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)
601 Congress Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip code)
Alfred P. Ouellette
Senior Attorney and Assistant Secretary
601 Congress Street
Boston, Massachusetts 02110
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4324
Date of fiscal year end: December 31
Date of reporting period: June 30, 2005
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Income Securities Trust
6.30.2005
Semiannual Report
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Keith F. Hartstein, President and Chief Executive Officer of
John Hancock Funds, LLC flush left next to first paragraph.]
CEO CORNER
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
Fund's investments
page 6
Financial statements
page 19
For more information
page 37
To Our Shareholders,
I am pleased to be writing to you as the new President and Chief Executive
Officer of John Hancock Funds, LLC, following the departure of James A.
Shepherdson to pursue other opportunities. In addition, on July 25, 2005,
your fund's Board of Trustees appointed me to the roles of President and
Chief Executive Officer of your fund.
As a means of introduction, I have been involved in the mutual fund
industry since 1985. I have been with John Hancock Funds for the last 15
years, most recently as executive vice president of retail sales and
marketing and a member of the company's executive and investment
committees. In my former capacity, I was responsible for all aspects of
the distribution and marketing of John Hancock Funds' open-end and
closed-end mutual funds. Outside of John Hancock, I have served as
Chairman of the Investment Company Institute (ICI) Sales Force Marketing
Committee since September 2003.
It is an exciting time to be at John Hancock Funds, and I am grateful for
the opportunity to lead and shape its future growth. With the acquisition
of John Hancock by Manulife Financial Corporation in April 2004, we are
receiving broad support toward the goal of providing our shareholders with
excellent investment opportunities and a more complete lineup of choices
for the discerning investor.
As you may have read, John Hancock recently entered into an agreement with
GMO, a Boston-based institutional money manager, to acquire eight of their
mutual funds. In addition, we are in the process of adding five "Lifestyle
Portfolio" funds-of-funds that blend multiple fund offerings from internal
and external money managers to create a broadly diversified asset
allocation portfolio. Look for more information about these exciting
additions to the John Hancock family of funds in your fourth quarter
shareholder newsletter.
Although there has been a change in executive-level management, rest
assured that the one thing that never wavers is John Hancock Funds'
commitment to placing the needs of shareholders above all else. We are all
dedicated to the task of working with you and your financial advisors to
help you reach your long-term financial goals.
Sincerely,
/s/ Keith F. Hartstein
Keith F. Hartstein,
President and Chief Executive Officer
This commentary reflects the CEO's views as of June 30, 2005. 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 six months
* Despite further interest rate increases by the Federal Reserve, bonds
gained ground amid tame inflation and mixed economic data.
* Treasury and government agency bonds were the best performers, while
corporate bonds lagged.
* The Fund benefited from its exposure to higher-quality bonds, but its
reduced interest rate sensitivity hindered performance as bond yields
declined.
[Bar chart with heading "John Hancock Income Securities Trust." Under the
heading is a note that reads "Fund performance for the six months ended
June 30, 2005." The chart is scaled in increments of 2% with -2% at the
bottom and 8% at the top. The first bar represents the 1.30% net asset
value of the Fund. The second bar represents the -0.03% market value of the
Fund. The third bar represents the 6.88% yield on closing market price. The
first 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." The second note below the chart reads "The yield on
closing market price is calculated by dividing the current annualized
distribution per share by the closing market price."]
Top 10 issuers
15.0% Federal National Mortgage Assn.
12.2% Federal Home Loan Mortgage Corp.
9.0% U.S. Treasury
3.1% Federal Home Loan Bank
1.1% Financing Corp.
1.0% Countrywide Home Loans
1.0% Washington Mutual, Inc.
0.9% Global Signal Trust
0.9% Midland Funding Corp. II
0.8% Rabobank Capital Fund II
As a percentage of net assets plus value of preferred shares on June 30, 2005.
1
BY BARRY H. EVANS, CFA, AND JEFFREY N. GIVEN, CFA, PORTFOLIO MANAGERS
MANAGERS'
REPORT
JOHN HANCOCK
Income Securities Trust
The U.S. bond market confounded expectations during the first six months
of 2005, as yields generally declined and bonds posted positive returns
overall. Bonds rallied despite a series of interest rate increases by the
Federal Reserve. The Fed raised its federal funds rate target by a
quarter-point four times in the first half of 2005, for a total of nine
rate hikes since June 2004. The federal funds rate ended the period at
3.25%, its highest level in nearly four years.
Although short-term bond yields rose in response to the Fed's actions --
the two-year Treasury note yield climbed from 3.1% to 3.6% -- longer-term
bond yields declined during the six-month period. Low inflation and mixed
economic data, which suggested that the Fed may end its rate-raising cycle
sooner than originally anticipated, were the main reasons behind the rally
in the long end of the bond market.
"The U.S. bond market con-
founded expectations during the
first six months of 2005, as yields
generally declined and bonds
posted positive returns
overall."
The Lehman Brothers U.S. Aggregate Index -- a broad measure of the U.S.
bond market -- returned 2.51% in the first half of 2005. Treasury bonds,
which tend to benefit the most from declining interest rates, posted the
best results. Corporate bonds, the top performers in 2003 and 2004, lagged
the rest of the bond market. In particular, high-yield corporate bonds
produced nearly flat returns during the period.
Fund performance
For the six months ended June 30, 2005, John Hancock Income Securities
Trust produced a total return of 1.30% at net asset value (NAV) and
- -0.03% at market value. The Fund's NAV return and its market performance
differ because 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
2
price at any time. For comparison, the average closed-end BBB-rated
corporate debt fund returned 2.77% at net asset value, according to
Lipper, Inc., while the Lehman Brothers Government/Credit Bond Index
returned 2.75%.
[Photos of Barry Evans and Jeff Given, flush right at top of page.]
Staying defensive
In our last report six months ago, we discussed our efforts to establish a
more defensive position for the portfolio, reducing its risk profile
through higher credit quality and less interest rate sensitivity. We
maintained this defensive positioning throughout the first half of 2005,
making few changes to the overall structure of the portfolio.
The portfolio benefited from its exposure to higher-quality bonds as they
outperformed lower-rated securities. However, the portfolio's reduced
sensitivity to interest rate fluctuations hindered performance, thanks to
the unexpected decline in longer-term bond yields during the period. The
lower rate sensitivity, along with an underweight in Treasury bonds, led
to the portfolio's underperformance of its Lipper peer group and the
Lehman index.
Better quality, same yield
The few changes we made to the portfolio during the period involved
upgrading credit quality by selling some of our lower-rated corporate
bonds and adding more government agency and mortgage-backed securities to
the portfolio. We focused on callable government agency securities
maturing in two to three years. These AAA-rated bonds offered yields that
were equal to or higher than BBB-rated corporate bonds with similar
maturities, so we were able to trade up in credit quality without giving
up any yield.
"The best individual performers in
the portfolio were longer-term,
higher-quality bonds."
In the mortgage-backed market, we invested in adjustable-rate mortgages,
which reset their interest rates at regular intervals. These short-term
bonds also carry AA or AAA ratings and offered higher yields than
similar-maturity corporate bonds.
Energy, telecom bonds perform well
The best individual performers in the portfolio were longer-term,
higher-quality bonds. One example was Alberta Energy, an A-rated
3
Canadian oil exploration and production company. Soaring oil prices
provided a lift to Alberta Energy bonds, and the long maturity date (in
2030) allowed them to participate in the general rally in long-term bonds.
[Table at top left-hand side of page entitled "Sector distribution 1." The
first listing is Government - U.S. agency 32%, the second is Financials
22%, the third is Government - U.S. 9%, the fourth is Utilities 8%, the
fifth is Telecommunication services 7%, the sixth is Industrials 6%, the
seventh is Consumer discretionary 5%, the eighth is Materials 3%, the ninth
is Consumer staples 3%, the tenth is Energy 2%, the eleventh is Health care
2% and the twelfth is Government - foreign 1%.]
