N-30D 1 ist.txt JOHN HANCOCK INCOME SECURITIES TRUST John Hancock Income Securities Trust ANNUAL REPORT 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."] [A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left next to first paragraph.] WELCOME Table of contents Your fund at a glance page 1 Manager's report page 2 Fund's investments page 6 Financial statements page 18 For your information page 33 Dear Fellow Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy would rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks a high level of cur- rent income con- sistent with prudent invest- ment risk by investing in a diversified portfo- lio of debt securi- ties. Over the last twelve months * Falling interest rates, a weak economy and a falling stock market boosted bonds in 2001. * Higher-quality bonds performed best. * The Fund increased its exposure to U.S. government agency and mortgage-backed securities with a yield advantage over Treasuries. [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, 2001." The chart is scaled in increments of 3% with 0% at the bottom and 9% at the top. The first bar represents the 8.26% total return for John Hancock Income Securities Trust. A note below the chart reads "The total return for the Fund is at net asset value with all distributions reinvested."] Top 10 issuers 12.8% United States Treasury 6.8% Government National Mortgage Assn. 6.4% Federal National Mortgage Assn. 1.8% Scotland International Finance No. 2, B.V. 1.5% Financing Corp. 1.3% Chugach Electric Association 1.2% Iberdrola International B.V. 0.9% Morgan Stanley Capital I 0.9% Morgan Stanley Dean Witter Capital I Trust 0.8% GMAC Commercial Mortgage Securities As a percentage of net assets on December 31, 2001. MANAGER'S REPORT BY JAMES K. HO, CFA, PORTFOLIO MANAGER John Hancock Income Securities Trust During 2001, the broad bond market outpaced stocks for the second consecutive year. An economic recession, a volatile stock market and a Federal Reserve Board aggressively cutting interest rates combined to produce a backdrop that, in general, was favorable to bonds. Investment-grade corporate bonds led the pack in terms of performance with government agency issues such as mortgage-backed securities coming in a close second. FUND PERFORMANCE For the 12 months ended December 31, 2001, John Hancock Income Securities Trust produced a total return of 8.26% at net asset value, compared with the 7.48% return of the average open-end corporate debt A-rated fund, according to Lipper, Inc. The Fund's benchmark index, the Lehman Brothers Goverment/Credit Bond Index, returned 8.50% in the same period. FED PUSHES RATES TO 40-YEAR LOW Over the year, the Fed lowered interest rates 11 times to help the ailing economy. This pushed the federal funds rate -- the interest rate banks charge each other for overnight loans -- to 1.75%, the lowest level this key indicator has been since 1961. "...the broad bond market outpaced stocks for the second consecu- tive year." The economy was already teetering on recession prior to September 11, and slumped into one immediately after. High-quality bonds, particularly Treasury securities, were in high demand during the following weeks. On October 31, the U.S. Treasury Department announced it would cease issuing 30-year bonds, which drove the prices of existing intermediate- and long-term Treasury issues even higher. November proved to be the most volatile month for Treasury securities in years. Better-than-expected economic reports caused investors to fear that the Fed might be nearing the end of its rate-cutting campaign and Treasury yields, which move in the opposite direction of price, soared. Then, upon the bankruptcy of Enron, investors fled to quality bonds again, reversing the price slide of Treasury issues. The Fund owned Treasury securities across the maturity spectrum, though we trimmed our exposure slightly over the year. [A photo of Team leader Jim Ho flush right next to first paragraph.] POSITIONS IN CORPORATE BONDS, MORTGAGE-BACKED SECURITIES INCREASED As we pared Treasury positions, we increased the weighting in mortgage-backed securities and other government agency issues. Mortgage-backed securities provided a healthy yield advantage over Treasury securities, helping boost the portfolio's income stream. We focused on issues that had relatively low prepayment risk. "Bonds in recession- resistant industries were well represented in the portfolio." We also selectively bolstered the Fund's stake in corporate bonds, primarily investment-grade issues. This required in-depth credit research, as problems abounded due to weak corporate profitability, a virtual halt in capital spending and investor wariness of certain sectors. The events of September 11 added to the woes of industries and companies already feeling the pinch of a slowing economy. Among the hardest hit were airlines, hotels and leisure-oriented companies. Where we could, we reduced the Fund's exposure to unsecured airline bonds. We held on to secured airline bonds because of the relatively greater degree of safety they offered in the sector, though they too came under considerable pressure. Cyclical issues, such as autos, paper and steel, also fared poorly in the immediate aftermath; however, many had rebounded by the year's end. On their recovery, we took the opportunity to pare positions in such companies as Georgia-Pacific and consumer finance companies such as Capital One Bank. However, we added to the Fund's Ford Motor Co. holdings, as new auto issues came to market, which led to better valuations in the sector. [Table at top left-hand side of page entitled "Top five sectors." The first listing is Government U.S. agencies 15%, the second is Government U.S. 13%, the third Utilities 11%, the fourth Banks 6%, and the fifth Mortgage banking 6%.] We decreased the Fund's weighting in high-yield bonds, due to economic weakness