-09 10.000 B+ 875 868,437
Republic Services, Inc.,
Sr Note 08-15-11 6.750 BBB 520 568,534
ISSUER, DESCRIPTION SHARES VALUE
PREFERRED STOCKS 4.54% $8,107,649
(Cost $8,153,904)
Abbey National Plc, 7.375% (United Kingdom) 41,300 1,057,280
California Federal Preferred Capital Corp., 9.125%, Ser A 37,160 966,532
CSC Holdings, Inc., 11.125%, Ser M 14,029 1,304,697
CSC Holdings, Inc., 11.750%, Ser H 4,076 387,220
Dominion Resources, Inc., 9.500% 20,000 1,083,800
DTE Energy Co., 8.750% 10,000 272,900
KeySpan Corp., 8.750% 20,000 1,011,400
Morgan Stanley Capital Trust II, 7.250% 32,900 861,980
TECO Energy, Inc., 9.500% 31,600 628,840
Viacom, Inc., 7.250% 20,000 533,000
ISSUER, DESCRIPTION, INTEREST PAR VALUE
MATURITY DATE RATE (000S OMITTED) VALUE
SHORT-TERM INVESTMENTS 11.81% $21,101,000
(Cost $21,101,000)
Joint Repurchase Agreement 11.81%
Investment in a joint repurchase agreement transaction with
UBS Warburg, Inc. -- Dated 12-31-02, due 01-02-03
(Secured by U.S. Treasury Bond 8.500% due 02-15-20,
U.S. Treasury Notes 4.625% due 02-28-02 and 5.375%
due 06-30-03, U.S. Treasury Inflation Indexed Notes 3.500%
due 01-15-11 and 3.000% due 07-15-12) 1.150% $21,101 21,101,000
TOTAL INVESTMENTS 111.43% $199,005,733
OTHER ASSETS AND LIABILITIES, NET (11.43%) ($20,417,501)
TOTAL NET ASSETS 100.00% $178,588,232
Notes to Schedule of Investments
(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 $11,837,556 or 6.63% of
the Fund's net assets as of December 31, 2002.
+ All or a portion of these securities, having an aggregate value of
$25,032,370 or 1.40% of the Fund's net assets, have been purchased
as forward commitments; that is the Fund has agreed on a trade date to
take delivery of and make payment for such securities on a delayed basis
subsequent to the date of this schedule. The purchase price and interest
rate of such securites are fixed at trade date, although the Fund does not
earn any interest on such securities until settlement date. The Fund has
instructed its Custodian Bank to segregate assets with a current value at
least equal to the amount of the forward commitments. Accordingly, the
market value of $25,938,681 of United States Treasury Bonds 5.375% thru
9.125% due 8-15-17 thru 2-15-31, United States Treasury Notes 6.000%
due 8-15-09 and 4.000% due 11-15-12, Federal National Mortgage Assn.
5.500% thru 7.000% due 8-25-12 thru 11-01-32 has been segregated
to cover the forward commitments.
# Par value of foreign bond is expressed in local currency, as shown
parenthetically in security description.
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investors Service or John Hancock Advisers, LLC
where Standard & Poor's ratings are not available.
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.
ASSETS AND
LIABILITIES
December 31, 2002
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 $193,877,617, including
$27,373,949 of securities loaned) $199,005,733
Cash 37,836
Receivable for investments sold 2,190,011
Dividends and interest receivable 2,558,099
Other assets 12,966
Total assets 203,804,645
LIABILITIES
Payable for investments purchased 24,845,406
Payable to affiliates 286,206
Other payables and accrued expenses 84,801
Total liabilities 25,216,413
NET ASSETS
Capital paid-in 175,212,973
Accumulated net realized loss on investments (1,845,891)
Net unrealized appreciation of investments 5,128,116
Accumulated net investment income 93,034
Net assets $178,588,232
NET ASSET VALUE PER SHARE
Based on 10,952,182 common shares outstanding $16.31
See notes to
financial statements.
