February 25, 2004
EDGAR
United States Securities and
Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form N-CSR
John Hancock Income Securities Trust (the "Registrant")
File Nos. 811-4186
Ladies and Gentlemen:
Enclosed herewith for filing pursuant to the Investment Company Act of 1940 and
the Securities Exchange Act of 1934 is the Registrant's Form N-CSR filing for
the period ending December 31, 2003.
If you have any questions or comments regarding this filing, please contact the
undersigned at (617) 375-1513.
Sincerely,
/s/Alfred P. Ouellette
Alfred Ouellette
Attorney and Assistant Secretary
ITEM 1. REPORT TO STOCKHOLDERS.
JOHN HANCOCK
Income Securities Trust
12.31.2003
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 Maureen Ford Goldfarb, Chairman and Chief Executive Officer,
flush left next to first paragraph.]
WELCOME
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 16
Trustees & officers
page 32
For your information
page 37
Dear Fellow Shareholders,
The stock market made a strong recovery in 2003, producing
double-digit returns in a broad-based rally. A rebounding economy
fueled by historically low interest rates, plus improving corporate
earnings and government stimulus in the form of tax cuts were the
stimuli for the market's reversal after three down years. As a result,
the market, as measured by the Standard & Poor's 500 Index, returned
28.67% in 2003. With technology leading the way, the tech-heavy Nasdaq
Composite Index rose 50.77%, while the Dow Jones Industrial Average
returned 28.27%. Bonds produced much more modest results, as investors
were lured by stocks and interest rates began to rise. The exceptions
were high-yield bonds, which posted stock-like returns of 28.97% for
the year, as measured by the Lehman Brothers High Yield Index.
In other news, we are pleased to inform you that on September 28,
2003, the Boards of Directors of Canada-based Manulife Financial
Corporation and Boston-based John Hancock Financial Services, Inc.,
the parent company of John Hancock Funds, unanimously voted to merge
the two companies.
Please be assured that the completion of the merger -- anticipated to
occur in the first half of 2004 -- will have no effect on your
investment in our John Hancock mutual funds. Your fund's adviser and
board of trustees will remain the same, as will your relationship with
your financial adviser.
The merger is subject to customary closing conditions, including
receipt of required regulatory approvals and approval by John Hancock
stockholders. If you only own shares in a John Hancock mutual fund you
are not affected and will not receive a proxy.
Additional information on this transaction is available on our Web
site: www.jhfunds.com. If you have questions about the merger, you may
also call 800-732-5543. Separately, for information about your
investments in John Hancock funds, please contact your financial
adviser or our Customer Service representatives at 800-225-5291.
Sincerely,
/S/ MAUREEN FORD GOLDFARB
Maureen Ford Goldfarb,
Chairman and Chief Executive Officer
This commentary reflects the chairman's views as of December 31, 2003.
They are subject to change at any time.
YOUR FUND
AT A GLANCE
The Fund seeks
a high level of
current income
consistent with
prudent invest
ment risk by
normally invest-
ing at least 80%
of its net assets
in a diversified
portfolio of
income securities.
Over the last twelve months
* Bonds posted generally positive returns despite rising interest rates.
* Corporate bonds, especially lower-quality securities, performed the
best, while mortgage-backed and Treasury bonds lagged.
* The Fund emphasized lower-quality corporate bonds and preferred stocks.
[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, 2003." The chart is scaled in increments of 5% with 0% at the bottom
and 10% at the top. The first bar represents the 9.57% 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
17.9% Federal National Mortgage Assn.
6.5% Federal Home Loan Mortgage Corp.
5.5% U.S. Treasury
1.3% General Motors Acceptance Corp.
1.2% Ford Motor Credit
1.1% Financing Corp.
1.0% MBNA Master Credit Card Trust
1.0% Midland Funding Corp. II
0.9% NOVA Chemicals Corp.
0.8% DPL, Inc.
As a percentage of net assets plus value of preferred shares on December
31, 2003.
1
BY BARRY H. EVANS, CFA, AND JEFFREY N. GIVEN, CFA, PORTFOLIO MANAGERS
MANAGERS'
REPORT
JOHN HANCOCK
Income Securities Trust
In 2003, the U.S. bond market produced positive results for the fourth
straight year, although gains were muted by rising interest rates.
Rates declined in the first half of the year, falling to 45-year lows
in June as a sluggish economy led the Federal Reserve to cut
short-term interest rates for the 13th time since the beginning of
2001. Investor concerns about the war with Iraq also contributed to
increased demand for bonds early in the year. However, as economic
conditions showed marked improvement during the last six months of the
year -- including the strongest quarter of economic growth in 20 years
-- interest rates reversed course, rising sharply and ending the year
slightly higher than at the beginning.
"...the U.S. bond market
produced positive
results for the fourth
straight year, although
gains were muted by
rising interest rates."
Lower-quality corporate bonds posted the highest returns in the bond
market; in particular, "high-yield" corporate bonds gained nearly 30%.
Higher-quality corporate bonds also produced solid returns, while
Treasury, government and mortgage-backed securities registered modest
gains.
FUND PERFORMANCE
For the year ended December 31, 2003, John Hancock Income Securities
Trust produced a total return of 9.57% at net asset value. The average
closed-end BBB-rated corporate debt fund returned 12.70% according to
Lipper Inc., while the Lehman Brothers Government/Credit Bond Index
returned 4.67%.
TRADING DOWN IN QUALITY
The primary theme in the portfolio in 2003 was increased exposure to
lower-quality corporate bonds. In particular, we boosted our holdings
of corporate bonds rated BBB -- the lowest investment-grade rating --
to nearly a third of the portfolio. We also added to our position in
below-investment-grade (or "high-yield") bonds, increasing our
holdings from 15% to 20% of the portfolio.
2
[Photos of Barry Evans and Jeff Given.]
Barry Evans
Jeff Given
We made most of these changes at the beginning of the year, when
lower-quality bonds offered both the highest yields and the best
relative values in the bond market. As expected, these segments of the
market performed exceptionally well throughout 2003, as investors grew
more confident about the improving financial health of the corporate
sector and were willing to take on added risk to obtain higher yields.
TELECOM AND CABLE BONDS REBOUND
Many of the highest returns in the portfolio came from the bonds of
telecommunications and cable companies. Both of these sectors posted
disastrous results in 2002 -- cable operators were dragged lower by
excess debt and the bankruptcy of Adelphia, while telecom companies
struggled with overcapacity and fierce price competition. In 2003,
though, these segments of the market roared back to life.
One of the portfolio's top performers was Telus, a Canadian telephone
company. Telus bonds fell sharply in 2002 after a credit-rating
downgrade, but in 2003 investors looked past the downgrade and
discovered the company's strong cash flow characteristics and lack of
competition in the marketplace. As a result, Telus bonds bounced back,
posting a total return of 30% for the year.
"The primary theme in
the portfolio in 2003 was
increased exposure to
lower-quality corporate
bonds."
But the best performer in the portfolio was Corporacion Durango, a
Mexican paper company. Durango has been working with bondholders like
us to restructure its debt in an effort to avoid bankruptcy, and
improved prospects for a favorable outcome caused the value of its
bonds to double.