and financial distress, particularly among the telecommunications companies that depended on venture capital. These included credits such as NextLink, Global Crossing, Level 3 and Nextel Communications -- names we sold early in the year. [Pie chart in middle of page with heading "Portfolio diversification As a percentage of net assets on 12-31-01." The chart is divided into five sections (from top to left): U.S. government & agency bonds 28%, Foreign government bonds 2%, Corporate bonds 61%, Preferred stock 1% and Short-term investments & other 8%.] INVESTMENT-GRADE TELECOM AND MEDIA BONDS PERFORM WELL Telecommunication bonds in the investment-grade arena were a different story. We focused on fixed-line and wireless telephone companies that dominated their markets, such as Deutsche Telekom, AT&T Wireless and Singapore Telecommunications, all of which we added to or newly purchased. Media remained another industry in which solid performing bonds were found. We continued to have sizable positions in AOL Time Warner, Viacom and Continental Cablevision. Industry consolidation has made these players into market leaders with great potential for growth. [Table at top of page entitled "SCORECARD." The header for the left column is "INVESTMENT" and the header for the right column is "RECENT PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is ConAgra Foods followed by an up arrow with the phrase "Strong demand for high-quality, stable companies." The second listing is Lockheed Martin followed by an up arrow with the phrase "Increase in defense spending; new government contract." The third listing is AT&T Wireless followed by an up arrow with the phrase "Continued use of wireless services by consumers."] RECESSION-RESISTANT BONDS HOLD STEADY Bonds in recession-resistant industries were well represented in the portfolio. These include securities in health care, defense, supermarkets and utilities, although we sold many utility generation holdings once it became clear to us that Enron was headed for financial disaster. We eliminated or reduced Enron, Calpine, Mirant and NRG prior to the worst of their downturns, but the Fund did not completely escape the effects of the declines. "The current interest-rate cycle appears at an end, but we would not be surprised if the Fed cut rates one more time." The health-care industry has enjoyed a recovery this year with investment-grade and high-yield issues performing well. Among those worth mentioning are Triad Hospitals, Dynacare, Tenet Healthcare, and Hospital Corp. of America. In defense, Lockheed Martin was a stellar performer. The company was awarded the coveted joint strike fighter contract in October. OUTLOOK We anticipate that 2002 will bring an economic recovery, though it most likely will not gather steam until much later in the year. The current interest-rate cycle appears at an end, but we would not be surprised if the Fed cut rates one more time. Because uncertainty remains in so many industries, we shall choose what the Fund owns with great care. This commentary reflects the views of the portfolio manager through the end of the Fund's period discussed in this report. Of course, the manager's views are subject to change as market and other conditions warrant. FUND'S INVESTMENTS This schedule is divided into three main categories: publicly traded bonds, preferred stocks and warrants, and short-term investments. Publicly traded bonds are further broken down by industry group. Short-term investments, which represent the Fund's cash position, are listed last. Securities owned by the Fund on December 31, 2001
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE PUBLICLY TRADED BONDS 91.12% $159,488,606 (Cost $156,546,159) Aerospace 1.12% $1,965,737 BAE Systems Asset Trust, Pass Thru Ctf Ser 2001 Class B 12-15-11 (R) 7.156% A $646 660,025 Jet Equipment Trust, Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910 BB- 550 486,233 Lockheed Martin Corp., Bond 12-01-29 8.500 BBB- 685 819,479 Agricultural Operations 0.22% 392,886 Cargill, Inc., Note 05-01-06 (R) 6.250 A+ 380 392,886 Automobiles/Trucks 1.36% 2,375,398 DaimlerChrysler Auto Trust, Pass Thru Ctf Ser 2000-E Class A-4 01-08-06 6.160 AAA 855 897,015 Delphi Automotive Systems Corp., Note 06-15-06 6.550 BBB 310 307,877 ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 180 181,933 Note 06-15-08 (R) 7.350 BBB+ 320 321,280 Note 12-15-09 (R) 7.950 BBB+ 340 346,157 Ford Motor Co., Note 07-16-31 7.450 BBB+ 350 321,136 Banks 6.41% 11,217,353 Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 1,000 1,106,970 African Development Bank, Sub Note (Supra National) 12-15-03 (Y) 9.750 AA- 1,000 1,111,530 Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 650 661,336 Barclays Bank Plc, Perpetual Bond (7.375% to 12-29-11 then variable) (United Kingdom) 06-29-49 (R) (Y) 7.375 A+ 610 632,790 BNP Paribas Capital Trust, Perpetual Bond (9.003% to 10-27-10 then variable) 12-27-49 (R) 9.003 A 330 370,963 BSCH Issuances Ltd., Sub Note (Cayman Islands) 09-14-10 (Y) 7.625 A 345 362,916 Capital One Bank, Sr Note 02-01-06 6.875 BBB- 395 384,647 Colonial Bank, Sub Note 06-01-11 9.375 BBB- 325 339,518 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49 (Y) 8.817 A- 380 411,844 Perpetual Bond (7.648% to 09-30-31 then variable) (United Kingdom) 08-31-49 (Y) 7.648 A- 440 445,526 Scotland International Finance No. 2, B.V., Gtd Sub Note (United Kingdom) 01-27-04 (R) (Y) 8.800 AA- 2,000 2,201,360 Gtd Sub Note (United Kingdom) 11-01-06 (R) (Y) 8.850 AA- 750 862,732 Skandinaviska Enskilda Banken AB, Perpetual Bond (6.50% to 06-30-03 then variable) (Sweden) 12-29-49 (R) (Y) 6.500 BBB 395 405,246 UBS Preferred Funding Trust I, Perpetual Bond (8.622% to 10-01-10 then variable) 10-01-49 8.622 AA- 545 606,149 Wells Fargo Bank N.A., Sub Note 02-01-11 6.450 A+ 490 500,726 Zions Bancorp, Note (6.50% to 10-15-06 then variable) 10-15-11 (R) 6.500 BBB- 345 