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JOHN HANCOCK FUNDS
BERKELEY SECTOR
OPPORTUNITY FUND
ANNUAL REPORT
FEBRUARY 28, 1995
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JOHN HANCOCK BERKELEY SECTOR OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995
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ASSETS:
Cash........................................................................ $100,000
Deferred organization expenses - Note A..................................... 39,000
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139,000
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LIABILITIES:
Accrued organization expenses - Note A...................................... 39,000
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NET ASSETS:
Capital paid-in............................................................. $100,000
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NET ASSET VALUE PER SHARE:
(based on 11,765 shares of beneficial interest outstanding -
unlimited number of shares authorized with no par value).................... $ 8.50
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See notes to financial statement
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NOTES TO FINANCIAL STATEMENT
JOHN HANCOCK BERKELEY SECTOR OPPORTUNITY FUND
NOTE A -
ACCOUNTING POLICIES
John Hancock Berkeley Sector Opportunity Fund (the "Fund"), a separate
portfolio of John Hancock Institutional Series Trust (the "Trust"), is an
open-end management investment company, registered under the Investment
Company Act of 1940. The Trust, organized as a Massachusetts business trust
in 1994, consists of eleven series portfolios: the Fund, John Hancock
Berkeley Bond Fund, John Hancock Berkeley Dividend Performers Fund, John
Hancock Berkeley Fundamental Value Fund, John Hancock Berkeley Global Bond
Fund, John Hancock Berkeley Overseas Growth Fund, John Hancock Independence
Balanced Fund, John Hancock Independence Diversified Core Equity Fund II,
John Hancock Independence Growth Fund, John Hancock Independence Medium
Capitalization Fund and John Hancock Independence Value Fund. Each Fund
currently has one class of shares with equal rights as to voting,
redemption, dividends and liquidation within their respective Fund. Only
shares of beneficial interest of the Fund were issued by February 28, 1995
and all were owned by John Hancock Advisers, Inc. (the "Adviser"), a wholly
owned subsidiary of The Berkeley Financial Group. The Fund has had no
operations other than those relating to organizational matters, however
certain other portfolios of the Trust have commenced operations since
February 28, 1995.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio will be 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 will be 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 the Adviser may
participate in a joint repurchase agreement transaction. Aggregate cash
balances will be 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 will be recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on sales
of investments will be determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund intends to comply with the requirements of
the Internal Revenue Code that are applicable to regulated investment
companies. It will not be subject to Federal income tax on taxable earnings
which are distributed to shareholders.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment
securities will be recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Fund is made aware of
the dividend. Interest income on investment securities will be recorded on
the accrual basis. Foreign income may be subject to foreign withholding
taxes which are accrued as applicable.
The Fund will record all distributions to shareholders from net
investment income and realized gains on the ex-dividend date. Such
distributions will be determined in conformity with income tax regulations,
which may differ from generally accepted accounting principles.
EXPENSES The majority of the expenses of the Trust will be directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund will be allocated in such a manner as
deemed equitable, taking into consideration, among other things, the nature
and type of expense and the relative sizes of the Funds.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed
in terms of foreign currencies will be translated into U.S. dollars based
on London currency exchange quotations as of 5:00 p.m., London time, on the
date of any determination of the net asset value of the Fund. Transactions
affecting statement of operations accounts and net realized gain/(loss) on
investments will be translated at the rates prevailing at the dates of the
transactions.
The Fund will not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from
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NOTES TO FINANCIAL STATEMENT
JOHN HANCOCK BERKELEY SECTOR OPPORTUNITY FUND
the fluctuations arising from changes in market prices of securities held.
Such fluctuations will be included with the net realized and unrealized
gain or loss from investments.
Reported net realized foreign exchange gains or losses will arise from
sales of foreign currency, currency gains or losses realized between the
trade and settlement dates on securities transactions and the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and losses
will arise from changes in the value of assets and liabilities other than
investments in securities, resulting from changes in the exchange rate.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call
over-the-counter options will be valued at the average of the "asked'
prices obtained from two independent brokers. Upon the writing of a call
or put option, an amount equal to the premium received by the Fund will be
included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be subsequently
marked-to-market to reflect the current market value of the written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument and buying puts and writing calls
will tend to decrease the Fund's exposure to the underlying instrument, or
hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the face
(or "notional") amount of each contract at value will reflect the maximum
exposure of the Fund in these contracts, but the actual exposure will be
limited to the change in value of the contract over the period the contract
remains open.