Another top performer was telecommunication services provider Sprint,
which recently entered into a merger agreement with Nextel. In addition to
their long maturity, Sprint bonds benefited from consolidation in the
wireless industry, which is expected to improve pricing power for wireless
service providers going forward.
Autos hit the skids
The weakest performers in the portfolio were bonds issued by the major
U.S. automakers, General Motors and Ford. Disappointing auto sales,
increased competition and higher gas prices caused GM to warn of lower
earnings, and its credit rating was cut to below-investment-grade status.
Ford, facing similar struggles, teetered on the edge of its own credit
downgrade (which we expect to occur in the next few months). The
downgrades caused sharp declines in the value of their bonds.
[Pie chart at middle of page with heading "Portfolio diversification 1."
The chart is divided into four sections (from top to left): Bonds 55%, U.S.
government & agency bonds 39%, Preferred stocks 5% and Short-term
investments & other 1%.]
We owned a modest amount of both GM and Ford (less than 2% of the
portfolio combined), and our holdings were all shorter-term securities --
Ford Motor Credit bonds maturing in 2009 and GMAC bonds maturing in 2011.
Nonetheless, these securities declined by about 10% during the period.
However, we are confident about the creditworthiness of these shorter-term
bonds and intend to maintain our positions.
4
Outlook
The U.S. economy, which grew by 4.4% in 2004, is slowing to a more
moderate growth rate in 2005. In addition, the inflation rate has remained
tame despite higher oil prices, and the dollar is strengthening after
several years of weakness. Consequently, we think most of the Fed's work
is done. We expect one or two more rate hikes in the coming months,
followed by a period of stability.
[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
Long-term Treasury bonds followed by an up arrow with the phrase "The
longest-term Treasury bond returned 11% as interest rates declined." The
second listing is Barclays Bank followed by an up arrow with the phrase
"AA-rated, long-term security benefited from flight to quality." The third
listing is Qwest followed by a down arrow with the phrase "Repeated
attempts to outbid Verizon in order to acquire MCI disappointed
investors."]
Given the moderate economic and inflationary environment, we don't expect
bond yields to rise significantly in the second half of 2005. The spreads
between corporate bond yields and Treasury yields remain near historically
low levels, but modest issuance in the corporate bond market and strong
corporate balance sheets should help keep spreads from widening
substantially. We continue to find many attractive investment
opportunities in the corporate bond market.
"Given the moderate economic
and inflationary environment, we
don't expect bond yields to rise
significantly in the second half
of 2005."
Within the portfolio, we intend to maintain our current positioning going
forward. If interest rates rise sharply, we may look to increase the
portfolio's interest rate sensitivity.
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 June 30, 2005.
5
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
June 30, 2005
(unaudited)
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 84.68% $149,764,617
(Cost $146,563,277)
Aerospace & Defense 0.65% 1,158,892
Raytheon Co.,
Note 8.300% 03-01-10 BBB- $1,000 1,158,892
Agricultural Products 0.53% 940,066
Corn Products International, Inc.,
Sr Note 8.450 08-15-09 BBB- 835 940,066
Airlines 1.06% 1,883,662
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1999-1 Class A 6.545 02-02-19 A- 626 626,733
Pass Thru Ctf Ser 2000-2 Class A-1 7.707 04-02-21 BBB 449 449,199
Pass Thru Ctf Ser 2000-2 Class B (L) 8.307 10-02-19 BB- 438 364,142
Pass Thru Ctf Ser 2001-1 Class C 7.033 06-15-11 B+ 338 283,422
Jet Equipment Trust,
Equip Trust Ctf Ser 1995-B2 (B)(H)(S) 10.910 08-15-14 D 550 2,750
Northwest Airlines Corp.,
Pass Thru Ctf Ser 1996-1D 8.970 01-02-15 CCC+ 257 157,416
Apparel Retail 0.34% 593,806
Gap, Inc. (The),
Note (P) 9.550 12-15-08 BBB- 515 593,806
Asset Management & Custody Banks 1.20% 2,124,360
Rabobank Capital Fund II,
Perpetual Bond (5.260% to 12-31-13
then variable) (S) 5.260 12-29-49 AA 2,065 2,124,360
Auto Parts & Equipment 0.25% 440,000
American Axle & Manufacturing, Inc.,
Sr Note (L) 5.250 02-11-14 BBB 500 440,000
Broadcasting & Cable TV 2.22% 3,934,844
AT&T Broadband Corp.,
Gtd Note 8.375 03-15-13 BBB 1,020 1,243,738
British Sky Broadcasting Group Plc,
Gtd Sr Note (United Kingdom) 8.200 07-15-09 BBB- 945 1,069,728
See notes to
financial statements.
6
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Broadcasting & Cable TV (continued)
TCI Communications, Inc.,
Sr Deb 9.800% 02-01-12 BBB $860 $1,095,380
XM Satellite Radio, Inc.,
Sr Sec Note, Step Coupon (Zero to
12-31-05 then 14.000%) (O) Zero 12-31-09 CCC+ 509 525,998
Building Products 1.23% 2,183,991
Pulte Homes Inc.,
Sr Note 6.250 02-15-13 BBB- 1,000 1,068,712
Toll Brothers, Inc.,
Gtd Sr Note 6.875 11-15-12 BBB- 1,000 1,115,279
Casinos & Gaming 1.64% 2,897,895
Chukchansi Economic Development Auth.,
Sr Note (G)(S) 14.500 06-15-09 CCC+ 500 611,250
Harrah's Operating Co., Inc.,
Gtd Sr Note 8.000 02-01-11 BBB- 765 877,182
Gtd Sr Note 5.500 07-01-10 BBB- 755 779,193
Waterford Gaming LLC,
Sr Note (S) 8.625 09-15-12 B+ 596 630,270
Commodity Chemicals 0.77% 1,367,773
RPM International, Inc.,
Sr Note 6.250 12-15-13 BBB 1,300 1,367,773
Construction Materials 0.22% 390,000
Votorantim Overseas IV,
Gtd Note (Cayman Islands) (S) 7.750 06-24-20 BBB- 390 390,000
Consumer Finance 4.32% 7,642,216
Barclays Bank Plc,
Perpetual Bond (6.86% to 6-15-32
then variable) (United Kingdom) (S) 6.860 09-29-49 A+ 1,600 1,881,306
CIT Group, Inc.,
Sr Note 5.000 02-13-14 A 750 757,545
Ford Motor Credit Co.,
Note 7.375 10-28-09 BBB- 1,625 1,587,929
General Motors Acceptance Corp.,
Note 7.250 03-02-11 BBB- 1,245 1,167,402
Household Finance Corp.,
Note 6.375 10-15-11 A 645 705,203
HSBC Finance Corp.,
Sr Note 6.750 05-15-11 A 1,390 1,542,831
Department Stores 0.35% 622,875
Penney, J.C. Co., Inc.,
Deb 7.650 08-15-16 BB+ 550 622,875
See notes to
financial statements.
