ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Income
Securities Trust
DECEMBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
================================================================================
--------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT AND REGISTRAR
STATE STREET BANK & TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
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
LISTED NEW YORK STOCK EXCHANGE SYMBOL: JHI
JOHN HANCOCK CLOSED-END FUNDS:
1-800-843-0090
--------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 were anything but dull. Bond investors enjoyed the
benefits of a strong economy with no inflation. Stock investors were treated to
record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances with relatively
minor swings, the stock market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round began in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had bounced back, yet it and many markets remained edgy and more
volatile as investors sorted out the Asian turmoil and its implications on
economic growth, interest rates and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
2
<PAGE>
================================================================================
BY JAMES K. HO, CFA, PORTFOLIO MANAGER
John Hancock
Income Securities Trust
Bond investors fared well in 1997
despite pockets of nerve-wracking volatility
Fiscal 1997 began last January amid an unsettled market environment as investors
speculated on whether or not the Federal Reserve Board would raise interest
rates to slow economic growth and head off inflation. Investor uncertainty
culminated in a brief period of market turbulence in late February and March as
investors reacted to the Fed's 0.25% increase in short-term rates.
Markets then regained their footing and moved forward with considerable
strength until midsummer, when leading indicators began to suggest that economic
growth was accelerating faster than anticipated and that higher inflation might
yet be on the way. Investors responded to the data in knee-jerk fashion, causing
bond prices to tumble and yields to rise across the board during much of August.
With September's arrival, investors' inflation fears had abated. Bond prices
turned upward yet again.
Meanwhile, Asia's currency woes had continued to quietly build steam
throughout the summer. Finally, the fiscal ills plaguing the Asian region boiled
over into world markets in late October and early November. U.S.
investment-grade corporate bonds, high-yield bonds, and emerging-market debt
issues took a drubbing as investors worldwide flocked to the safety of U.S.
Treasury securities. In fact, U.S. Treasuries rallied so tremendously that by
the Fund's fiscal year end, the yield on the bellwether 30-year Treasury bond
tested historic lows,
"...bonds wound up having a good year."
[A 2 1/4" x 3 3/4" photo of Fund management team at bottom right. Caption reads:
"Jim Ho (seated) and Fund management team members (l-r): Lester Duke, Beverly
Cleathero, Seth Robbins and Linda Carter."]
3
<PAGE>
================================================================================
John Hancock Funds - Income Securities Trust
Asian turmoil created a buying opportunity in corporate bonds.
ending at 5.92%. By the year's end, the U.S. corporate and high-yield markets
had also begun to regain their footing, as well. Overall, bonds wound up having
a good year.
For John Hancock Income Securities Trust, fiscal 1997 also wrapped up on
an attractive note. The Fund produced a strong total return of 10.29% at net
asset value, outperforming the average open-end corporate debt A-rated fund's
9.17% return, according to Lipper Analytical Services, Inc.
Duration and yield curve strategies pay off
While we generally try to avoid making duration adjustments and yield curve
positioning the focal points of our investment management, the strategies we
employed during the year contributed to the Fund's solid performance. Throughout
the period, we kept the Fund's average duration -- a measure of the Fund's
sensitivity to interest rate changes -- relatively short-to-neutral in
comparison to other comparable bond funds and its benchmark, the Lehman Brothers
Government/Corporate Bond Index. In doing so, we aligned the Fund's assets at
opposite ends of the yield curve -- a widely followed graph illustrating the
difference between short-term and long-term interest rates -- owning both
short-term and long-term securities. This positioning is known as a "barbell"
structure and helped the Fund as the yield curve flattened considerably during
the fiscal year. In fact, the difference in yield between the 2-year Treasury
note and the 30-year Treasury bond was only slightly more than a quarter of a
percentage point by fiscal year end.
As the period drew to a close, we adjusted duration to a more solidly
neutral position and shifted to a "bullet" strategy, redeploying assets in
intermediate-term securities, thereby matching the benchmark's duration more
closely. We have positioned the portfolio thus, believing the Fed will leave
interest rates alone or perhaps even cut short-term rates should corporate
profits come under pressure and the economy begin to slow as a result of Asia's
economic turmoil. This, in turn, would most likely result in a steepening of the
yield curve. Emphasizing intermediate-term securities, we believe, will best
serve the Fund should the yield curve begin to steepen in the months ahead.
Sector strengths
In pursuing a high level of current income consistent with prudent investment
risk, the Fund focuses on corporate bonds, while placing a secondary emphasis on
U.S. government and government agency securities. Investment-grade corporate
bonds comprise the bulk of the portfolio's net assets and, therefore, its
performance. However, each sector in which we chose to invest
[Chart entitled "Top Five Bond Sectors" at top left hand column. The chart lists
five sectors: 1) U.S. Government & Agencies 33%; 2) Banks & Financials 22%; 3)
Utilities 14%; 4) Media 7%; 5) Transportation 5%. A footnote below states "As a
percentage of net assets on December 31, 1997."]
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance ... and what's behind the numbers." The first listing is Nextel
Communications followed by an up arrow and the phrase "Strong demand for
wireless communications." The second listing is NB Capital Trust followed by a
horizontal arrow and the phrase "Callable bond structure hurt by declining
interest rates." The third listing is TCI, Inc. followed by an up arrow and the
phrase "Improvement in cable operations." Footnote below reads: "See "Schedule
of Investments." Investment holdings are subject to change."]
