Edgar Filing: JOHN HANCOCK PREFERRED INCOME FUND

PROSPECTUS August 22, 2002
--------------------------------------------------------------------------------

22,500,000 SHARES

[JHF LOGO]
JOHN HANCOCK PREFERRED INCOME FUND
COMMON SHARES
--------------------------------------------------------------------------------

INVESTMENT OBJECTIVES. John Hancock Preferred Income Fund (the "Fund") is a
newly organized, diversified, closed-end management investment company. The
Fund's primary investment objective is to provide a high level of current
income, consistent with preservation of capital. The Fund's secondary investment
objective is to provide growth of capital to the extent consistent with its
primary investment objective.

PORTFOLIO CONTENTS. The Fund seeks to achieve its objectives by investing in
securities that, in the opinion of the Fund's investment adviser, may be
undervalued relative to similar securities in the marketplace. Under normal
market conditions, the Fund invests at least 80% of its assets (net assets plus
borrowing for investment purposes) in preferred stocks and other preferred
securities, including convertible preferred securities. The Fund allocates its
investments among various industry sectors and among issuers in such sectors
based on the investment adviser's evaluation of market and economic conditions.
The Fund expects to emphasize investments in preferred securities issued or
guaranteed by U.S. corporations in the utilities sector and will be subject to
certain risks due to such emphasis. The Fund will not invest 25% or more of its
total assets in any one industry, except that the Fund will invest 25% or more
of its total assets in the industries comprising the utilities sector. The Fund
will invest at least 80% of its total assets in preferred securities and other
fixed income securities which are rated investment grade (i.e., at least "Baa"
by Moody's Investors Service, Inc. ("Moody's") or "BBB" by Standard & Poor's
Rating Group ("S&P")) or in unrated securities determined by the investment
adviser to be of comparable credit quality. The Fund may invest up to 20% of its
total assets in (i) preferred securities or other fixed income securities rated
below investment grade (B or higher) or unrated preferred securities or unrated
fixed income securities determined by the Fund's investment adviser to be of
comparable quality and (ii) common stocks or other equity securities that are
not considered preferred securities. The weighted average credit rating of the
Fund's portfolio of preferred securities and other fixed income securities will
be at least investment grade. There can be no assurance that the Fund will
achieve its investment objectives.

INVESTMENT ADVISER. John Hancock Advisers, LLC (the "Adviser") is the Fund's
investment adviser and administrator.

NO PRIOR HISTORY. Because the Fund is newly organized, its shares have no
history of public trading. Shares of closed-end funds frequently trade at prices
lower than their net asset value. The risk of loss due to this discount may be
greater for initial investors expecting to sell their shares in a relatively
short period after completion of the public offering. The Fund's common shares
have been approved for listing on the New York Stock Exchange under the symbol
"HPI," subject to official notice of issuance.

BEFORE BUYING ANY COMMON SHARES YOU SHOULD READ THE DISCUSSION OF THE MATERIAL
RISKS OF INVESTING IN THE FUND IN "RISK FACTORS" BEGINNING ON PAGE 22. CERTAIN
OF THESE RISKS ARE SUMMARIZED IN "PROSPECTUS SUMMARY -- SPECIAL RISK
CONSIDERATIONS" BEGINNING ON PAGE 5.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

PRICE TO PUBLIC SALES LOAD PROCEEDS TO FUND
-----------------------------------------------------------------------------------------------------------------

Per Share $ 25.000 $ 1.125 $ 23.875
-----------------------------------------------------------------------------------------------------------------
Total $562,500,000 $25,312,500 $537,187,500
-----------------------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-Allotment Option $646,875,000 $29,109,375 $617,765,625
-----------------------------------------------------------------------------------------------------------------

In addition to the sales load, the Fund will pay organizational and offering
expenses of up to $0.05 per share which will reduce the "Proceeds to Fund"
(above). The Adviser has agreed to pay the amount by which the aggregate of all
of the Fund's organizational expenses and all offering costs (other than the
sales load) that exceed $0.05 per share. The Fund's organizational and offering
expenses are estimated to be $495,000.

UBS WARBURG MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES LEGG MASON WOOD WALKER,
INCORPORATED

RBC CAPITAL MARKETS WACHOVIA SECURITIES
H&R BLOCK FINANCIAL ADVISORS, INC. QUICK & REILLY, INC.
SIGNATOR INVESTORS, INC.

--------------------------------------------------------------------------------

LEVERAGE. The Fund may use leverage to the extent permitted by the Investment
Company Act of 1940, as amended, and currently anticipates issuing preferred
shares representing approximately 33 1/3% of the Fund's total capital
immediately after issuance. By using leverage, the Fund will seek to obtain a
higher return for holders of common shares than if the Fund did not use
leverage. Leveraging is a speculative technique and there are special risks
involved. There can be no assurance that a leveraging strategy will be used or
that it will be successful during any period in which it is employed. See
"Leverage."

You should read this Prospectus, which contains important information about the
Fund, before deciding whether to invest, and retain it for future reference. A
Statement of Additional Information, dated August 22, 2002 containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 46 of this Prospectus. You may request a free copy of the Statement of
Additional Information by calling 1-800-225-6020 or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities and
Exchange Commission's web site (http://www.sec.gov).

