UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4186
John Hancock Income Securities Trust
(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip code)
Susan S. Newton, Secretary
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-375-1702
Date of fiscal year end: December 31
Date of reporting period: December 31, 2004
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Income Securities Trust
12.31.2004
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 James A. Shepherdson, Chief Executive Officer, flush left next
to first paragraph.]
CEO CORNER
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 19
Trustees & officers
page 35
For more information
page 37
Dear Fellow Shareholders,
The stock market advanced for the second straight year, largely on the wings
of a strong post-election rally that produced solid returns for the major
indexes in 2004. For much of the year, the market was fairly dull, moving
mostly sideways as investors worried about higher interest rates,
sky-rocketing oil prices, the tight presidential election and the war in
Iraq. With the election over and oil prices moderating, investors felt more
confident, and the broad Standard & Poor's 500 Index wound up returning
10.88% for the year. The Dow Jones Industrial Average returned 5.40% and a
late and strong rally in technology stocks helped the Nasdaq Composite Index
move from a negative stance in October to finish the year with a 9.15%
return. Despite the Federal Reserve's five hikes in short-term interest
rates, bonds still turned in positive results, with the Lehman Brothers
Aggregate Bond Index up 4.34%.
The way this year has played out in the financial markets serves as a good
reminder of why keeping a long-term perspective is such a critical element
of successful investing. Getting caught up in the day-to-day twists and
turns of the market -- and trying to act on them -- can wreak havoc with
your portfolio and derail progress toward meeting your overall financial
objectives.
Since no one can predict the market's moves, the best way to reach your
goals is to stay invested and stick to your plan. Investing should be a
marathon, not a sprint. Do not try to time the market, and make sure you
work with your investment professional to ensure that your portfolio remains
properly diversified to meet your long-term objectives. For example, after
several years of dominance, small-cap stocks and value stocks could now
represent higher percentages of your portfolio than you may want. If you are
comfortable with your financial plan, it becomes easier to ride out the
market's daily ups and downs. It could also provide you with a greater
chance of success over time.
Sincerely,
/S/ JAMES A. SHEPHERDSON
James A. Shepherdson,
Chief Executive Officer
This commentary reflects the CEO's views as of December 31, 2004. 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
investment risk by
investing at least
80% of its assets in a
diversified portfolio
of income securities.
Over the last twelve months
* Bonds rallied for the fifth straight calendar year despite solid economic
growth and rising inflation.
* Lower-quality corporate bonds and mortgage-backed securities posted the
best results, while Treasury bonds lagged.
* The Fund shifted to a more defensive position, with higher credit quality
and reduced interest rate sensitivity.
[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, 2004." The chart is scaled in increments of 5% with 0% at the bottom and
10% at the top. The first bar represents the fund's 5.70% Net asset value.
The second bar represents the fund's 9.95% Market value. A note below the
chart reads "The total returns for the Fund include the reinvestment of all
distributions. The performance data contained within this material
represents past performance, which does not guarantee future results."]
Top 10 issuers
12.6% Federal National Mortgage Assn.
9.9% United States Treasury
9.0% Federal Home Loan Mortgage Corp.
1.1% Financing Corp.
1.0% General Motors Acceptance Corp.
0.9% Midland Funding Corp. II
0.9% Global Signal Trust
0.9% Government National Mortgage Assn.
0.8% NOVA Chemicals Corp.
0.8% Morgan Stanley
As a percentage of net assets plus the value of preferred shares on December
31, 2004.
1
BY BARRY H. EVANS, CFA, AND JEFFREY N. GIVEN, CFA, PORTFOLIO MANAGERS
MANAGERS'
REPORT
JOHN HANCOCK
Income Securities Trust
The broad U.S. bond market gained ground overall in 2004 -- its fifth
consecutive year of positive performance -- as solid gains in long-term
bonds overcame declining prices in shorter-term securities. The U.S.
economy, bolstered by improving job growth, expanded by approximately 4% in
2004, up from 3% growth the previous year. Inflation, as measured by the
consumer price index, also picked up, increasing from 2% in 2003 to 3.5% in
2004. Although some of the higher inflation was the result of record-high
oil prices, many segments of the economy -- especially housing and medical
care -- also experienced noteworthy price increases.
In response, the Federal Reserve embarked on a series of interest rate
increases in the second half of 2004. The Fed raised short-term interest
rates five times between June and December, each time by a quarter point. As
a result, the federal funds rate rose from a 46-year low of 1% to 2.25% by
the end of the year. Yields on bonds maturing in five years or less followed
suit, but longer-term bond yields declined, reflecting the bond market's
confidence that the Fed's gradual rate increases will keep inflation in
check and the economy growing at a moderate pace.
For the year, the broad Lehman Brothers U.S. Aggregate Bond Index returned
4.34%. Every major sector of the bond market posted positive returns, but
lower-quality, higher-yielding corporate bonds fared the best. The Lehman
Brothers Corporate High-Yield Index returned 11.13% for the year as
investors looked to maximize yield in a low-interest rate environment.
Mortgage-backed securities and investment-grade corporate bonds also
produced solid results, while Treasury and government agency securities
lagged.
"The broad U.S. bond market
gained ground overall in 2004
--its fifth consecutive year of
positive performance..."
Fund performance
For the year ended December 31, 2004, John Hancock Income Securities Trust
produced a total return of 5.70% at net asset value and 9.95% at market
value. The difference in the Fund's net asset value (NAV) performance and
its market performance stems from
2
the fact that the market share price is subject to the dynamics of secondary
market trading, which could cause it to trade at a discount or premium to
the Fund's NAV share price at any time. The average closed-end BBB-rated
corporate debt fund returned 7.22% at net asset value, according to Lipper
Inc., while the Lehman Brothers Government/Credit Bond Index returned 4.19%.
[Photos of Barry Evans and Jeff Given, flush right at top of page.]
Playing defense
The main theme in the portfolio during the year was a shift toward a more
defensive position in anticipation of rising interest rates. Our efforts to
lower the portfolio's risk profile included trading up in credit quality,
reducing the portfolio's sensitivity to interest rates and trimming our
exposure to preferred stocks.
Unfortunately, as lower-quality bonds continued to outperform and interest
rates remained relatively stable, our more conservative positioning caused
the portfolio's return to lag its peer group average. Despite the negative
impact on relative performance, we believe that taking some risk off the
table was a prudent strategy given the economic and market conditions.
"The main theme in the portfolio
during the year was a shift toward a
more defensive position in
anticipation of rising
interest rates."
Upgrading credit quality
A key part of our defensive strategy was reducing the portfolio's overall
credit risk. The outperformance of lower-quality corporate bonds in recent
years has elevated valuations in this segment of the market. Although the
portfolio still has a meaningful position in lower-rated bonds, we
selectively sold some of our below-investment-grade corporate securities
during the past year and replaced them with higher-quality corporate bonds.
For example, we sold our holdings of retailer Toys R Us, a
below-investment-grade credit. Toys R Us is spinning off its popular Babies
R Us franchise, leaving a pure-play toy retailer that is struggling to
compete with the major discount stores. Several other lower-quality bonds in
the portfolio were redeemed by the issuers in 2004, including satellite TV
provider PanAmSat, media company Garden State Newspapers, and paper products
maker Boise Cascade. To replace these bonds, we added solid investment-grade
3
credits such as telecommunications giant BellSouth, beer producer Foster's,
and financial services firms Morgan Stanley and Wachovia.
[Table at top left-hand side of page entitled "Top five industry sectors1."