OPERATIONS
For the year ended
December 31, 2002
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
Interest (including securities lending income of $35,414
and net of foreign withholding taxes of $1,425) $11,118,713
Dividends 75,336
Total investment income 11,194,049
EXPENSES
Investment management fee 1,068,302
Transfer agent fee 115,791
Custodian fee 88,804
Accounting and legal services fee 52,579
Printing 50,564
Auditing fee 35,000
New York Stock Exchange fee 34,451
Trustees' fee 10,811
Interest expense 7,478
Miscellaneous 5,939
Legal fee 2,500
Total expenses 1,472,219
Net investment income 9,721,830
REALIZED AND UNREALIZED GAIN
Net realized gain on investments 886,746
Change in net unrealized appreciation (depreciation)
of investments 2,151,819
Net realized and unrealized gain 3,038,565
Increase in net assets from operations $12,760,395
See notes to
financial statements.
CHANGES IN
NET ASSETS
This Statement
of Changes in
Net Assets
shows how the
value of the
Fund's net assets
has changed
since the end of
the previous
period. The dif-
ference reflects
earnings less
expenses, any
investment gains
and losses, dis-
tributions paid
to shareholders,
if any, and any
increase due to
reinvestment of
distributions.
YEAR YEAR
ENDED ENDED
12-31-01 12-31-02
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $10,811,979 $9,721,830
Net realized gain 4,385,391 886,746
Change in net unrealized
appreciation (depreciation) (2,125,785) 2,151,819
Increase in net assets
resulting from operations 13,071,585 12,760,395
Distributions to shareholders
From net investment income (11,092,817) (9,996,235)
From Fund share transactions 1,162,518 795,011
NET ASSETS
Beginning of period 171,887,775 175,029,061
End of period 1 $175,029,061 $178,588,232
1 Includes accumulated (distributions in excess of) net investment
income of ($10,149) and $93,034, respectively.
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
COMMON SHARES
The Financial Highlights show how the Fund's net asset value for a share
has changed since the end of the previous period.
PERIOD ENDED 12-31-98 12-31-99 12-31-00 12-31-01 1 12-31-02 1
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $16.55 $16.64 $15.37 $15.89 $16.06
Net investment income 2 1.14 1.10 1.07 1.00 0.89
Net realized and unrealized
gain (loss) on investments 0.09 (1.27) 0.52 0.19 0.28
Total from investment
operations 1.23 (0.17) 1.59 1.19 1.17
Less distributions
From net investment income (1.14) (1.10) (1.07) (1.02) (0.92)
Net asset value,
end of period $16.64 $15.37 $15.89 $16.06 $16.31
Per share market value,
end of period $15.88 $12.69 $14.44 $14.65 $14.66
Total return at
market value 3 (%) 1.75 (13.42) 23.06 8.69 6.42
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $177 $165 $172 $175 $179
Ratio of expenses
to average net assets (%) 0.81 0.80 0.84 0.80 0.84
Ratio of net investment income
to average net assets (%) 6.79 6.88 6.89 6.17 5.56
Portfolio turnover (%) 240 184 248 299 371
1 As required, effective January 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment
Companies, as revised, relating to the amortization of premiums and
accretion of discounts on debt securities. The effect of this change on
per share amounts for the year ended December 31, 2001 was to decrease
net investment income per share by $0.02, increase net realized and
unrealized gain per share by $0.02, and, had the Fund not made these
changes to amortization and accretion, the ratio of net investment
income to average net assets would have been 6.30%. The effect of this
change on per share amounts for the year ended December 31, 2002 was to
decrease net investment income per share by $0.03, increase net realized
and unrealized gain per share by $0.03, and, had the Fund not made these
changes to amortization and accretion, the ratio of net investment
income to average net assets would have been 5.78%. Per share ratios and
supplemental data for periods prior to January 1, 2001 have not been
restated to reflect this change in presentation.
2 Based on average shares outstanding.
3 Assumes dividend reinvestment.
See notes to
financial statements.