7
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Diversified Banks 1.67% $2,953,220
Bank of New York,
Cap Security (S) 7.780% 12-01-26 A- $650 699,597
Chuo Mitsui Trust & Banking Co.,
Perpetual Sub Note (5.506% to
04-15-15 then variable) (Japan) (S) 5.506 12-01-49 Baa2 390 383,146
Royal Bank of Scotland Group Plc,
Perpetual Bond (7.648% to 09-30-31
then variable) (United Kingdom) 7.648 08-29-49 A 650 826,590
Wachovia Corp.,
Sub Note 5.250 08-01-14 A- 1,000 1,043,887
Diversified Chemicals 2.12% 3,749,617
Lyondell Chemical Co.,
Gtd Sr Sub Note 10.875 05-01-09 B 500 518,750
NOVA Chemicals Corp.,
Med Term Note (Canada) 7.400 04-01-09 BB+ 2,045 2,070,563
Potash Corp. of Saskatchewan, Inc.,
Note (Canada) 7.750 05-31-11 BBB+ 1,000 1,160,304
Diversified Commercial Services 1.13% 1,991,247
Hutchison Whampoa International Ltd.,
Gtd Note (United Kingdom) (S) 6.500 02-13-13 A- 750 814,262
Noble Group Ltd.,
Sr Note (Bermuda) (S) 6.625 03-17-15 BB+ 1,000 923,235
Sotheby's Holdings, Inc.,
Note 6.875 02-01-09 BB- 250 253,750
Diversified Financial Services 1.65% 2,915,155
Beaver Valley Funding Corp.,
Sec Lease Obligation Bond 9.000 06-01-17 BB+ 513 608,716
Glencore Funding LLC,
Gtd Note (S) 6.000 04-15-14 BBB- 1,380 1,323,278
St. George Funding Co.,
Perpetual Bond (8.485% to 06-30-17
then variable) (Australia) (S) 8.485 12-31-49 Baa1 870 983,161
Electric Utilities 9.06% 16,014,667
AES Eastern Energy, L.P.,
Pass Thru Ctf Ser 1999-A 9.000 01-02-17 BB+ 1,106 1,282,586
BVPS II Funding Corp.,
Collateralized Lease Bond 8.890 06-01-17 BB+ 700 849,947
Empresa Electrica Guacolda S.A.,
Sr Sec Note (Chile) (S) 8.625 04-30-13 BBB- 830 918,316
FPL Energy National Wind,
Sec Note (S) 5.608 03-10-24 BBB- 400 408,160
See notes to
financial statements.
8
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Electric Utilities (continued)
HQI Transelect Chile S.A.,
Sr Note (Chile) 7.875% 04-15-11 A- $1,230 $1,419,066
Indiantown Cogeneration, L.P.,
1st Mtg Note Ser A-9 9.260 12-15-10 BB+ 480 511,356
IPALCO Enterprises, Inc.,
Sr Sec Note 8.625 11-14-11 BB- 325 365,625
Kansas Gas & Electric Co.,
Bond (S) 5.647 03-29-21 BB- 310 314,631
Midland Funding Corp. II,
Deb Ser B 13.250 07-23-06 BB- 2,225 2,355,554
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) (S) 9.625 11-15-09 BBB 514 595,328
PNPP II Funding Corp.,
Deb 9.120 05-30-16 BB+ 491 589,372
PPL Capital Funding,
Gtd Sr Note Ser A 4.330 03-01-09 BBB- 500 496,131
System Energy Resources, Inc.,
Sec Bond (S) 5.129 01-15-14 BBB 449 447,632
TNP Enterprises, Inc.,
Sr Sub Note Ser B (G) 10.250 04-01-10 B 365 384,345
TransAlta Corp.,
Note (Canada) 5.750 12-15-13 BBB- 2,000 2,103,044
TXU Corp.,
Note (S) 6.500 11-15-24 BBB- 1,020 999,133
Sec Bond 7.460 01-01-15 BBB 638 694,440
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 8.090 01-02-17 BBB- 1,150 1,280,001
Electrical Components & Equipment 1.62% 2,871,483
AMETEK, Inc.,
Sr Note 7.200 07-15-08 BBB 1,500 1,607,958
Jabil Circuit, Inc.,
Sr Note 5.875 07-15-10 BB+ 1,220 1,263,525
Food Retail 1.89% 3,341,989
Ahold Lease USA, Inc.,
Gtd Pass Thru Ctf Ser 2001A-1 7.820 01-02-20 BB 1,360 1,469,271
Delhaize America, Inc.,
Gtd Note 9.000 04-15-31 BB+ 1,500 1,872,718
Foreign Government 1.64% 2,902,665
Colombia, Republic of,
Note (Colombia) 10.000 01-23-12 BB 750 873,750
Mexican States, United,
Global Med Term Note Ser A (Mexico) 6.375 01-16-13 BBB 1,890 2,028,915
See notes to
financial statements.
9
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Gas Utilities 0.60% $1,054,927
Energy Transfer Partners,
Gtd Sr Note (G)(S) 5.950% 02-01-15 BBB- $500 504,323
NorAm Energy Corp.,
Deb 6.500 02-01-08 BBB 525 550,604
Health Care Facilities 0.84% 1,477,686
HCA, Inc.,
Note 8.750 09-01-10 BB+ 900 1,022,859
Manor Care, Inc.,
Gtd Note 6.250 05-01-13 BBB 425 454,827
Health Care Services 0.88% 1,552,078
Wellpoint, Inc.,
Jr Note 5.000 12-15-14 BBB+ 1,520 1,552,078
Hotels, Resorts & Cruise Lines 1.61% 2,850,819
Hyatt Equities LLC,
Note (S) 6.875 06-15-07 BBB 1,060 1,093,794
Meditrust,
Note 7.000 08-15-07 BB- 1,710 1,757,025
Hypermarkets & Super Centers 0.17% 293,480
Controladora Comercial Mexicana S.A. de C.V,
Sr Note (Mexico) (S) 6.625 06-01-15 BBB- 290 293,480
Industrial Conglomerates 0.35% 611,786
Vedanta Resources Plc,
Sr Note (United Kingdom) (S) 6.625 02-22-10 BB+ 620 611,786
Industrial Machinery 1.65% 2,920,644
Kennametal, Inc.,
Sr Note 7.200 06-15-12 BBB 1,405 1,571,783
Manitowoc Co., Inc., (The)
Sr Note 7.125 11-01-13 B+ 500 522,500
Trinity Industries Leasing Co.,
Pass Thru Ctf (S) 7.755 02-15-09 Ba1 781 826,361
Insurance Brokers 1.10% 1,942,278
Marsh & McLennan Cos., Inc.,
Sr Note (L) 5.375 03-15-07 BBB 1,530 1,549,973
Willis Group North America,
Gtd Note 5.625 07-15-15 BBB- 195 196,254
Gtd Note 5.125 07-15-10 BBB- 195 196,051
Integrated Oil & Gas 1.53% 2,710,917
Pemex Project Funding Master Trust,
Gtd Note 9.125 10-13-10 BBB 1,115 1,305,665
Petro-Canada,
Deb (Canada) 9.250 10-15-21 BBB 1,000 1,405,252
See notes to
financial statements.
10
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Integrated Telecommunication Services 5.44% $9,626,052
AT&T Corp.,
Med Term Note 8.350% 05-15-25 BB+ $500 516,250
Sr Note (P) 9.750 11-15-31 BB+ 510 663,637
Bellsouth Corp.,
Deb 6.300 12-15-15 A 1,118 1,195,165
France Telecom S.A.,
Note (France) 8.500 03-01-11 A- 910 1,056,031
Qwest Capital Funding, Inc.,
Gtd Note (L) 7.000 08-03-09 B 1,000 977,500
SBC Communications, Inc.,
Note 5.100 09-15-14 A 870 889,542
Sprint Capital Corp.,
Gtd Sr Bond 7.625 01-30-11 BBB- 1,000 1,142,079
Note 6.875 11-15-28 BBB- 820 941,263
Telecom Italia Capital,
Gtd Note (Luxembourg) (S) 4.950 09-30-14 BBB+ 1,500 1,485,218
Telefonos de Mexico S.A. de C.V.,
Note (Mexico) (S) 5.500 01-27-15 BBB 765 759,367
Investment Banking & Brokerage 0.71% 1,260,416
Merrill Lynch & Co.,
Med Term Note Ser C 5.000 01-15-15 A+ 430 440,291
Mizuho Financial Group Cayman Ltd.,
Gtd Note (Cayman Islands) 8.375 12-29-49 A2 750 820,125
IT Consulting & Other Services 0.24% 421,930
NCR Corp.,
Note 7.125 06-15-09 BBB- 390 421,930
Metal & Glass Containers 0.31% 543,125
Owens-Brockway Glass Container, Inc.,
Gtd Sr Note 8.250 05-15-13 B 500 543,125
Multi-Line Insurance 1.02% 1,802,935
Assurant, Inc.,
Sr Note 6.750 02-15-34 BBB+ 510 582,710
Massachusetts Mutual Life Insurance Co.,
Surplus Note (S) 7.625 11-15-23 AA 485 622,317
MetLife, Inc.,
Note 5.700 06-15-35 A 580 597,908
Multi-Media 1.17% 2,071,747
News America Holdings, Inc.,
Gtd Sr Deb 8.250 08-10-18 BBB- 540 664,038
Time Warner, Inc.,
Deb 9.125 01-15-13 BBB+ 1,114 1,407,709
See notes to
financial statements.