The first listing is Government-U.S. agencies 24%, the second is
Government-U.S. 10%, the third is Electric utilities 7%, the fourth is
Telecommunications services 5%, and the fifth is Specialized finance 5%.]
We also eliminated our exposure to tobacco-related bonds, including Altria
(the parent company of Philip Morris) and Golden State Tobacco (bonds backed
by California's share of the legal settlement between the major tobacco
companies and 46 states). We decided to exit these positions because of the
high degree of litigation risk associated with these securities.
Another credit-quality adjustment involved cutting back significantly on the
portfolio's preferred stock holdings and replacing them with corporate and
mortgage-backed securities. By moving up the capital structure, we were able
to reduce the level of credit risk without altering the credit breakdown of
the portfolio.
[Pie chart in middle of page with heading "Portfolio diversification1." The
chart is divided into three sections (from top to right): Corporate bonds
61%, U.S. government & agency bonds 34% and Preferred stocks 5%.]
Corporate winners and losers
One of the best performers in the portfolio during the year was XM Satellite
Radio. The company's subscriber base continues to grow at a
stronger-than-expected rate, and more car makers are installing XM products
in their vehicles. In addition, we believe XM has better technology than its
competitors. Another strong contributor to performance was Empresa Electrica
Guacolda, an electric utility in Chile. The dollar-denominated Empresa
securities benefited from the general outperformance of emerging-market
bonds.
On the downside, Ford Motor Credit detracted from portfolio performance.
Pension funding liabilities, disappointing product lineups and high cost
structures weighed on all of the domestic auto makers, increasing the
possibility of a credit-rating downgrade.
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 Global
Signal followed by an up arrow with the phrase "Commercial mortgage security
backed by cell phone towers." The second listing is Beaver Valley Funding
followed by an up arrow with the phrase "Lease obligation bond benefited
from improving prospects at lessee First Energy." The third listing is
Short-term bonds followed by a down arrow with the phrase "Yields soared and
prices fell with Fed rate hikes."]
Reducing interest rate sensitivity
We began lowering the Fund's sensitivity to interest rates in early 2004 to
protect the portfolio against the negative impact of rising interest rates.
We accomplished this by trading out of some longer-term securities, which
tend to suffer the biggest price declines when rates rise, and adding
shorter-term bonds to the portfolio. This positioning helped neutralize the
effects of leverage on the portfolio and reduced overall portfolio
volatility.
Outlook
We expect interest rates to trend higher in 2005. The economy appears poised
for moderate but steady growth, and accelerating inflation remains a threat.
Therefore, we expect the Federal Reserve to continue raising short-term
rates, though at the same gradual pace as in 2004. The futures market
projects the federal funds rate -- currently at 2.25% -- to be 3.5% by the
end of 2005. We believe that interest rates will rise across the board, with
short-term rates rising more than long-term rates in response to the Fed's
moves.
"...we will continue to seek out oppor
tunities to upgrade the overall credit
quality of the portfolio."
Given this outlook, we plan to maintain our current defensive positioning.
Valuations among lower-quality, higher-yielding bonds are stretched to
historically high levels, so we will continue to seek out opportunities to
upgrade the overall credit quality of the portfolio. We also intend to keep
the interest rate sensitivity of the portfolio relatively low, allowing it
to hold up better in a rising interest rate environment.
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, 2004
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
December 31, 2004
This schedule is divided into four main categories: bonds, preferred stocks,
U.S. government and agencies securities and short-term investments. Bonds,
preferred stocks and U.S. government and agencies securities are further
broken down by industry group. Short-term investments, which represent the
Fund's cash position, are listed last.
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Bonds 89.47% $161,388,415
(Cost $156,015,616)
Aerospace & Defense 0.66% 1,187,743
Jet Equipment Trust,
Equip Trust Ctf Ser 1995B2 (B)(H)(S) 10.910% 08-15-14 D $550 2,750
Raytheon Co.,
Note 8.300 03-01-10 BBB- 1,000 1,184,993
Agricultural Products 1.23% 2,228,164
Bunge Ltd Finance Corp.,
Gtd Note (L) 4.375 12-15-08 BBB 1,250 1,259,592
Corn Products International, Inc.,
Sr Note 8.450 08-15-09 BBB- 835 968,572
Airlines 1.58% 2,860,550
American Airlines, Inc.,
Pass Thru Ctf Ser 2001-2 (L) 7.858 10-01-11 A- 1,000 1,033,521
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1999-1A 6.545 02-02-19 A- 1,589 1,579,047
Northwest Airlines Corp.,
Pass Thru Ctf Ser 1996-1C 10.150 01-02-05 CCC+ 32 31,709
Pass Thru Ctf Ser 1996-1D 8.970 01-02-15 CCC+ 284 216,273
Apparel Retail 0.35% 627,013
Gap, Inc. (The),
Note (L) 10.300 12-15-08 BB+ 515 627,013
Asset Management & Custody Banks 0.85% 1,526,235
Rabobank Capital Fund II,
Perpetual Bond (5.260% to
12-31-13 then variable) (S) 5.260 12-29-49 AA 1,500 1,526,235
Auto Parts & Equipment 0.27% 480,059
American Axle & Manufacturing, Inc.,
Sr Note 5.250 02-11-14 BBB 500 480,059
See notes to
financial statements.
6
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Automobile Manufacturers 0.14% $259,021
General Motors Corp.,
Sr Deb 8.375% 07-15-33 BBB- $250 259,021
Brewers 0.55% 994,193
Fosters Financial Corp.,
Note (S) 4.875 10-01-14 BBB+ 1,000 994,193
Broadcasting & Cable TV 4.45% 8,033,094
AT&T Broadband Corp.,
Gtd Note 8.375 03-15-13 BBB 1,020 1,257,758
British Sky Broadcasting Group Plc,
Gtd Sr Note (United Kingdom) 8.200 07-15-09 BBB- 945 1,092,337
Clear Channel Communications, Inc.,
Note 4.250 05-15-09 BBB- 1,000 989,880
Cox Enterprises, Inc.,
Note (S) 7.875 09-15-10 BBB 380 427,856
Grupo Televisa S.A.,
Note (Mexico) 8.000 09-13-11 BBB- 1,855 2,147,163
Innova S. de R.L.,
Sr Note (Mexico) 12.875 04-01-07 B+ 39 38,817
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 10.000 03-15-05 BB+ 445 451,119
TCI Communications, Inc.,
Sr Deb 9.800 02-01-12 BBB 860 1,108,534
XM Satellite Radio, Inc.,
Sr Sec Note, Step Coupon
(Zero to 12-31-05 then 14.000%) (O) Zero 12-31-09 CCC+ 509 519,630
Building Products 2.17% 3,914,625
D.R. Horton, Inc.,
Note 4.875 01-15-10 BB+ 750 746,250
KB Home,
Sr Note 5.750 02-01-14 BB+ 1,000 990,000
Pulte Homes, Inc.,
Sr Note 6.250 02-15-13 BBB- 1,000 1,063,837
Toll Brothers, Inc.,
Gtd Sr Note 6.875 11-15-12 BBB- 1,000 1,114,538
Casinos & Gaming 1.27% 2,285,540
Chukchansi Economic Development Auth.,
Sr Note (G)(S) 14.500 06-15-09 Caa1 500 630,000
Waterford Gaming LLC,
Sr Note (S) 8.625 09-15-12 B+ 622 665,540
Wynn Las Vegas LLC,
1st Mtg Note (S) 6.625 12-01-14 B+ 1,000 990,000
See notes to
financial statements.