NOTES TO
STATEMENTS
NOTE A
Accounting policies
John Hancock Income Securities Trust (the "Fund") is a closed-end
diversified investment management company registered under the
Investment Company Act of 1940.
Significant accounting policies of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at
fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60
days are valued at amortized cost, which approximates market value.
Joint repurchase agreement
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with other registered investment companies
having a management contract with John Hancock Advisers, LLC (the
"Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
LLC, may participate in a joint repurchase agreement transaction.
Aggregate cash balances are invested in one or more large repurchase
agreements, whose underlying securities are obligations of the U.S.
government and/or its agencies. The Fund's custodian bank receives
delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
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. Some securities may be
purchased on a "when-issued" or "forward delivery" basis, which means
that the securities will be delivered to the Fund at a future date,
usually beyond customary settlement date.
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.
Securities lending
The Fund may lend securities to certain qualified brokers who pay the
Fund negotiated lender fees. These fees are included in interest income.
The loans are collateralized at all times with cash or securities with a
market value at least equal to the market value of the securities on
loan. As with other extensions of credit, the Fund may bear the risk of
delay of the loaned securities in recovery or even loss of rights in the
collateral, should the borrower of the securities fail financially. On
December 31, 2002, the Fund loaned securities having a market value of
$27,373,949 collateralized by securities in the amount of $28,051,444.
Federal income taxes
The Fund qualifies as a "regulated investment company" by complying with
the applicable provisions of the Internal Revenue Code and will not be
subject to federal income tax on taxable income that is distributed to
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $1,647,579 of a capital
loss carryforward available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gain distributions will be
made. The entire amount of the loss carryforward expires December 31,
2008.
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. During the year
ended December 31, 2002, the tax character of distributions paid was as
follows: ordinary income $9,996,235. As of December 31, 2002, the
components of distributable earnings on a tax basis included $103,105 of
undistributed ordinary income. 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 the Adviser. Under
the investment management contract, the Fund pays a quarterly management
fee to the Adviser, equivalent on an annual basis, to the sum of (a)
0.65% of the first $150,000,000 of the Fund's average weekly net asset
value, (b) 0.375% of the next $50,000,000, (c) 0.35% of the next
$100,000,000 and (d) 0.30% of the Fund's average weekly net asset value
in excess of $300,000,000.
In the event normal operating expenses of the Fund, exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, exceed 1.5%
of the first $30,000,000 of the Fund's average weekly net asset value
and 1.0% of the Fund's average weekly net asset value in excess of
$30,000,000, the fee payable to the Adviser will be reduced to the
extent of such excess, and the Adviser will make additional arrangements
necessary to eliminate any remaining excess expenses. There were no
management fee reductions during the year ended December 31, 2002.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Fund. The compensation for the
year was at an annual rate of approximately 0.03% of the average net
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
This listing illustrates the number of Fund shares reinvested, the
reclassification of capital accounts and the number of shares
outstanding at the beginning and end of the last two periods, along with
the corresponding dollar value. The Fund has an 30 million shares
authorized with no par value.
YEAR ENDED 12-31-01 YEAR ENDED 12-31-02
SHARES AMOUNT SHARES AMOUNT
Beginning of period 10,819,590 $173,576,723 10,898,374 $174,131,001
Distributions reinvested 78,784 1,162,518 53,808 795,011
Reclassification of
capital accounts -- (608,240) -- 286,961
End of period 10,898,374 $174,131,001 10,952,182 $175,212,973
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 December 31, 2002, aggregated $403,222,655 and
$387,421,771, respectively. Purchases and proceeds from sales or
maturities of obligations of U.S. government aggregated $231,299,547 and
$233,725,342, respectively, during the year ended December 31, 2002.
The cost of investments owned on December 31, 2002, including short-term
investments, for federal income tax purposes was $194,379,269. Gross
unrealized appreciation and depreciation of investments aggregated
$7,899,988 and $3,273,524, respectively, resulting in net unrealized
appreciation of $4,626,464. The difference between book basis and tax
basis net unrealized appreciation of investments is attributable
primarily to the tax deferral of losses on wash sales and amortization
of premiums and accretion of discounts on debt securities.