338,100 Zions Financial Corp., Note (6.95% to 05-15-06 then variable) 05-15-11 6.950 BBB- 475 475,000 Beverages 0.26% 461,150 Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 460 461,150 Broker Services 0.66% 1,162,744 Citigroup, Inc., Note 01-18-11 6.500 AA- 335 345,107 Goldman Sachs Group, Inc., Bond 01-15-11 6.875 A+ 485 499,899 Salomon Smith Barney Holdings, Inc., Note 03-15-06 5.875 AA- 310 317,738 Building 0.14% 246,360 Vulcan Materials Co., Note 02-01-06 6.400 A+ 240 246,360 Business Services -- Misc. 0.38% 667,200 Cendant Corp., Note 08-15-06 (R) 6.875 BBB 695 667,200 Chemicals 0.73% 1,284,585 Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 325 335,061 Equistar Chemicals L.P./Equistar Funding Corp., Note 02-15-04 8.500 BBB- 350 348,579 Potash Corp. of Saskatchewan, Inc., Note (Canada) 05-31-11 (Y) 7.750 BBB+ 565 600,945 Cosmetics & Personal Care 0.16% 276,313 International Flavors & Fragrance, Inc., Note 05-15-06 6.450 BBB+ 270 276,313 Energy 0.56% 972,978 CalEnergy Co., Inc., Sr Bond 09-15-28 8.480 BBB- 550 579,370 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B+ 367 393,608 Finance 4.85% 8,490,195 American Express Credit Account Master Trust, Pass Thru Ctf Ser 2000-1 Class A 09-17-07 7.200 AAA 855 922,861 Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 520 520,260 Ford Motor Credit Co., Note 01-15-03 7.250 BBB+ 495 507,900 Note 02-01-06 6.875 BBB+ 415 414,855 Note 10-25-11 7.250 BBB+ 345 336,002 General Motors Acceptance Corp., Note 07-15-05 7.500 BBB+ 515 535,379 Note 03-02-11 7.250 BBB+ 350 352,495 Household Finance Corp., Note 05-09-05 8.000 A 645 693,962 HSBC Capital Funding LP, Perpetual Bond (9.547% to 06-30-10 then variable) (Channel Islands) 12-31-49 (R) (Y) 9.547 A- 610 704,519 ING Capital Funding Trust III, Perpetual Bond (8.439% to 12-31-10 then variable) 12-31-49 8.439 A 365 398,580 MBNA Master Credit Card Trust II, Pass Thru Ctf Ser 2000-A Class A 07-16-07 7.350 AAA 865 932,306 Standard Credit Card Master Trust, Series 1995-1 (Class A) 01-07-07 8.250 AAA 1,225 1,354,384 U.S. Bank N.A., Note 08-01-11 6.375 A 470 476,148 Yanacocha Receivables Master Trust, Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 339 340,544 Food 1.11% 1,941,286 ConAgra Foods, Inc., Note 09-15-11 6.750 BBB+ 485 498,439 Sub Note 09-15-04 7.400 BBB 355 380,095 Delhaize America, Inc., Note 04-15-11 8.125 BBB- 475 518,021 Earthgrains Co. (The), Note 08-01-03 8.375 A+ 510 544,731 Government -- Foreign 2.14% 3,747,902 Chile, Republic of, Bond (Chile) 01-11-12 (Y) 7.125 A- 345 354,650 Colombia, Republic of, Bond (Colombia) 04-09-11 (Y) 9.750 BBB 460 482,315 Nova Scotia, Province of, Deb (Canada) 04-01-22 (Y) 8.750 A- 750 940,875 Ontario, Province of, Bond (Canada) 06-04-02 (Y) 7.750 AA 500 511,915 Quebec, Province of, Deb (Canada) 09-15-29 (Y) 7.500 A+ 735 821,686 Saskatchewan, Province of, Bond (Canada) 12-15-20 (Y) 9.375 A+ 480 636,461 Government -- U.S. 12.80% 22,398,640 United States Treasury, Bond 08-15-17 8.875 AAA 1,215 1,614,055 Bond 08-15-25 6.875 AAA 2,840 3,238,480 Bond 02-15-31 5.375 AAA 3,370 3,321,034 Inflation Indexed Note 01-15-07 3.375 AAA 2,558 2,564,030 Note 08-15-03 5.750 AAA 365 382,279 Note 02-15-05 7.500 AAA 3,190 3,528,427 Note 07-15-06 7.000 AAA 3,609 3,990,183 Note 05-15-08 5.625 AAA 520 544,783 Note 08-15-10 5.750 AAA 3,065 3,215,369 Government -- U.S. Agencies 14.77% 25,856,659 Federal Home Loan Mortgage Corp., 20 Yr Pass Thru Ctf 01-01-16 11.250 AAA 118 132,596 Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 50 52,188 15 Yr Pass Thru Ctf 09-01-10 7.000 AAA 294 306,152 15 Yr Pass Thru Ctf 09-01-12 7.000 AAA 81 84,453 15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 670 688,349 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 1,140 1,131,650 15 Yr Pass Thru Ctf 07-01-15 7.000 AAA 289 299,841 30 Yr Pass Thru Ctf 05-01-16 6.000 AAA 645 647,264 30 Yr Pass Thru Ctf 10-01-23 7.000 AAA 340 348,187 30 Yr Pass Thru Ctf 11-01-28 6.500 AAA 209 209,998 30 Yr Pass Thru Ctf 06-01-30 7.500 AAA 454 468,629 30 Yr Pass Thru Ctf 02-01-31 7.500 AAA 997 1,029,159 30 Yr Pass Thru Ctf 05-01-31 6.000 AAA 342 335,136 30 Yr Pass Thru Ctf 12-01-31 7.000 AAA 440 448,765 Federal National Mortgage Assn., Benchmark Note 01-15-30 7.125 AAA 4,315 4,788,312 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 308 323,422 Financing Corp., Bond 02-08-18 9.400 AAA 2,000 2,662,500 Government National Mortgage Assn., 30 Yr SF Pass Thru Ctf 09-15-28 to 12-15-31 6.500 AAA 7,175 7,215,902 30 Yr SF Pass Thru Ctf 11-15-28 to 08-15-31 7.000 AAA 3,046 3,118,281 30 Yr SF Pass Thru Ctf 09-15-29 7.500 AAA 976 1,011,107 30 Yr SF Pass Thru Ctf 07-15-30 8.000 AAA 138 144,997 30 Yr SF Pass Thru Ctf 04-15-21 9.000 AAA 131 141,485 30 Yr SF Pass Thru Ctf 11-15-19 to 02-15-25 9.500 AAA 182 198,385 30 Yr SF Pass Thru Ctf 11-15-20 10.000 AAA 63 69,901 Insurance 1.90% 3,322,705 AXA SA, Sub Note (France) 12-15-30 (Y) 8.600 A- 510 574,234 Equitable Life Assurance Society USA, Surplus Note 12-01-05 (R) 6.950 A+ 250 262,693 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 485 509,735 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 500 520,095 Nationwide Mutual Insurance Co., Notes 12-01-31 (R) 8.250 A- 330 327,782 Sun Canada Financial Co., Sub Note 12-15-07 (R) 6.625 AA- 725 741,312 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 AA+ 355 386,854 Leisure 0.75% 1,311,601 Harrah's Operating Co., Inc., Gtd Note 06-01-07 7.125 BBB- 485 491,741 Sr Sub Note 12-15-05 7.875 BB+ 260 269,750 HMH Properties, Inc., Sr Note Ser A 08-01-05 7.875 BB 345 327,750 Waterford Gaming LLC, Sr Note 03-15-10 (R) 9.500 B+ 218 222,360 Media 5.70% 9,977,973 Adelphia Communications Corp., Sr Note Ser B 10-01-02 9.250 B+ 550 552,750 Sr Note Ser B 07-15-03 8.125 B+ 280 278,600 AOL Time Warner, Inc., Bond 04-15-31 7.625 BBB+ 525 555,602 British Sky Broadcasting Group Plc, Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 715 738,459 