4
<PAGE>
================================================================================
John Hancock Funds - Income Securities Trust
provided the Fund with respectable performance at different times during the
year.
Exposure to emerging-market corporate bonds early in the fiscal year
proved fruitful; however, we gave back some, but not all, of the gains during
the carnage of late October/early November. Fortunately, we had discerned that
turbulence was mounting in the Asian nations and sold out of most positions in
that region during late summer, thereby avoiding much of the downturn.
Naturally, volatility spilled over into other emerging markets, such as Latin
America, in which the Fund had some exposure. We opportunistically sold out of
many positions there as well, anticipating further turmoil down the road.
As it became increasingly evident that investors worldwide were looking to
U.S. Treasury securities as the safest haven, we opted to increase our weighting
of U.S. Treasury issues slightly. On the other hand, the downward pressure that
Asia's turmoil placed on U.S. high-yield and investment-grade corporate bonds
also presented us with attractive buying opportunities in those groups.
Believing that the fundamentals of many U.S. corporations remain solid, we
bought on dips as selective credits grew more appealing on a valuation basis. We
added to such existing holdings as Time Warner and TCI Communications. After
conducting extensive research, we selectively purchased several high-yield
bonds, including Physicians Sales Service, Garden State News and Nextel
Communications. The three main industry sectors we emphasized in the corporate
arena included media, utilities and financial services, particularly banks.
Keeping a watchful eye on Asia
Current market conditions seem to suggest that bonds could continue to fare well
in the months ahead. The impact of Asia's currency crisis may begin to create a
drag on the U.S. economy in the form of "cheaper" export prices and lower
corporate profitability. This prospect, combined with Fed Chairman Greenspan's
recent remarks about the potential for deflation, hint at a classical bias
toward lower interest rates. Given such a possibility, we expect to maintain a
duration-neutral strategy and a "bullet" structure along the yield curve. We
also will continue to upgrade the overall portfolio by moving into industry
sectors we believe are less subject to the vagaries of the economy -- media,
utilities, and healthcare, for example. As always, selectivity will continue to
be emphasized in terms of credit quality and valuation.
"...bonds could continue to fare well in the months ahead."
- --------------------------------------------------------------------------------
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.
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1997." The chart is
scaled in increments of 2% from bottom to top, with 12% at the top and 0% at the
bottom. Within the chart, there are two solid bars. The first represents the
10.29% total return for John Hancock Income Securities Trust. The second
represents the 9.17% total return for the average open-end corporate debt
A-rated fund. The footnote below states: "The total return for John Hancock
Income Securities Trust is at net asset value with all distributions reinvested.
The average open-end corporate debt A-rated fund is tracked by Lipper Analytical
Services, Inc."]
5
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on December 31, 1997. You'll
also find the net asset value as of that date.
Statement of Assets and Liabilities
December 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Publicly traded bonds (cost - $164,797,375) .............. $ 170,103,583
Joint repurchase agreement (cost -$3,440,000) ............ 3,440,000
Corporate savings account ................................ 627
-------------
173,544,210
Receivable for investments sold .......................... 24,000
Interest receivable ...................................... 3,275,070
Other assets ............................................. 7,001
-------------
Total Assets ............................ 176,850,281
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ......................... 2,038,685
Dividend payable .......................................... 397,451
Payable for futures variation margin - Note A ............. 1,188
Payable to John Hancock Advisers, Inc. ....................
and affiliates - Note B .................................. 379,451
Accounts payable and accrued expenses ..................... 93,123
-------------
Total Liabilities ....................... 2,909,898
-----------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 169,114,379
Accumulated net realized loss on investments and
financial futures contracts .............................. (520,500)
Net unrealized appreciation of investments and
financial futures contracts .............................. 5,304,120
Undistributed net investment income ....................... 42,384
-------------
Net Assets .............................. $ 173,940,383
===========================================================
Net Asset Value Per Share:
(Based on 10,511,835 shares of beneficial
interest outstanding - 30 million shares
authorized with no par value) ............................ $16.55
=============================================================================
The 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.
Statement of Operations
Year ended December 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................... $14,015,985
------------
Expenses:
Investment management fee - Note B .......................... 1,054,986
Transfer agent fee - Note B ................................. 122,635
Printing .................................................... 78,754
Custodian fee ............................................... 63,521
Auditing fee ................................................ 36,500
Financial services fee - Note B ............................. 31,187
New York Stock Exchange fee ................................. 24,653
Trustees' fees .............................................. 13,497
Miscellaneous ............................................... 6,374
Legal fees .................................................. 2,544
------------
Total Expenses ............................ 1,434,651
-----------------------------------------------------------
Net Investment Income ..................... 12,581,334
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold ....................... (231,879)
Net realized loss on financial futures contracts ............ (36,589)
Change in net unrealized appreciation/depreciation
of investments ............................................. 4,042,558
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts ............. (3,313)
------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ............... 3,770,777
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................. $16,352,111
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ....................................................................... $12,617,557 $12,581,334
Net realized gain (loss) on investments sold and financial futures contracts ................ 342,684 (268,468)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts ............................................................... (5,805,120) 4,039,245
------------- -------------
Net Increase in Net Assets Resulting from Operations ...................................... 7,155,121 16,352,111
------------- -------------
Distributions to Shareholders:
Dividends from net investment income ($1.2175 and $1.2025 per share, respectively) .......... (12,614,747) (12,592,069)
------------- -------------
From Fund Share Transactions - Net:*
(Market value of shares issued in reinvestment of distributions) ............................ 1,688,062 1,219,573
------------- -------------
Net Assets:
Beginning of period ......................................................................... 172,732,332 168,960,768
------------- -------------
End of period (including undistributed net investment income of $53,119 and
$42,384, respectively) .................................................................... $168,960,768 $173,940,383
============= =============
* Analysis of Fund Share Transactions:
Shares outstanding, beginning of period ..................................................... 10,319,398 10,431,824
Shares issued to shareholders in reinvestment of distributions .............................. 112,426 80,011
------------- -------------
Shares outstanding, end of period ........................................................... 10,431,824 10,511,835
============= =============
</TABLE>
The 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 difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase due to reinvestment of distributions in the Fund.