11
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Multi-Utilities & Unregulated Power 1.51% $2,669,752
CalEnergy Co., Inc.,
Sr Bond 8.480% 09-15-28 BBB- $550 739,268
Salton Sea Funding Corp.,
Sr Sec Note Ser C 7.840 05-30-10 BB+ 1,825 1,930,484
Office Services & Supplies 1.51% 2,670,921
Office Depot, Inc.,
Sr Note 6.250 08-15-13 BBB- 1,560 1,635,602
Steelcase, Inc.,
Sr Note 6.375 11-15-06 BBB- 1,020 1,035,319
Oil & Gas Drilling 0.75% 1,329,653
Alberta Energy Co., Ltd.,
Note (Canada) 8.125 09-15-30 A- 725 982,846
Delek & Avner-Yam Tethys,
Sr Sec Note (Israel) (S) 5.326 08-01-13 BBB- 348 346,807
Oil & Gas Exploration & Production 0.79% 1,401,093
Occidental Petroleum Corp.,
Sr Deb 10.125 09-15-09 BBB+ 1,160 1,401,093
Oil & Gas Refining & Marketing & Trucking 0.58% 1,029,051
Enterprise Products Operations, L.P.,
Gtd Sr Note Ser B 5.600 10-15-14 BB+ 1,000 1,029,051
Paper Packaging 0.74% 1,311,388
Stone Container Corp.,
Sr Note 9.750 02-01-11 B 285 301,388
Sr Note 8.375 07-01-12 B 1,000 1,010,000
Paper Products 1.14% 2,015,625
Abitibi-Consolidated Co.,
Gtd Sr Note (Canada) 6.950 12-15-06 BB- 1,250 1,265,625
MDP Acquisitions Plc,
Sr Note (Ireland) 9.625 10-01-12 B- 750 750,000
Pharmaceuticals 1.88% 3,323,507
Medco Health Solutions, Inc.,
Sr Note 7.250 08-15-13 BBB 1,550 1,744,830
Wyeth,
Note 5.500 03-15-13 A 1,500 1,578,677
Property & Casualty Insurance 0.93% 1,641,184
Markel Corp.,
Sr Note 7.350 08-15-34 BBB- 535 600,208
Ohio Casualty Corp.,
Note 7.300 06-15-14 BB 750 824,848
URC Holdings Corp.,
Sr Note (S) 7.875 06-30-06 AA- 210 216,128
See notes to
financial statements.
12
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Real Estate Investment Trusts 1.34% $2,368,918
Healthcare Realty Trust, Inc.,
Sr Note 8.125% 05-01-11 BBB- $175 200,367
iStar Financial, Inc.,
Sr Note 7.000 03-15-08 BBB- 820 870,039
ProLogis Trust,
Sr Note 7.050 07-15-06 BBB+ 510 522,543
Simon Property Group, L.P.,
Note (S) 5.100 06-15-15 BBB+ 525 524,719
Ventas Realty, L.P./Capital Corp.,
Sr Note 6.625 10-15-14 BB 250 251,250
Real Estate Management & Development 0.82% 1,443,170
Post Apartment Homes,
Sr Note 5.125 10-12-11 BBB 870 892,076
Socgen Real Estate Co., LLC,
Perpetual Bond Ser A (7.640% to
09-30-07 then variable) (S) 7.640 12-29-49 A 515 551,094
Regional Banks 2.58% 4,571,561
Colonial Capital II,
Gtd Cap Security Ser A 8.920 01-15-27 BB 1,085 1,190,353
Crestar Capital Trust I,
Gtd Cap Security 8.160 12-15-26 A- 910 989,220
First Chicago NDB Institutional Capital,
Gtd Cap Bond Ser A (S) 7.950 12-01-26 A1 500 540,251
Greater Bay Bancorp,
Sr Note (S) 5.125 04-15-10 BBB- 565 572,293
NB Capital Trust IV,
Gtd Cap Security 8.250 04-15-27 A 1,170 1,279,444
Soft Drinks 0.62% 1,088,750
Panamerican Beverages, Inc.,
Sr Note (Panama) 7.250 07-01-09 BBB 1,000 1,088,750
Specialized Finance 1.32% 2,343,299
Astoria Depositor Corp.,
Pass Thru Ctf Ser B (G)(S) 8.144 05-01-21 BB 750 740,625
Bosphorous Financial Services,
Sr Sec Floating Rate Note (P)(S) 5.068 02-15-12 Baa3 500 499,863
ESI Tractebel Acquistion Corp.,
Gtd Sec Bond Ser B 7.990 12-30-11 BB 858 912,147
Humpuss Funding Corp.,
Gtd Note (S) 7.720 12-15-09 B2 197 190,664
See notes to
financial statements.
13
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Telecommunication Services 0.92% $1,631,455
Telus Corp.,
Note (Canada) 8.000% 06-01-11 BBB $1,395 1,631,455
Telecommunications Equipment 1.12% 1,976,957
Corning, Inc.,
Med Term Note 8.300 04-04-25 Ba2 1,150 1,200,988
Note 6.050 06-15-15 BBB- 775 775,969
Thrifts & Mortgage Finance 9.97% 17,627,277
Bear Stearns Alt-A Trust,
Collateralized Mtg Obligation
Ser 2005-3 Class B2 5.424 04-25-35 AA+ 460 468,373
Bear Stearns Commericial Mortgage
Securities, Inc.,
Commercial Sub Bond Ser 2004-ESA
Class C (S) 4.937 05-14-16 AA 1,000 1,019,070
Centex Home Equity Loan Trust,
Home Equity Ln Asset Backed Ctf
Ser 2004-A Class AF-4 4.510 08-25-32 AAA 2,000 2,001,456
Chaseflex Trust,
Pass Thru Ctf Ser 2005-2 Class 4A1 5.000 05-25-20 AAA 1,283 1,293,234
ContiMortgage Home Equity Loan Trust,
Pass Thru Ctf Ser 1995-2 Class A-5 8.100 08-15-25 AAA 181 190,936
Countrywide Alternative Loan Trust,
Mtg Asset Backed Pass Thru Ctf
Ser 2004-24CB Class 1A1 6.000 11-25-34 AAA 1,174 1,195,520
Mtg Asset Backed Pass Thru Ctf
Ser 2005-J1 Class 3A1 6.500 08-25-32 AAA 694 708,782
Countrywide Home Loans Servicing, L.P.,
Mtg Asset Backed Pass Thru Ctf
Ser 2005-6 Class 2A1 5.500 04-25-35 Aaa 784 793,607
Credit-Based Asset Servicing and
Securitization LLC,
Mtg Asset Backed Pass Thru Ctf
Ser 2004-CB4 Class A3 4.632 05-25-35 AAA 1,000 1,003,088
DLJ Mortgage Acceptance Corp.,
Commercial Mortgage Pass Thru Ctf
Ser 1996-CF1 Class B1 (S) 8.356 03-13-28 AAA 1,535 1,567,696
First Horizon Alternative Mortgage Securities,
Mtg Pass Thru Ctf Ser 2004-AA5 Class B1 5.262 12-25-34 AA 320 322,473
Global Signal Trust,
Sub Bond Ser 2004-1A Class D (S) 5.098 01-15-34 BBB 2,000 1,975,048
Sub Bond Ser 2004-2A Class D (S) 5.093 12-15-14 Baa2 405 401,734
GSR Mortgage Loan Trust,
Mtg Pass Thru Ctf Ser 2004-9 Class B1 (G) 4.429 08-25-34 AA 721 719,239
See notes to
financial statements.