Century Communications Corp., Sr Note 03-01-05 9.500 B+ 220 216,700 Charter Communications Holdings, LLC/Charter Communications Holdings Capital Corp., Sr Note 01-15-11 11.125 B+ 135 143,100 Sr Note 05-15-11 10.000 B+ 230 234,600 Clear Channel Communications, Inc., Note 06-15-05 7.875 BBB- 650 680,569 Comcast Cable Communications, Inc., Sr Note 01-30-11 6.750 BBB 515 517,008 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 BBB+ 595 653,268 CSC Holdings, Inc., Sr Sub Deb 05-15-16 10.500 BB- 235 262,025 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 265 271,625 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 275 266,750 Grupo Televisa S.A., Note (Mexico) 09-13-11 (R) (Y) 8.000 BB+ 215 215,000 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 345 374,636 Mediacom LLC/Mediacom Capital Corp., Sr Note 01-15-13 9.500 B+ 100 103,250 Sr Note Ser B 04-15-08 8.500 B+ 180 180,900 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 225 235,917 News America, Inc., Gtd Sr Note 04-30-28 7.300 BBB- 325 302,630 Rogers Cablesystems Ltd., Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 BBB- 445 480,600 Sabre Holdings Corp., Note 08-01-11 7.350 BBB+ 170 157,250 TCI Communications, Inc., Sr Deb 02-15-26 7.875 BBB+ 365 387,524 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 434 513,600 Univision Communications, Inc., Gtd Sr Note 07-15-11 7.850 BB+ 520 532,740 Viacom, Inc., Gtd Sr Note 01-30-06 6.400 A- 525 543,296 Gtd Sr Deb 07-30-30 7.875 A- 525 579,574 Medical 1.40% 2,445,990 Dynacare, Inc., Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 430 455,800 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 405 409,050 HCA - The Healthcare Co., Note 09-01-10 8.750 BB+ 235 254,388 Note 06-01-06 7.125 BB+ 495 502,672 HEALTHSOUTH Corp., Sr Note 02-01-08 8.500 BBB- 265 276,925 Quest Diagnostics, Inc., Sr Note 07-12-06 6.750 BBB- 355 364,280 Triad Hospitals, Inc., Sr Note Ser B 05-01-09 8.750 B- 175 182,875 Metal 0.19% 329,007 Newmont Mining Corp., Note 05-15-11 8.625 BBB 325 329,007 Mortgage Banking 6.16% 10,778,969 Asset Securitization Corp., Pass Thru Ctf Ser 1997-D4 Class A-1B 04-14-29 7.400 AAA 890 947,155 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 594 621,000 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 628 628,473 Credit Suisse First Boston Mortgage Securities Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 12-17-07 6.260 AAA 1,019 1,044,265 Deutsche Mortgage & Asset Receiving Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class C 03-15-08 6.861 A2 415 421,355 FirstPlus Home Loan Trust, Pass Thru Ctf Ser 1998-4 Class A-5 01-10-18 6.380 AAA 215 215,591 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.411 Aaa 1,425 1,464,375 LB Commercial Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 614 636,883 Morgan (J.P.) Commercial Mortgage Finance Corp., Mtg Pass Thru Ctf Ser 1997-C5 Class A2 09-15-29 7.069 AAA 640 674,827 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 1,555 1,633,838 Morgan Stanley Dean Witter Capital I Trust, Pass Thru Ctf Ser 2001-IQA Class A-1 12-18-32 4.570 Aaa 1,563 1,541,755 Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 205 205,237 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 7.180 AAA 710 744,215 Oil & Gas 4.25% 7,434,758 Alberta Energy Co., Ltd., Note (Canada) 09-15-30 (Y) 8.125 BBB+ 370 395,893 Note (Canada) 11-01-31 (Y) 7.375 BBB+ 355 348,642 Amerada Hess Corp., Note 08-15-11 6.650 BBB 580 580,313 Apache Finance Canada Corp., Gtd Note (Canada) 12-15-29 (Y) 7.750 A- 355 390,962 Forest Oil Corp., Sr Note 06-15-08 8.000 BB 210 211,050 Louis Dreyfus Natural Gas Corp., Sr Note 12-01-07 6.875 BBB+ 345 356,640 Nova Chemicals Corp., Sr Note (Canada) 05-15-06 (Y) 7.000 BBB- 345 325,414 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB 600 722,274 Sr Note 01-15-07 5.875 BBB 340 337,076 Sr Note 01-15-12 6.750 BBB 350 351,425 Ocean Energy, Inc., Sr Sub Note Ser B 07-15-07 8.875 BB+ 265 278,825 Pemex Project Funding Master Trust, Bond 10-13-10 9.125 BB+ 700 738,500 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 (Y) 7.125 BBB- 175 128,888 Snyder Oil Corp., Sr Sub Note 06-15-07 8.750 BBB 290 303,099 Tosco Corp., Note 02-15-30 8.125 BBB+ 680 788,018 Union Pacific Resources Group, Inc., Deb 05-15-28 7.150 BBB+ 555 554,750 Valero Energy Corp., Note 06-15-05 8.375 BBB 210 225,091 Note 03-15-06 7.375 BBB 380 397,898 Paper & Paper Products 1.30% 2,265,801 Georgia-Pacific Corp., Note 05-15-06 7.500 BBB- 320 317,277 International Paper Co., Note 07-08-05 8.125 BBB 520 559,047 Stone Container Corp., Sr Note 02-01-11 9.750 B 285 306,375 Stora Enso Oyj, Sr Note (Finland) 05-15-11 (Y) 7.375 BBB+ 535 561,750 Weyerhaeuser Co., Note 08-01-06 6.000 A- 520 521,352 Real Estate Operations 0.12% 207,284 EOP Operating L.P., Note 02-15-05 6.625 BBB+ 200 207,284 Real Estate Investment Trusts 1.33% 2,336,092 American Health Properties, Inc., Note 01-15-07 7.500 BBB+ 270 273,038 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB 380 390,712 Camden Property Trust, Note 04-15-04 7.000 BBB 420 438,299 Healthcare Realty Trust, Inc., Sr Note 05-01-11 8.125 BBB- 325 336,261 iStar Financial, Inc., Sr Note 08-15-08 8.750 BB+ 135 135,675 Liberty Property L.P., Medium Term Note 06-05-02 6.600 BBB 355 359,974 ProLogis Trust, Note 04-15-04 6.700 BBB+ 390 402,133 Retail 0.50% 872,076 Kroger Co., Sr Note 04-01-11 6.800 BBB- 555 565,739 Toys "R" Us, Inc., Note 08-01-11 (R) 7.625 BBB+ 315 306,337 Telecommunications 5.97% 10,454,866 AT&T Corp., Sr Note (Coupon rate Step-up/down on rating) 11-15-31 (R) 8.000 BBB+ 415 434,136 AT&T Wireless Services, Inc., Sr Note 03-01-31 8.750 BBB 685 778,975 Cingular Wireless, Bond 12-15-31 (R) 7.125 A+ 350 350,350 Citizens Communications Co., Note 05-15-06 8.500 BBB 675 717,376 Deutsche Telekom International Finance B.V., Bond (Coupon rate Step-up/down on rating) (Netherlands) 06-15-05 (Y) 7.750 A- 300 321,087 Bond (Coupon rate