The footnote illustrates the number of Fund shares outstanding at the beginning
of the period, reinvested and outstanding at the end of the period, for the last
two periods.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................... $16.31 $16.97 $15.10 $16.74 $16.20
-------- -------- -------- -------- --------
Net Investment Income ..................................... 1.31 1.28 1.26 1.22 1.20
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts ......................... 0.80 (1.79) 1.64 (0.54) 0.35
-------- -------- -------- -------- --------
Total from Investment Operations ...................... 2.11 (0.51) 2.90 0.68 1.55
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ...................... (1.32) (1.28) (1.26) (1.22) (1.20)
Distributions from Net Realized Gain on Investments Sold
and Financial Futures Contracts ......................... (0.13) (0.08) -- -- --
-------- -------- -------- -------- --------
Total Distributions ................................... (1.45) (1.36) (1.26) (1.22) (1.20)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ............................ $16.97 $15.10 $16.74 $16.20 $16.55
======== ======== ======== ======== ========
Per Share Market Value, End of Period ..................... $16.500 $13.750 $15.750 $14.875 $16.750
Total Investment Return at Market Value ................... 7.22% (8.70%) 24.11% 2.34% 21.57%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................. $170,988 $154,116 $172,732 $168,961 $173,940
Ratio of Expenses to Average Net Assets ................... 0.84% 0.87% 0.84% 0.84% 0.84%
Ratio of Net Investment Income to Average Net Assets ...... 7.67% 8.03% 7.77% 7.50% 7.34%
Portfolio Turnover Rate ................................... 95% 82% 105% 117% 143%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period. It
also shows the total investment return for each period based on the market value
of Fund shares. Additionally, important relationships between some items
presented in the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Income
Securities Trust on December 31, 1997. It's divided into two main categories:
publicly traded bonds and short-term investments. The securities are further
broken down by industry groups. Short-term investments, which represent the
Fund's "cash" position, are listed last.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
PUBLICLY TRADED BONDS
Aerospace (0.39%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) ....................... 10.910% BBB- $550 $686,582
-----------
Banks (9.42%)
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04, (Y) ........................... 8.200 AA- 1,000 1,093,930
ABN-Amro Bank N.V. - Chicago Branch,
Gtd Sub Deb (Netherlands) 05-31-05, (Y) ........................... 7.250 AA- 500 524,890
African Development Bank,
Sub Note (Supra National) 12-15-03, (Y) ........................... 9.750 AA- 1,000 1,181,150
Bank of New York,
Cap Security 12-01-26 (R) ........................................ 7.780 A- 595 618,389
Banque National de Paris - New York Branch,
Sub Note (France) 01-15-07, (Y) ................................... 7.200 A1 540 558,290
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 ............................................ 9.750 AA- 900 1,014,993
Landeskreditbank Baden - Wuerttemberg,
Sub Note (Germany) 02-01-23, (Y) .................................. 7.625 AAA 2,500 2,833,275
National Westminster Bank PLC - New York Branch,
Sub Note 05-01-01 ................................................ 9.450 AA- 1,250 1,365,588
NB Capital Trust IV,
Cap Security 04-15-27 ............................................ 8.250 A- 570 622,018
Scotland International Finance No. 2 B.V.,
Gtd Sub Note (United Kingdom) 01-27-04 (R), (Y) ................... 8.800 A 2,000 2,247,260
Gtd Sub Note (United Kingdom) 11-01-06 (R), (Y) ................... 8.850 A+ 750 862,430
Security Pacific Corp.,
Medium Term Sub Note 04-26-01 .................................... 10.500 A1 1,500 1,692,795
Sub Note 11-15-00 ................................................ 11.500 A 1,000 1,135,450
State Street Institutional Capital B,
Cap Security 03-15-27 (R) ........................................ 8.035 A 590 631,265
-----------
16,381,723
-----------
Broker Services (0.31%)
CS First Boston,
Sub Note 05-15-06 (R) ............................................ 7.750 AA- 500 534,985
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Building (0.68%)
Georgia-Pacific Corp.,
Deb 01-15-18 ..................................................... 9.750% BBB- $685 $712,105
Deb 02-15-18 ..................................................... 9.500 BBB- 450 469,139
-----------
1,181,244
-----------
Chemicals (0.19%)
Sociedad Quimica y Minera de Chile S.A.,
Loan Part Ctf (Chile) 09-15-06 (R), (Y) ........................... 7.700 BBB+ 320 329,114
-----------
Containers (0.55%)
Riverwood International Corp.,
Gtd Sr Sub Note 04-01-08 ......................................... 10.875 CCC+ 295 278,775
Stone Container Corp.,
Unit 04-01-02 .................................................... 12.250 B- 650 672,750
-----------
951,525
-----------
Cosmetics & Personal Care (0.44%)
Johnson & Johnson,
Deb 11-15-23 ..................................................... 6.730 AAA 750 767,003