7
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Commodity Chemicals 0.75% $1,352,260
RPM International, Inc.,
Sr Note 6.250% 12-15-13 BBB $1,300 1,352,260
Consumer Finance 4.72% 8,518,769
Capital One Financial Corp.,
Sr Note 6.250 11-15-13 BBB- 1,000 1,075,188
CIT Group, Inc.,
Sr Note 5.000 02-13-14 A 750 748,769
Ford Motor Credit Co.,
Note 7.375 10-28-09 BBB- 1,625 1,752,835
General Motors Acceptance Corp.,
Note 7.250 03-02-11 BBB- 2,550 2,669,753
Household Finance Corp.,
Note 6.375 10-15-11 A 645 712,335
HSBC Finance Corp.,
Sr Note 6.750 05-15-11 A 1,390 1,559,889
Department Stores 0.76% 1,374,000
Penney J.C. Co., Inc.,
Deb 7.650 08-15-16 BB+ 1,200 1,374,000
Diversified Banks 2.72% 4,903,445
Bank of New York,
Cap Security (S) 7.780 12-01-26 A- 650 708,322
Barclays Bank Plc,
Perpetual Bond (6.860% to 6-15-32
then variable) (United Kingdom) (S) 6.860 09-29-49 A+ 1,600 1,799,354
Citigroup, Inc.,
Sub Note 6.000 10-31-33 A+ 560 579,539
Royal Bank of Scotland Group Plc,
Perpetual Bond (7.648% to 09-30-31
then variable) (United Kingdom) 7.648 08-29-49 A 650 791,326
Wachovia Corp.,
Sub Note 5.250 08-01-14 A- 1,000 1,024,904
Diversified Chemicals 1.89% 3,412,125
NOVA Chemicals Corp.,
Med Term Note (Canada) 7.400 04-01-09 BB+ 2,045 2,234,163
Potash Corp. of Saskatchewan, Inc.,
Note (Canada) 7.750 05-31-11 BBB+ 1,000 1,177,962
See notes to
financial statements.
8
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Diversified Commercial Services 1.18% $2,129,409
Brascan Corp.,
Note (Canada) 5.750% 03-01-10 A- $1,010 1,068,638
Hutchison Whampoa International Ltd.,
Gtd Note (United Kingdom) (S) 6.500 02-13-13 A- 750 808,271
Sotheby's Holdings, Inc.,
Note 6.875 02-01-09 BB- 250 252,500
Electric Utilities 9.01% 16,248,691
AES Eastern Energy L.P.,
Pass Thru Ctf Ser 1999A 9.000 01-02-17 BB+ 391 444,622
Beaver Valley Funding Corp.,
Sec Lease Obligation Bond 9.000 06-01-17 BB+ 513 606,720
BVPS II Funding Corp.,
Collateralized Lease Bond 8.890 06-01-17 BB+ 700 845,250
El Paso Electric Co.,
1st Mtg Ser E 9.400 05-01-11 BBB 1,000 1,103,985
Empresa Electrica Guacolda S.A.,
Sr Sec Note (Chile) (S) 8.625 04-30-13 BBB- 850 970,703
Exelon Generation Co. LLC,
Sr Note 5.350 01-15-14 A- 1,000 1,025,382
HQI Transelect Chile S.A.,
Sr Note (Chile) 7.875 04-15-11 A- 1,230 1,422,185
IPALCO Enterprises, Inc.,
Sr Sec Note 8.625 11-14-11 BB- 325 364,000
MidAmerican Energy Holdings Co.,
Sr Bond 8.480 09-15-28 BBB- 550 723,443
Midland Funding Corp. II,
Deb Ser B 13.250 07-23-06 BB- 2,225 2,454,386
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) (S) 9.625 11-15-09 BBB- 514 608,186
PNPP II Funding Corp.,
Deb 9.120 05-30-16 BB+ 491 577,588
PPL Capital Funding,
Gtd Sr Note Ser A 4.330 03-01-09 BBB- 500 494,180
System Energy Resources, Inc.,
Sec Bond (S) 5.129 01-15-14 BBB 500 500,410
Texas Utilities Electric Co.,
Sec Bond 7.460 01-01-15 BBB 699 771,172
TransAlta Corp.,
Note (Canada) 5.750 12-15-13 BBB- 2,000 2,059,504
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 8.090 01-02-17 BBB- 1,154 1,276,975
See notes to
financial statements.
9
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Electrical Components & Equipment 1.61% $2,910,500
AMETEK, Inc.,
Sr Note 7.200% 07-15-08 BBB $1,500 1,626,301
Jabil Circuit, Inc.,
Sr Note (L) 5.875 07-15-10 BB+ 1,220 1,284,199
Environmental Services 0.44% 804,300
Allied Waste North America, Inc.,
Gtd Sr Sub Note Ser B 10.000 08-01-09 B+ 766 804,300
Food Retail 0.97% 1,748,586
Delhaize America, Inc.,
Gtd Note 8.125 04-15-11 BB+ 1,500 1,748,586
Foreign Government 0.93% 1,680,975
Colombia, Republic of,
Note (Colombia) 10.000 01-23-12 BB 750 866,250
Mexican States, United,
Global Med Term Note Ser A (Mexico) 6.375 01-16-13 BBB- 765 814,725
Gas Utilities 1.90% 3,422,843
Duke Capital LLC,
Sr Note 8.000 10-01-19 BBB- 750 915,254
Kinder Morgan Energy Partners,
Sr Note 5.000 12-15-13 BBB+ 1,405 1,403,953
Magellan Midstream Partners, L.P.,
Note 6.450 06-01-14 BBB 500 540,704
NorAm Energy Corp.,
Deb 6.500 02-01-08 BBB 525 562,932
Health Care Facilities 0.57% 1,028,777
HCA, Inc.,
Note 8.750 09-01-10 BB+ 900 1,028,777
Health Care Services 0.84% 1,515,215
Wellpoint, Inc.,
Note (S) 5.000 12-15-14 BBB+ 1,520 1,515,215
Highways & Railtracks 1.13% 2,039,862
CSX Corp.,
Sr Note 4.875 11-01-09 BBB 2,000 2,039,862
Hotels, Resorts & Cruise Lines 2.55% 4,591,489
Harrah's Operating Co., Inc.,
Gtd Sr Note 8.000 02-01-11 BBB- 765 888,516
Gtd Sr Note 5.500 07-01-10 BBB- 755 781,519
Hyatt Equities LLC,
Note (S) 6.875 06-15-07 BBB 1,060 1,115,266
Meditrust,
Note 7.000 08-15-07 BB- 1,710 1,806,188
See notes to
financial statements.