Step-up/down on rating) (Netherlands) 06-15-30 (Y) 8.250 A- 515 571,599 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 545 599,315 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 425 431,749 MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A) (Y) Zero BBB 355 191,700 Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 280 198,800 Qwest Capital Funding, Inc., Note 02-15-11 7.250 BBB+ 515 502,388 Singapore Telecommunications Ltd., Bond (Coupon rate Step-up/down on rating) (Singapore) 12-01-31 (R) (Y) 7.375 AA- 385 390,294 Sprint Capital Corp., Note 01-30-06 7.125 BBB+ 670 698,475 Note 11-15-28 6.875 BBB+ 695 635,710 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 01-26-06 (Y) 8.250 BB+ 705 738,487 Telus Corp., Note (Canada) 06-01-11 (Y) 8.000 BBB+ 520 548,028 Verizon Global Funding Corp., Note 12-01-30 7.750 A+ 690 765,307 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 295 351,050 WorldCom, Inc., Note 05-15-06 8.000 BBB+ 635 681,736 Note 05-15-31 8.250 BBB+ 520 548,304 Transportation 2.55% 4,461,452 America West Airlines, Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 B+ 352 264,248 Burlington Northern Santa Fe Corp., Deb 08-15-30 7.950 BBB+ 690 772,807 Continental Airlines, Inc., Pass Thru Ctf Ser 1996-C 10-15-13 9.500 BBB- 407 325,691 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA 589 507,951 Delta Air Lines, Inc., Note 12-15-05 7.700 BB 30 27,000 Humpuss Funding Corp., Note 12-15-09 (R) 7.720 B3 201 144,747 Northwest Airlines 1996-1 Pass Through Trusts, Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BB 150 137,701 Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BB+ 351 281,051 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 517 523,854 Railcar Trust No. 1992-1, Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 678 711,319 U.S. Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 B 496 332,254 United Airlines, Inc., Pass Thru Ctf Ser 2000-2 04-01-12 7.032 AA 459 432,829 Utilities 11.33% 19,832,646 AES Corp., Sr Note 06-01-09 9.500 BB 215 189,200 Sr Sub Note 07-15-06 10.250 B+ 460 423,200 AES Eastern Energy L.P., Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 410 382,370 Beaver Valley Funding Corp., Sec Lease Oblig Bond 06-01-17 9.000 BBB- 463 500,248 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BBB- 700 761,656 Calpine Corp., Sr Note 05-15-06 10.500 BB+ 220 203,500 Chugach Electric Association, Inc., 1st Mtg Bond 1991 Ser A 03-15-22 9.140 A 2,000 2,200,240 Cleveland Electric Illuminating Co., 1st Mtg Bond Ser B 05-15-05 9.500 BBB 1,205 1,229,100 CMS Energy Corp., Sr Note 10-15-07 9.875 BB 40 42,400 Sr Note Ser B 01-15-04 6.750 BB 400 392,172 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 635 682,625 Exelon Generation Co., LLC, Sr Note 06-15-11 (R) 6.950 A- 510 515,875 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 366 377,698 HQI Transelect Chile SA, Sr Note (Chile) 04-15-11 (Y) 7.875 A- 510 522,842 Hydro-Quebec, Gtd Bond Ser HY (Canada) 01-15-22 (Y) 8.400 A+ 340 408,476 Gtd Deb Ser IF (Canada) 02-01-03 (Y) 7.375 A+ 750 789,585 Iberdrola International B.V., Note 10-01-02 7.500 A+ 2,000 2,067,900 KeySpan Corp., Note 11-15-10 7.625 A 520 564,689 Long Island Lighting Co., Deb 03-15-23 8.200 A- 640 660,800 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 1,010 1,116,050 Deb Ser B 07-23-06 13.250 BB+ 225 262,125 Monterrey Power S.A. de C.V., Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 140 145,454 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 Baa2 752 790,172 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 95 101,006 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 480 470,400 Pinnacle West Capital Corp., Sr Note 04-01-06 6.400 BBB 475 480,500 PNPP II Funding Corp., Deb 05-30-16 9.120 BBB- 495 550,702 PSEG Energy Holdings, Inc., Sr Note 02-15-08 8.625 BBB- 340 342,213 Republic Services, Inc., Sr Note 08-15-11 6.750 BBB 520 521,004 Sierra Pacific Resources, Note 05-15-05 8.750 BBB- 230 234,402 TIERS-MIR-2001-14, Fixed Rate Ctf 06-15-04 (R) 7.200 BBB- 645 583,725 Waterford 3 Funding Corp., Sec Lease Obligation Bond 01-02-17 8.090 BBB- 787 806,308 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 510 514,009 NUMBER OF SHARES OR ISSUER, DESCRIPTION, WARRANTS VALUE PREFERRED STOCKS AND WARRANTS 1.34% $2,351,467 (Cost $2,317,617) California Federal Preferred Capital Corp., 9.125%, Ser A, Preferred Stock 37,160 928,628 CSC Holdings, Inc., 11.125%, Ser M, Preferred Stock 9,029 943,531 CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 4,076 430,018 MetroNet Communications Corp., Warrant (Canada) (R) (Y) ** 530 49,290 INTEREST PAR VALUE ISSUER, DESCRIPTION, MATURITY DATE RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 5.39% $9,426,000 (Cost $9,426,000) Joint Repurchase Agreement 5.39% Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds 9.875% due 11-15-15 and 8.750% due 05-15-17, U.S. Treasury Notes 5.625% due 12-31-02 and 6.250% due 02-15-03, U.S. Treasury Inflation Index Bond 3.375% due 04-15-32 and U.S. Treasury Inflation Index Note 3.375% due 01-15-07) 1.700% $9,426 9,426,000 TOTAL INVESTMENTS 97.85% $171,266,073 OTHER ASSETS AND LIABILITIES, NET 2.15% $3,762,988 TOTAL NET ASSETS 100.00% $175,029,061 (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $16,484,969 or 9.42% of the Fund's net assets as of December 31, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is U.S. dollar denominated. * Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, LLC where Standard & Poor's ratings are not available. ** Non-income producing security. 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.