-----------
Energy (0.71%)
AES Corp.,
Sr Sub Note 07-15-06 ............................................. 10.250 B+ 695 752,338
CalEnergy Co., Inc.,
Sr Note 09-15-06 ................................................. 9.500 BB- 450 491,724
-----------
1,244,062
-----------
Finance (5.96%)
CIT Group Holdings, Inc.,
Deb 03-15-01 ..................................................... 9.250 A 1,000 1,089,070
Constitution Capital Trust I,
Cap Security 04-15-27 (R) ........................................ 9.150 BBB 420 472,844
ContiFinancial Corp.,
Sr Note 08-15-03 ................................................. 8.375 BB+ 400 414,000
DR Investments,
Sr Note 05-15-07 (R) ............................................. 7.450 A- 450 478,805
DSPL Finance Co. B.V.,
Gtd Sr Sec Note (Indonesia) 12-30-10 (R), (Y) ..................... 9.120 BBB 500 398,900
Ford Motor Credit Co.,
Note 12-08-05 .................................................... 6.250 A 240 237,430
Green Tree Home Improvement Loan Trust,
Pass Thru Ctf Ser 1995-D Class M-1 09-15-25 ...................... 6.950 Aa2 650 660,461
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-1 Class A-5 12-25-13 ...................... 6.290 AAA 720 716,175
Industrial Credit Investment Corporation of India Ltd.,
Bond (India) 08-15-07 (R), (Y) .................................... 7.550 BB+ 540 447,768
MBNA Master Credit Card Trust,
Ser 1995-D Class A 11-15-02 ...................................... 6.050 AAA 1,585 1,586,981
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Finance (continued)
Merrill Lynch Mortgage Investors, Inc.,
Sub Bond Ser 1992-B Class B 04-15-12 .............................. 8.500% Aaa $341 $346,115
Midland American Capital Corp.,
Gtd Deb 11-15-03 ................................................. 12.750 A 1,500 1,579,680
Standard Credit Card Master Trust,
Credit Card Part Ctf Ser 1995-10 Class A 02-07-01 ................. 5.900 AAA 500 499,215
Susa Partnership, LP,
Note 12-01-07 ..................................................... 7.000 BBB 350 351,820
United Companies Financial Corp.,
Sr Note 01-15-04 .................................................. 7.700 BBB- 600 603,948
Yanacocha Receivables Master Trust,
Pass Thru Cert Ser 1997-A (Peru) 06-15-04 (R), (Y) ................ 8.400 BBB- 492 491,960
-----------
10,375,172
-----------
Funeral Services & Related (0.43%)
Loewen Group International, Inc.,
Gtd Sr Note 10-15-03 .............................................. 8.250 BB+ 740 757,575
-----------
Glass Products (0.29%)
Vicap S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R), (Y) ............................ 11.375 B+ 470 501,725
-----------
Government - Foreign (2.29%)
Croatia, Republic of,
Sr Note (Croatia) 02-27-02 (R), (Y) ............................... 7.000 BBB- 520 520,858
Nova Scotia, Province of,
Deb (Canada) 04-01-22, (Y) ........................................ 8.750 A- 750 932,243
Ontario, Province of,
Bond (Canada) 06-04-02, (Y) ....................................... 7.750 AA- 500 531,405
Panama, Republic of,
Note (Panama) 02-13-02 (R), (Y) ................................... 7.875 BB+ 530 510,125
Quebec, Province of,
Deb (Canada) 10-01-13, (Y) ........................................ 13.000 A+ 500 547,275
Deb (Canada) 07-15-23, (Y) ........................................ 7.500 A+ 280 300,874
Saskatchewan, Province of,
Bond (Canada) 12-15-20, (Y) ....................................... 9.375 A 480 636,557
-----------
3,979,337
-----------
Government - U.S. (24.17%)
United States Treasury,
Bond 08-15-05 ..................................................... 10.750 AAA 885 1,151,332
Bond 08-15-17 ..................................................... 8.875 AAA 1,745 2,316,208
Bond 05-15-18 ..................................................... 9.125 AAA 2,250 3,064,568
Bond 02-15-23 + ................................................... 7.125 AAA 10,108 11,538,888
Note 04-15-98 ..................................................... 7.875 AAA 1,000 1,006,720
Note 02-15-99 ..................................................... 8.875 AAA 4,395 4,546,759
Note 11-30-99 ..................................................... 7.750 AAA 3,323 3,446,051
Note 05-15-01 ..................................................... 8.000 AAA 996 1,064,007
Note 05-15-02 ..................................................... 7.500 AAA 7,830 8,356,098
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Government - U.S. (continued)
Note 02-15-05 ..................................................... 7.500% AAA $5,048 $5,548,055
-----------
42,038,686
-----------
Government - U.S. Agencies (9.11%)
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 ...................................... 11.250 AAA 473 530,882
Federal National Mortgage Assn.,
15 Yr SF Pass Thru Ctf 01-25-05 ................................... 8.000 AAA 1,000 1,042,500
15 Yr SF Pass Thru Ctf 02-01-08 ................................... 7.500 AAA 472 484,846
15 Yr SF Pass Thru Ctf 06-01-10 ++ ................................ 7.000 AAA 995 1,009,607
30 Yr SF Pass Thru Ctf 10-01-23 ................................... 7.000 AAA 740 748,886
30 Yr Pass Thru Ctf 03-01-24 ++ ................................... 6.500 AAA 300 296,250
Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 ...................... 6.940 AAA 383 396,188
Financing Corp.,
Bond 02-08-18 ..................................................... 9.400 A-1+ 2,000 2,713,440
Government National Mortgage Assn.,
30 Yr SF Pass Thru Ctf 11-15-19 to 02-15-25 ....................... 9.500 AAA 1,055 1,141,740
30 Yr SF Pass Thru Ctf 11-15-20 ................................... 10.000 AAA 344 383,402
30 Yr SF Pass Thru Ctf 04-15-21 ................................... 9.000 AAA 465 504,154
30 Yr SF Pass Thru Ctf 01-15-23 to 03-15-23 ....................... 8.500 AAA 1,410 1,487,392
30 Yr SF Pass Thru Ctf 02-15-24 to 02-15-26 ++ .................... 7.500 AAA 3,136 3,214,278
30 Yr SF Pass Thru Ctf 08-15-26 ................................... 8.000 AAA 750 777,398
Tennessee Valley Authority,
Power Bonds 1989 Ser G 11-15-29 .................................. 8.625 AAA 1,000 1,113,540
-----------
15,844,503
-----------
Insurance (4.89%)
Conseco, Inc.,
Sr Note 12-15-04 .................................................. 10.500 BBB 740 890,427
Equitable Life Assurance Society of the United States,
Surplus Note 12-01-05 (R) ......................................... 6.950 A 550 561,875
Fairfax Financial Holdings Ltd.,
Note 04-15-26 ..................................................... 8.300 BBB+ 695 770,699
Liberty Mutual Insurance Co.,
Surplus Note 05-04-07 (R) ......................................... 8.200 A+ 1,100 1,213,795
Surplus Note 10-15-26 (R) ......................................... 7.875 A2 435 478,783
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) ......................................... 7.625 AA 1,145 1,251,233
NAC Re Corp.,
Note 06-15-99 ..................................................... 8.000 A- 370 378,654
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) ......................................... 7.500 AA- 1,500 1,523,070
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) ......................................... 6.625 AA 725 738,420
URC Holdings Corp.,
Sr Note 06-30-06 (R) .............................................. 7.875 A- 640 690,477
-----------
8,497,433
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Leisure (0.97%)
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 ........................................ 13.500% BB+ $150 $192,375
Showboat Marina Casino Partnership/Finance Corp.,
1st Mtg Note Ser B 03-15-03 ....................................... 13.500 B 500 602,500
Sun International Hotels Ltd.,
Sub Note 12-15-07 ................................................. 8.625 B+ 260 263,900
Trump Hotels & Casino Resorts Funding, Inc./Holdings, L.P.,
Sr Note 06-15-05 .................................................. 15.500 B- 550 629,750
-----------
1,688,525
-----------
Media (7.03%)
Adelphia Communications Corp.,
Sr Note 10-01-02 .................................................. 9.250 B3 550 561,000
Century Communications Corp.,
Sr Note 08-15-00 .................................................. 9.500 BB- 280 292,600
Clear Channel Communications, Inc.,
Deb 10-15-27 ...................................................... 7.250 BBB- 545 548,270
Comcast Cable Communications, Inc.,
Note 05-01-17 .................................................... 8.875 BBB- 195 230,911
Comcast Corp.,
Sr Sub Deb 07-15-12 .............................................. 10.625 BB+ 605 749,335
Continental Cablevision, Inc.,
Sr Sub Deb 06-01-07 .............................................. 11.000 BBB 1,210 1,343,536
Garden State Newspapers, Inc.,
Sr Sub Note 10-01-09 (R) ......................................... 8.750 B+ 450 452,250
Hearst-Argyle Television, Inc.,
Sr Note 11-15-07 ................................................. 7.000 Baa3 505 508,732
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05, (Y) .................................... 10.625 Ba3 250 275,245
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 .............................................. 8.250 BBB- 710 775,114
Sr Note 10-15-99 ................................................. 9.125 BBB- 1,000 1,045,970
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05, (Y) .............................. 10.000 BB+ 800 880,000
SFX Broadcasting, Inc.,
Sr Sub Note Ser B 05-15-06 ....................................... 10.750 B- 495 543,263
TeleWest Communications PLC,
Sr Deb (United Kingdom) 10-01-06, (Y) ............................. 9.625 B+ 380 400,900
Time Warner, Inc.,
Deb 01-15-13 ..................................................... 9.125 BBB- 565 672,785
TKR Cable I, Inc.,
Sr Deb 10-30-07 .................................................. 10.500 BBB- 1,955 2,203,872
Videotron Holdings PLC,
Sr Discount Note (United Kingdom) 08-15-05, (Y) ................... 11.000 BBB+ 840 742,972
-----------
12,226,755
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Medical (1.06%)
Integrated Health Services, Inc.,
Sr Sub Note 01-15-08 (R) ......................................... 9.250% B $595 $606,900
Physician Sales & Services, Inc.,
Sr Sub Note 10-01-07 (R) ......................................... 8.500 B 235 239,700
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 ............................................. 10.750 B+ 355 386,950