14
FINANCIAL STATEMENTS
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
Thrifts & Mortgage Finance (continued)
Indymac Index Mortgage Loan Trust,
Asset Backed Ctf Ser 2004-AR13 Class B1 5.296% 01-25-35 AA $484 $489,248
Asset Backed Ctf Ser 2005-AR5 Class B1 5.463 05-25-35 AA 524 538,636
Provident Funding Mortgage Loan Trust,
Mtg Pass Thru Ctf Ser 2005-1 Class B1 4.384 05-25-35 AAA 325 321,203
Washington Mutual, Inc.,
Mtg Ln Pass Thru Ctf (N) 6.500 08-29-35 AA 1,090 1,123,552
Mtg Ln Pass Thru Ctf Ser 2005-AR4
Class B1 4.684 04-25-35 AA 1,515 1,494,382
Utilities Other 0.31% 546,145
Magellan Midstream Partners, L.P.,
Note 6.450 06-01-14 BBB 500 546,145
Wireless Telecommunication Services 2.67% 4,713,668
America Movil S.A. de C.V.,
Sr Note (Mexico) 5.750 01-15-15 BBB 1,275 1,294,588
AT&T Wireless Services , Inc.,
Sr Note 8.125 05-01-12 A 1,525 1,827,174
Crown Castle Towers LLC,
Sub Bond Ser 2005-1A Class D 5.612 06-15-35 Baa2 620 622,906
Mobile Telesystems Finance S.A.,
Gtd Sr Note (Luxembourg) (S) 9.750 01-30-08 BB- 400 429,000
Nextel Communications, Inc.,
Sr Note 7.375 08-01-15 BB 500 540,000
Credit
Issuer, description rating (A) Shares Value
Preferred stocks 7.74% $13,683,319
(Cost $13,717,794)
Agricultural Products 0.62% 1,103,125
Ocean Spray Cranberries, Inc., 6.25%, Ser A (S) BB+ 12,500 1,103,125
Broadcasting & Cable TV 0.57% 1,013,200
Viacom, Inc., 7.25% A- 40,000 1,013,200
Consumer Finance 0.31% 542,678
HSBC Finance Corp., 6.36%, Depositary Shares Ser B BBB+ 21,680 542,678
Diversified Banks 2.82% 4,983,016
Abbey National Plc, 7.375% (United Kingdom) A- 41,300 1,087,016
Bank One Capital Trust VI, 7.20% A- 55,000 1,434,400
Fleet Capital Trust VII, 7.20% A 55,000 1,416,800
USB Capital IV, 7.35% A- 40,000 1,044,800
See notes to
financial statements.
15
FINANCIAL STATEMENTS
Credit
Issuer, description rating (A) Shares Value
Diversified Financial Services 1.15% $2,031,600
ABN AMRO Capital Funding Trust VII, 6.08% A 40,000 994,000
Citigroup Capital VII, 7.125% A 40,000 1,037,600
Electric Utilities 0.29% 504,200
DTE Energy Co., 8.75%, Conv BBB- 20,000 504,200
Integrated Telecommunication Services 0.58% 1,030,000
Telephone & Data Systems, Inc., 7.60%, Ser A A- 40,000 1,030,000
Multi-Utilities & Unregulated Power 0.61% 1,084,000
PSEG Funding Trust II, 8.75% BB+ 40,000 1,084,000
Real Estate Investment Trusts 0.79% 1,391,500
Apartment Investment & Management Co., 8.00%, Ser T B+ 55,000 1,391,500
Interest Maturity Credit Par value
Issuer, description rate date rating (A) (000) Value
U.S. government and agencies securities 60.60% $107,175,423
(Cost $104,897,968)
Government U.S. 13.45% 23,780,307
United States Treasury,
Bond (L) 9.125% 05-15-18 AAA $495 740,509
Bond (L) 8.875 08-15-17 AAA 1,215 1,765,879
Bond (L) 6.250 02-15-07 AAA 2,350 2,448,040
Bond (L) 5.375 02-15-31 AAA 3,050 3,599,000
Note (L) 5.250 11-15-28 AAA 515 588,206
Note (L) 4.125 05-15-15 AAA 165 167,410
Note (L) 4.000 02-15-15 AAA 14,420 14,471,263
Government U.S. Agency 47.15% 83,395,116
Federal Home Loan Bank,
Bond 4.600 04-11-08 AAA 2,530 2,544,368
Bond 4.500 04-11-08 AAA 3,000 3,008,175
Bond 4.430 04-07-08 AAA 2,550 2,559,912
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 4.500 04-01-18 AAA 771 767,687
15 Yr Pass Thru Ctf 4.500 05-01-19 AAA 1,816 1,809,524
20 Yr Pass Thru Ctf 11.250 01-01-16 AAA 35 37,300
30 Yr Pass Thru Ctf 6.000 08-01-34 AAA 15,250 15,648,446
30 Yr Pass Thru Ctf 5.500 04-01-33 AAA 2,173 2,205,455
CMO REMIC 2901-UB 5.000 03-15-33 AAA 4,345 4,411,495
CMO REMIC 2978-CL 5.500 01-15-31 AAA 2,695 2,754,233
CMO REMIC 2978-JD 5.500 08-15-31 AAA 2,640 2,702,515
Med Term Note 4.300 09-24-08 AAA 2,000 2,008,178
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 7.500 02-01-08 AAA 1 1,073
15 Yr Pass Thru Ctf 7.000 09-01-10 AAA 42 44,325
15 Yr Pass Thru Ctf 7.000 09-01-12 AAA 7 7,442
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., (continued)
15 Yr Pass Thru Ctf 7.000% 04-01-17 AAA $64 $66,587
15 Yr Pass Thru Ctf 5.000 10-01-19 AAA 1,006 1,017,741
30 Yr Pass Thru Ctf (M) 5.500 07-01-33 AAA 2,640 2,675,476
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf (M) 5.000 08-01-33 AAA 9,480 9,459,258
30 Yr Pass Thru Ctf 6.000 01-01-34 AAA 3,809 3,906,802
30 Yr Pass Thru Ctf 6.000 05-01-35 AAA 5,106 5,236,366
30 Yr Pass Thru Ctf 5.500 05-01-34 AAA 1,150 1,166,804
30 Yr Pass Thru Ctf 5.500 11-01-34 AAA 2,685 2,723,302
CMO REMIC 2003-17-QT 5.000 08-25-27 AAA 1,675 1,683,731
Note 6.000 05-20-25 AAA 1,720 1,727,102
Note (L) 5.000 04-19-10 AAA 2,530 2,553,309
Note 4.500 04-01-08 AAA 2,465 2,465,000
Note (L) 4.450 04-11-08 AAA 2,550 2,554,858
Note (L) 4.300 05-05-08 AAA 2,670 2,678,694
Financing Corp.,
Bond 9.400 02-08-18 Aaa 2,000 2,941,928
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 10.000 11-15-20 AAA 7 7,832
30 Yr Pass Thru Ctf 9.500 11-15-19 AAA 0 496
30 Yr Pass Thru Ctf 9.500 01-15-21 AAA 5 5,062
30 Yr Pass Thru Ctf 9.500 02-15-25 AAA 13 14,640
Interest Credit Par value
Issuer, description, maturity date rate rating (A) (000) Value
Short-term investments 2.28% $4,035,000
(Cost $4,035,000)
Government U.S. Agency 2.20% 3,900,000
Federal Home Loan Bank,
Disc Note 07-01-05 Zero AAA $3,900 3,900,000
Joint Repurchase Agreement 0.08% 135,000
Investment in a joint repurchase agreement transaction
with Morgan Stanley -- Dated 06-30-05 due
07-01-05 (secured by U.S. Treasury Inflation
Indexed Note 1.875% due 07-15-13) 2.900% 135 135,000
Total investments 155.30% $274,658,359
Other assets and liabilities, net (4.98%) ($8,807,247)
Fund preferred shares, at value (50.32%) ($89,000,000)
Total net assets 100.00% $176,851,112
See notes to
financial statements.
17
FINANCIAL STATEMENTS
Notes to Schedule of Investments
(A) Credit ratings 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 June 30, 2005.