The Fund's common shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution,
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.

The underwriters named in this Prospectus may purchase up to 3,375,000
additional common shares from the Fund under certain circumstances.

The underwriters expect to deliver the common shares to purchasers on or about
August 27, 2002.

You should rely only on the information contained or incorporated by reference
in this Prospectus. The Fund has not, and the underwriters have not, authorized
anyone to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. The Fund is
not, and the underwriters are not, making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus. The Fund's business, financial
condition, results of operations and prospects may have changed since that date.

Until September 16, 2002 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a Prospectus. This is in addition
to the dealers' obligation to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.

TABLE OF CONTENTS
--------------------------------------------------------------------------------

Prospectus summary.................... 1
Summary of Fund expenses.............. 10
The Fund.............................. 12
Use of proceeds....................... 12
Investment objectives and principal
investment strategies............... 12
Leverage.............................. 20
Risk factors.......................... 22
Management of the Fund................ 30
Dividends and distributions; Automatic
Dividend Reinvestment Plan.......... 32
Closed-end fund structure............. 35
U.S. federal income tax matters....... 35
Net asset value....................... 37
Description of shares................. 38
Certain provisions of the Agreement
and Declaration of Trust and
By-laws............................. 40
Underwriting.......................... 43
Custodian, transfer agent, registrar,
dividend disbursing agent and
shareholder servicing agent......... 45
Validity of common shares............. 45
Table of contents for the Statement of
Additional Information.............. 46

--------------------------------------------------------------------------------
II

Prospectus summary

This is only a summary. This summary may not contain all of the information that
you should consider before investing in the Fund's common shares. You should
review the more detailed information contained in this Prospectus and in the
Statement of Additional Information, especially the information set forth under
the heading "Risk factors."

THE FUND

John Hancock Preferred Income Fund (previously named John Hancock Preferred
Equity Income Fund) (the "Fund") is a newly organized, diversified, closed-end
management investment company.

THE OFFERING

The Fund is offering 22,500,000 common shares of beneficial interest, no par
value, at $25.00 per share through a group of underwriters (the "Underwriters")
led by UBS Warburg LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The common shares of beneficial interest are called "common shares" in the rest
of this Prospectus. You must purchase at least 100 common shares. Investors will
be required to pay a sales load of 4.50% of the initial offering price, which
will reduce the initial amount invested. The Fund has given the Underwriters an
option to purchase up to 3,375,000 additional common shares to cover orders in
excess of 22,500,000 common shares. See "Underwriting." The Fund's investment
adviser, John Hancock Advisers, LLC (the "Adviser"), has agreed to pay the
amount by which the aggregate of all of the Fund's organizational expenses and
all offering costs (other than the sales load) exceeds $0.05 per common share.

INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES
The Fund's primary investment objective is to provide a high level of current
income, consistent with preservation of capital. The Fund's secondary investment
objective is to provide growth of capital to the extent consistent with its
primary investment objective. There can be no assurance that the Fund will
achieve its investment objectives.

PORTFOLIO CONTENTS
The Fund seeks to achieve its objectives by investing in securities that, in the
opinion of the Adviser, may be undervalued relative to similar securities in the
marketplace. Under normal market conditions, the Fund invests at least 80% of
its assets (net assets plus borrowing for investment purposes) in preferred
stocks and other preferred securities, including convertible preferred
securities. The Fund will invest at least 80% of its total assets in preferred
securities and other fixed income securities which are rated investment grade
(i.e., at least "Baa" by Moody's Investors Service, Inc. ("Moody's") or "BBB" by
Standard & Poor's Rating Group ("S&P")) or in unrated securities determined by
the investment adviser to be of comparable credit quality. The Fund may invest
up to 20% of its total assets in (i) preferred securities or other fixed income
securities rated below investment grade (B or higher) or unrated preferred
securities or unrated fixed income securities determined by the Adviser to be of
comparable quality and (ii) common stocks or other equity securities that are
not considered preferred securities. The weighted average credit rating of the
Fund's portfolio of preferred securities and other fixed income securities will
be at least investment grade. The Fund intends to invest primarily in fully
taxable preferred securities. The Fund's portfolio may include both fixed rate
and adjustable rate securities. The allocation of the Fund's assets in various
types of preferred, debt and equity securities may vary from time to time
depending on the Adviser's assessment of market conditions.

on an issuer's historical financial information and each rating agency's
investment analysis at the time of rating. Consequently, the rating assigned to
any particular security is not necessarily a reflection of the issuer's current
financial condition, which may be better or worse than the rating indicates. The
Adviser's analysis may include consideration of the issuer's experience and
managerial strength, changing financial condition, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest or dividend rates. The Adviser will also consider
relative values based on anticipated cash flow, interest or dividend coverage,
asset coverage, earnings prospects, current yield and price stability. The
Adviser seeks to produce superior results by focusing on the business cycle and
individual security fundamentals and less so on interest rates and duration. In
structuring the portfolio, the Adviser seeks to add investment value in two
ways:

+ by anticipating the broader, more gradual changes in the business cycle, and
then investing in those industries and sectors that are expected to benefit
from the changes

+ by looking within those industries and sectors for issuers and companies that
are undervalued and mispriced relative to the market

INDUSTRY AND ISSUER CONCENTRATION
The Fund intends to emphasize investments in preferred securities issued or
guaranteed by U.S. corporations in the utilities sector and will be subject to
certain risks due to such emphasis. The Fund will not invest 25% or more of its
total assets in any one industry, except that the Fund will invest 25% or more
of its total assets in the industries comprising the utilities sector. The Fund
will allocate its investments among industry sectors and among issuers in such
sectors, based on the Adviser's evaluation of market and economic conditions.