Tenet Healthcare Corp.,
Sr Sub Note 01-15-07 ............................................. 8.625 B+ 585 604,013
-----------
1,837,563
-----------
Mortgage Banking (2.01%)
Countywide Home Loans, Inc.,
Mortgage Pass Thru Ctf Ser 1997-7 Cl A8 12-25-27 ................. 7.250 Aaa 919 946,621
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1997-C2 Class A3 11-15-07 ...................... 6.566 AAA 705 712,931
Money Store Residential Trust 1997-I (The),
Pass Thru Ctf Ser 1997-I Class A-3 08-15-12 ...................... 6.680 AAA 650 646,953
Salomon Brothers Mortgage Securities VII, Inc.,
Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 ............... 6.750 Aaa 454 457,782
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 ...................... 7.180 AAA 710 737,705
-----------
3,501,992
-----------
Oil & Gas (1.44%)
Camuzzi Gas Pampeana S.A.,
Note 12-15-01 ..................................................... 9.250 BBB- 328 328,000
Norsk Hydro ASA,
Deb (Norway) 10-01-16, (Y) ........................................ 7.500 A 720 775,541
Occidental Petroleum Corp.,
Sr Deb 09-15-09 .................................................. 10.125 BBB 600 762,192
Transgas de Occidenta S.A.,
Sr Note (Colombia) 11-01-10 (R), (Y) .............................. 9.790 BBB- 615 633,107
-----------
2,498,840
-----------
Paper & Paper Products (0.94%)
Celulosa Arauco Y Constitucion S.A.,
Note (Chile) 09-15-09 (R), (Y) .................................... 7.200 Baa3 565 553,135
Indah Kiat International Finance Co.,
Gtd Sec Bond Ser B (Indonesia) 06-15-02, (Y) ...................... 11.875 BB 140 135,100
Gtd Sec Bond Ser C (Indonesia) 06-15-06, (Y) ...................... 12.500 BB 265 257,050
Indah Kiat Pulp & Paper Corp. (P.T.),
Sr Sec Note (Canadian Dollar) 11-01-00 (R) ........................ 8.875 BB 235 211,500
S.D. Warren Co.,
Sr Sub Note 12-15-04 ............................................. 12.000 B+ 432 482,760
-----------
1,639,545
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Real Estate Investment Trust (0.29%)
TriNet Corporate Realty Trust, Inc.,
Note 05-15-01 .................................................... 7.300% BBB- $500 $511,180
-----------
Retail (2.54%)
Fort James Corp.,
Sr Note 09-15-02 ................................................. 6.500 BBB- 470 472,171
Kroger Co. (The),
Lease Ctf 02-01-09 ............................................... 12.950 BBB- 1,910 2,139,200
May Department Stores Co. (The),
Deb 06-15-18 ..................................................... 10.750 A 254 270,977
Safeway, Inc.,
Deb 01-15-09 ..................................................... 13.500 BBB 474 531,253
Southern Foods Group L.P.,
Sr Sub Note 09-01-07 (R) ......................................... 9.875 B 515 538,175
Supermercados Norte,
Bond (Argentina) 02-09-04 (R), (Y) ................................ 10.875 B1 490 464,275
-----------
4,416,051
-----------
Steel (0.29%)
IVACO Inc.,
Sr Note (Canada) 09-15-05, (Y) .................................... 11.500 B+ 320 348,000
Weirton Steel Corp.,
Sr Note 03-01-98 ................................................. 11.500 B 149 149,745
-----------
497,745
-----------
Telecommunications (2.38%)
Esprit Telecom Group PLC,
Sr Note (United Kingdom) 12-15-07, (Y) ............................ 11.500 NR 260 267,800
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 ....................................... 13.000 B- 585 614,206
Metronet Communications Corp.,
Unit (Sr Note & Warrant) (Canada) 08-15-07 (R), (Y) ............... 12.000 NR 530 612,150
Nextel Communications, Inc.,
Sr Disc Note (Step coupon, 11.50%, 09-01-98) 09-01-03 ............. Zero CCC 635 631,031
Sr Disc Note (Step coupon, 9.75%, 02-15-99) 08-15-04 .............. Zero CCC 705 627,450
Qwest Communications International Inc.,
Sr Note Ser B 04-01-07 ........................................... 10.875 B+ 465 528,938
TCI Communications, Inc.,
Sr Deb 08-01-15 .................................................. 8.750 BBB- 523 606,152
Teligent, Inc.,
Sr Note 12-01-07 ................................................. 11.500 CCC 260 260,650
-----------
4,148,377
-----------
Tobacco (0.50%)
RJR Nabisco, Inc.,
Note 12-01-02 .................................................... 8.625 BBB- 455 484,388
Note 09-15-03 .................................................... 7.625 BBB- 375 383,295
-----------
867,683
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Transportation (4.67%)
America West Airlines, Inc.,
Pass Thru Ctf Ser B 01-02-08 ..................................... 6.930% A- $530 $535,784
Continental Airlines,
Pass Thru Ctf Ser 96-C 10-15-13 .................................. 9.500 BBB+ 490 570,123
Humpuss Funding Corp.,
Gtd Note (Indonesia) 12-15-09 (R), (Y) ............................ 7.720 Baa3 534 431,494
MRS Logistica S.A.,
Bond Ser B (Brazil) 08-15-05 (R), (Y) ............................. 10.625 B 450 406,125
Northwest Airlines, Inc.,
Gtd Note 03-15-04 ................................................ 8.375 BB- 265 272,828
Pass Thru Ctf Ser 1996-1C 01-02-05 ............................... 10.150 BB+ 325 347,932
Pass Thru Ctf Ser 1996-1D 01-02-15 ............................... 8.970 BBB- 393 436,145
NWA Trust,