NOTE E
Reclassification of accounts
During the year ended December 31, 2002, the Fund reclassified amounts
to reflect an increase in accumulated net realized loss on investments
of $664,549, an increase in accumulated net investment income of
$377,588 and an increase in capital paid-in of $286,961. This represents
the amount necessary to report these balances on a tax basis, excluding
certain temporary differences, as of December 31, 2002. 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. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
NOTE F
Change in accounting principle
Effective January 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised,
relating to the amortization of premiums and accretion of discounts on
debt securities. The cumulative effect of this accounting change had no
impact on the total net assets of the Fund, but resulted in a $834,274
reduction in the cost of investments and a corresponding increase in net
unrealized appreciation of investments, based on securities held as of
December 31, 2000.
The effect of this change for the year ended December 31, 2001 was to
decrease net investment income by $228,613, decrease unrealized
appreciation of investments by $243,611 and increase net realized gain
of investments by $472,224. The effect of this change for the year ended
December 31, 2002 was to decrease net investment income by $377,606,
decrease unrealized appreciation of investments by $287,323 and increase
net realized gain on investments by $664,929.
The statement of changes in net assets and the financial highlights for
prior periods have not been restated to reflect this change in
presentation.
NOTE G
Change in Independent Auditor
Based on the recommendation of the Audit Committee of the Fund, the
Board of Trustees has determined not to retain Ernst & Young LLP as the
Fund's independent auditor and voted to appoint PricewaterhouseCoopers
LLP for the fiscal year ended December 31, 2003. During the two most
recent fiscal years, Ernst & Young 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 Ernst & Young
LLP on accounting principles, financial statements disclosure or audit
scope, which if not resolved to the satisfaction of Ernst & Young LLP,
would have caused them to make reference to the disagreement in their
report.
AUDITORS'
REPORT
Report of
Ernst & Young
LLP, Independent
Auditors
To the Board of Trustees and Shareholders of John Hancock Income
Securities Trust,
We have audited the accompanying statement of assets and liabilities of
John Hancock Income Securities Trust (the "Fund"), including the
schedule of investments, as of December 31, 2002, and the related
statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended. 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 auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as
of December 31, 2002, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our 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 John Hancock Income Securities Trust at December
31, 2002, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
February 7, 2003
TAX
INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund paid during its taxable
year ended December 31, 2002.
With respect to the ordinary dividends paid by the Fund for the fiscal
year ended December 31, 2002, 0.75% of the dividends qualify for the
corporate dividends-received deduction.
Shareholders will be mailed a 2002 U.S. Treasury Department Form
1099-DIV in January 2003. This will reflect the total of all
distributions that are taxable for calendar year 2002.
INVESTMENT
OBJECTIVE
AND POLICY
The Fund is a closed-end diversified investment management company,
shares of which were initially offered to the public on February 14,
1973, and are publicly traded on the New York Stock Exchange. Its
investment objective is to generate a high level of current income
consistent with prudent investment risk. The Fund invests in a
diversified portfolio of freely marketable debt securities and may
invest an amount not exceeding 20% of its assets in income-producing
preferred and common stock. Under normal circumstances the Fund will
invest at least 80% of net assets in income securities. Income
securities will consist of the following: (i) marketable corporate debt
securities, (ii) governmental obligations and (iii) cash and commercial
paper. "Net assets" is defined as net assets plus borrowings for
investment purposes. The Fund will notify shareholders at least 60 days
prior to any change in this 80% investment policy.