FOREIGN SECURITIES
Although the Fund will invest primarily in the securities of U.S. issuers, the
Fund may invest up to 20% of its total assets in securities of corporate and
governmental issuers located outside the United States that are traded or
denominated in U.S. dollars.

ILLIQUID SECURITIES
The Fund may invest up to 20% of its total assets in illiquid securities, which
are securities that can not be disposed of by the Fund within seven days in the
ordinary course of business at approximately the amount at which the Fund values
the securities. The Fund may invest in securities that are sold in direct
private placement transactions and are neither listed on an exchange nor traded
in the over-the-counter market.

OTHER SECURITIES
Normally, the Fund will invest substantially all of its assets to meet its
investment objectives. The Fund may invest the remainder of its assets in
securities with remaining maturities of less than one year, cash equivalents or
may hold cash. For temporary defensive purposes, the Fund may depart from its
principal investment strategies and invest part or all of its assets in
securities with remaining maturities of less than one year or cash equivalents
or may hold cash. During such periods, the Fund may not be able to achieve its
investment objectives.

HEDGING AND INTEREST RATE TRANSACTIONS

The Fund may, but is not required to, use various hedging and interest rate
transactions to earn income, facilitate portfolio management and mitigate risks.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, equity, fixed income
and interest rate indices, and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Fund also may purchase derivative instruments that
combine features of these instruments. The Fund generally seeks to use these

instruments and transactions as a portfolio management or hedging technique to
seek to protect against possible adverse changes in the market value of
securities held in or to be purchased for the Fund's portfolio, protect the
value of the Fund's portfolio, facilitate the sale of certain securities for
investment purposes, manage the effective interest rate exposure of the Fund,
manage the effective maturity or duration of the Fund's portfolio, or establish
positions in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. The Fund may use these transactions to enhance
potential gain, although no more than 5% of the Fund's total assets will be
committed to initial margin for such transactions entered into for non-hedging
purposes.

USE OF LEVERAGE BY THE FUND

The Fund may use leverage to the extent permitted by the Investment Company Act
of 1940, as amended (the "1940 Act"), and currently anticipates that it will
issue preferred shares, as soon as practicable after the closing of this
offering, with an aggregate liquidation preference of approximately 33 1/3% of
the Fund's total assets immediately after issuance. The Fund may not be
leveraged at all times and the amount of leverage, if any, may vary depending
upon a variety of factors, including the Adviser's outlook for the market for
preferred stocks and the costs that the Fund would incur as a result of such
leverage. The Fund may issue preferred shares in the public or private markets
or may borrow from banks and other financial institutions. The Fund may also
borrow through reverse repurchase agreements. The Fund's leveraging strategy may
not be successful. By leveraging its investment portfolio, the Fund creates an
opportunity for increased net income or capital appreciation. However, the use
of leverage also involves risks, which can be significant. These risks include
the possibility that the value of the assets acquired with such borrowing
decreases although the Fund's liability is fixed, greater volatility in the
Fund's net asset value and the market price of the Fund's common shares and
higher expenses. Since the Adviser's fee is based upon a percentage of the
Fund's managed assets, the Adviser's fee will be higher if the Fund is leveraged
and the Adviser will have an incentive to leverage the Fund. The Adviser intends
only to leverage the Fund when it believes that the potential return on the
additional investments acquired through the use of leverage is likely to exceed
the costs incurred in connection with the borrowing.

THE INVESTMENT ADVISER AND ADMINISTRATOR

John Hancock Advisers, LLC is the Fund's investment adviser and administrator.
The Adviser is responsible on a day-to-day basis for investment of the Fund's
portfolio in accordance with its investment objectives and policies. The Adviser
makes all investment decisions for the Fund and places purchase and sale orders
for the Fund's portfolio securities. The Adviser also provides office space to
the Fund and administrative and clerical services relating to the Fund's books
and records and preparation of reports.

The Adviser serves as the investment adviser to the Patriot Group of Trusts,
consisting of Patriot Premium Dividend Fund I, Patriot Premium Dividend Fund II,
Patriot Select Dividend Trust, Patriot Preferred Dividend Fund and Patriot
Global Dividend Fund. Each Patriot Fund is a leveraged dual-class, closed-end
investment company, which focuses on investing in preferred stocks and other
securities. The Adviser was organized in 1968 and had, as of March 31, 2002
approximately $29 billion in assets under management, of which approximately
$1.3 billion was invested in preferred securities. The Adviser is an indirect
wholly-owned subsidiary of John Hancock Financial Services, Inc., a financial
services company.