10
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Industrial Conglomerates 0.70% $1,263,221
Bombardier, Inc.,
Note (Canada) (S) 6.750% 05-01-12 BB $500 458,750
Vedanta Resources Plc,
Sr Note (United Kingdom) (L)(S) 6.625 02-22-10 BB 795 804,471
Industrial Machinery 1.77% 3,190,110
Kennametal, Inc.,
Sr Note 7.200 06-15-12 BBB 1,405 1,561,285
Manitowoc Co., Inc., (The),
Sr Note 7.125 11-01-13 B+ 500 541,250
Trinity Industries Leasing Co.,
Pass Thru Ctf (S) 7.755 02-15-09 Ba1 1,020 1,087,575
Investment Banking & Brokerage 2.50% 4,508,465
Merrill Lynch & Co.,
Med Term Note Ser C 5.000 01-15-15 A+ 1,500 1,494,122
Mizuho Financial Group Cayman Ltd.,
Gtd Note (Cayman Islands) 8.375 12-29-49 A2 750 821,925
Morgan Stanley,
Sub Note 4.750 04-01-14 A 2,250 2,192,418
IT Consulting & Other Services 0.24% 430,621
NCR Corp.,
Note 7.125 06-15-09 BBB- 390 430,621
Leisure Products 0.57% 1,027,613
Brunswick Corp.,
Note 5.000 06-01-11 BBB+ 1,000 1,027,613
Metal & Glass Containers 0.30% 550,000
Owens-Brockway Glass Container, Inc.,
Gtd Sr Sec Note 8.250 05-15-13 B 500 550,000
Multi-Line Insurance 0.62% 1,125,137
Assurant, Inc.,
Sr Note 5.625 02-15-14 BBB+ 510 526,702
Massachusetts Mutual Life Insurance Co.,
Surplus Note (S) 7.625 11-15-23 AA 485 598,435
Multi-Media 1.17% 2,101,641
News America Holdings, Inc.,
Gtd Sr Deb 8.250 08-10-18 BBB- 540 669,551
Time Warner, Inc.,
Deb 9.125 01-15-13 BBB+ 1,114 1,432,090
See notes to
financial statements.
11
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Office Services & Supplies 1.77% $3,187,136
Office Depot, Inc.,
Sr Note 6.250% 08-15-13 BBB- $2,000 2,134,108
Steelcase, Inc.,
Sr Note 6.375 11-15-06 BBB- 1,020 1,053,028
Oil & Gas Exploration & Production 4.12% 7,436,364
Alberta Energy Co. Ltd.,
Note (Canada) 8.125 09-15-30 A- 725 939,960
Occidental Petroleum Corp.,
Sr Deb 10.125 09-15-09 BBB+ 1,160 1,431,867
Pemex Project Funding Master Trust,
Gtd Note (Mexico) 9.125 10-13-10 BBB- 1,115 1,336,885
Salton Sea Funding Corp.,
Sr Sec Note Ser C 7.840 05-30-10 BB+ 1,841 1,996,778
TEPPCO Partners, L.P.,
Gtd Sr Note 7.625 02-15-12 BBB 1,500 1,730,874
Oil & Gas Refining & Marketing 0.56% 1,008,870
Enterprise Products Operations, L.P.,
Sr Note (S) 5.600 10-15-14 BB+ 1,000 1,008,870
Other Diversified Financial Services 1.24% 2,239,719
Glencore Funding LLC,
Gtd Note (S) 6.000 04-15-14 BBB 1,380 1,335,120
Humpuss Funding Corp.,
Note (S) 7.720 12-15-09 B2 214 201,633
St. George Funding Co.,
Perpetual Bond (8.485% to 06-30-17
then variable) (Australia) (S) 8.485 12-31-49 BBB+ 615 702,966
Paper Packaging 0.78% 1,402,075
Stone Container Corp.,
Sr Note 9.750 02-01-11 B 285 312,075
Sr Note 8.375 07-01-12 B 1,000 1,090,000
Paper Products 2.80% 5,042,294
Abitibi-Consolidated Co.,
Gtd Sr Note (Canada) 6.950 12-15-06 BB 2,000 2,075,000
International Paper Co.,
Note 5.850 10-30-12 BBB 2,000 2,131,044
MDP Acquisitions Plc,
Sr Note (Ireland) 9.625 10-01-12 B 750 836,250
See notes to
financial statements.
12
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Pharmaceuticals 1.83% $3,292,891
Medco Health Solutions, Inc.,
Sr Note (L) 7.250% 08-15-13 BBB $1,550 1,733,906
Wyeth,
Note 5.500 03-15-13 A 1,500 1,558,985
Property & Casualty Insurance 0.57% 1,030,514
Ohio Casualty Corp.,
Note 7.300 06-15-14 BB 750 807,147
URC Holdings Corp.,
Sr Note (S) 7.875 06-30-06 AA- 210 223,367
Real Estate Investment Trusts 1.04% 1,878,370
Healthcare Realty Trust, Inc.,
Sr Note 8.125 05-01-11 BBB- 175 203,862
iStar Financial, Inc.,
Sr Note 7.000 03-15-08 BBB- 820 882,980
ProLogis Trust,
Sr Note 7.050 07-15-06 BBB+ 510 535,903
Ventas Realty, L.P.,
Sr Note (S) 6.625 10-15-14 BB 250 255,625
Real Estate Management & Development 0.80% 1,436,262
Post Apartment Homes,
Sr Note 5.125 10-12-11 BBB 870 871,360
Socgen Real Estate Co. LLC,
Perpetual Bond Ser A (7.640% to
09-30-07 then variable) (S) 7.640 12-29-49 A 515 564,902
Regional Banks 0.95% 1,714,552
Greater Bay Bancorp,
Sr Note Ser B 5.250 03-31-08 BBB- 565 579,680
NB Capital Trust IV,
Gtd Cap Security 8.250 04-15-27 A- 1,020 1,134,872
Soft Drinks 0.62% 1,112,500
Panamerican Beverages, Inc.,
Sr Note (Panama) 7.250 07-01-09 BBB 1,000 1,112,500
Specialized Finance 7.32% 13,205,250
Ameriquest Mortgage Securities, Inc.,
Pass Thru Ctf Ser 2003-IA1 Class A4 4.965 11-25-33 AAA 2,000 2,031,159
Bear Stearns Commercial Mortgage
Securities, Inc.,
Commercial Sub Bond Ser 2004-ESA
Class C (S) 4.937 05-14-16 AA 1,000 1,022,472
See notes to
financial statements.
13
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Specialized Finance (continued)
Centex Home Equity Loan Trust,
Home Equity Loan Asset-Backed
Ctf Ser 2004-A Class AF4 4.510% 08-25-32 AAA $2,000 1,993,921
ContiMortgage Home Equity Loan Trust,
Pass Thru Ctf Ser 1995-2 Class A5 8.100 08-15-25 AAA 217 231,733
Countrywide Alternative Loan Trust,
Asset-Backed Pass Thru Ctf Ser
2004-24CB Class 1A1 6.000 11-25-34 AAA 1,336 1,372,923
Credit-Based Asset Servicing and
Securitization LLC,
Mtg Asset-Backed Ctf Ser 2004-CB4
Class A3 4.632 05-25-35 AAA 1,000 1,013,276
Deutsche Mortgage & Asset
Receiving Corp.,
Commercial Mtg Pass Thru Ctf Ser
1998-C1 Class C 6.861 06-15-31 A2 415 449,956
DLJ Mortgage Acceptance Corp.,
Commercial Mtg Pass Thru Ctf Ser
1996-CF1 Class B1 (S) 8.354 03-13-28 A 1,535 1,611,167
Global Signal Trust,
Sub Bond Ser 2004-1A Class D (S) 5.098 01-15-34 BBB 2,000 2,003,440
Sub Bond Ser 2004-2A Class D (S) 5.093 12-15-14 Baa2 405 402,848
MBNA Master Credit Card Trust,
Sub Bond Ser 1998-E Class C (S) 6.600 09-15-10 BBB 1,000 1,072,355
Telecommunication Services 7.54% 13,609,955
AT&T Corp.,
Sr Note 9.050 11-15-11 BB+ 1,730 1,991,662
Bellsouth Corp.,
Bond 5.200 09-15-14 A 350 356,728
Deb 6.300 12-15-15 A 1,155 1,255,427
Deutsche Telekom International
Finance B.V.,
Bond (Coupon rate step up/down
on rating) (Netherlands) 8.500 06-15-10 BBB+ 1,005 1,197,330
Qwest Capital Funding, Inc.,
Gtd Note (L) 7.000 08-03-09 B 1,000 987,500
SBC Communications, Inc.,
Note 5.100 09-15-14 A 870 878,086
Sprint Capital Corp.,
Gtd Sr Bond 7.625 01-30-11 BBB- 1,000 1,161,039
Note 6.875 11-15-28 BBB- 820 897,725
Telecom Italia Capital,
Gtd Note (Luxembourg) (S) 4.950 09-30-14 BBB+ 1,500 1,469,609
See notes to
financial statements.