ASSETS AND LIABILITIES December 31, 2001 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 $168,289,776) $171,266,073 Cash 1,240,686 Dividends and interest receivable 2,872,790 Other assets 14,327 Total assets 175,393,876 LIABILITIES Payable to affiliates 272,018 Other payables and accrued expenses 92,797 Total liabilities 364,815 NET ASSETS Capital paid-in 174,131,001 Accumulated net realized loss on investments (2,068,088) Net unrealized appreciation of investments 2,976,297 Distributions in excess of net investment income (10,149) Net assets $175,029,061 NET ASSET VALUE PER SHARE Based on 10,898,374 common shares outstanding $16.06 OPERATIONS For the year ended December 31, 2001 This Statement of Operations summarizes the Fund's invest- ment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. INVESTMENT INCOME Interest (including income on securities loaned of $38,438) $12,016,216 Dividends 200,578 Total investment income 12,216,794 EXPENSES Investment management fee 1,069,903 Transfer agent fee 124,836 Custodian fee 66,506 Accounting and legal services fee 35,715 Auditing fee 35,000 New York Stock Exchange fee 33,250 Printing 24,617 Trustees' fee 9,494 Miscellaneous 3,519 Legal fee 1,975 Total expenses 1,404,815 Net investment income 10,811,979 REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 4,385,391 Change in net unrealized appreciation (depreciation) of investments (2,125,785) Net realized and unrealized gain 2,259,606 Increase in net assets from operations $13,071,585 CHANGES IN NET ASSETS This Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous period. The dif- ference reflects earnings less expenses, any investment gains and losses, dis- tributions paid to shareholders, if any, and any increase due to reinvestment of distributions. YEAR YEAR ENDED ENDED 12-31-00 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $11,497,402 $10,811,979 Net realized gain (loss) (2,920,491) 4,385,391 Change in net unrealized appreciation (depreciation) 8,740,097 (2,125,785) Increase in net assets resulting from operations 17,317,008 13,071,585 Distributions to shareholders From net investment income (11,515,246) (11,092,817) From fund share transactions 1,266,845 1,162,518 NET ASSETS Beginning of period 164,819,168 171,887,775 End of period 1 $171,887,775 $175,029,061 1 Includes undistributed net investment income of $25,036 and distributions in excess of net investment income of $10,149, respectively.
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 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $16.20 $16.55 $16.64 $15.37 $15.89 Net investment income 1.20 1.14 1.10 1.07 1.00 Net realized and unrealized gain (loss) on investments 0.35 0.09 (1.27) 0.52 0.19 Total from investment operations 1.55 1.23 (0.17) 1.59 1.19 Less distributions From net investment income (1.20) (1.14) (1.10) (1.07) (1.02) Net asset value, end of period $16.55 $16.64 $15.37 $15.89 $16.06 Per share market value, end of period $16.75 $15.88 $12.69 $14.44 $14.65 Total return at market value 2 (%) 21.57 1.75 (13.42) 23.06 8.69 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $174 $177 $165 $172 $175 Ratio of expenses to average net assets (%) 0.84 0.81 0.80 0.84 0.80 Ratio of net investment income to average net assets (%) 7.34 6.79 6.88 6.89 6.17 2 Portfolio turnover (%) 143 240 184 248 299 1 As required, effective January 1, 2001 the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. The effect of this change 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 amortized premiums on debt securities, the annualized 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. 2 Assumes dividend reinvestment.
NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Income Securities Trust (the "Fund") is a closed-end diversified investment management company registered under the Investment Company Act of 1940. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. 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. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At December 31, 2001, the Fund loaned securities having a market value of $28,200,000 collateralized by securities in the amount of $28,343,735. 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 which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $1,724,595 of capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent such a carryforward is used by the Fund, no capital gain distributions will be made. The carryforward expires as follows: December 31, 2008 -- $1,724,595. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date. Interest income on investment securities is recorded on the accrual basis. The Fund records distributions to shareholders from net investment income and realized gains on the ex- dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 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, (b) 0.375% of the next $50,000,000, (c) 0.350% of the next $100,000,000 and (d) 0.300% of the Fund's average weekly net asset value in excess of $300,000,000. In the event normal operating expenses of the Fund, exclusive of taxes, interest, brokerage commissions and extraordinary expenses, exceed 1.5% of the first $30,000,000 of the Fund's average weekly net asset value and 1.0% of the Fund's average weekly net asset value in excess of $30,000,000, the fee payable to the Adviser will be reduced to the extent of such excess, and the Adviser will make additional arrangements necessary to eliminate any remaining excess expenses. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of Fund shares reinvested, the reclassification of capital accounts and the number of shares outstanding at the beginning and end of the last two periods, along with the corresponding dollar value. The Fund has 30 million shares authorized with no par value. YEAR ENDED 12-31-00 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT Beginning of period 10,726,230 $172,310,709 10,819,590 $173,576,723 Distributions reinvested 93,360 1,266,845 78,784 1,162,518 Reclassification of capital accounts -- (831) -- (608,240) End of period 10,819,590 $173,576,723 10,898,374 $174,131,001 NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2001, aggregated $309,981,980 and $296,702,109, respectively. Purchases and proceeds from sales of obligations of the U.S. government aggregated $181,640,163 and $194,415,008, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $169,223,934. Gross unrealized appreciation and depreciation of investments aggregated $4,420,250 and $2,378,111, respectively, resulting in net unrealized appreciation of $2,042,139. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect an increase in accumulated net realized loss on investments of $471,687, a decrease in distributions in excess of net investment income of $1,079,927 and a decrease in capital paid-in of $608,240. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of December 31, 2001. 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. The calculation of net investment income per share in the financial highlights excludes these adjustments. NOTE F Change in accounting principle Effective January 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. Prior to this date, the Fund did not amortize premiums on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $834,274 reduction in the cost of investments and a corresponding increase in net unrealized appreciation, based on securities held as of December 31, 2000. The effect of this change for the year ended December 31, 2001 was to decrease net investment income by $228,613, decrease unrealized appreciation on investments by $243,611 and increase net realized gain on investments by $472,224. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in presentation. AUDITORS' REPORT Report of Ernst & Young LLP, Independent Auditors To the Board of Trustees and Shareholders of John Hancock Income Securities Trust We have audited the accompanying statement of assets and liabilities of the John Hancock Income Securities Trust (the "Fund"), including the schedule of the Fund's investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock Income Securities Trust at December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Boston, Massachusetts February 8, 2002 TAX INFORMATION Unaudited For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund during its fiscal year ended December 31, 2001. With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2001, 1.82% of the dividends qualify for the corporate dividends-received deduction. DIVIDENDS AND DISTRIBUTIONS During the fiscal year ended December 31, 2001, John Hancock Income Securities Trust (the "Fund") paid to shareholders dividends from net investment income totaling $ 1.0225 per share. The dates of payment and the amounts per share are as follows: INCOME PAYMENT DATE DIVIDEND ----------------------------- March 30, 2001 $0.2575 June 29, 2001 0.2550 September 28, 2001 0.2600 December 28, 2001 0.2500 INVESTMENT OBJECTIVE AND POLICY The Fund is a closed-end diversified investment management company, shares of which were initially offered to the public on February 14, 1973 and are publicly traded on the New York Stock Exchange. Its investment objective is to generate a high level of current income consistent with prudent investment risk. The Fund invests in a diversified portfolio of freely marketable debt securities and may invest an amount not exceeding 20% of its assets in income-producing preferred and common stock. 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 use option contracts to manage its exposure to the stock market. The Fund may buy and sell financial futures contracts to hedge against the effects of fluctuations in interest rates and other market conditions. 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. 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 Automatic Dividend Reinvestment Plan. On November 20, 2001, the Trustees approved the following investment policy change effective December 15, 2001: 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. In addition, the Fund will notify shareholders at least 60 days prior to any change in this 80% investment policy. FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures contracts and options on futures contracts to hedge against the effects of fluctuations in interest rates and other market conditions. The Fund's ability to hedge successfully will depend on the Adviser's ability to predict accurately the future direction of interest rate changes and other market factors. There is no assurance that a liquid market for futures and options will always exist. In addition, the Fund could be prevented from opening, or realizing the benefits of closing out, a futures or options position because of position limits or limits on daily price fluctuations imposed by an exchange. The Fund will not engage in transactions in futures contracts and options on futures for speculation, but only for hedging or other permissible risk management purposes. All of the Fund's futures contracts and options on futures will be traded on an U.S. commodity exchange or board of trade. The Fund will not engage in a transaction in futures or options on futures if, immediately thereafter, the sum of initial margin deposits on existing positions and premiums paid for options on futures would exceed 5% of the Fund's total assets. DIVIDEND REINVESTMENT PLAN The Fund offers shareholders the opportunity to elect to receive shares of the Fund's common shares in lieu of cash dividends. Any shareholder of record of the Fund may elect to participate in the Automatic Dividend Reinvestment Plan (the "Plan") and receive the Fund's common shares in lieu of all or a portion of the cash dividends. The Plan is available to all shareholders without charge. Shareholders may join the Plan by filling out and mailing an authorization card showing an election to reinvest all or a portion of dividend payments. If received in proper form by State Street Bank and Trust Company, P.O. Box 8209, Boston, Massachusetts 02266-8209 (the "Agent Bank") not later than seven business days before 