(M) These securities having an aggregate value of $12,134,734, or 6.86% of
the Fund's net assets, have been purchased as forward commitments--that
is, the Fund has agreed on trade date to take delivery of and to make
payment for these securities on a delayed basis subsequent to the date of
this schedule. The purchase price and interest rate of these securities
are fixed at trade date, although the Fund does not earn any interest on
these until settlement date. The Fund has segregated assets with a current
value at least equal to the amount of the forward commitments.
Accordingly, the market value of $12,376,215 of Federal Home Loan Mortgage
Corp., 6.000%, 08-01-34, Federal Home Loan Mortgage Corp., 5.000%,
03-15-33, and Federal National Mortgage Assn., 6.000%, 05-01-35 has been
segregated to cover the forward commitments.
(N) This security having an aggregate value of $1,123,552 or 0.64% of the
Fund's net assets, has been purchased on a when issued basis. The purchase
price and the interest rate of such securities are fixed at trade date,
although the Fund does not earn any interest on such securities until
settlement date. The Fund has instructed its custodian bank to segregate
assets with a current value at least equal to the amount of its when
issued commitments. Accordingly, the market value of $1,149,140 of Federal
Home Loan Mortgage Corp., 6.000%, 08-01-34 has been segregated to cover
the when issued commitments.
(O) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(P) Represents rate in effect on June 30, 2005.
(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 $31,324,578 or 17.71% of the Fund's net
assets as of June 30, 2005.
Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, security is U.S.
dollar-denominated.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to
financial statements.
18
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
June 30, 2005
(unaudited)
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of
what the Fund
owns, is due
and owes. You'll
also find the net
asset value for each
common share.
Assets
Investments, at value (cost $269,214,039)
including $31,942,801 of securities loaned $274,658,359
Cash 175
Cash segregated for futures contacts 402,750
Receivable for investments sold 11,536,671
Receivable for shares sold 273,551
Dividends and interest receivable 3,320,622
Other assets 15,855
Total assets 290,207,983
Liabilities
Payable for investments purchased 23,806,572
Payable for futures variation margin 109,075
Payable to affiliates
Management fees 348,161
Other 5,117
Other payable and accrued expenses 83,798
Total liabilities 24,352,723
Auction Preferred Shares (APS) Series A, including
accrued dividends, unlimited number of shares
of beneficial interest authorized with no par value,
1,780 shares issued, liquidation preference of
$25,000 per share 44,502,074
APS Series B, including accrued dividends, unlimited
number of shares of beneficial interest authorized
with no par value, 1,780 shares issued, liquidation
preference of $25,000 per share 44,502,074
Net assets
Common shares capital paid-in 176,833,010
Accumulated net realized loss on investments
and financial futures contracts (3,872,868)
Net unrealized appreciation of investments
and financial futures contracts 4,337,050
Distributions in excess of net investment income (446,080)
Net assets applicable to common shares $176,851,112
Net asset value per common share
Based on 11,179,708 common shares outstanding --
30 million shares authorized with no par value $15.82
See notes to
financial statements.
19
FINANCIAL STATEMENTS
OPERATIONS
For the period ended
June 30, 2005
(unaudited) 1
This Statement
of Operations
summarizes the
Fund's investment
income earned and
expenses incurred
in operating the
Fund. It also shows
net gains (losses)
for the period
stated.
Investment income
Interest $7,158,301
Dividends 534,032
Securities lending 57,447
Total investment income 7,749,780
Expenses
Investment management fees 672,378
APS auction fees 111,415
Transfer agent fees 53,877
Custodian fees 38,701
Printing fees 31,267
Accounting and legal services fees 27,522
Professional fees 22,920
Miscellaneous 19,499
Registration and filing fees 11,648
Trustees' fees 3,542
Security lending fees 2,923
Interest 474
Total expenses 996,166
Net investment income 6,753,614
Realized and unrealized loss
Net realized loss on
Investments (239,124)
Financial futures contracts (1,179,054)
Change in net unrealized appreciation (depreciation) of
Investments (1,336,557)
Financial futures contracts (839,830)
Net realized and unrealized loss (3,594,565)
Distributions to APS Series A (623,825)
Distributions to APS Series B (618,637)
Increase in net assets from operations $1,916,587
1 Semiannual period from 1-1-05 through 6-30-05.
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 Period
ended ended
12-31-04 6-30-05 1
Increase (decrease) in net assets
From operations
Net investment income $13,479,487 $6,753,614
Net realized loss (1,090,604) (1,418,178)
Change in net unrealized
appreciation (depreciation) (1,578,388) (2,176,387)
Distributions to APS Series A and B (1,337,920) (1,242,462)
Increase in net assets
resulting from operations 9,472,575 1,916,587
Distributions to common shareholders
From net investment income (13,140,127) (6,021,584)
From Fund share transactions 1,322,600 570,859
Net assets
Beginning of period 182,730,202 180,385,250
End of period 2 $180,385,250 $176,851,112
1 Semiannual period from 1-1-05 through 6-30-05. Unaudited.
2 Includes accumulated (distributions in excess of) net investment income
of $64,352 and ($446,080), respectively.
See notes to
financial statements.
21
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 12-31-00 1 12-31-01 1,2 12-31-02 1 12-31-03 12-31-04 6-30-05 3
Per share operating performance
Net asset value,
beginning of period $15.37 $15.89 $16.06 $16.31 $16.53 $16.19
Net investment income 4 1.07 1.00 0.89 0.93 1.22 0.61
Net realized and unrealized
gain (loss) on investments 0.52 0.19 0.28 0.63 (0.25) (0.33)
Distributions to APS Series A and B 5 -- -- -- (0.02) (0.12) (0.11)
Total from
investment operations 1.59 1.19 1.17 1.54 0.85 0.17
Less distributions to
common shareholders
From net investment income (1.07) (1.02) (0.92) (0.96) (1.19) (0.54)
From net realized gains -- -- -- (0.26) -- --
(1.07) (1.02) (0.92) (1.22) (1.19) (0.54)
Capital charges
Offering costs and underwriting
discount related to APS -- -- -- (0.10) -- --
Net asset value, end of period $15.89 $16.06 $16.31 $16.53 $16.19 $15.82
Per share market value,
end of period $14.44 $14.65 $14.66 $15.39 $15.68 $15.12
Total return at market value 6 (%) 23.06 8.69 6.42 13.49 9.95 (0.03) 7
Ratios and supplemental data
Net assets applicable to common
shares, end of period (in millions) $172 $175 $179 $183 $180 $177
Ratio of expenses to
average net assets (%) 0.84 0.80 0.84 0.87 8 1.14 8 1.13 8,9
Ratio of net investment income to
average net assets (%) 6.89 6.17 5.56 5.58 10 7.44 10 7.63 9,10
Portfolio turnover (%) 248 299 371 273 135 62
Senior securities
Total APS Series A outstanding
(in millions) -- -- -- $45 $45 $45
Total APS Series B outstanding
(in millions) -- -- -- $45 $45 $45
Involuntary liquidation preference
APS Series A per unit (in thousands) -- -- -- $25 $25 $25
Involuntary liquidation preference
APS Series B per unit (in thousands) -- -- -- $25 $25 $25
Average market value
per unit (in thousands) -- -- -- $25 $25 $25
Asset coverage per unit 11 -- -- -- $75,402 $75,049 $74,365
See notes to
financial statements.
22
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 Semiannual period from 1-1-05 through 6-30-05. Unaudited.
4 Based on the average of the shares outstanding.
5 APS Series A and B were issued on 11-4-03.
6 Assumes dividend reinvestment.
7 Not annualized.
8 Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
annualized ratios of expenses would have been 0.81%, 0.76% and 0.75% for
the periods ended 12-31-03, 12-31-04 and 6-30-05, respectively.
9 Annualized.
10 Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the annualized ratios of net investment income would have been
5.19%, 4.99% and 5.09% for the periods ended 12-31-03, 12-31-04 and
6-30-05, respectively.
11 Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing that amount by the number of APS outstanding, as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
See notes to
financial statements.
23
NOTES TO
STATEMENTS
Unaudited
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 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.