ADDING YIELD WITH PREFERRED STOCKS
We increased the portfolio's exposure to preferred stocks, expanding
our position from 4% to 12% of the portfolio during the year.
Preferred shares offer a way to capture higher yields without
increasing the portfolio's overall volatility. We focused on A-rated
companies whose bonds offered little yield advantage over Treasury
securities, but whose preferred stocks yielded two to three percentage
points more than Treasury bonds. The pre-
3
ferred stocks in the portfolio are primarily utilities and financial
services companies, but we also added the preferred shares of several real
estate investment trusts during the last six months.
[Table at top left-hand side of page entitled "Top five industry groups1."
The first listing is Government-U.S. agencies 26%, the second is Utilities
9%, the third Finance 8%, the fourth Government-U.S. 6%, and the fifth
Media 5%.]
MORTGAGES IMPROVE
Mortgage-backed securities comprised about a quarter of the portfolio
throughout the year. We increased our holdings of mortgage-backed
securities in late 2002, when the mortgage-backed market declined
after a substantial refinancing boom brought on by record low mortgage
rates. In hindsight, we were about six months too early --
mortgage-backed bonds continued to struggle in the first half of 2003
as falling rates triggered more refinancing activity.
However, mortgage-backed securities rebounded in the second half of
the year as rising interest rates reduced the amount of refinancing
activity. Interest rates were relatively steady during the last few
months, and mortgage-backed securities tend to perform best during
periods of interest rate stability.
[Pie chart in middle of page with heading "Portfolio diversification1." The
chart is divided into five sections (from top to left): Corporate bonds
54%, U.S. government & agency bonds 32%, Preferred stocks 12%, Short-term
investments 1% and Foreign government bonds 1%.]
TAKING ADVANTAGE OF LEVERAGE
In August, the Fund's board of trustees approved the use of leverage
in the portfolio. In practice, this means the Fund issued preferred
shares equal to one-third of the value of the portfolio's assets and
invested the proceeds in additional fixed-income securities. Leverage
allows the portfolio to take advantage of the typically wide gap
between short-term interest rates -- payable as dividends on the
preferred shares -- and the yields the Fund can earn on longer-term
bonds. The Fund's common shareholders benefit from this difference.
4
[Table at top of page entitled "SCORECARD." The header for the left column
is "INVESTMENT" and the header for the right column is "PERIOD'S
PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is
Cablevision preferred stock followed by an up arrow with the phrase
"Improved cash flows and balance sheet." The second listing is PanAmSat
followed by an up arrow with the phrase "Satellite TV company beat earnings
expectations." The third listing is Long-term Treasury bonds followed by a
down arrow with the phrase "Suffered the biggest price declines as interest
rates rose."]
There are risks to using leverage, most notably that it magnifies the
losses if these bonds decline in value. However, the significant extra
yield the portfolio earns on the bonds provides a cushion against any
potential losses.
OUTLOOK
We expect the interest-rate stability that characterized the last part
of 2003 to carry over into the first half of 2004. The Fed has made it
clear that it will keep short-term interest rates at their current low
levels, even in the face of a robust economic recovery, as long as
inflation remains benign. We think the Fed will be more cautious than
usual because there is less margin for error. If the central bank
raises rates too soon, the economic recovery could stall prematurely,
and the Fed would have little room to cut rates and resuscitate the
economy.
"In this environment,
we intend to maintain
our current positioning,
with an emphasis on
lower-quality bonds."
In this environment, we intend to maintain our current positioning,
with an emphasis on lower-quality bonds. We believe lower-rated bonds
can continue to outperform as investors reach for yield and companies
make further progress on debt reduction and balance sheet repair. A
relatively stable interest-rate environment would also be favorable
for mortgage-backed securities.
This commentary reflects the views of the portfolio managers through
the end of the Fund's period discussed in this report. The managers'
statements reflect their own opinions. As such, they are in no way
guarantees of future events, and are not intended to be used as
investment advice or a recommendation regarding any specific security.
They are also subject to change at any time as market and other
conditions warrant.
1 As a percentage of the Fund's portfolio on December 31, 2003.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
December 31, 2003
This schedule is divided into three main categories: publicly traded
bonds, preferred stocks and short-term investments. Long-term debt is
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 127.58% $233,130,147
(Cost $225,850,635)
Aerospace 0.68% 1,237,495
Jet Equipment Trust,
Equipment Trust Ctf Ser 95B2 08-15-14 (B) (R) 10.910% D $550 37,587
Raytheon Co.,
Note 03-01-10 8.300 BBB- 1,000 1,199,908
Automobiles/Trucks 0.53% 961,260
Avis Group Holdings, Inc.,
Sr Sub Note 05-01-09 11.000 BBB- 888 961,260
Banks -- Foreign 3.15% 5,764,598
Barclays Bank Plc,
Perpetual Bond (6.860% to 06-15-32
then variable) (United Kingdom) 06-15-49 (R) 6.860 A+ 1,600 1,735,170
Corporacion Andina de Fomento,
Note (Supra National) 05-21-13 5.200 A 1,760 1,751,767
Rabobank Capital Funding II,
Perpetual Bond (5.260% to 12-31-13
then variable) 12-31-49 (R) 5.260 AA 1,500 1,502,076
Royal Bank of Scotland Group Plc,
Perpetual Bond (7.648% to 09-30-31
then variable) (United Kingdom) 08-31-49 7.648 A 650 775,585
Banks -- United States 0.82% 1,501,451
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 650 715,141
Capital One Bank,
Note 06-13-13 6.500 BB+ 750 786,310
Beverages 0.59% 1,079,203
Panamerican Beverages, Inc.,
Sr Note (Panama) 07-01-09 7.250 BBB 1,000 1,079,203
See notes to
financial statements.
6
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Building 1.76% $3,225,819
Pulte Homes Inc,
Note 02-15-13 6.250% BBB- $2,000 2,123,140
Toll Brothers, Inc.,
Gtd Sr Note 11-15-12 6.875 BBB- 1,000 1,102,679
Chemicals 2.04% 3,723,547
NOVA Chemicals Corp.,
Note (Canada) 09-15-05 7.000 BB+ 1,000 1,055,000
Sr Note (Canada) 05-15-06 7.000 BB+ 1,280 1,350,400
RPM International, Inc.,
Bond 12-15-13 (R) 6.250 BBB 1,300 1,318,147
Computers 0.24% 434,979
NCR Corp.,
Note 06-15-09 7.125 BBB- 390 434,979
Containers 1.39% 2,537,785
Owens-Brockway Glass Container, Inc.,
Gtd Sr Note 05-15-13 8.250 B+ 500 536,875
Sealed Air Corp.,
Sr Note 04-15-08 (R) 5.375 BBB 1,895 2,000,910
Diversified Operations 1.73% 3,165,380
Hutchison Whampoa International Ltd.,
Note (US Virgin Islands) 02-13-13 (R) 6.500 A- 1,500 1,562,255
Tyco International Group S.A.,
Note (Luxembourg) 10-15-11+ 6.375 BBB- 1,500 1,603,125
Electronics 1.17% 2,135,571
AMETEK, Inc.,
Sr Note 07-15-08 7.200 BBB 1,000 1,092,500
Jabil Circuit, Inc.,
Sr Note 07-15-10 5.875 BB+ 1,000 1,043,071
Finance 8.73% 15,950,444
Bank One Issuance Trust,
Pass Thru Ctf Ser 2003-C1 09-15-10 4.540 BBB 1,000 1,022,277
Bunge Ltd Finance Corp.,
Note 12-15-08 (R) 4.375 BBB 1,250 1,257,377
Capital One Financial Corp.,
Note 11-15-13 6.250 BB+ 1,000 1,025,191
Citibank Credit Card Issuance Trust,
Pass Thru Ctf Ser 2003-C3 04-07-10 4.450 BBB 1,000 1,016,580
Ford Motor Credit Co.,
Note 10-28-09 7.375 BBB- 3,000 3,294,483
General Motors Acceptance Corp.,
Note 01-19-10 7.750 BBB 3,000 3,400,674
Household Finance Corp.,
Note 05-15-11 6.750 A 1,390 1,564,783
See notes to
financial statements.