14
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Telecommunication Services (continued)
Telefonos de Mexico, S.A. de C.V.,
Note (Mexico) 4.500% 11-19-08 BBB- $1,750 1,761,662
Telus Corp.,
Note (Canada) 8.000 06-01-11 BBB 1,395 1,653,187
Telecommunications Equipment 1.57% 2,833,817
Corning, Inc.,
Med Term Note 8.300 04-04-25 BB+ 1,150 1,210,266
Note 6.300 03-01-09 BB+ 240 251,713
France Telecom S.A.,
Note (France) 8.500 03-01-11 BBB+ 1,150 1,371,838
Trucking 0.33% 595,976
CNF, Inc.,
Sr Deb Ser B 6.700 05-01-34 BBB- 560 595,976
Wireless Telecommunication Services 2.27% 4,087,579
America Movil S.A. de C.V.,
Note (Mexico) (S) 5.750 01-15-15 BBB- 1,275 1,272,092
AT&T Wireless Services , Inc.,
Sr Note 8.125 05-01-12 A 1,525 1,843,487
Mobile Telesystems Finance S.A.,
Gtd Sr Note (Luxembourg) (S) 9.750 01-30-08 BB- 400 422,000
Nextel Communications, Inc.,
Sr Note 7.375 08-01-15 BB 500 550,000
Credit
Issuer, description rating (A) Shares Value
Preferred stocks 7.72% $13,928,552
(Cost $13,730,491)
Agricultural Products 0.56% 1,017,187
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) BB+ 12,500 1,017,187
Broadcasting & Cable TV 0.58% 1,048,000
Viacom, Inc., 7.25% A- 40,000 1,048,000
Diversified Banks 3.41% 6,158,615
Abbey National Plc, 7.375% (United Kingdom) A- 41,300 1,117,165
Bank One Capital Trust VI, 7.20% A- 55,000 1,460,800
Citigroup Capital VII, 7.125% A 40,000 1,056,000
Fleet Capital Trust VII, 7.20% A- 55,000 1,460,250
USB Capital IV, 7.35% A- 40,000 1,064,400
See notes to
financial statements.
15
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Electric Utilities 1.22% $2,208,600
Ameren Corp., 9.75%, Conv BBB+ 20,000 575,200
DTE Energy Co., 8.75%, Conv BBB 20,000 521,400
PSEG Funding Trust II, 8.75% BB+ 40,000 1,112,000
Gas Utilities 0.58% 1,043,400
KeySpan Corp., 8.75%, Conv A 20,000 1,043,400
Integrated Telecommunication Services 0.59% 1,055,200
Telephone & Data Systems, Inc., 7.60%, Ser A A- 40,000 1,055,200
Real Estate Investment Trusts 0.78% 1,397,550
Apartment Investment & Management Co., 8.00%, Ser T B+ 55,000 1,397,550
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
U.S. government and agencies securities 49.91% $90,033,346
(Cost $88,823,329)
Government U.S. 14.74% 26,587,722
United States Treasury,
Bond (L) 9.125% 05-15-18 AAA $495 719,954
Bond (L) 8.875 08-15-17 AAA 1,215 1,721,787
Bond (L) 5.375 02-15-31 AAA 2,840 3,070,972
Note (L) 4.250 11-15-14 AAA 21,020 21,075,009
Government U.S. Agency 35.17% 63,445,624
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 4.500 05-01-19 AAA 1,963 1,957,648
15 Yr Pass Thru Ctf 4.500 08-01-19 AAA 968 965,389
15 Yr Pass Thru Ctf 4.500 11-01-19 AAA 1,194 1,191,157
20 Yr Pass Thru Ctf 11.250 01-01-16 AAA 45 50,280
30 Yr Pass Thru Ctf 6.000 08-01-34 AAA 17,225 17,805,034
30 Yr Pass Thru Ctf 5.500 04-01-33 AAA 2,299 2,338,129
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 7.500 02-01-08 AAA 4 4,728
15 Yr Pass Thru Ctf 7.000 09-01-10 AAA 55 58,578
15 Yr Pass Thru Ctf 7.000 09-01-12 AAA 7 8,056
15 Yr Pass Thru Ctf 7.000 02-01-16 AAA 1,465 1,553,543
15 Yr Pass Thru Ctf 7.000 04-01-17 AAA 73 78,353
15 Yr Pass Thru Ctf 5.000 08-01-19 AAA 1,040 1,057,700
15 Yr Pass Thru Ctf 5.000 10-01-19 AAA 3,881 3,945,716
15 Yr Pass Thru Ctf 4.500 10-01-19 AAA 1,281 1,277,292
30 Yr Pass Thru Ctf 6.500 11-01-34 AAA 992 1,041,611
30 Yr Pass Thru Ctf 6.000 12-01-33 AAA 6,498 6,722,373
30 Yr Pass Thru Ctf 6.000 01-01-34 AAA 13,606 14,076,922
See notes to
financial statements.
16
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Government U.S. Agency (continued)
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf 5.500% 04-01-33 AAA $1,159 1,182,129
30 Yr Pass Thru Ctf 5.500 05-01-34 AAA 1,218 1,237,679
CMO REMIC 2003-17-QT 5.000 08-25-27 AAA 1,675 1,694,961
Financing Corp.,
Bond 9.400 02-08-18 AAA 2,000 2,865,558
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 10.000 11-15-20 AAA 7 7,821
30 Yr Pass Thru Ctf 9.500 11-15-19 AAA 1 511
30 Yr Pass Thru Ctf 9.500 01-15-21 AAA 11 12,558
30 Yr Pass Thru Ctf 9.500 02-15-25 AAA 13 14,831
30 Yr Pass Thru Ctf 6.500 10-15-32 AAA 2,180 2,297,067
Interest Par value
Issuer, description, maturity date rate (000) Value
Short-term investments 0.40% $711,000
(Cost $711,000)
Joint Repurchase Agreement 0.40% 711,000
Investment in a joint repurchase agreement transaction
with Morgan Stanley -- Dated 12-31-04,
due 01-03-05 (secured by U.S. Treasury Inflation
Indexed Bond 3.875% due 04-15-29) 1.600% $711 711,000
Total investments 147.50% $266,061,313
Other assets and liabilities, net (47.50%) ($85,676,063)
Total net assets 100.00% $180,385,250
(A) Credit ratings are unaudited and are rated by Moody's Investors
Service where Standard & Poor's ratings are not available, unless
indicated otherwise.
(B) This security is fair valued in good faith under procedures
established by the Board of Trustees.
(G) Security rated internally by John Hancock Advisers, LLC.
(H) Non-income-producing issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
(L) All or a portion of this security is on loan as of December 31, 2004.
(O) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(S) 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 $30,797,185 or 17.07% of the Fund's net
assets as of December 31, 2004.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, security is U.S.
dollar-denominated.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to
financial statements.