It is contemplated that at least 75% of the value of the Fund's total
assets will be represented by debt securities which have at the time of
purchase a rating within the four highest grades as determined by
Moody's Investors Service, Inc., or Standard & Poor's Corporation. The
Fund intends to engage in short-term trading and may invest in
repurchase agreements. The Fund may issue a single class of senior
securities not to exceed 331/3% of its net assets at market value and
may borrow from banks as a temporary measure for emergency purposes in
amounts not to exceed 5% of the total assets at cost. The Fund may lend
portfolio securities not to exceed 331/3% of total assets.
FINANCIAL FUTURES CONTRACTS
AND OPTIONS
The Fund may buy and sell financial futures contracts and options on
futures contracts to hedge against the effects of fluctuations in
interest rates and other market conditions. The Fund's ability to hedge
successfully will depend on the Adviser's ability to predict accurately
the future direction of interest rate changes and other market factors.
There is no assurance that a liquid market for futures and options will
always exist. In addition, the Fund could be prevented from opening, or
realizing the benefits of closing out, a futures or options position
because of position limits or limits on daily price fluctuations imposed
by an exchange.
The Fund will not engage in transactions in futures contracts and
options on futures for speculation, but only for hedging or other
permissible risk management purposes. All of the Fund's futures
contracts and options on futures will be traded on an U.S. commodity
exchange or board of trade. The Fund will not engage in a transaction in
futures or options on futures if, immediately thereafter, the sum of
initial margin deposits on existing positions and premiums paid for
options on futures would exceed 5% of the Fund's total assets.
DIVIDENDS AND
DISTRIBUTIONS
The Fund pays quarterly dividends from net investment income and intends
to distribute any available net realized capital gains annually. All
distributions are paid in cash unless the shareholder elects to
participate in the Dividend Reinvestment Plan.
During the fiscal year ended December 31, 2002, the Fund paid to
shareholders dividends from net investment income totaling $ 0.9150 per
share. The dates of payment and the amounts per share are as follows:
DIVIDEND
REINVESTMENT PLAN
The Fund offers shareholders a Dividend Reinvestment Plan (the "Plan"),
which offers the opportunity to earn compounded yields. Any shareholder
of record of the Fund may elect to participate in the Plan and receive
the Fund's common shares in lieu of all or a portion of the cash
dividends. The Plan is available to all shareholders without charge.
Mellon Investor Services (the "Plan Agent") will act as agent for
participating shareholders.
Shareholders may join the Plan by notifying the Plan Agent by telephone,
in writing or by visiting the Plan Agent's Web site at
www.melloninvestor.com showing an election to reinvest all or a portion
of dividend payments. If received in proper form by the Plan Agent prior
to the record date for a dividend, the election will be effective with
respect to all dividends paid after such record date. Shareholders whose
shares are held in the name of a broker or nominee should contact the
broker or nominee to participate in the Plan.
The Board of Trustees of the Fund will declare dividends from net
investment income payable in cash or, in the case of shareholders
participating in the Plan, partially or entirely in the Fund's common
shares. The number of shares to be issued for the benefit of each
shareholder will be determined by dividing the amount of the cash
dividend otherwise payable to such shareholder on shares included under
the Plan, by the per share net asset value of the common shares on the
date for payment of the dividend, unless the net asset value per share
on the payment date is less than 95% of the market price per share on
that date, in which event the number of shares to be issued to a
shareholder will be determined by dividing the amount of the cash
dividend payable to such shareholder by 95% of the market price per
share of the common shares on the payment date. The market price of the
common shares on a particular date shall be the mean between the highest
and lowest sales price on the New York Stock Exchange on that date. Net
asset value will be determined in accordance with the established
procedures of the Fund. However, if as of such payment date the market
price of the common shares is lower than such net asset value per share,
the number of shares to be issued will be determined on the basis of
such market price. Fractional shares, carried out to four decimal
places, will be credited to the shareholder's account. Such fractional
shares will be entitled to future dividends. The shares issued to
participating shareholders, including fractional shares, will be held by
the Plan Agent in the name of the participant. A confirmation will be
sent to each shareholder promptly, normally within five to seven days,
after the payment date of the dividend. The confirmation will show the
total number of shares held by such shareholder before and after the
dividend, the amount of the most recent cash dividend that the
shareholder has elected to reinvest and the number of shares acquired
with such dividend.