7
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Finance (continued)
Humpuss Funding Corp.,
Note 12-15-09 (R) 7.720% B2 $248 $211,073
PDVSA Finance Ltd.,
Note (Cayman Islands) 11-16-12 8.500 B+ 565 548,050
St. George Funding Co.,
Perpetual Bond (8.485% to 06-30-17
then variable) 12-31-49 (R) 8.485 Baa1 615 707,998
Targeted Return Index Securities Trust,
Sec Note 08-15-08 (R) 6.539# Baa3 1,680 1,821,036
Yanacocha Receivables Master Trust,
Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 80 80,922
Food 2.70% 4,935,936
Cadbury Schweppes US Finance,
Note 10-01-08 (R) 3.875 BBB 2,000 1,990,918
Corn Products International, Inc.,
Sr Note 08-15-09 8.450 BBB- 835 933,112
Kraft Foods, Inc.,
Sr Note 10-01-08 4.000 BBB+ 2,000 2,011,906
Government -- Foreign 1.30% 2,377,500
Columbia, Republic of,
Note (Colombia) 01-23-12 10.000 BB 750 821,250
United Mexican States,
Global Med Term Note Ser A (Mexico) 01-16-13 6.375 BBB- 1,500 1,556,250
Government -- U.S. 8.12% 14,841,953
United States Treasury,
Bond 08-15-17+ 8.875 AAA 1,215 1,720,744
Bond 05-15-18+ 9.125 AAA 495 717,924
Bond 02-15-31+ 5.375 AAA 8,270 8,624,386
Inflation Indexed Note 01-15-11+ 3.500 AAA 1,116 1,254,250
Note 08-15-08+ 3.250 AAA 2,420 2,434,747
Note 11-15-13+ 4.250 AAA 90 89,902
Government -- U.S. Agencies 38.39% 70,150,099
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 11.250 AAA 64 71,034
30 Yr Pass Thru Ctf 04-01-33 5.500 AAA 5,326 5,393,404
30 Yr Pass Thru Ctf 11-01-33 6.000 AAA 9,897 10,231,992
CMO REMIC 2496-PE 07-15-31 5.500 AAA 645 637,095
CMO REMIC 2563-PA 03-15-31 4.250 AAA 1,239 1,230,673
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 7 7,643
15 Yr Pass Thru Ctf 09-01-10 to 04-01-17 7.000 AAA 221 235,904
15 Yr Pass Thru Ctf 05-01-18 5.000 AAA 1,000 1,021,341
15 Yr Pass Thru Ctf 10-01-18 4.500 AAA 6,115 6,129,021
See notes to
financial statements.
8
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Government -- U.S. Agencies (continued)
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf 07-01-33 5.500% AAA $1,374 $1,392,178
30 Yr Pass Thru Ctf 10-01-33 6.000 AAA 34,391 35,566,062
CMO REMIC 2002-73-PE 10-25-31 5.500 AAA 825 824,010
CMO REMIC 2003-16-PD 10-25-16 5.000 AAA 1,340 1,362,665
CMO REMIC 2003-17-QT 08-25-27 5.000 AAA 1,675 1,697,115
Bond 03-15-13+ 4.375 AAA 390 383,028
Financing Corp.,
Bond 02-08-18 9.400 Aaa 2,000 2,852,998
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 11-15-19 to 02-15-25 9.500 AAA 41 45,865
30 Yr Pass Thru Ctf 11-15-20 10.000 AAA 11 12,515
30 Yr Pass Thru Ctf 08-15-33 5.000 AAA 1,064 1,055,556
Insurance 2.06% 3,765,030
Mantis Reef Ltd.,
Note (Australia) 11-14-08 (R) 4.692 A- 1,000 1,004,988
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 485 585,038
QBE Insurance Group Ltd.,
Bond 07-01-23 (R) 5.647 BBB 1,000 952,995
UnumProvident Corp.,
Sr Note 03-01-11 7.625 BBB- 895 985,959
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 AA- 210 236,050
Leisure 2.12% 3,872,354
Chukchansi Economic Development Authority,
Sr Note 06-15-09 (R) 14.500 Caa1** 500 607,500
Harrah's Operating Co., Inc.,
Sr Sub Note 12-15-05 7.875 BB+ 745 810,187
Hyatt Equities LLC,
Note 06-15-07 (R) 6.875 BBB 1,060 1,138,757
Waterford Gaming LLC,
Sr Note 09-15-12 (R) 8.625 B+ 686 727,160
Wynn Las Vegas LLC,
2nd Mtg Note 11-01-10 12.000 CCC+ 500 588,750
Machinery 1.10% 2,007,101
Kennametal, Inc.,
Sr Note 06-15-12 7.200 BBB 1,405 1,490,226
Manitowoc Co., Inc. (The),
Sr Note 11-01-13 7.125 B+ 500 516,875
Media 6.18% 11,290,464
British Sky Broadcasting Group Plc,
Sr Note (United Kingdom) 07-15-09 8.200 BBB- 945 1,125,031
See notes to
financial statements.
9
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Media (continued)
Clear Channel Communications, Inc.,
Sr Note 11-01-08 8.000% BBB- $1,385 $1,603,137
Continental Cablevision, Inc.,
Deb 08-01-13 9.500 BBB 660 762,371
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 275 292,187
Grupo Televisa SA,
Note (Mexico) 09-13-11 8.000 BBB- 1,855 2,075,281
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 12.875 B+ 39 39,398
Liberty Media Corp.,
Note 05-15-13 5.700 BBB- 750 758,449
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 8.250 BBB- 540 664,265
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 10.000 BBB- 445 477,262
TCI Communications, Inc.,
Sr Deb 02-01-12 9.800 BBB 860 1,121,824
Sr Deb 04-15-22 10.125 BBB 335 473,323
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 1,114 1,415,311
XM Satellite Radio, Inc.,
Sr Sec Note, Step Coupon (Zero to 12-31-05
then 14.000%) 12-31-09 (A) Zero CCC+ 540 482,625
Medical 2.50% 4,561,948
HCA, Inc.,
Note 11-06-08 5.250 BBB- 1,000 1,019,138
Note 09-01-10 8.750 BBB- 900 1,071,661
Medco Health Solutions, Inc.,
Sr Note 08-15-13 7.250 BBB 1,550 1,690,972
Schering-Plough Corp.,
Bond 12-01-33 6.500 A 750 780,177
Metal 1.77% 3,239,751
Brascan Corp.,
Note (Canada) 03-01-10 5.750 A- 1,750 1,852,629
Noranda, Inc.,
Note (Canada) 02-15-11 8.375 BBB- 1,175 1,387,122
Mortgage Banking 5.28% 9,657,340
Ameriquest Mortgage Securities, Inc.,
Pass Thru Ctf Ser 2003-IA1 Class A4 11-25-33 4.965 AAA 2,000 2,004,062
Conseco Finance Securitizations Corp.,
Home Equity Pass Thru Ctf Ser 2002-A
Class A3 04-15-32 5.330 AAA 402 404,909
See notes to
financial statements.