The Fund pays the Adviser an advisory fee for its investment advisory and
administrative services on an annual basis equal to 0.75% of the Fund's average
daily managed assets. This fee is accrued and payable daily. "Managed assets"
means the total assets of the Fund (including any assets attributable to any
leverage that may be outstanding) minus the sum of accrued liabilities (other
than liabilities representing financial leverage). The liquidation preference of
the preferred shares is not a liability.

Pursuant to a separate Accounting and Legal Services Agreement, the Adviser is
reimbursed for certain tax, accounting and legal services.

The Adviser has contractually agreed to waive a portion of its advisory fee. The
Adviser has agreed that, until the fifth anniversary of the investment advisory
agreement, the Adviser will limit its advisory fee to 0.55% of average daily
managed assets, in the sixth year to 0.60% of average daily managed assets, in
the seventh year to 0.65% of average daily managed assets, and in the eighth
year to 0.70% of average daily managed assets. After the eighth year the Adviser
will no longer waive a portion of its advisory fee.

LISTING

Currently, there is no public market for the Fund's common shares. However, the
Fund's common shares have been approved for listing on the New York Stock
Exchange under the trading or "ticker" symbol "HPI," subject to official notice
of issuance.

CUSTODIAN, TRANSFER AGENT, REGISTRAR, DIVIDEND DISBURSING AGENT AND SHAREHOLDER
SERVICING AGENT

The Bank of New York will serve as the Fund's custodian. Mellon Investor
Services, LLC will serve as the Fund's transfer agent, registrar and dividend
disbursing agent. UBS Warburg LLC will serve as the Fund's shareholder servicing
agent.

MARKET PRICE OF COMMON SHARES

Common shares of closed-end investment companies frequently trade at prices
lower than their net asset value. This characteristic is separate and distinct
from the risk that net asset value could decrease as a result of the Fund's
investment activities and may be a greater risk to investors expecting to sell
their shares in a relatively short period of time following the completion of
this offering. The Fund cannot predict whether the common shares will trade at,
above or below net asset value. The Fund's net asset value will be reduced
immediately following this offering by the sales load and the amount of the
organization and offering expenses paid by the Fund. See "Use of proceeds." In
addition to net asset value, the market price of the Fund's common shares may be
affected by such factors as the Fund's use of leverage, dividend stability,
portfolio credit quality, liquidity, market supply and demand, the Fund's
dividends paid (which are in turn affected by expenses), call protection for
portfolio securities and interest rate movements. See "Leverage," "Risk factors"
and "Description of shares." The Fund's common shares are designed primarily for
long-term investors, and you should not purchase common shares if you intend to
sell them shortly after purchase.

DISTRIBUTIONS

The Fund intends to distribute to common shareholders all or a portion of its
investment company taxable income monthly and net capital gains, if any, at
least annually. The Fund expects its initial distribution will be declared
approximately 45 days, and paid approximately 60 to 90 days, after the
completion of this offering. At times, in order to maintain a stable level of
distributions, the Fund may pay out less than all of its investment income or
pay out accumulated undistributed income in addition to current net investment
income. Dividend and capital gains distributions generally are used to purchase
additional common shares of the Fund. However, an investor can choose to receive
distributions in cash. Since not all investors can participate in the automatic
dividend reinvestment plan, you should contact your broker or nominee to confirm
that you are eligible to participate in the plan.

SPECIAL RISK CONSIDERATIONS

NO OPERATING HISTORY
The Fund is a newly organized closed-end management investment company and has
no operating history or history of public trading. The Fund is not intended to
be a complete investment program and should only be considered as an addition to
an investor's existing diversified portfolio of investments. Due to the
uncertainty inherent in all investments, there can be no assurance that the Fund
will achieve its investment objectives.

MARKET DISCOUNT RISK
Shares of closed-end funds frequently trade at prices lower than their net asset
value. This is commonly referred to as "trading at a discount." This
characteristic of shares of closed-end funds is a risk separate and distinct
from the risk that the Fund's net asset value may decrease. Investors who sell
their shares within a relatively short period after completion of the public
offering are likely to be exposed to this risk. Accordingly, the Fund is
designed primarily for long-term investors and should not be considered a
vehicle for trading purposes. Net asset value will be reduced following the
offering by the underwriting discount and the amount of offering expenses paid
by the Fund.

INTEREST RATE RISK
Interest rate risk is the risk that fixed income securities such as preferred
securities and debt securities will decline in value because of changes in
market interest rates. When market interest rates rise, the market value of such
securities generally will fall. The Fund's investment in preferred securities
means that the net asset value and market price of the common shares will tend
to decline if market interest rates rise.

During periods of declining interest rates, an issuer may exercise its option to
redeem preferred securities or prepay principal of debt securities earlier than
scheduled, forcing the Fund to reinvest in lower yielding securities. This is
known as call or prepayment risk. During periods of rising interest rates, the
average life of certain types of securities may be extended because of slower
than expected principal payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of the security. This is
known as extension risk.