17
PORTFOLIO
CONCENTRATION
December 31, 2004
(unaudited)
This table shows the
Fund's investments,
aggregated by
various industries.
Industry distribution Value as a percentage of Fund's total investments
------------------------------------------------------------------------------
Aerospace & defense 0.45%
Agricultural products 1.22
Airlines 1.07
Apparel retail 0.23
Asset management & custody banks 0.57
Auto parts & equipment 0.18
Automobile manufacturers 0.10
Brewers 0.37
Broadcasting & cable TV 3.41
Building products 1.47
Casinos & gaming 0.86
Commodity chemicals 0.51
Consumer finance 3.20
Department stores 0.52
Diversified banks 4.16
Diversified chemicals 1.28
Diversified commercial services 0.80
Electric utilities 6.94
Electrical components & equipment 1.09
Environmental services 0.30
Food retail 0.66
Foreign government 0.63
Gas utilities 1.68
Government U.S 9.99
Government U.S. agency 23.85
Health care facilities 0.39
Health care services 0.57
Highways & railtracks 0.77
Hotels, resorts & cruise lines 1.72
Industrial conglomerates 0.47
Industrial machinery 1.20
Integrated telecommunication services 0.40
Investment banking & brokerage 1.69
IT consulting & other services 0.16
Leisure products 0.39
Metal & glass containers 0.21
Multi-line insurance 0.42
Multi-media 0.79
Office services & supplies 1.20
Oil & gas exploration & production 2.79
Oil & gas refining & marketing 0.38
Other diversified financial services 0.84
Paper packaging 0.53
Paper products 1.90
Pharmaceuticals 1.24
Property & casualty insurance 0.39
Real estate investment trusts 1.23
Real estate management & development 0.54
Regional banks 0.64
Soft drinks 0.42
Specialized finance 4.96
Telecommunication services 5.12
Telecommunication equipment 1.07
Trucking 0.22
Wireless telecommunication services 1.54
Short-term investments 0.27
Total investments 100.00%
See notes to
financial statements.
18
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
December 31, 2004
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 $259,280,436)
including $32,671,666 of securities loaned $266,061,313
Cash 567
Cash segregated for futures contacts 635,000
Receivable for shares sold 293,514
Dividends and interest receivable 3,140,633
Other assets 15,670
Total assets 270,146,697
Liabilities
Payable for futures variation margin 245,310
Payable to affiliates
Management fees 372,060
Other 8,962
Other payable and accrued expenses 125,275
Total liabilities 751,607
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 44,504,920
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 44,504,920
Net assets
Common shares capital paid-in 176,262,151
Accumulated net realized loss on investments,
financial futures contracts and options (2,454,690)
Net unrealized appreciation of investments
and financial futures contracts 6,513,437
Accumulated net investment income 64,352
Net assets applicable to common shares $180,385,250
Net asset value per common share
Based on 11,141,310 common shares outstanding --
30 million shares authorized with no par value $16.19
See notes to
financial statements.
19
FINANCIAL STATEMENTS
OPERATIONS
For the year ended
December 31, 2004
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 $13,854,459
Dividends 1,638,463
Securities lending 52,590
Total investment income 15,545,512
Expenses
Investment management fees 1,408,377
APS auction fees 244,677
Transfer agent fees 79,393
Accounting and legal services fees 70,936
Custodian fees 70,003
Printing 57,589
Miscellaneous 45,982
Professional fees 44,781
Registration and filing fees 23,982
Trustees' fees 15,413
Interest 3,096
Security lending fees 1,796
Total expenses 2,066,025
Net investment income 13,479,487
Realized and unrealized gain (loss)
Net realized gain (loss) on
Investments 1,086,022
Financial futures contracts (2,145,026)
Options (31,600)
Change in net unrealized appreciation (depreciation) of
Investments (1,281,449)
Financial futures contracts (296,939)
Net realized and unrealized loss (2,668,992)
Distributions to APS Series A (665,548)
Distributions to APS Series B (672,372)
Increase in net assets from operations $9,472,575
See notes to
financial statements.
20
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
These Statements
of Changes in Net
Assets show how
the value of the
Fund's net assets
has changed
during the last
two periods. The
difference reflects
earnings less
expenses, any
investment
gains and losses,
distributions, if
any, paid to
shareholders and
the net of Fund
share transactions.
Year Year
ended ended
12-31-03 12-31-04
Increase (decrease) in net assets
From operations
Net investment income $10,219,224 $13,479,487
Net realized gain (loss) 4,029,289 (1,090,604)
Change in net unrealized
appreciation (depreciation) 2,963,709 (1,578,388)
Distributions to APS Series A and B 1 (170,668) (1,337,920)
Increase in net assets
resulting from operations 17,041,554 9,472,575
Distributions to common shareholders
From net investment income (10,500,286) (13,140,127)
From net realized gains (2,903,395) ---
(13,403,681) (13,140,127)
From Fund share transactions 504,097 1,322,600
Net assets
Beginning of period 178,588,232 182,730,202
End of period 2 $182,730,202 $180,385,250
1 APS Series A and B were issued on 11-4-03.
2 Includes accumulated net investment income of $131,906 and $64,352,
respectively.
See notes to
financial statements.
21
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 12-31-00 1 12-31-01 1,2 12-31-02 1 12-31-03 12-31-04
Per share operating performance
Net asset value,
beginning of period 15.37 $15.89 $16.06 $16.31 $16.53
Net investment income 3 1.07 1.00 0.89 0.93 1.22
Net realized and unrealized
gain (loss) on investments 0.52 0.19 0.28 0.63 (0.25)
Distributions to APS Series A and B 4 -- -- -- (0.02) (0.12)
Total from
investment operations 1.59 1.19 1.17 1.54 0.85
Less distributions to
common shareholders
From net investment income (1.07) (1.02) (0.92) (0.96) (1.19)
From net realized gains -- -- -- (0.26) --
(1.07) (1.02) (0.92) (1.22) (1.19)
Capital charges
Offering costs and underwriting
discounts related to APS -- -- -- (0.10) --
Net asset value, end of period $15.89 $16.06 $16.31 $16.53 $16.19
Per share market value,
end of period $14.44 $14.65 $14.66 $15.39 $15.68
Total return at market value 5 (%) 23.06 8.69 6.42 13.49 9.95
Ratios and supplemental data
Net assets applicable to common
shares, end of period (in millions) $172 $175 $179 $183 $180
Ratio of expenses to
average net assets (%) 0.84 0.80 0.84 0.87 6 1.14 6
Ratio of net investment income
to average net assets (%) 6.89 6.17 5.56 5.58 7 7.44 7
Portfolio turnover (%) 248 299 371 273 135
Senior securities
Total APS Series A outstanding
(in millions) -- -- -- $45 $45
Total APS Series B outstanding
(in millions) -- -- -- $45 $45
Involuntary liquidation preference
APS Series A per unit (in thousands) -- -- -- $25 $25
Involuntary liquidation preference
APS Series B per unit (in thousands) -- -- -- $25 $25
Average market value
per unit (in thousands) -- -- -- $25 $25
Asset coverage per unit 8 -- -- -- $75,402 $75,049
See notes to
financial statements.
22
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 Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
annualized ratios of expenses would have been 0.81% and 0.76% for the years
ended 12-31-03 and 12-31-04, respectively.
7 Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the ratios of net investment income would have been 5.19% and 4.99%
for the years ended 12-31-03 and 12-31-04, respectively.
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.