10
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Mortgage Banking (continued)
ContiMortgage Home Equity Loan Trust,
Home Equity Pass Thru Ctf Ser 1995-2
Class A5 08-15-25 8.100% AAA $316 $316,244
Deutsche Mortgage & Asset Receiving Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-C1
Class C 06-15-31 6.861 A2 415 457,513
GMAC Commercial Mortgage Securities, Inc.,
Mtg Pass Thru Ctf Ser 1998-C1 Class A1
05-15-30 6.853 Aaa 763 793,667
Greenwich Capital Commercial Funding Corp.,
Commercial Mtg Pass Thru Ctf Ser 2003-C2
Class A2 07-05-10 4.022 AAA 2,000 2,008,125
LB-UBS Commercial Mortgage Trust,
Commercial Mortgage Pass Thru Ctf
Ser 2003-C3 Class A4 05-15-32 4.166 AAA 1,000 955,053
MBNA Master Credit Card Trust,
Sub Bond Ser 1998-E Class C 09-15-10 6.600 BBB 1,000 1,089,442
Sub Bond Ser 1999-B Class C 08-15-11 6.650 BBB 1,500 1,628,325
Oil & Gas 2.05% 3,746,902
Alberta Energy Co. Ltd.,
Note (Canada) 09-15-30 8.125 A- 725 927,279
Occidental Petroleum Corp.,
Sr Deb 09-15-09 10.125 BBB+ 1,160 1,495,561
Pemex Project Funding Master Trust,
Gtd Note 10-13-10 9.125 BBB- 1,115 1,324,062
Paper & Paper Products 4.30% 7,849,379
Abitibi-Consolidated Co.,
Gtd Sr Note (Canada) 12-15-06 6.950 BB+ 2,000 2,093,972
Boise Cascade Corp.,
Sr Note 11-01-10 6.500 BB 1,085 1,131,828
Corporacion Durango S.A. de C.V.,
Sr Note (Mexico) 07-15-09 (B) (R) 13.750 D 500 300,000
International Paper Co.,
Note 10-30-12+ 5.850 BBB 2,000 2,083,654
MDP Acquisitions Plc,
Sr Note (Ireland) 10-01-12 9.625 B 750 840,000
Stone Container Corp.,
Sr Note 02-01-11 9.750 B 285 314,925
Sr Note 07-01-12 8.375 B 1,000 1,085,000
Real Estate Investment Trust 1.08% 1,976,662
Healthcare Realty Trust, Inc.,
Sr Note 05-01-11 8.125 BBB- 175 200,400
Meditrust,
Note 08-15-07 7.000 BB- 1,710 1,776,262
See notes to
financial statements.
11
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Real Estate Operations 0.32% $581,831
Socgen Real Estate Co. LLC,
Perpetual Bond Ser A (7.64% to 09-30-07
then variable) 12-31-49 (R) 7.640% A $515 581,831
Retail 3.30% 6,037,116
Delhaize America, Inc.,
Gtd Note 04-15-06 7.375 BB+ 1,010 1,085,750
Gap, Inc. (The),
Note 12-15-08 10.550 BB+ 515 634,737
Office Depot, Inc.,
Note 08-15-13 6.250 BBB- 2,000 2,099,988
Penney J.C. Corp., Inc.,
Note 03-01-10 8.000 BB+ 1,000 1,146,250
Toys "R" Us, Inc.,
Note 08-01-11+ 7.625 BB+ 1,000 1,070,391
Revenue Bonds 0.55% 1,003,466
Golden State Tobacco Securitization Corp.,
Rev Ser 2003-A-1 06-01-39 6.750 BBB 1,020 1,003,466
Telecommunications 7.54% 13,769,691
AT&T Wireless Services, Inc.,
Sr Note 03-01-11 7.875 BBB 1,525 1,764,648
Corning, Inc.,
Note 03-01-09 6.300 BB+ 240 249,000
Note 04-04-25 8.300 BB+ 1,000 1,027,500
Deutsche Telekom International Finance B.V.,
Bond (Coupon rate step up/down on rating)
(Netherlands) 06-15-10 8.000 BBB+ 1,005 1,215,162
France Telecom S.A.,
Note (France) 03-01-06 8.450 BBB 1,150 1,284,544
Mobile Telesystems Finance S.A.,
Gtd Sr Note (Luxembourg) 01-30-08 (R) 9.750 B+ 400 433,000
Nextel Communications, Inc.,
Sr Note 08-01-15 7.375 B+ 500 537,500
PanAmSat Corp.,
Sr Note 02-01-12 8.500 B+ 675 749,250
Qwest Capital Funding, Inc.,
Gtd Note 08-15-06+ 7.750 CCC+ 1,000 1,035,000
Sprint Capital Corp.,
Gtd Note 05-01-09 6.375 BBB- 1,000 1,068,733
Note 05-01-19 6.900 BBB- 1,000 1,021,539
Telefonos de Mexico S.A. de C.V.,
Note (Mexico) 11-19-08 (R) 4.500 BBB- 1,750 1,752,660
Telus Corp.,
Note (Canada) 06-01-11 8.000 BBB 1,395 1,631,155
See notes to
financial statements.
12
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Tobacco 0.88% $1,600,192
Altria Group, Inc.,
Note 11-04-13+ 7.000% BBB $1,500 1,600,192
Transportation 2.92% 5,340,170
American Airlines, Inc.,
Pass Thru Ctf Ser 2001-2 10-01-11 7.858 A- 1,000 1,014,779
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 A- 1,636 1,617,010
CSX Corp.,
Sr Note 11-01-09 4.875 BBB 2,000 2,067,660
Northwest Airlines, Corp.,
Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 B- 68 45,048
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 B- 309 241,185
TFM S.A. de C.V.,
Gtd Sr Disc Note (Mexico) 06-15-09 11.750 B 345 354,488
Utilities 9.48% 17,322,730
AES Eastern Energy L.P.,
Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BB+ 408 451,063
Beaver Valley Funding Corp.,
Sec Lease Obligation Bond 06-01-17 9.000 BB+ 463 532,181
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BB+ 700 784,000
CalEnergy Co., Inc.,
Sr Bond 09-15-28 8.480 BBB- 550 680,388
DPL, Inc.,
Sr Note 09-01-11 6.875 BB- 2,200 2,288,000
El Paso Electric Co.,
1st Mtg Ser E 05-01-11 9.400 BBB- 1,000 1,170,337
Empresa Electrica Guacolda S.A.,
Sr Note (Chile) 04-30-13 (R) 8.625 BBB- 950 1,002,971
GG1B Funding Corp.,
Deb 01-15-11 7.430 BBB- 294 302,990
HQI Transelect Chile S.A.,
Sr Note (Chile) 04-15-11 7.875 A- 1,230 1,415,788
IPALCO Enterprises, Inc.,
Sr Sec Note 11-14-11 7.625 BB- 325 363,187
Korea Gas Corp.,
Sr Unsub Note (South Korea) 11-26-10 (R) 4.750 A- 1,000 998,789
Midland Funding Corp. II,
Deb Ser B 07-23-06 13.250 BB- 2,225 2,603,250
Pinnacle Partners,
Sr Note 08-15-04 (R) 8.830 BB+ 690 715,012
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BB+ 495 563,439
See notes to
financial statements.