CREDIT RISK
Credit risk is the risk that preferred securities or debt securities in the
Fund's portfolio will decline in price or fail to make dividend payments when
due because the issuer of the security experiences a decline in its financial
status. The weighted average credit rating of the Fund's portfolio of preferred
securities and other fixed income securities will be at least investment grade.
Although the Fund will primarily invest in investment grade securities, the Fund
is authorized to invest up to 20% of its total assets in preferred securities
and other fixed income securities that are rated below investment grade at the
time of acquisition. These securities may be rated as low as B by Moody's and
S&P. Securities rated "Baa" by Moody's are considered by Moody's as medium to
lower medium grade securities; they are neither highly protected nor poorly
secured; dividend or interest payments and capital or principal security, as the
case may be, appear to Moody's to be adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
time; and in the opinion of Moody's, securities in this rating category lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated "BBB" by S&P are regarded by S&P as
having an adequate capacity to pay dividends or interest and repay capital or
principal, as the case may be; whereas such securities normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely, in the opinion of S&P, to lead to a weakened capacity to pay
dividends or interest and repay capital or principal for securities in this
category than in higher rating categories. Below investment grade securities and
comparable unrated securities involve substantial risk of loss, are considered
speculative with respect to the issuer's ability to pay interest and any
required redemption or principal payments and are susceptible to default or
decline in market value due to adverse economic and business developments. The
ratings of Moody's and S&P represent

their opinions as to the quality of those securities that they rate; ratings are
relative and subjective and are not absolute standards of quality.

DIVIDENDS RECEIVED DEDUCTION
The income from taxable preferred securities in which the Fund intends to invest
does not qualify for the dividends received deduction (the "Dividends Received
Deduction") under Section 243 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Dividends Received Deduction generally allows corporations to
deduct from their income 70% of dividends received from domestic corporations.
Accordingly, any corporate shareholder should assume that none of the
distributions it receives from the Fund will qualify for the Dividends Received
Deduction.

SPECIAL RISKS RELATED TO PREFERRED SECURITIES
There are special risks associated with investing in preferred securities:

+ LIMITED VOTING RIGHTS. Generally, holders of preferred securities (such as
the Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods,
at which time the preferred security holders may elect a number of directors
to the issuer's board. Generally, once the issuer pays all the arrearages,
the preferred security holders no longer have voting rights.

+ SPECIAL REDEMPTION RIGHTS. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a special redemption by the issuer may negatively impact the
return of the security held by the Fund.

+ DEFERRAL. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its distributions, the Fund may be required to report
income for tax purposes although it has not yet received such income.

+ SUBORDINATION. Preferred securities are subordinated to bonds and other debt
instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than those debt instruments.

+ LIQUIDITY. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. government securities.

SECTOR RISK
Under normal market conditions, the Fund will emphasize investments in preferred
securities issued or guaranteed by U.S. corporations in the utilities sector.
The Fund will not invest 25% or more of its total assets in issuers engaged in
any one industry, except that the Fund will invest 25% or more of its total
assets in the industries comprising the utilities sector.

The utilities industries in which the Fund may invest include companies engaged
in:

+ the generation, transmission, sale or distribution of electric energy

+ the distribution, purification and treatment of water

+ the provision of sewage management, treatment or other sanitary services

+ the production, transmission or distribution of natural gas

+ the provision of pollution control or abatement services

+ telecommunications, including telephone, telegraph, satellite, microwave and
other communications media (but not companies engaged primarily in public
broadcasting industry)

The Fund's emphasis on securities of utilities issuers makes it more susceptible
to adverse conditions affecting such industries than a fund that does not have
its assets invested to a similar degree in such issuers. Issuers in the
utilities sector are subject to a variety of factors that may adversely affect
their business or operations, including:

+ high interest costs in connection with capital construction programs

+ governmental regulation of rates charged to customers

+ costs associated with environmental and other regulations

+ the effects of economic slowdowns and surplus capacity

+ increased competition from other providers of utility services

+ uncertainties concerning the availability of fuel at reasonable prices

+ the effects of energy conservation policies

Issuers in the utilities sector may also be subject to regulation by various
governmental authorities and may be affected by the imposition of special
tariffs and changes in tax laws, regulatory policies and accounting standards.
Generally, prices charged by utilities are also regulated in the United States
with the intention of protecting the public while ensuring that the rate of
return earned by such companies is sufficient to allow them to attract capital
in order to grow and continue to provide appropriate services. There can be no
assurance that such pricing policies or rates of return will continue in the
future. The nature of regulation of industries in the utilities sector is
evolving. Changes in regulation increasingly allow participants in the utilities
sector to provide services and products outside their traditional geographic
areas and lines of business, creating new areas of competition within such
industries. The emergence of competition may result in certain companies being
forced to defend their core businesses which may cause such companies to be less
profitable.