Participation in the Plan may be terminated at any time by contacting
the Plan Agent by telephone, in writing or by visiting the Plan Agent's
Web site, and such termination will be effective immediately. However,
notice of termination must be received prior to the record date of any
distribution to be effective for that distribution. Upon termination,
certificates will be issued representing the number of full shares of
common shares held by the Plan Agent. A shareholder will receive a cash
payment for any fractional share held.
The reinvestment of dividends will not relieve participants of any
federal, state or local income tax, which may be due with respect to
such dividend. Dividends reinvested in common shares will be treated on
your federal income tax return as though you had received a dividend in
cash in an amount equal to the fair market value of the shares received,
as determined by the prices for shares of the Fund on the New York Stock
Exchange as of the dividend payment date. Distributions from the Fund's
long-term capital gains will be processed as noted above for those
electing to reinvest in common shares and will be taxable to you as
long-term capital gains. The confirmation referred to above will contain
all the information you will require for determining the cost basis of
shares acquired and should be retained for that purpose. At year end,
each account will be supplied with detailed information necessary to
determine total tax liability for the calendar year.
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, New Jersey 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
On March 7, 2002, the Annual Meeting of the Fund was held to elect
eleven Trustees and to ratify the actions of the Trustees in selecting
independent auditors for the Fund. The shareholders elected the
following Trustees to serve until their respective successors are duly
elected and qualified, with the votes tabulated as follows:
WITHHELD
FOR AUTHORITY
Dennis S. Aronowitz 9,495,981 133,327
Richard P. Chapman, Jr. 9,500,587 128,721
William J. Cosgrove 9,497,641 131,667
John M. DeCiccio 9,491,533 137,775
Richard A. Farrell 9,507,640 121,668
Maureen R. Ford 9,504,409 124,899
Gail D. Fosler 9,501,226 128,082
William F. Glavin 9,442,832 186,476
Dr. John A. Moore 9,491,496 137,812
Patti McGill Peterson 9,490,842 138,466
John W. Pratt 9,501,229 128,079
The shareholders also ratified the Trustees' selection of Ernst & Young,
LLP as the Fund's independent auditors for the fiscal year ending
December 31, 2002, with the votes tabulated as follows: 9,451,207 FOR,
60,154 AGAINST and 117,947 ABSTAINING.
TRUSTEES
& OFFICERS
This chart provides information about the Trustees and Officers who
oversee your John Hancock fund. Officers elected by the Trustees
manage the day-to-day operations of the Fund and execute policies
formulated by the Trustees.
INDEPENDENT TRUSTEES
NUMBER OF
NAME, AGE TRUSTEE JOHN HANCOCK
PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN
DIRECTORSHIPS DURING PAST 5 YEARS SINCE 1 BY TRUSTEE
Dennis S. Aronowitz, Born: 1931 1988 31
Professor of Law, Emeritus, Boston University School of Law
(as of 1996); Director, Brookline Bancorp.
Richard P. Chapman, Jr., Born: 1935 1975 31
President and Chief Executive Officer, Brookline Bancorp.
(lending) (since 1972); Chairman and Director, Lumber
Insurance Co. (insurance) (until 2000); Chairman and
Director, Northeast Retirement Services, Inc. (retirement
administration) (since 1998).
William J. Cosgrove, Born: 1933 1991 31
Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A.
(retired 1991); Executive Vice President, Citadel Group Representatives,
Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for
Inner City Children (since 1986).
Richard A. Farrell 2, Born: 1932 1996 31
President, Farrell, Healer & Co., Inc. (venture capital management firm)
(since 1980) and General Partner of the Venture Capital Fund of NE
(since 1980); prior to 1980, headed the venture capital group at Bank
of Boston Corporation.
William F. Glavin 2, Born: 1932 1996 31
President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox
Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd.