13
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Utilities (continued)
TransAlta Corp.,
Note (Canada) 12-15-13 5.750% BBB- $2,000 $2,009,988
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 8.090 BBB- 1,265 1,441,347
Waste Disposal Service & Equip 0.81% 1,485,000
Allied Waste North America, Inc.,
Gtd Sr Sub Note Ser B 08-01-09 10.000 B+ 1,375 1,485,000
ISSUER, DESCRIPTION SHARES
PREFERRED STOCKS 18.08% $33,044,009
(Cost $32,261,230)
Automobiles/Trucks 0.79% 1,448,700
Delphi Trust I, 8.25% BB 55,000 1,448,700
Banks 4.14% 7,559,525
Abbey National Plc, 7.375%, (United Kingdom) A 41,300 1,125,425
BAC Capital Trust III, 7.00% A- 40,000 1,075,200
Bank One Capital Trust VI, 7.20% BBB+ 55,000 1,482,800
Fleet Capital Trust VII, 7.20% BBB+ 55,000 1,456,400
J.P. Morgan Chase Capital XI, 5.875%, Ser K A- 55,000 1,345,300
USB Capital IV, 7.35% A- 40,000 1,074,400
Finance 3.52% 6,442,000
Citigroup Capital VII, 7.125% A 40,000 1,068,800
General Electric Capital Corp., 5.875% AAA 50,000 1,297,500
Lehman Brothers Holding Capital Trust IV, 6.375% BBB+ 60,000 1,530,000
Merrill Lynch Preferred Capital Trust III, 7.00% A- 50,000 1,337,000
Morgan Stanley Capital Trust II, 7.25% A- 45,000 1,208,700
Media 1.79% 3,271,949
CSC Holdings, Inc., 11.125%, Ser M B 17,029 1,788,045
CSC Holdings, Inc., 11.75%, Ser H B 4,076 423,904
Viacom, Inc., 7.25% A- 40,000 1,060,000
Mortgage Banking 0.62% 1,128,800
Wachovia Preferred Funding Corp., 7.25%, Ser A BBB+ 40,000 1,128,800
Real Estate Investment Trust 3.05% 5,568,475
Apartment Investment & Management Co.,
8.00%, Ser T+ B+ 55,000 1,419,000
CarrAmerica Realty Corp., 7.50%, Ser E BBB- 55,000 1,463,000
Health Care Property Investors, Inc., 7.10%, Ser F BBB 50,000 1,271,875
ProLogis Trust, 6.75%, Ser F BBB 55,000 1,414,600
Telecommunications 0.58% 1,068,400
Telephone & Data Systems, Inc., 7.60%, Ser A A- 40,000 1,068,400
See notes to
financial statements.
14
FINANCIAL STATEMENTS
CREDIT
ISSUER, DESCRIPTION RATING* SHARES VALUE
Utilities 3.59% $6,556,160
Ameren Corp., 9.75%, Conv BBB+ 20,000 594,800
BGE Capital Trust II, 6.20% BBB 60,000 1,577,400
Dominion Resources, Inc., 9.50%, Conv BBB+ 20,000 1,145,000
DTE Energy Co., 8.75%, Conv BBB 20,000 512,400
KeySpan Corp., 8.75%, Conv A 20,000 1,078,000
PSEG Funding Trust II, 8.75% BB+ 40,000 1,124,000
TECO Energy, Inc., 9.50%, Conv BB- ++ 31,600 524,560
ISSUER, DESCRIPTION, INTEREST PAR VALUE
MATURITY DATE RATE (000s OMITTED)
SHORT-TERM INVESTMENTS 1.11% $2,029,000
(Cost $2,028,965)
Government -- U.S. Agencies 0.93%
Federal Home Loan Bank,
Disc Note 01-02-04 Zero AAA $1,700 1,700,000
Joint Repurchase Agreement 0.18%
Investment in a joint repurchase agreement
transaction with UBS Warburg, Inc. -- Dated
12-31-03, due 01-02-04 (Secured by U.S.
Treasury Inflation Indexed Bond, 3.875%,
due 04-15-29, and U.S. Treasury Inflation
Indexed Notes, 3.625% through 4.250%,
due 01-15-08 through 01-15-10) 0.850% 329 329,000
TOTAL INVESTMENTS 146.77% $268,203,156
OTHER ASSETS AND LIABILITIES, NET (46.77%) ($85,472,954)
TOTAL NET ASSETS 100.00% $182,730,202
+ All or a portion of this security is on loan as of December 31, 2003.
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investors Service, unless indicated otherwise.
** Security rated internally by John Hancock Advisers, LLC.
# Represents rate in effect on December 31, 2003.
(A) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(B) Non-income-producing issuer, filed for protection under the
Federal Bankruptcy code or is in default of interest payment.
(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 $25,977,361 or 14.22%
of the Fund's net assets as of December 31, 2003.
Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer; however, the
security is U.S.-dollar-denominated.
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
See notes to
financial statements.
15
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
December 31, 2003
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of what
the Fund owns, is
due and owes.
You'll also find
the net asset
value for each
common share.
ASSETS
Investments at value (cost $260,140,830) including
$20,059,407 of securities loaned $268,203,156
Cash segregated for futures contracts 375,000
Receivable for shares sold 589,360
Dividends and interest receivable 3,179,927
Other assets 13,189
Total assets 272,360,632
LIABILITIES
Due to custodian 28,587
Payable for futures variation margin 39,063
Payable to affiliates
Management fee 327,229
Other 9,164
Other payables and accrued expenses 226,387
Total liabilities 630,430
Auction Preferred Shares (APS) Series A, at value,
unlimited number of shares of beneficial
interest authorized with no par value, 1,780
shares issued, liquidation preference of
$25,000 per share 44,500,000
APS Series B, at value, unlimited number of shares of
beneficial interest authorized with no par value,
1,780 shares issued, liquidation preference of
$25,000 per share 44,500,000
NET ASSETS
Common shares capital paid-in 175,501,784
Accumulated net realized loss on investments (995,313)
Net unrealized appreciation of investments 8,091,825
Accumulated net investment income 131,906
Net assets applicable to common shares $182,730,202
NET ASSET VALUE PER COMMON SHARE
Based on 11,056,746 common shares outstanding $16.53
See notes to
financial statements.