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, bank or nominee to participate in the Plan. Participation in the Plan may be terminated at any time by written notice to the Agent Bank and such termination will be effective immediately. However, notice of termination must be received seven days 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 Agent Bank. A shareholder will receive a cash payment for any fractional share held. The Agent Bank will act as agent for participating shareholders. The Board of Trustees of the Fund will declare dividends from net investment income payable in cash or, in the case of shareholders participating in the Plan, partially or entirely in the Fund's common shares. The number of shares to be issued for the benefit of each shareholder will be determined by dividing the amount of the cash dividend otherwise payable to such shareholder on shares included under the Plan by the per share net asset value of the common shares on the date for payment of the dividend, unless the net asset value per share on the payment date is less than 95% of the market price per share on that date, in which event the number of shares to be issued to a shareholder will be determined by dividing the amount of the cash dividend payable to such shareholder by 95% of the market price per share of the common shares on the payment date. The market price of the common shares on a particular date shall be the mean between the highest and lowest sales price on the New York Stock Exchange on that date. Net asset value will be determined in accordance with the established procedures of the Fund. However, if as of such payment date the market price of the common shares is lower than such net asset value per share, the number of shares to be issued will be determined on the basis of such market price. Fractional shares, carried out to three decimal places, will be credited to your account. Such fractional shares will be entitled to future dividends. The shares issued to participating shareholders, including fractional shares, will be held by the Agent Bank in the name of the participant. A confirmation will be sent to each shareholder promptly, normally within 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. The reinvestment of dividends does not in any way relieve participating shareholders of any federal, state or local income tax, which may be due with respect to such dividend. Dividends reinvested in shares will be treated on your federal income tax return as though you had received a dividend in cash in an amount equal to the fair market value of the shares received, as determined by the prices for shares of the Fund on the New York Stock Exchange as of the dividend payment date. Distributions from the Fund's long-term capital gains will be processed as noted above for those electing to reinvest in 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, State Street Bank and Trust Company, at P.O. Box 8209, Boston, Massachusetts 02266-8209, (telephone 1-800-426-5523). 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: State Street Bank and Trust Company P.O. Box 8200 Boston, Massachusetts 02266-8200 Telephone: 1-800-426-5523 If your shares are held with a brokerage firm, you should contact that firm, bank or other nominee for assistance. Shareholder meeting (unaudited) On March 29, 2001, the Annual Meeting of the Fund was held to elect eleven Trustees and to ratify the actions of the Trustees in selecting independent auditors for the Fund. The shareholders elected the following Trustees to serve until their respective successors are duly elected and qualified, with the votes tabulated as follows: WITHHELD FOR AUTHORITY ------------------------------------------------- Dennis S. Aronowitz 9,171,177 379,791 Stephen L. Brown 9,278,193 272,774 Richard P. Chapman, Jr. 9,333,448 217,519 William J. Cosgrove 9,338,413 212,555 Richard A. Farrell 9,341,500 209,467 Maureen R. Ford 9,430,958 120,009 Gail D. Fosler 9,429,887 121,081 William F. Glavin 9,417,929 133,038 John A. Moore 9,425,929 125,038 Patti McGill Peterson 9,426,729 124,238 John W. Pratt 9,425,731 125,236 The shareholders also ratified the Trustees' selection of Ernst & Young LLP as the Fund's independent auditors for the fiscal year ending December 31, 2001, with the votes tabulated as follows: 9,193,846 FOR, 33,719 AGAINST and 323,403 ABSTAINING. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 1988 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1975 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 1991 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 1996 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 1994 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1996 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 1996 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 1996 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 1996 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer Executive Vice President, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1992 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1992 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; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates. FOR YOUR INFORMATION INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT AND REGISTRAR State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 STOCK SYMBOL Listed New York Stock Exchange: JHS For shareholder assistance refer to page 30 HOW TO CONTACT US On the Internet www.jhfunds.com By regular mail State Street Bank and Trust Company P.O. Box 8200 Boston, MA 02266-8200 Customer service representatives 1-800-426-5523 24-hour automated information 1-800-843-0090 [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner. A tag line below reads "JOHN HANCOCK FUNDS."] 1-800-426-5523 1-800-843-0090 www.jhfunds.com PRSRT STD U. S. Postage PAID S. Hackensack, NJ Permit No. 750 P600A 12/01 2/02