23
NOTES TO
STATEMENTS
Note A
Accounting policies
John Hancock Income Securities Trust (the "Fund") is a closed-end
diversified management investment company registered under the Investment
Company Act of 1940.
Significant accounting policies
of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at fair
value as determined in good faith in accordance with procedures approved by
the Trustees. Short-term debt investments which have a remaining maturity of
60 days or less may be valued at amortized cost, which approximates market
value. The Fund determines the net asset value of the common shares each
business day.
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 John Hancock Financial Services,
Inc., 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 the 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.
Options
The Fund may enter into option contracts. Listed options will be valued at
the last quoted sales
24
price on the exchange on which they are primarily traded. Over-the-counter
options are valued at the mean between the last bid and asked prices. Upon
the writing of a call or put option, an amount equal to the premium
received by the Fund will be included in the Fund's Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked to market to reflect the current
market value of the written option.
The Fund may use option contracts to manage its exposure to the price
volatility of financial instruments. Writing puts and buying calls will
tend to increase the Fund's exposure to the underlying instrument, and
buying puts and writing calls will tend to decrease the Fund's exposure to
the underlying instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum
exposure of the Fund in these contracts, but the actual exposure will be
limited to the change in value of the contract over the period the contract
remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk") or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options
have minimal credit risk as the exchanges act as counterparties to each
transaction, and only present liquidity risk in highly unusual market
conditions. To minimize credit and liquidity risks in over-the-counter
option contracts, the Fund continuously monitors the creditworthiness of all
its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's Statement of
Assets and Liabilities. The Fund had no written option transactions during
the year ended December 31, 2004.
Securities lending
The Fund may lend securities to certain qualified brokers who pay the Fund
negotiated lender fees. 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, 2004, the Fund loaned securities having a
market value of $32,671,666 collateralized by securities in the amount of
$33,544,481. 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 instruments. At the time the Fund enters into financial
futures contracts, 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.
25
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, 2004, the Fund had deposited $635,000 in a
segregated account to cover margin requirements on open financial futures
contracts.
The Fund had the following financial futures contracts open on December
31, 2004:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION DEPRECIATION
------------------------------------------------------------------------------
U.S. 20-Year Treasury Bond 150 Short March 05 ($167,456)
U.S. 10-Year Treasury Note 500 Short March 05 (99,984)
------------------------------------------------------------------------------
($267,440)
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 $2,123,466 of a capital loss carryforward, 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, 2012.
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 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, if any, 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.
For the year ended December 31, 2004, the tax character of distributions
paid was as follows: ordinary income $14,478,047. As of December 31, 2004,
the components of distributable earnings on a tax basis included $85,166 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.
26
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 daily 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 daily 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 period
amounted to $70,936. The Fund also paid the Adviser the amount of $601 for
certain publishing services, included in the printing fees.
Mr. James A. Shepherdson is a director and officer of the Adviser, as well
as affiliated Trustee of the Fund, and is compensated by the Adviser. 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 investments, 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 common share 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.
Year ended 12-31-03 Year ended 12-31-04
Shares Amount Shares Amount
Beginning of period 10,952,182 $175,212,973 11,056,746 $175,501,784
Distributions reinvested 104,564 1,602,997 84,564 1,302,088
Offering costs and
underwriting discount
related to Auction
Preferred Shares -- (1,098,900) -- 20,512
Reclassification of capital accounts -- (215,286) -- (562,233)
End of period 11,056,746 $175,501,784 11,141,310 $176,262,151
27
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
$188,388 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 1.00% to 2.67% and Series B from 1.04% to 2.67% during the year
ended December 31, 2004. Accrued dividends on APS are included in the
value of APS on the Fund's Statement of Assets and Liabilities.
The APS are redeemable at the option of the Fund, at a redemption price
equal to $25,000 per share, plus accumulated and unpaid dividends on any
dividend payment date. The APS are also subject to mandatory redemption
at a redemption price equal to $25,000 per share, plus accumulated and
unpaid dividends, if the Fund is in default on its asset coverage
requirements with respect to the APS as defined in the Fund's by-laws.
If the dividends on the APS shall remain unpaid in an amount equal to
two full years' dividends, the holders of the APS, as a class, have the
right to elect a majority of the Board of Trustees. In general, the
holders of the APS and the common shareholders have equal voting rights
of one vote per share, except that the holders of the APS, as a class,
vote to elect two members of the Board of Trustees, and separate class
votes are required on certain matters that affect the respective
interests of the APS and common 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, 2004, aggregated $278,560,495 and
$290,445,627, respectively. Purchases and proceeds from maturities of
obligations of the U.S. government aggregated $77,035,662 and
$64,978,604, respectively, during the year ended December 31, 2004.
The cost of investments owned on December 31, 2004, including short-term
investments, for federal income tax purposes was $260,507,212. Gross
unrealized appreciation and depreciation of investments aggregated
$7,157,375 and $1,603,274, respectively, resulting in net unrealized
appreciation of $5,554,101. 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, 2004, the Fund reclassified amounts
to reflect an increase in accumulated net realized loss on investments
of $368,773, an increase in accumulated net investment income of
$931,006 and a decrease in capital paid-in of $562,233. This represents
the amounts necessary to report these balances on a tax basis, excluding
certain temporary differences, as of December 31, 2004. 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
28
accounting for deferred compensation and amortization of premiums and
accretion of discounts on debt securities. The calculation of net
investment income per share in the Fund's Financial Highlights excludes
these adjustments.
29
AUDITORS'
REPORT
Report of
Independent
Registered Public
Accounting Firm
To the Board of Trustees and Shareholders of
John Hancock Income Securities Trust,
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, 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 John Hancock
Income Securities Trust (the "Fund") at December 31, 2004, the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, 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 Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audits 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 audits, which included confirmation of
securities at December 31, 2004 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion. 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 17, 2005
30
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, 2004.
With respect to the ordinary dividends paid by the Fund for the fiscal year
ended December 31, 2004, 2.92% 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 2004.
Shareholders will be mailed a 2004 U.S. Treasury Department Form 1099-DIV in
January 2005. This will reflect the total of all distributions that are
taxable for the calendar year 2004.
31
Investment
objective
and policy
The Fund is a closed-end diversified management investment company, common
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 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.
By-laws
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, which 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 August 21, 2003, shareholders approved the amendment of the Fund's
by-laws effective August 26, 2003, to provide for the issuance of preferred
shares. Effective March 9, 2004, the Trustees approved additional changes to
conform the Fund's maximum dividend rate on the preferred shares with the
rate used by other John Hancock funds.
On September 14, 2004, the Trustees approved an amendment to the Fund's
by-laws increasing the maximum applicable dividend rate ceiling on the
preferred shares to conform with the modern calculation methodology used by
the industry and other John Hancock funds.
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
32
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 period ended December 31, 2004, the Fund paid to shareholders
dividends from net investment income totaling $1.185 per share. The dates of
payment and the amounts per share are as follows:
INCOME
PAYMENT DATE DIVIDEND
-------------------------------
March 31, 2004 $0.310
June 30, 2004 0.310
September 30, 2004 0.290
December 31, 2004 0.275
Dividend
reinvestment plan
The Fund offers its common shareholders a Dividend 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 determine whether
and how they may 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
33
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 common 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.
34
TRUSTEES
& OFFICERS
This chart provides information about the Trustees and Officers who oversee
your John Hancock fund. Officers elected by the Trustees manage the
day-to-day operations of the Fund and execute policies formulated by the
Trustees.