16
FINANCIAL STATEMENTS
OPERATIONS
For the year ended
December 31, 2003
This Statement
of Operations
summarizes the
Fund's investment
income earned
and expenses
incurred in operat-
ing the Fund.
It also shows net
gains (losses) for
the period stated.
INVESTMENT INCOME
Interest (including securities lending income of $32,012) $10,417,491
Dividends 1,396,660
Total investment income 11,814,151
EXPENSES
Investment management fee 1,151,423
APS auction fee 25,649
Transfer agent fee 105,583
Printing 81,382
Custodian fee 69,522
Accounting and legal services fee 59,894
Auditing fee 38,100
Registration and filing fee 33,507
Trustees' fee 12,067
Miscellaneous 10,128
Legal fee 4,201
Interest 3,471
Total expenses 1,594,927
Net investment income 10,219,224
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on
Investments 4,663,371
Financial futures contracts (634,082)
Change in net unrealized appreciation (depreciation) of
Investments 2,934,210
Financial futures contracts 29,499
Net realized and unrealized gain 6,992,998
Distributions to APS Series A (84,842)
Distributions to APS Series B (85,826)
Increase in net assets from operations $17,041,554
See notes to
financial statements.
17
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 dif-
ference reflects
earnings less
expenses, any
investment gains
and losses,
distributions to
shareholders,
and any increase
due to reinvest-
ment of
distributions.
YEAR YEAR
ENDED ENDED
12-31-02 1 12-31-03
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $9,721,830 $10,219,224
Net realized gain 886,746 4,029,289
Change in net unrealized
appreciation (depreciation) 2,151,819 2,963,709
Distributions to APS Series A and B 2 -- (170,668)
Increase in net assets
resulting from operations 12,760,395 17,041,554
Distributions to common shareholders
From net investment income (9,996,235) (10,500,286)
From net realized gains -- (2,903,395)
(9,996,235) (13,403,681)
From Fund share transactions 795,011 504,097
NET ASSETS APPLICABLE TO COMMON SHARES
Beginning of period 175,029,061 178,588,232
End of period 3 $178,588,232 $182,730,202
1 Audited by previous auditor.
2 APS Series A and B were issued on 11-4-03.
3 Includes accumulated net investment income of $93,034 and $131,906,
respectively.
See notes to
financial statements.
18
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 12-31-99 1 12-31-00 1 12-31-01 1,2 12-31-02 1 12-31-03
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $16.64 $15.37 $15.89 $16.06 $16.31
Net investment income 3 1.10 1.07 1.00 0.89 0.93
Net realized and unrealized
gain (loss) on investments (1.27) 0.52 0.19 0.28 0.63
Distributions to APS Series A and B 4 -- -- -- -- (0.02)
Total from investment operations (0.17) 1.59 1.19 1.17 1.54
Less distributions to common shareholders
From net investment income (1.10) (1.07) (1.02) (0.92) (0.96)
From net realized gains -- -- -- -- (0.26)
(1.10) (1.07) (1.02) (0.92) (1.22)
Capital charges
Offering costs and underwriting discount
related to APS -- -- -- -- (0.10)
Net asset value, end of period $15.37 $15.89 $16.06 $16.31 $16.53
Per share market value, end of period $12.69 $14.44 $14.65 $14.66 $15.39
Total return at market value 5 (%) (13.42) 23.06 8.69 6.42 13.49
RATIOS AND SUPPLEMENTAL DATA
Net assets applicable to common shares,
end of period (in millions) $165 $172 $175 $179 $183
Ratio of expenses to average net assets (%) 0.80 0.84 0.80 0.84 0.876
Ratio of net investment income to
average net assets (%) 6.88 6.89 6.17 5.56 5.587
Portfolio turnover (%) 184 248 299 371 273
SENIOR SECURITIES
Total APS Series A outstanding (in millions) -- -- -- -- $45
Total APS Series B outstanding (in millions) -- -- -- -- $45
Involuntary liquidation preference APS Series A
per unit (in thousands) -- -- -- -- $25
Involuntary liquidation preference APS Series B
per unit (in thousands) -- -- -- -- $25
Average market value per unit (in thousands) -- -- -- -- $25
Asset coverage per unit 8 -- -- -- -- $75,402
See notes to
financial statements.
19
FINANCIAL HIGHLIGHTS
Notes to Financial Highlights
1 Audited by previous auditor.
2 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%. Per
share ratios and supplemental data for periods prior to January 1,
2001, have not been restated to reflect this change in presentation.
3 Based on the average shares outstanding.
4 APS Series A and B were issued on 11-4-03.
5 Assumes dividend reinvestment.
6 Ratio calculated on the basis of expenses relative to the average
net assets of common shares. Without the exclusion of preferred
shares, the ratio of expenses would have been 0.81%.
7 Ratio calculated on the basis of net investment income relative to
the average net assets of common shares. Without the exclusion of
preferred shares, the ratio of net investment income would have been
5.19%.
8 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.
20
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 are 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
21
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, 2003, the Fund loaned
securities having a market value of $20,059,407 collateralized by
securities in the amount of $20,557,819. Securities lending expenses
are paid by the Fund to the Adviser.
Financial futures contracts
The Fund may buy and sell financial futures contracts. Buying futures
tends to increase the Fund's exposure to the underlying instrument.
Selling futures tends to decrease the Fund's exposure to the
underlying instrument or hedge other Fund's instruments. At the time
the Fund enters into a financial futures contract, it is required to
deposit with its custodian a specified amount of cash or U.S.
government securities, known as "initial margin," equal to a certain
percentage of the value of the financial futures contract being
traded. Each day, the futures contract is valued at the official
settlement price of the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments to and from the broker, known as
"variation margin," are made on a daily basis as the market price of
the financial futures contract fluctuates. Daily variation margin
adjustments arising from this "mark to market" are recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss.
Risks of entering into financial futures contracts include the
possibility that there may be an illiquid market and/or that a change
in the value of the contracts may not correlate with changes in the
value of the underlying securities. In addition, the Fund could be
prevented from opening or realizing the benefits of closing out
financial futures positions because of position limits or limits on
daily price fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses can be affected as a result of
financial futures contracts.
On December 31, 2003, the Fund had deposited $375,000 in a segregated
account to cover margin requirements on open financial futures
contracts.
The Fund had the following open financial futures contracts on
December 31, 2003:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION APPRECIATION
------------------------------------------------------------------------------
U.S. 10-year Treasury Note 250 Short MAR 04 $29,499
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. Net capital losses of $671,232 that are
attributable to security transactions incurred after October 31, 2003,
are treated as arising on January 1, 2004, the first day of the Fund's
next taxable year.
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. The Fund
may place a debt obligation on non-accrual status and reduce related
interest income by ceasing current accruals and writing off
22
interest receivables when the collection of interest has become doubtful.
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, 2003, the tax character of distributions paid was
as follows: ordinary income $11,574,924 and long-term capital gains
$1,999,425. As of December 31, 2003, the components of distributable
earnings on a tax basis included $142,138 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. Distrib utions 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) 0.650% of the first $150,000,000 of the Fund's average
weekly net asset value, and the value attributable to the Auction
Preferred Shares (collectively, "managed assets"), (b) 0.375% of the
next $50,000,000, (c) 0.350% of the next $100,000,000 and (d) 0.300%
of the Fund's average weekly managed assets in excess of $300,000,000.