Sr Note Ser A 06-21-14 ........................................... 9.250 A2 586 692,920
Railcar Trust No. 1992-1,
Pass Thru Ser 1992-1 Class A 06-01-04 ............................ 7.750 AAA 1,469 1,540,690
Scandinavian Airlines System,
Deb (Sweden) 07-20-99, (Y) ........................................ 9.125 A3 700 731,500
Sea-Land Service, Inc.,
Gtd Deb Ser A 01-02-11 ........................................... 10.600 BBB 1,000 1,052,720
U.S. Air, Inc.,
Pass Thru Ctf Ser 1989-A2 01-01-13 ............................... 9.820 A- 355 392,719
Pass Thru Ctf Ser 1990-A1 03-19-05 ............................... 11.200 BB+ 637 713,965
-----------
8,124,945
-----------
Utilities (13.84%)
Avon Energy Partners Holdings,
Sr Note (United Kingdom) 12-11-07 (R), (Y) ........................ 7.050 A- 353 359,433
British Telecom Finance, Inc.,
Gtd Deb (United Kingdom) 02-15-19, (Y) ............................ 9.625 AAA 1,120 1,208,301
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 ............................... 8.890 BB- 700 783,261
Calpine Corp.,
Sr Note 05-15-06 ................................................. 10.500 B+ 465 499,875
Sr Note 07-15-07 (R) ............................................. 8.750 BB- 200 204,000
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A (Philippine Islands) 11-15-05, (Y) .................. 11.450 BB 400 412,000
CE Energy,
Note 12-30-07 (R) ................................................ 6.995 BBB+ 505 509,787
Chugach Electric Association, Inc.,
1St Mtg 1991 Ser A 03-15-22 ...................................... 9.140 A 2,000 2,387,238
Cleveland Electric Illuminating Co. & Toledo Edison Co.,
Sec Note Ser B 07-01-04 .......................................... 7.670 Ba1 585 609,131
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 ........................................... 9.500 BB+ 1,090 1,208,830
EIP Funding-PNM,
Sec Fac Bond 10-01-12 ............................................ 10.250 Ba2 718 836,116
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Utilities (continued)
Enersis S.A.,
Note (Chile) 12-01-16, (Y) ........................................ 7.400% A- $825 $818,615
Fideicomiso Petacalco Trust,
Sr Sec Note (Mexico) 12-23-09 (R), (Y) ............................ 10.160 BB 470 479,400
First PV Funding Corp.,
Deb Ser 86A 01-15-14 ............................................. 10.300 BB- 202 218,408
Deb Ser 86B 01-15-16 ............................................. 10.150 BB- 692 749,069
GTE Corp.,
Deb 11-01-20 ..................................................... 10.250 A 1,500 1,694,310
Hydro-Quebec Corp.,
Gtd Bond (Canada) 02-01-21, (Y) ................................... 9.400 A+ 900 1,162,080
Gtd Deb (Canada) 02-01-03, (Y) .................................... 7.375 A+ 750 784,538
Iberdrola International B.V.,
Note (Spain) 10-01-02, (Y) ........................................ 7.500 AA- 2,000 2,104,920
Long Island Lighting Co.,
Deb 07-15-19 ..................................................... 8.900 BB+ 395 420,316
Gen Ref Bond 05-01-21 ............................................ 9.750 BBB 1,080 1,107,000
Gen Ref Mtg 07-01-24 ............................................. 9.625 BBB 1,055 1,074,781
Midland Cogeneration Venture L.P.,
Sec Deb Ser C-91 07-23-02 ........................................ 10.330 BB 1,052 1,131,296
Midland Funding Corp. II,
Deb 07-23-05 ..................................................... 11.750 B 300 360,405
Deb Ser B 07-23-06 ............................................... 13.250 B 225 289,087
North Atlantic Energy Corp.,
1st Mtg Bond 06-01-02 ............................................ 9.050 B+ 600 616,584
Philippine Long Distance Telephone Co.,
Note (Philippine Islands) 03-06-07, (Y) ........................... 7.850 BB+ 554 482,673
Puget Sound Energy, Inc.,
Jr Sub Deb 06-01-27 (R) .......................................... 8.231 Baa3 330 344,322
System Energy Resources, Inc.,
1st Mtg 08-01-01 ................................................. 7.710 BBB- 615 637,773
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 ............................... 8.090 BBB- 555 580,164
-----------
24,073,713
-----------
TOTAL PUBLICLY TRADED BONDS
(Cost $164,797,375) (97.79%) 170,103,583
------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Income Securities Trust
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.98%)
Investment in a joint repurchase agreement transaction with HSBC
Securities, Inc. , Dated 12-31-97, Due 01-02-98 (Secured by
U. S. Treasury Notes, 9.250% thru 11.250%, Due 02-15-15
thru 02-15-16) - Note A............................................ 6.600% $3,440 $3,440,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company Daily
Interest Savings Account, Current Rate 4.95%....................... 627
-----------
TOTAL SHORT-TERM INVESTMENTS (1.98%) 3,440,627
------- ------------
TOTAL INVESTMENTS (99.77%) $173,544,210
------- ------------
OTHER ASSETS AND LIABILITIES (0.23%) 396,173
------- ------------
TOTAL NET ASSETS (100.00%) $173,940,383
======= ============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $23,236,416 or 13.36% of net assets as of
December 31, 1997.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, security is U.S. dollar
denominated.