Independent Trustees
Name, age Number of
Position(s) held with Fund Trustee John Hancock
Principal occupation(s) and other of Fund funds overseen
directorships during past 5 years since 1 by Trustee
Charles L. Ladner, 2 Born: 1938 2004 49
Independent Chairman (since 2004); Chairman and Trustee, Dunwoody
Village, Inc. (retirement services) (until 2003); Senior Vice President and
Chief Financial Officer, UGI Corporation (public utility holding company)
(retired 1998); Vice President and Director for AmeriGas, Inc. (retired
1998); Director of AmeriGas Partners, L.P. (until 1997) (gas distribution);
Director, EnergyNorth, Inc. (until 1995); Director, Parks and History
Association (since 2001).
Richard P. Chapman, Jr., 2 Born: 1935 1975 39
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 39
Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A.
(retired 1991); Executive Vice President, Citadel Group Representatives,
Inc. (financial reinsurance) (until 2004); Director, Hudson City Savings Bank
(since 1995); Director, Hudson City Bancorp (since 1999); Trustee, Scholarship
Fund for Inner City Children (since 1986).
John A. Moore, 2 Born: 1939 1996 49
President and Chief Executive Officer, Institute for Evaluating Health
Risks, (nonprofit institution) (until 2001); Chief Scientist, Sciences
International (health research) (until 2003); Principal, Hollyhouse
(consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002).
Patti McGill Peterson, 2 Born: 1943 1996 49
Executive Director, Council for International Exchange of Scholars and
Vice President, Institute of International Education (since 1998);
Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until
1998); Former President of Wells College and St. Lawrence University;
Director, Niagara Mohawk Power Corporation (until 2003); Director, Ford
Foundation, International Fellowships Program (since 2002); Director,
Lois Roth Endowment (since 2002); Director, Council for International
Educational Exchange (since 2003).
35
Non-Independent 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
James A. Shepherdson, Born: 1952 2004 49
President and Chief Executive Officer
Executive Vice President, Manulife Financial Corporation (since 2004);
Director, President and Chief Executive Officer, John Hancock Advisers,
LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley
Group") (holding company); Director, President and Chief Executive
Officer, John Hancock Funds, LLC ("John Hancock Funds"); President,
Director and Chief Executive Officer, Sovereign Asset Management
Corporation ("SAMCorp"); Director, Chairman and President, NM Capital
Management, Inc.; President, John Hancock Retirement Services, John
Hancock Life Insurance Company (until 2004); Chairman, Essex Corporation
(until 2004); Co-Chief Executive Officer, MetLife Investors Group (until
2003); Senior Vice President, AXA/Equitable Insurance Company (until
2000).
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 H. King, Born: 1952 1988
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 1984
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;
Director, Senior Vice President and Secretary, NM Capital Management, Inc.
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 Non-independent Trustees hold positions with the Fund's investment
adviser, underwriter and certain other affiliates.
36
For more information
The Fund's proxy voting policies, procedures and records are available
without charge, upon request:
By phone On the Fund's Web site On the SEC's Web site
1-800-225-5291 www.jhfunds.com/proxy www.sec.gov
Investment adviser
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, MA 02199-7603
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer agent and
registrar
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Transfer agent for APS
Deutsche Bank Trust
Company Americas
280 Park Avenue
New York, NY 10017
Legal counsel
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109-1803
Independent registered
public accounting firm
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
Stock symbol
Listed New York Stock
Exchange:
JHS
For shareholder assistance
refer to page 34
How to contact us
Internet www.jhfunds.com
Mail Regular mail:
Mellon Investor Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Phone Customer service representatives 1-800-852-0218
Portfolio commentary 1-800-344-7054
24-hour automated information 1-800-843-0090
TDD line 1-800-231-5469
A listing of month-end portfolio holdings is available on our Web site,
www.jhfunds.com. A more detailed portfolio holdings summary is available on
a quarterly basis 60 days after the fiscal quarter on our Web site or upon
request by calling 1-800-225-5291, or on the Securities and Exchange
Commission's Web site, www.sec.gov.
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 EASI-Line
1-800-231-5469 (TDD)
www.jhfunds.com
PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
P600A 12/04
2/05
ITEM 2. CODE OF ETHICS.
As of the end of the period, December 31, 2004, the registrant has adopted
a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its
Chief Executive Officer, Chief Financial Officer and Treasurer
(respectively, the principal executive officer, the principal financial
officer and the principal accounting officer, the "Senior Financial
Officers"). A copy of the code of ethics is filed as an exhibit to this
Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Charles L. Ladner is the audit committee financial expert and is
"independent", pursuant to general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(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
$31,000 for the fiscal year ended December 31, 2003 and $32,500 for the
fiscal year ended December 31, 2004. 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,
2003 and fiscal year ended December 31, 2004 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 $4,000 for the fiscal year ended December 31, 2003
and $4,200 for the fiscal year ended December 31, 2004. The nature of the
services comprising the tax fees was the review of the registrant's income
tax returns and tax distribution requirements. These fees were billed to
the registrant and were approved by the registrant's audit committee. There
were no tax fees billed to the control affiliates.
(d) All Other Fees
The all other fees billed to the registrant for products and services
provided by the principal accountant were none for the fiscal year ended
December 31, 2003 and $5,000 for the fiscal year ended December 31, 2004.
There were no other fees during the fiscal year ended December 31, 2003 and
December 31, 2004 billed to control affiliates for products and services
provided by the principal accountant. The nature of the services comprising
the all other fees was related to the principal accountant's report on the
registrant's Eligible Asset Coverage. These fees were approved by the
registrant's audit committee.
(e)(1) See attachment "Approval of Audit, Audit-related, Tax and Other
Services", with the audit committee pre-approval policies and procedures.
(e)(2) There were no fees that were approved by the audit committee
pursuant to the de minimis exception for the fiscal years ended December
31, 2003 and December 31, 2004 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, 2004, 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 $4,000 for the fiscal year ended December 31, 2003, and $120,662 for
the fiscal year ended December 31, 2004.
(h) The audit committee of the registrant has considered the non-audit
services provided by the registrant's principal accountant(s) to the
control affiliates and has determined that the services that were not
pre-approved are compatible with maintaining the principal accountant(s)'
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee
comprised of independent trustees. The members of the audit committee are
as follows:
Richard P. Chapman, Jr.
Charles L. Ladner
Dr. John A. Moore
Patti McGill Peterson
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
See attached Exhibit "Proxy Voting Policies and Procedures".
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) There were no material changes to previously disclosed John Hancock
Funds - Administration Committee Charter.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form
N-CSR, the registrant's principal executive officer and principal
accounting officer have concluded that those disclosure controls and
procedures provide reasonable assurance that the material information
required to be disclosed by the registrant on this report is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal half-year (the registrant's second fiscal half-year in the case of
an annual report) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive
officer and principal accounting 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 accounting officer, as required by 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
and Rule 30a-2(b) under the Investment Company Act of 1940, are attached.
The certifications furnished pursuant to this paragraph are not deemed to
be "filed" for purposes of Section 18 of the Securities Exchange Act of
1934, or otherwise subject to the liability of that section. Such
certifications are not deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent that the Registrant specifically incorporates
them by reference.
(c)(1) Proxy Voting Policies and Procedures are attached.
(c)(2) Approval of Audit, Audit-related, Tax and Other Services is
attached.
(c)(3) Contact person at the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Income Securities Trust
By:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: February 17, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: February 17, 2005
By:
------------------------------
William H. King
Vice President and Treasurer
Date: February 17, 2005