Securities lending
The Fund may lend securities to certain qualified brokers who pay
24
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 June 30, 2005, the Fund loaned securities
having a market value of $31,942,801 collateralized by securities in the
amount of $32,292,636. 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 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.
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 June 30, 2005, the Fund had deposited $402,750 in a segregated account
to cover margin requirements on open financial futures contracts.
The Fund had the following financial futures contracts open on June 30, 2005:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION DEPRECIATION
- -------------------------------------------------------------------------------
U.S. 10-Year Treasury Note 505 Short Sep 05 ($1,082,546)
U.S. 10-Year Treasury Note 32 Short Sep 05 (24,724)
($1,107,270)
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 available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent that such carryforward is
used by the Fund, no capital gain distributions will be made. The entire
amount of the loss carryforward expires December 31, 2012.
25
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, 2004, the tax character of distributions paid was as
follows: ordinary income $14,478,047.
Such distributions, on a tax basis, are determined in conformity with
income tax regulations, which may differ from accounting principles
generally accepted in the United States of America. Distributions in
excess of tax basis earnings and profits, if any, are reported in the
Fund's financial statements as a return of capital.
Use of estimates
The preparation of these financial statements, in accordance with
accounting principles generally accepted in the United States of America,
incorporates estimates made by management in determining the reported
amount of assets, liabilities, revenues and expenses of the Fund. Actual
results could differ from these estimates.
Note B
Management fee and
transactions with
affiliates and others
The Fund has an investment management contract with 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 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 $27,522. The Fund also paid the Adviser the amount of
$4,037 for certain compliance costs, included in the miscellaneous
expenses.
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.
The Fund is listed for trading on the New York Stock Exchange ("NYSE") and
has filed with the NYSE its chief executive officer certification
regarding compliance with the NYSE's listing standards. The Fund also
files with the Securities and Exchange Commission the certification of its
chief executive officer and chief accounting officer required by Section
302 of the Sarbanes-Oxley Act.
26
Note C
Fund share transactions
This listing illustrates the number of 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.
<CAPTION
Year ended 12-31-04 Period ended 6-30-05 1
Shares Amount Shares Amount
Beginning of period 11,056,746 $175,501,784 11,141,310 $176,262,151
Distributions reinvested 84,564 1,302,088 38,398 570,859
Offering costs and underwriting
discount related to Auction
Preferred Shares -- 20,512 -- --
Reclassification of capital accounts -- (562,233) -- --
End of period 11,141,310 $176,262,151 11,179,708 $176,833,010
1 Semiannual period from 1-1-05 through 6-30-05. Unaudited.
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 total offering costs of
$188,388 and the total underwriting discount of $890,000 has been charged
to capital paid-in of common shares during the years ended December 31,
2003 and December 31, 2004.
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 2.10%
to 3.40% and Series B from 2.24% to 3.45% during the period ended June 30,
2005. 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
period ended June 30, 2005, aggregated $118,105,102 and $107,531,247,
respectively. Purchases and proceeds from sales or maturities of
obligations of U.S. government aggregated $50,836,745 and $54,136,215,
respectively, during the period ended June 30, 2005.
The cost of investments owned on June 30, 2005, including short-term
investments, for federal income tax purposes was $270,587,813.
27
Gross unrealized appreciation and depreciation of investments aggregated
$6,905,067 and $2,834,521, respectively, resulting in net unrealized
appreciation of $4,070,546. 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 on debt securities.
28
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 with 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
29
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 June 30, 2005, the Fund paid to shareholders
dividends from net investment income totaling $0.540 per share. The dates
of payments and the amounts per share are as follows:
INCOME
PAYMENT DATE DIVIDEND
- --------------------------------
March 31, 2005 $0.280
June 30, 2005 0.260
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
New York Stock Exchange on that date. Net asset
30
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.
31
Shareholder meeting
On March 2, 2005, the Annual Meeting of the Fund was held to elect ten
Trustees and to ratify the actions of the Trustees in selecting independent
auditors for the Fund.
Proxies covering 9,743,702 shares of beneficial interest were voted at the
meeting. The common shareholders elected the following Trustees to serve
until their respective successors are duly elected and qualified, with the
votes tabulated as follows:
WITHHELD
FOR AUTHORITY
- --------------------------------------------------------------
James F. Carlin 9,651,626 88,516
Richard P. Chapman, Jr. 9,645,751 94,391
William Cosgrove 9,639,538 100,604
William H. Cunningham 9,638,442 101,700
Ronald R. Dion 9,648,175 91,967
Charles L. Ladner 9,651,175 88,967
Steven R. Pruchansky 9,650,732 89,410
James A. Shepherdson * 9,651,651 88,491
* Mr. James A. Shepherdson resigned effective July 15, 2005.
The preferred shareholders elected Dr. John A. Moore and Patti McGill
Peterson to serve as the Fund's Trustees until their successors are duly
elected and qualified, with the votes for each Trustee tabulated as
follows: 3,548 FOR, 0 AGAINST, 12 ABSTAINING.
The common and preferred shareholders ratified the Trustees' selection of
PricewaterhouseCoopers LLP as the Fund's independent auditor for the fiscal
year ending December 31, 2005, with votes tabulated as follows: 9,639,963
FOR, 36,850 AGAINST and 66,889 ABSTAINING.
32
Board Consideration
of and Continuation
of Investment
Advisory Agreement
Section 15(c) of the Investment Company Act of 1940 (the "1940 Act")
requires the Board of Trustees (the "Board") of John Hancock Income
Securities Trust (the "Fund"), including a majority of the Trustees who
have no direct or indirect interest in the investment advisory agreement
and are not "interested persons" of the Fund, as defined in the 1940 Act
(the "Independent Trustees"), annually to review and consider the
continuation of the investment advisory agreement (the "Advisory
Agreement") with John Hancock Advisers, LLC (the "Adviser") for the Fund.
At meetings held on May 19-20 and June 6-7, 2005, the Board, including
the Independent Trustees considered the factors and reached the
conclusions described below relating to the selection of the Adviser and
the continuation of the Advisory Agreement. During such meetings, the
Board's Contracts/Operations Committee and the Independent Trustees also
met in executive sessions with their independent legal counsel. In
evaluating the Advisory Agreement, the Board, including the
Contracts/Operations Committee and the Independent Trustees, reviewed a
broad range of information requested for this purpose by the Independent
Trustees, including but not limited to the following: (i) the investment
performance of the Fund and a broader universe of relevant funds (the
"Universe") selected by Lipper Inc. ("Lipper"), an independent provider of
investment company data, for a range of periods, (ii) advisory and other
fees incurred by, and the expense ratios of, the Fund and a peer group of
comparable funds selected by Lipper (the "Peer Group"), (iii) the advisory
fees of comparable portfolios of other clients of the Adviser, (iv) the
Adviser's financial results and condition, including its and certain of
its affiliates' profitability from services performed for the Fund, (v)
breakpoints in the Fund's and the Peer Group's fees and a study undertaken
at the direction of the Independent Trustees as to the allocation of the
benefits of economies of scale between the Fund and the Adviser, (vi) the
Adviser's record of compliance with applicable laws and regulations, with
the Fund's investment policies and restrictions, and with the Fund's Code
of Ethics and the structure and responsibilities of the Adviser's
compliance department, (vii) the background and experience of senior
management and investment professionals, and (viii) the nature, cost and
character of advisory and non-investment management services provided by
the Adviser and its affiliates.
Nature, Extent and Quality
of Services
The Board considered the ability of the Adviser, based on its resources,
reputation and other attributes, to attract and retain qualified
investment professionals, including research, advisory, and supervisory
personnel. The Board further considered the compliance programs and
compliance records of the Adviser. In addition, the Board took into
account the administrative services provided to the Fund by the Adviser
and its affiliates.
Based on the above factors, together with those referenced below, the
Board concluded that, within the context of its full deliberations, the
nature, extent and quality of the investment advisory services provided to
the Fund by the Adviser were sufficient to support renewal of the Advisory
Agreement.