While the Fund will not invest 25% or more of its total assets in any one of the
industries comprising the financial services sector, from time to time the Fund
may have significant exposure to issuers in the financial services sector. These
industries include bank holding companies, banks, securities brokers and dealers
and life, property, casualty and multi-line insurance companies. These
industries are subject to extensive regulation at the federal and/or state level
and, to the extent that they operate internationally, in other countries. Each
of these industries may also be significantly affected by changes in prevailing
interest rates, general economic conditions and industry specific risks. The
enactment of new legislation and regulation, as well as changes in the
interpretation and enforcement of existing laws and regulations, may directly
affect the manner of operations and profitability of participants in the
financial services sector. From time to time, changes in law and regulation have
permitted greater diversification of their financial products, but their ability
to expand by acquisition or branching across state lines and to engage in
non-banking activities continues to be limited. Federal or state law and
regulations require banks, bank holding companies, broker-dealers and insurance
companies to maintain minimum levels of capital and liquidity. Bank regulators
have broad authority and can impose sanctions, including conservatorship or
receivership, on non-complying banks even when these banks continue to be
solvent, thereby possibly resulting in the elimination of stockholders' equity.

CONVERTIBLE SECURITIES
The preferred securities and other fixed income securities in which the Fund
invests may be convertible into the issuer's or a related party's common shares.
Convertible securities generally offer lower dividend yields or interest rates
than non-convertible securities of similar quality. As with all fixed income
securities, the market values of convertible securities tend to decline as
interest rates increase and, conversely, to increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the convertible security tends to reflect
the market price of the underlying common stock. As the market price of the
underlying

common stock declines, the convertible security tends to trade increasingly on a
yield basis and thus may not decline in price to the same extent as the
underlying common stock.

COMMON STOCKS
The common stocks and other non-preferred equity securities in which the Fund
invests may experience substantially more volatility in their market value than
the Fund's investments in preferred securities. Such securities may also be more
susceptible to adverse changes in market value due to issuer specific events,
such as unfavorable earnings reports. The market values of common stocks are
also generally sensitive to general movements in the equities markets.

ILLIQUID SECURITIES
The Fund may invest up to 20% of its total assets in illiquid securities.
Illiquid securities may be difficult to dispose of at a fair price at the times
when the Adviser believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
the Adviser's judgment may play a greater role in the valuation process.
Investment of the Fund's assets in illiquid securities may restrict the Fund's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which the Fund's
operations require cash and could result in the Fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.

FOREIGN SECURITIES
Although the Fund will only invest in securities of non-U.S. issuers that are
traded or denominated in U.S. dollars, the Fund's investments in non-U.S.
issuers may involve unique risks compared to investing in securities of U.S.
issuers. These risks are more pronounced to the extent that the Fund invests a
significant portion of its non-U.S. investments in one region or in the
securities of emerging market issuers. These risks may include:

+ less information about non-U.S. issuers or markets may be available due to
less rigorous disclosure or accounting standards or regulatory practices

+ many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, the Adviser may not be able to sell the Fund's portfolio
securities at times, in amounts and at prices it considers reasonable

+ adverse effect of currency exchange rates or controls on the value of the
Fund's investments

+ the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession

+ economic, political and social developments may adversely affect the
securities markets

+ withholding and other non-U.S. taxes may decrease the Fund's return

DERIVATIVES
The Fund's hedging and interest rate transactions have risks, including the
imperfect correlation between the value of such instruments and the underlying
assets of the Fund, the possible default of the other party to the transaction
or illiquidity of the derivative instruments. Furthermore, the ability to
successfully use hedging and interest rate transactions depends on the Adviser's
ability to predict pertinent market movements, which cannot be assured. Thus,
the use of derivatives for hedging and interest rate management purposes may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
realize on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the

Fund as premiums and cash or other assets held in margin accounts with respect
to hedging and interest rate transactions are not otherwise available to the
Fund for investment purposes.

LEVERAGE
The Fund may issue preferred shares, borrow money or issue debt securities to
the extent permitted by the 1940 Act. Leverage creates risks which may adversely
affect the return for the holders of common shares, including:

+ the likelihood of greater volatility of net asset value and market price of
the Fund's common shares

+ fluctuations in the dividend rates on any preferred shares or in interest
rates on borrowings and short-term debt

+ increased operating costs, which may reduce the Fund's total return

+ the potential for a decline in the value of an investment acquired with
borrowed funds, while the Fund's obligations under such borrowing remain
fixed

Certain types of borrowings may result in the Fund being subject to covenants in
credit agreements, including those relating to asset coverage, borrowing base
and portfolio composition requirements and additional covenants that may affect
the Fund's ability to pay dividends and distributions on common shares in
certain instances. The Fund may also be required to pledge its assets to the
lenders in connection with certain types of borrowing. The Fund may be subject
to certain restrictions on investments imposed by guidelines of one or more
nationally recognized statistical rating organizations which may issue ratings
for the preferred shares or short-term debt instruments issued by the Fund.
These guidelines may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the 1940 Act.

ANTI-TAKEOVER PROVISIONS
The Fund's Agreement and Declaration of Trust and By-laws include provisions
that could limit the ability of other entities or persons to acquire control of
the Fund or to change the composition of its Board of Trustees. Such provisions
could limit the ability of holders of common shares to sell their shares at a
premium over prevailing market prices by discouraging a third-party from seeking
to obtain control of the Fund. These provisions include staggered terms of
office for the Trustees, advance notice requirements for shareholder proposals,
and super-majority voting requirements for open-ending the Fund or a merger,
liquidation, asset sales and similar transactions.