Patti McGill Peterson, Born: 1943 1996 39
Executive Director, Council for International Exchange of Scholars
(since 1998), Vice President, Institute of International Education
(since January 1998); Senior Fellow, Cornell Institute of Public Affairs,
Cornell University (until 1997); President Emerita of Wells College and
St. Lawrence University; Director, Niagara Mohawk Power Corporation
(electric utility).
John A. Moore 2, Born: 1939 1996 39
President and Chief Executive Officer, Institute for Evaluating Health
Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences
International (health research) (since 1998); Principal, Hollyhouse
(consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002).
John W. Pratt, Born: 1931 1996 31
Professor of Business Administration Emeritus, Harvard University
Graduate School of Business Administration (as of 1998).
INTERESTED TRUSTEES 3
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
John M. DeCiccio, Born: 1948 2001 61
Trustee
Executive Vice President and Chief Investment Officer, John Hancock
Financial Services, Inc.; Director, Executive Vice President and Chief
Investment Officer, John Hancock Life Insurance Company; Chairman of
the Committee of Finance of John Hancock Life Insurance Company;
Director, John Hancock Subsidiaries, LLC (Subsidiaries, LLC), Hancock
Natural Resource Group, Independence Investment LLC, Independence
Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The
Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock
Funds, LLC ("John Hancock Funds"), Massachusetts Business Development
Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance
Agency, Inc.") (until 1999).
Maureen R. Ford, Born: 1955 2000 61
Trustee, Chairman, President and Chief Executive Officer
Executive Vice President, John Hancock Financial Services, Inc., John
Hancock Life Insurance Company; Chairman, Director, President and
Chief Executive Officer, the Adviser and The Berkeley Group; Chairman,
Director, President and Chief Executive Officer, John Hancock Funds; Chairman,
Director and Chief Executive Officer, Sovereign Asset Management
Corporation ("SAMCorp."); Director, Independence Investment LLC,
Subsidiaries, LLC, Independence Fixed Income LLC and Signature Services;
Senior Vice President, MassMutual Insurance Co. (until 1999).
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NAME, AGE
POSITION(S) HELD WITH FUND OFFICER
PRINCIPAL OCCUPATION(S) AND OF FUND
DIRECTORSHIPS DURING PAST 5 YEARS SINCE
William L. Braman, Born: 1953 2000
Executive Vice President and Chief Investment Officer
Executive Vice President and Chief Investment Officer, the Adviser and each of the John
Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment
Officer, Baring Asset Management, London UK (until 2000).
Richard A. Brown, Born: 1949 2000
Senior Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock
Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller,
Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001).
Thomas H. Connors, Born: 1959 1992
Vice President and Compliance Officer
Vice President and Compliance Officer, the Adviser and each of the John Hancock funds;
Vice President, John Hancock Funds.
William H. King, Born: 1952 1991
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).
Susan S. Newton, Born: 1950 1991
Senior Vice President, Secretary and Chief Legal Officer
Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each
of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President,
Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington
Avenue, Boston, Massachusetts 02199.
The Statement of Additional Information of the Fund includes additional
information about members of the Board of Trustees of the Fund and is
available, without charge, upon request, by calling 1-800-225-5291.
1 Each Trustee serves until resignation, retirement age or until his or
her successor is elected.
2 Member of Audit Committee.
3 Interested Trustees hold positions with the Fund's investment adviser,
underwriter and certain other affiliates.
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
FOR YOUR
INFORMATION
INVESTMENT ADVISER
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
The Bank of New York
One Wall Street
New York, New York 10286
TRANSFER AGENT AND REGISTRAR
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
STOCK SYMBOL
Listed New York Stock Exchange:
JHS
For shareholder assistance refer to page 29
HOW TO
CONTACT US
On the Internet www.jhfunds.com
By regular mail Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7059
24-hour automated information 1-800-843-0090
TDD Line 1-800-231-5469
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
1-800-852-0218
1-800-843-0090
1-800-231-5469 (TDD)
www.jhfunds.com
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
P600A 12/02
2/03