+ A portion of this United States Treasury Bond with a value of $5,708 owned
by the Fund was designated as margin deposits for futures contracts as of
December 31, 1997.
++ These securities having an aggregate value of $2,038,281 or 1.17% of the
Fund's net assets, have 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 values of $783,167 and
$1,317,773 of U.S. Treasury Bond, 9.125%, 05-15-18 and U.S. Treasury Note,
7.500%, 02-15-05 have been segregated to cover the when issued
commitments.
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investor Services or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
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
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Income Securities Trust
NOTE A -
ACCOUNTING POLICIES
John Hancock Income Securities Trust (the "Fund") is a closed-end 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,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more 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.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $94,631 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent such carryforwards are used by the
Fund, no capital gain distributions will be made. The carryforwards expire as
follows: December 31, 2004 -- $76,080, and December 31, 2005 -- $18,551.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment securities
is recorded on the accrual basis.
The Fund records all dividends and distributions to shareholders from net
investment income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with federal income tax regulations, which may
differ from generally accepted accounting principles.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
DISCOUNT ON SECURITIES The Fund accretes original issue discount from par value
on securities purchased from either the date of issue or the date of purchase
over the life of the security, as required by the Internal Revenue Code.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it will be 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 contracts 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, known as
"variation margin," to and from the broker 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 futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or
19
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Income Securities Trust
realizing the benefits of closing out futures positions because of position
limits or limits on daily price fluctuations 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 futures transactions.
At December 31, 1997, open positions in financial futures contracts were
as follows:
UNREALIZED
EXPIRATION OPEN CONTRACT POSITION DEPRECIATION
- ---------- ------------- -------- ------------
MAR 98 2 U.S. TREASURY NOTE SHORT $3,313
======
At December 31, 1997, the Fund has deposited in a segregated account $5,000 par
value of U.S. Treasury Bond, 7.125% due 02-15-23, to cover margin requirements
on open financial futures contracts.
NOTE B -
MANAGEMENT FEE AND
ADMINISTRATIVE SERVICES
Under the present investment management contract, the Fund pays a quarterly
management fee to the Adviser, for a continuous investment program, 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, exceeds 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 and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees 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. At December 31, 1997, the Fund's investment to cover the deferred
compensation had unrealized appreciation of $1,225.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended December 31, 1997, aggregated $106,694,460 and $114,651,296, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $131,136,261 and $117,254,895, respectively.
The cost of investments owned at December 31, 1997 (excluding the
corporate savings account) for federal income tax purposes was $168,588,695.
Gross unrealized appreciation and depreciation of investments at December 31,
1997 aggregated $6,786,701 and $1,831,813, respectively, resulting in net
unrealized appreciation of $4,954,888.
20
<PAGE>
================================================================================
John Hancock Funds - Income Securities Trust
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Income Securities Trust
We have audited the accompanying statement of assets and liabilities of John
Hancock Income Securities Trust (the "Trust"), including the schedule of
investments, as of December 31, 1997, 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 Trust'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 generally accepted auditing
standards. 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, 1997, by correspondence with the custodian
and brokers, or other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
John Hancock Income Securities Trust at December 31, 1997, the results of its
operations for the year then ended, 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 generally accepted
accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distribution of the Fund during the fiscal year ended December
31, 1997.
None of the distributions qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1997 U.S.Treasury Department Form 1099-DIV
in January of 1998. This will reflect the tax character of all distributions for
calendar year 1997.
21
<PAGE>
================================================================================
John Hancock Funds - Income Securities Trust
DIVIDENDS AND DISTRIBUTIONS
During 1997, dividends from net investment income totaling $1.2025 per share was
paid to shareholders. The dates of payment and the amounts per share are as
follows:
INCOME
PAYMENT DATE DIVIDEND
- ------------ --------
March 31, 1997 $0.3025
June 30, 1997 $0.3000
September 30, 1997 $0.3000
December 30, 1997 $0.3000
INVESTMENT OBJECTIVE AND POLICY
John Hancock Income Securities Trust 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. The Fund intends to
engage in short-term trading, may issue a single class of senior securities not
to exceed 33 1/3% of its net assets at market value, may borrow from banks as a
temporary measure for emergency purposes in amounts not to exceed 5% of the
total assets at cost and may lend its portfolio securities. 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.
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 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.
DIVIDEND REINVESTMENT PLAN
John Hancock Income Securities Trust offers shareholders the opportunity to
elect to receive shares of the Fund's Common Shares in lieu of cash dividends.
The Plan is available to all shareholders without charge. Any shareholder of
record of John Hancock Income Securities Trust ("Income Securities") may elect
to participate in the Automatic Dividend Reinvestment Plan (the "Plan") and
receive shares of Income Securities' Common Shares in lieu of all or a portion
of the cash dividends.
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.
22
<PAGE>
================================================================================
John Hancock Funds - Income Securities Trust
The Agent Bank will act as agent for participating shareholders. The Board
of Trustees of Income Securities will declare dividends from net investment
income payable in cash or, in the case of shareholders participating in the
Plan, partially or entirely in Income Securities' 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 Income Securities. 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 which 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.
Additional information may be obtained from the Customer Service
Department, John Hancock Income Securities Trust, 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, 1-800-843-0090.
23
<PAGE>
================================================================================
-------------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 S. Hackensack, NJ
1-800-843-0090 Permit No. 750
INTERNET: www.jhancock.com/funds -------------------
[LOGO] Printed on Recycled Paper P600A 12/97
2/98