Risks may also arise if counterparties do not perform under the
contracts' terms, or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options
have minimal credit risk as the exchanges act as counterparties to each
transaction, and only present liquidity risk in highly unusual market
conditions. To minimize credit and liquidity risks in over-the-counter
option contracts, the Fund will continuously monitor the creditworthiness
of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's
period-end Statement of Assets and Liabilities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward
foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date at a set price. The aggregate principal amounts
of the contracts will be marked-to-market daily at the applicable foreign
currency exchange rates. Any resulting unrealized gains and losses will be
included in the determination of the Fund's daily net assets. The Fund
records realized gains and losses at the time the forward foreign currency
contract is closed out or offset by a matching contract. Although certain
strategies could minimize the risk of loss due to a decline in the value of
the hedged foreign currency, they could also limit any potential gain which
might result from an increase in the value. Risks may arise upon entering
these contracts from potential inability of counterparties to meet the
terms of the contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. 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 contract being
traded. Each day, the futures contract will be valued at the official
settlement price of the board of trade or U.S. commodities exchange.
Subsequent payments, known as "variation margin", to and from the broker
will be 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", will be recorded by the Fund as unrealized gains or
losses.
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NOTES TO FINANCIAL STATEMENT
JOHN HANCOCK BERKELEY SECTOR OPPORTUNITY FUND
When the contracts are closed, the Fund will recognize 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
contracts may not correlate with changes in the value of the underlying
securities. In addition, the Fund could be prevented from opening or
realizing the benefits of closing out 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
contracts.
ORGANIZATION EXPENSE Expenses incurred in connection with the organization
of the Fund have been capitalized and will be charged to the Fund's
operations ratably over a five-year period that will begin with the
commencement of investment operations of the Fund.
In the event that any of the initial shares are redeemed during the
amortization period, the redemption proceeds will be reduced by a pro rata
portion of the then unamortized organization expense in the same
proportion as the number of the initial shares redeemed bears to the
number of the initial shares outstanding at the time of such redemption.
NOTE B -
MANAGEMENT FEE, AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund will pay a
monthly management fee to the Adviser, for a continuous investment program
equivalent, on an annual basis, to the sum of: (a) 0.80% of the first
$500,000,000 of the Fund's average daily net assets and (b) 0.75% of the
Fund's average daily net assets in excess of $500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares of beneficial
interest, 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 current limits are 2.5% of the
first $30,000,000 of the Fund's average daily net assets, 2.0% of the next
$70,000,000 and 1.5% of the remaining average daily net assets.
The Adviser has voluntarily agreed to limit Fund expenses further to the
extent required to prevent expenses from exceeding 1.00% of the Fund's
average daily net assets. The Adviser reserves the right to terminate this
voluntary limitation in the future.
The Fund has a distribution agreement with John Hancock Funds Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. The Fund will pay all
expenses of printing prospectuses and other sales literature, all fees and
expenses in connection with qualification as a dealer in various states,
and all other expenses in connection with the sale and offering for sale of
the shares of the Fund which have not been herein specifically allocated to
the Trust.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. The Fund will pay transfer agent fees based
on transaction volume and the number of shareholder accounts outstanding.
Messrs. Edward J. Boudreau, Jr., Richard S. Scipione and Thomas W.L.
Cameron are directors and 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.
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INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholder of
John Hancock Berkeley Sector Opportunity Fund:
We have audited the accompanying statement of assets and liabilities
of John Hancock Berkeley Sector Opportunity Fund as of February 28,
1995. This financial statement is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statement of assets
and liabilities is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the statement of assets and liabilities. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our
audit of the statement of assets and liabilities provides a reasonable
basis for our opinion.
In our opinion, such statement of assets and liabilities presents
fairly, in all material respects, the financial position of
John Hancock Berkeley Sector Opportunity Fund as of February 28, 1995
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
March 31, 1995
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