Fund Performance
The Board considered the performance results for the Fund over various
time periods. The Board also considered these results in comparison to the
performance of the Universe, as well as the Fund's benchmark indices.
Lipper determined the Universe
33
for the Fund. The Board reviewed with a represen tative of Lipper the
methodology used by Lipper to select the funds in the Universe and the
Peer Group.
The Board noted that the performance of the Fund was below the median and
average performance of its Universe for the time periods under review. The
Board also noted that the Fund consistently performed higher than one of
its benchmark indices, the Lehman Brothers Government/Corporate Bond
Index, for the time periods under review, but performed lower than its
other benchmark index, the Lipper Closed-End Investment Grade Funds Index,
during the more recent periods under review. The Adviser discussed with
the Board factors contributing to the Fund's performance results. The
Adviser noted that, in its view, the Fund's Universe was over-inclusive.
The Adviser provided additional analysis which demonstrated that the
Fund's performance was consistent with other similarly leveraged
closed-end funds. The Board indicated its intent to continue to monitor
the Fund's performance trends.
Investment Advisory Fee
Rates and Expenses
The Board reviewed and considered the contractual investment advisory fee
rate payable by the Fund to the Adviser for investment advisory services
(the "Advisory Agreement Rate"). The Board received and considered
information comparing the Advisory Agreement Rate with the advisory fees
for the Peer Group. The Board noted that the Advisory Agreement Rate was
lower than the median rate of the Peer Group, and reasonable in relation
to the services provided.
The Board received and considered information regarding the Fund's total
operating expense ratio and its various components, including contractual
advisory fees, actual advisory fees, non-management fees, transfer agent
fees and custodian fees, including and excluding investment-related
expenses. The Board also considered comparisons of these expenses to the
Peer Group and the Universe. The Board noted that the total operating
expense ratio of the Fund was slightly higher than the Peer Group's and
Universe's median total operating expense ratio due, in part, to the
Fund's transfer agency expense. The Board noted that, historically, the
Fund's total operating expense ratio has been consistently below the
Universe's median total operating expense ratio.
The Adviser also discussed the Lipper data and rankings, and other
relevant information, for the Fund. Based on the above-referenced
considerations and other factors, the Board concluded that the Fund's
overall expense results and performance supported the re-approval of the
Advisory Agreement.
Profitability
The Board received and considered a detailed profitability analysis of the
Adviser based on the Advisory Agreement, as well as on other relationships
between the Fund and the Adviser and its affiliates. The Board concluded
that, in light of the costs of providing investment management and other
services to the Fund, the profits and other ancillary benefits reported by
the Adviser were not unreasonable.
Economies of Scale
The Board received and considered general information regarding economies
of scale with respect to the management of the Fund, including the Fund's
ability to appropriately benefit from economies of scale under the Fund's
fee structure. The Board recognized the inherent limitations of any
analysis of economies of scale, stemming largely from the Board's
understanding that most of the Adviser's costs are not specific to
individual Funds, but rather are incurred across a variety of products and
services.
The Board observed that the Advisory Agreement offers breakpoints.
However, the Board considered the limited
34
relevance of economies of scale in the context of a closed-end fund that,
unlike an open-end fund, does not continuously offer its shares, and
concluded that the fees were fair and equitable based on relevant factors,
including the Fund's total expenses ranking relative to its Peer Group.
Information About
Services to Other Clients
The Board also received information about the nature, extent and quality
of services and fee rates offered by the Adviser to its other clients,
including other registered investment companies, institutional investors
and separate accounts. The Board concluded that the Advisory Agreement
Rate was not unreasonable, taking into account fee rates offered to others
by the Adviser and giving effect to differences in services covered by
such fee rates.
Other Benefits to
the Adviser
The Board received information regarding potential "fall-out" or ancillary
benefits received by the Adviser and its affiliates as a result of the
Adviser's relationship with the Fund. Such benefits could include, among
others, benefits directly attributable to the relationship of the Adviser
with the Fund and benefits potentially derived from an increase in the
business of the Adviser as a result of its relationship with the Fund
(such as the ability to market to shareholders other financial products
offered by the Adviser and its affiliates).
The Board also considered the effectiveness of the Adviser's and the
Fund's policies and procedures for complying with the requirements of the
federal securities laws, including those relating to best execution of
portfolio transactions and brokerage allocation.
Other Factors and
Broader Review
As discussed above, the Board reviewed detailed materials received from
the Adviser as part of the annual re-approval process under Section 15(c)
of the 1940 Act. The Board also regularly reviews and assesses the quality
of the services that the Fund receives throughout the year. In this
regard, the Board reviews reports of the Adviser at least quarterly, which
include, among other things, a detailed portfolio review, detailed fund
performance reports and compliance reports. In addition, the Board meets
with portfolio managers and senior investment officers at various times
throughout the year.
After considering the above-described factors and based on its
deliberations and its evaluation of the information described above, the
Board concluded that approval of the continuation of the Advisory
Agreement for the Fund was in the best interest of the Fund and its
shareholders. Accordingly, the Board unanimously approved the continuation
of the Advisory Agreement.
35
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
Trustees
Charles L. Ladner, Chairman*
James F. Carlin
Richard P. Chapman, Jr.*
William H. Cunningham
Ronald R. Dion
Dr. John A. Moore*
Patti McGill Peterson*
Steven R. Pruchansky
*Members of the Audit Committee
Officers
Keith F. Hartstein
President and
Chief Executive Officer
William H. King
Vice President and Treasurer
Francis V. Knox, Jr.
Vice President and
Chief Compliance Officer
Investment adviser
John Hancock Advisers, LLC
601 Congress Street
Boston, MA 02210-2805
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer agent
and 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
Stock symbol
Listed New York Stock Exchange:
JHS
For shareholder assistance refer
to page 31
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
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PRESORTED
STANDARD
U. S. POSTAGE
PAID
MIS
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P60SA 6/05
8/05
ITEM 2. CODE OF ETHICS.
As of the end of the period, June 30, 2005, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, that applies to its
Chief Executive Officer, Chief Financial Officer and Treasurer
(respectively, the principal executive officer, the principal financial
officer and the principal accounting officer, the "Senior Financial
Officers"). A copy of the code of ethics is filed as an exhibit to this
Form N-CSR.
The code of ethics was amended effective February 1, 2005 to address new
Rule 204A-1 under the Investment Advisers Act of 1940 and to make other
related changes.
The most significant amendments were:
(a) Broadening of the General Principles of the code to cover compliance
with all federal securities laws.
(b) Eliminating the interim requirements (since the first quarter of 2004)
for access persons to preclear their personal trades of John Hancock mutual
funds. This was replaced by post-trade reporting and a 30 day hold
requirement for all employees.
(c) A new requirement for "heightened preclearance" with investment
supervisors by any access person trading in a personal position worth
$100,000 or more.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
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.
The registrant has adopted procedures by which shareholders may recommend
nominees to the registrant's Board of Trustees. A copy of the procedures
is filed as an exhibit to this Form N-CSR. See attached "John Hancock
Funds - Administration Committee Charter" and "John Hancock Funds -
Governance Committee Charter".
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls
and procedures as conducted within 90 days of the filing date of this Form
N-CSR, the registrant's principal executive officer and principal financial
officer have concluded that those disclosure controls and procedures
provide reasonable assurance that the material information required to be
disclosed by the registrant on this report is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal half-year (the registrant's second fiscal half-year in the case of
an annual report) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive
officer and principal financial officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company
Act of 1940, are attached.
(b) 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) Submission of Matters to a Vote of Security Holders is attached. See
attached "John Hancock Funds - Administration Committee Charter" and "John
Hancock Funds - Governance Committee Charter".
(c)(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.
John Hancock Income Securities Trust
By: /s/ Keith F. Hartstein
------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: August 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Keith F. Hartstein
------------------------------
Keith F. Hartstein
President and Chief Executive Officer
Date: August 29, 2005
By: /s/ William H. King
------------------------------
William H. King
Vice President and Treasurer
Date: August 29, 2005