Summary of Fund expenses

The following table shows the Fund's expenses as a percentage of net assets
attributable to common shares assuming the use of leverage through the issuance
of preferred shares in an amount equal to 33 1/3% of the Fund's total assets.

Shareholder transaction expenses
Sales load (as a percentage of offering price).......... 4.50%
Dividend reinvestment and cash purchase plan fees....... None(1)

PERCENTAGE OF NET ASSETS
ATTRIBUTABLE
TO COMMON SHARES
(ASSUMING THE ISSUANCE
OF PREFERRED SHARES)(2)
-------------------------------------------------------------------

Annual expenses
Advisory fee............................................ 1.13%
Other expenses.......................................... 0.28%
Total annual expenses................................... 1.41%
Fee waiver (years 1-5).................................. 0.30%(3)
Net annual expenses (years 1-5)......................... 1.11%(3)

(1) A shareholder that directs the Plan Agent to sell shares held in a dividend
reinvestment account will pay brokerage charges.

(2) The table above shows the estimated expenses that you will bear as a holder
of common shares, assuming the Fund issues preferred shares in an amount
equal to 33 1/3% of the Fund's total assets, stated as percentage of the
Fund's net assets attributable to common shares. The table below shows the
estimated expenses of the Fund assuming the Fund does not issue preferred
shares or otherwise utilize leverage.

PERCENTAGE OF NET ASSETS
ATTRIBUTABLE
TO COMMON SHARES
(ASSUMING NO
PREFERRED SHARES ARE
ISSUED OR OUTSTANDING)
-------------------------------------------------------------------

Annual expenses
Advisory fee............................................. 0.75%
Other expenses........................................... 0.16%
Total annual expenses.................................... 0.91%
Fee waiver (years 1-5)................................... 0.20%(3)
Net annual expenses (years 1-5).......................... 0.71%(3)

(3) The Adviser has contractually agreed to waive a portion of its advisory
fee. The Adviser has agreed that, until the fifth anniversary of the
investment advisory agreement, the Adviser will limit its advisory fee to
0.55% of average daily managed assets, in the sixth year to 0.60% of
average daily managed assets, in the seventh year to 0.65% of average daily
managed assets, and in the eighth year to 0.70% of average daily managed
assets. After the eighth year, the Adviser will no longer waive a portion
of its advisory fee. Without the fee waiver, "Net annual expenses" would be
estimated to be 1.41% of average daily net assets attributable to common
shares (assuming the issuance of preferred shares) and 0.91% of average
daily net assets attributable to common shares (assuming no preferred
shares are issued or outstanding). The Adviser has agreed to pay the amount
by which the aggregate of all of the Fund's organizational expenses and all
offering costs (other than the sales load) exceeds $0.05 per common share.

The purpose of the tables in this section is to assist you in understanding the
various costs and expenses that a shareholder will bear directly or indirectly
by investing in the Fund's common shares. As of the date of this Prospectus, the
Fund has not commenced investment operations. The amount set forth under other
expenses is based upon estimates for the current year, assuming no exercise of
the

over-allotment option granted to the Underwriters. The table assumes that the
Fund issues 22,500,000 common shares and issues preferred shares as a means of
leverage. If the Fund issues fewer common shares, all other things being equal,
these expenses would increase. If the Fund leverages through borrowing, the Fund
would incur interest expense. For additional information with respect to the
Fund's expenses, see "Management of the Fund." Other expenses include custodial
and transfer agency fees, legal and accounting expenses, and listing fees.

EXAMPLE
The following example illustrates the expenses (including the sales load of $45)
that you would pay on a $1,000 investment in common shares, assuming (i) total
net annual expenses of 1.11% of net assets attributable to common shares in
years 1 through 5, 1.19% in year 6, 1.26% in year 7, 1.34% in year 8 and 1.41%
in years 9 and 10 and (ii) a 5% annual return:(1)

1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------------------------

Total expenses incurred................................. $56 $79 $103 $186

(1) THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. The example assumes that the estimated other expenses set forth
in the fee table are accurate and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater or
less than the hypothetical 5% return shown in the example.

--------------------------------------------------------------------------------

The Fund

John Hancock Preferred Income Fund (the "Fund") is a newly organized,
diversified, closed-end management investment company. The Fund was organized
under the laws of the Commonwealth of Massachusetts on June 27, 2002, and has
registered under the 1940 Act. As a recently organized entity, the Fund has no
operating history. The Fund's principal office is located at 101 Huntington
Avenue, Boston, Massachusetts 02199, and its telephone number is (800) 225-6020.

Use of proceeds

The net proceeds of this offering will be approximately $536,692,500 (or
approximately $617,270,625 assuming the Underwriters exercise the over-allotment
option in full) after payment of organizational expenses and offering costs
estimated to be approximately $495,000 and the deduction of the sales load.

The Fund will invest the net proceeds of the offering in accordance with its
investment objectives and principal investment strategies as stated below. The
Fund expects that there will be an initial investment period of up to three
months following the completion of its common shares offering before it is
invested in accordance with its investment objectives and policies. Pending such
investment, the Fund anticipates that all or a portion of the proceeds will be
invested in U.S. government securities or high grade, short-term money market
instruments. See "Investment objectives and principal investment strategies."