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 daily
managed assets of the Fund. The Fund also paid the Adviser the amount
of $1,035 for certain publishing services, included in the printing
fees.
Ms. Maureen Ford Goldfarb and Mr. John M. DeCiccio are directors
and/or officers of the Adviser and/or its affiliates, as well as
Trustees 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 assets 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.
23
NOTE C
Fund share transactions
Common shares
This listing illustrates the Fund common shares distributions
reinvested, offering costs and underwriting discount charged to
capital paid-in, reclassification of 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. The Fund has 30
million common shares authorized with no par value.
YEAR ENDED 12-31-02 1 YEAR ENDED 12-31-03
SHARES AMOUNT SHARES AMOUNT
Beginning of period 10,898,374 $174,131,001 10,952,182 $175,212,973
Distributions reinvested 53,808 795,011 104,564 1,602,997
Offering costs and
underwriting discount
related to Auction
Preferred Shares -- -- -- (1,098,900)
Reclassification of
capital accounts -- 286,961 -- (215,286)
End of period 10,952,182 $175,212,973 11,056,746 $175,501,784
1 Audited by previous auditor.
Auction preferred shares
The Fund issued a total of 3,560 Auction Preferred Shares; 1,780
shares of Series A Auction Preferred Shares and 1,780 shares of Series
B Auction Preferred Shares (collectively, the "preferred shares" or
"APS") on November 4, 2003, in a public offering. The offering costs
of $208,900 and the underwriting discount of $890,000 have been
charged to capital paid-in of common shares.
Dividends on the APS, which accrue daily, are cumulative at a rate
that was established at the offering of the APS and has been reset
every 7 days thereafter by an auction. Dividend rates on APS Series A
ranged from 1.15% to 1.20% and Series B from 1.15% to 1.33% during the
year ended December 31, 2003. Accrued dividends on APS, if any, are
included in the value of APS on the Fund's Statement of Assets and
Liabilities.
The APS are redeemable at the option of the Fund, at a redemption
price equal to $25,000 per share, plus accumulated and unpaid
dividends on any dividend payment date. The APS are also subject to
mandatory redemption at a redemption price equal to $25,000 per share,
plus accumulated and unpaid dividends, if the Fund is in default on
its asset coverage requirements with respect to the APS as defined in
the Fund's by-laws. If the dividends on the APS shall remain unpaid in
an amount equal to two full years' dividends, the holders of the APS,
as a class, have the right to elect a majority of the Board of
Trustees. In general, the holders of the APS and the common
shareholders have equal voting rights of one vote per share, except
that the holders of the APS, as a class, vote to elect two members of
the Board of Trustees, and separate class votes are required on
certain matters that affect the respective interests of the APS and
common 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 December 31, 2003, aggregated $444,952,338 and
$356,653,049, respectively. Purchases and proceeds from sales or
24
maturities of obligations of the U.S. government aggregated
$161,051,834 and $168,375,358, respectively, during the year ended
December 31, 2003.
The cost of investments owned on December 31, 2003, including
short-term investments, for federal income tax purposes was
$260,899,097. Gross unrealized appreciation and depreciation of
investments aggregated $8,934,370 and $1,630,311, respectively,
resulting in net unrealized appreciation of $7,304,059. The difference
between book basis and tax basis net unrealized appreciation of
investments is attributable primarily to the tax deferral of losses on
certain sales of securities and amortization of premiums and accretion
of discounts on debt securities.
NOTE E
Reclassification of accounts
During the year ended December 31, 2003, the Fund reclassified amounts
to reflect an increase in accumulated net realized loss on investments
of $275,316, an increase in accumulated net investment income of
$490,602 and a decrease in capital paid-in of $215,286. This
represents the amount necessary to report these balances on a tax
basis, excluding certain temporary differences, as of December 31,
2003. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net
asset value of the Fund, are primarily attributable to certain
differences in the computation of distributable income and capital
gains under federal tax rules versus accounting principles generally
accepted in the United States of America and book and tax differences
in accounting for deferred compensation and premium amortization. The
calculation of net investment income per share in the Fund's Financial
Highlights excludes these adjustments.
NOTE F
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.
25
AUDITORS'
REPORT
Report of
Pricewaterhouse-
Coopers LLP,
Independent
Auditors
To the Shareholders and Board of Trustees of
John Hancock Income Securities Trust,
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for credit ratings) and
the related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects, the
financial position of the John Hancock Income Securities Trust (the
"Trust") at December 31, 2003, the results of its operations, the
changes in its net assets and the financial highlights for the year
then ended, in conformity with accounting principles generally
accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these financial
statements in accordance with the auditing standards generally
accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
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, and
evaluating the overall financial statement presentation. We believe
that our audit, which included confirmation of securities owned at
December 31, 2003, by correspondence with the custodian and brokers,
provides a reasonable basis for our opinion. The statement of changes
in net assets of the Trust for the year ended December 31, 2002, and
the financial highlights for each of the periods ended on or before
December 31, 2002, were audited by other independent auditors, whose
report dated February 7, 2003, expressed an unqualified opinion
thereon.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 13, 2004
26
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 December 31, 2003.
The Fund has designated distributions to shareholders of $1,999,425 as
a long-term capital gain dividend.
With respect to the ordinary dividends paid by the Fund for the fiscal
year ended December 31, 2003, 2.77% of the dividends qualifies for the
corporate dividends-received deduction.
The Fund hereby designates the maximum amount allowable of its net
taxable income as qualified dividend income as provided in the Jobs
and Growth Tax Relief Reconciliation Act of 2003. This amount will be
reflected on Form 1099-DIV for the calendar year 2003.
Shareholders will be mailed a 2003 U.S. Treasury Department Form
1099-DIV in January 2004. This will reflect the total of all
distributions that are taxable for the calendar year 2003.
27
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. The
Fund's 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 33 1/3% 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 33 1/3% 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 a 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 year ended December 31, 2003, the Fund paid to shareholders
dividends from net investment income totaling $0.9550 per share. The
dates of payment and the amounts per share are as follows:
INCOME
PAYMENT DATE DIVIDEND
--------------------------------------
March 31, 2003 $0.2275
June 30, 2003 0.2275
September 30, 2003 0.2300
December 31, 2003 0.2700
DIVIDEND
REINVESTMENT PLAN
The Fund offers its common shareholders a Dividend
28
Reinvestment Plan (the "Plan"), which offers the opportunity to earn
compounded yields. Any holder of common shares 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 common 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
29
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.
30
SHAREHOLDER
MEETINGS
In November 2002, the Board of Trustees adopted several amendments to
the Fund's by-laws, including provisions relating to the calling of a
special meeting and requiring advance notice of shareholder proposals
or nominees for Trustee. The advance notice provisions in the by-laws
require shareholders to notify the Fund in writing of any proposal
which they intend to present at an annual meeting of shareholders,
including any nominations for Trustee, between 90 and 120 days prior
to the first anniversary of the mailing date of the notice from the
prior year's annual meeting of shareholders. The notification must be
in the form prescribed by the by-laws. The advance notice provisions
provide the Fund and its Trustees with the opportunity to thoughtfully
consider and address the matters proposed before the Fund prepares and
mails its proxy statement to shareholders. Other amendments set forth
the procedures that must be followed in order for a shareholder to
call a special meeting of shareholders. Please contact the Secretary
of the Fund for additional information about the advance notice
requirements or the other amendments to the by-laws.
On March 20, 2003, 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. Proxies covering 9,732,741 shares
of beneficial interest were voted at the meeting.
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 9,595,611 137,130
Richard P. Chapman, Jr 9,605,315 127,426
William Cosgrove 9,601,375 131,366
John M. DeCiccio 9,549,913 182,828
Richard Farrell 9,608,612 124,129
Maureen R. Ford 9,609,338 123,403
William F. Glavin 9,592,043 140,698
John A. Moore 9,601,340 131,401
Patti McGill Peterson 9,603,530 129,211
John W. Pratt 9,597,860 134,881
The shareholders also ratified the Trustees' selection of
PricewaterhouseCoopers LLP as the Fund's independent auditors for the
fiscal year ending December 31, 2003, with the votes tabulated as
follows: 9,584,537 FOR, 48,635 AGAINST and 99,568 ABSTAINING.
31
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 20
Professor of Law, Emeritus, Boston University School of Law
(as of 1996); Director, Brookline Bancorp (since 1998).
Richard P. Chapman, Jr., Born: 1935 1975 20
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 J. Cosgrove, Born: 1933 1991 20
Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A.
(retired 1991); Executive Vice President, Citadel Group Representatives,
Inc. (financial reinsurance); Director, Hudson City Savings Bank (since 1995);
Director, Hudson City Bancorp (since 1999); Trustee, Scholarship Fund for
Inner City Children (since 1986).
Richard A. Farrell, Born: 1932 1996 20
President, Farrell, Healer & Co., Inc. (venture capital management firm)
(since 1980) and President, the Venture Capital Fund of NE (since 1980);
prior to 1980, headed the venture capital group at Bank of Boston Corporation;
Trustee, Marblehead Savings Bank (since 1994).
William F. Glavin, 2 Born: 1932 1996 20
President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox
Corporation (until 1989); Director, Reebok, Inc. (until 2002) and Inco Ltd.
(until 2002).
John A. Moore, 2 Born: 1939 1996 30
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).
32
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
Patti McGill Peterson, 2 Born: 1943 1996 30
Executive Director, Council for International Exchange of Scholars (since
1998); Vice President, Institute of International Education (since 1998);
Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until
1997); President Emerita of Wells College and St. Lawrence University;
Director, Niagara Mohawk Power Corporation (electric utility); Director,
Ford Foundation, International Fellowships Program (since 2002); Director,
Lois Roth Endowment (since 2002); Director, Council for International
Educational Exchange (since 2003); Advisory Board, UNCF, Global
Partnerships Center (since 2002).
John W. Pratt, Born: 1931 1996 20
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 51
Trustee
Director, John Hancock Life Insurance Co. (financial services); Executive
Vice President and Chief Investment Officer, John Hancock Life Insurance
Company, Inc. (holding company); Chairman of the Committee of Finance
of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries,
LLC (Subsidiaries, LLC), Hancock Natural Resource Group, Independence
Investment LLC, Declaration Management Research LLC, John Hancock
Advisers, LLC (the "Adviser"), The Berkeley Financial Group, LLC ("The
Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds")
and Massachusetts Business Development Corporation.
Maureen Ford Goldfarb, Born: 1955 2000 51
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, President and Chief Executive Officer, Sovereign Asset
Management Corporation ("SAMCorp."); Director, Independence
Investment LLC, Subsidiaries, LLC and Signature Services; Investment
Company Institute Board of Governors (since 2002); Senior Vice President,
MassMutual Insurance Co. (until 1999).
33
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NAME, AGE
POSITION(S) HELD WITH FUND OFFICER
PRINCIPAL OCCUPATION(S) AND OF FUND
DIRECTORSHIPS DURING PAST 5 YEARS SINCE
Richard A. Brown, Born: 1949 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.
34
35
36
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
TRANSFER AGENT FOR APS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, New York 10017
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
STOCK SYMBOL
Listed New York Stock Exchange:
JHS
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
For shareholder assistance refer to page 30
HOW TO
CONTACT US
On the Internet www.jhfunds.com
By regular mail Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7054
24-hour automated information 1-800-843-0090
TDD Line 1-800-231-5469
The Fund's voting policies and procedures are available without
charge, upon request:
By phone 1-800-225-5291
On the Fund's Web site www.jhfunds.com/proxy
On the SEC's Web site www.sec.gov
37
[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 12/03
2/04
ITEM 2. CODE OF ETHICS.
As of the end of the period, December 31, 2003, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief
Executive Officer, Chief Financial Officer and Treasurer (respectively, the
principal executive officer, the principal financial officer and the principal
accounting officer, the "Senior Financial Officers"). A copy of the code of
ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
William F. Glavin 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 $31,500 for the
fiscal year ended December 31, 2002 and $41,000 for the fiscal year ended
December 31, 2003. 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 December 31, 2002
and fiscal year ended December 31, 2003 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 $3,500 for the fiscal year ended December 31, 2002 and $4,000 for
the fiscal year ended December 31, 2003. 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
There were no other fees during the fiscal year ended December 31, 2002 and
fiscal year ended December 31, 2003 billed to the registrant. The aggregate all
other fees billed to control affiliates for products and services provided by
the principal accountant, other than services reported above, if any, amounted
to $0 for the fiscal year ended December 31, 2002 and $165,000 for the fiscal
year ended December 31, 2003. The nature of the services comprising the all
other fees was related to computer security administration, documentation of
existing key controls in the John Hancock Infrastructure Group and analysis of
transfer agent fee data. 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 December 31, 2002 and
December 31, 2003 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 December 31, 2003, 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
$1,557,852 for the fiscal year ended December 31, 2002, and $243,000 for the
fiscal year ended December 31, 2003.
(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.
Not applicable at this time.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
See attached Exhibit "Proxy Voting Policies and Procedures".
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form N-CSR,
the registrant's principal executive officer and principal financial officer
have concluded that those disclosure controls and procedures provide reasonable
assurance that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive officer
and principal financial officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(b)(1) Separate certifications for the registrant's principal executive officer
and principal financial officer, as required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule
30a-2(b) under the Investment Company Act of 1940, are attached. The
certifications furnished pursuant to this paragraph are not deemed to be "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of that section. Such certifications are not deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, except to the extent that the Registrant
specifically incorporates them by reference.
(c)(1) Proxy Voting Policies and Procedures are attached.
(d)(1) Approval of Audit, Audit-related, Tax and Other Services
(d)(2) 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.
By:
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Maureen Ford Goldfarb
Chairman, President and Chief Executive Officer
Date: February 11, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
------------------------------
Maureen Ford Goldfarb
Chairman, President and Chief Executive Officer
Date: February 11, 2003
By:
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Richard A. Brown
Senior Vice President and Chief Financial Officer
Date: February 11, 2003