Investment objectives and principal investment strategies

INVESTMENT OBJECTIVES

The Fund's primary investment objective is to provide a high level of current
income, consistent with preservation of capital. The Fund's secondary investment
objective is to provide growth of capital to the extent consistent with its
primary investment objective. The Fund seeks to achieve its objectives by
investing in securities that, in the opinion of the Adviser, may be undervalued
relative to similar securities in the marketplace. The Fund's investment
objectives are non-fundamental policies and may be changed without the approval
of a majority of the outstanding voting securities (as defined in the 1940 Act)
of the Fund. The Fund makes no assurance that it will realize its objectives.

PRINCIPAL INVESTMENT FOCUS AND PHILOSOPHY

Under normal market conditions, the Fund invests at least 80% of its assets (net
assets plus borrowing for investment purposes) in preferred stocks and other
preferred securities, including convertible preferred securities. This is a
non-fundamental policy and may be changed by the Board of Trustees of the Fund
provided that shareholders are provided with at least 60 days prior written
notice of any change as required by the rules under the 1940 Act. The Fund
intends to invest primarily in fully taxable preferred securities. The Fund's
portfolio of preferred securities may include both fixed rate and adjustable
rate securities. The allocation of the Fund's assets in various types of
preferred, debt and equity securities may vary from time to time depending upon
the Adviser's assessment of market conditions.

The Fund invests at least 80% of its total assets in preferred securities and
other fixed income securities which are rated investment grade (i.e., at least
"Baa" by Moody's Investors Service, Inc. ("Moody's") or "BBB" by Standard &
Poor's Rating Group ("S&P")) or in unrated securities

--------------------------------------------------------------------------------
12

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

determined by the Adviser to be of comparable credit quality. The Fund may
invest up to 20% of its total assets in (i) preferred securities or other fixed
income securities rated below investment grade (B or higher) or unrated
preferred securities or unrated fixed income securities determined by the
Adviser to be of comparable quality and (ii) common stocks or other equity
securities that are not considered preferred securities. The weighted average
credit rating of the Fund's portfolio of preferred securities and other fixed
income securities will be at least investment grade.

Securities rated "BBB" by S&P are regarded by S&P as having an adequate capacity
to pay dividends or interest and repay capital or principal, as the case may be;
whereas such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay dividends or interest and repay
capital or principal for securities in this category than in higher rating
categories. Securities rated "Baa" by Moody's are considered by Moody's as
medium to lower medium grade securities; they are neither highly protected nor
poorly secured; dividend or interest payments and capital or principal security,
as the case may be, appear to Moody's to be adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
time; and in the opinion of Moody's, securities in this rating category lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Below investment grade securities and comparable
unrated securities involve substantial risk of loss, are considered speculative
with respect to the issuer's ability to pay interest and any required redemption
or principal payments and are susceptible to default or decline in market value
due to adverse economic and business developments. The descriptions of the
investment grade rating categories by Moody's and S&P, including a description
of their speculative characteristics, are set forth in the Statement of
Additional Information. All references to securities ratings by Moody's and S&P
in this Prospectus shall, unless otherwise indicated, include all securities
within each such rating category (i.e., (1), (2) and (3) in the case of Moody's
and (+) and (-) in the case of S&P). All percentage and ratings limitations on
securities in which the Fund may invest apply at the time of making an
investment and shall not be considered violated if an investment rating is
subsequently downgraded to a rating that would have precluded the Fund's initial
investment in such security or weighted average portfolio. In the event of such
security downgrade, the Fund will sell the portfolio security as soon as the
Adviser believes it to be prudent to do so in order to again cause the Fund to
be within the percentage and ratings limitations set forth in this Prospectus.
In the event that the Fund disposes of a portfolio security subsequent to its
being downgraded, the Fund may experience a greater risk of loss than if such
security had been sold prior to such downgrading.

The Adviser seeks to produce superior results by focusing on the business cycle
and individual security fundamentals and less so on interest rate and duration.
In structuring the portfolio, the Adviser seeks to add investment value in two
ways:

+ by anticipating the broader, more gradual changes in the business cycle, and
then investing in those industries and sectors that are expected to benefit
from the changes

+ by looking within those industries and sectors for issuers and companies that
are undervalued and mispriced relative to the market

The Adviser believes that focusing on sectors, industries, issuers and
individual security fundamentals, rather than predicting the direction of
interest rates and duration, will lead to superior investment results over time.

--------------------------------------------------------------------------------
13

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

The Adviser's analysis may include consideration of the issuer's experience and
managerial strength, changing financial condition, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest or dividend rates. The Adviser will also consider
relative values based on anticipated cash flow, interest or dividend coverage,
asset coverage, earnings prospects, current yield and price stability.

Preferred securities were developed initially as a cost-effective way for
corporations to raise capital by attracting investors seeking a high level of
income with preservation of capital. The Adviser believes that preferred
securities have the following characteristics that investors may find favorable:

+ issuers of preferred securities are typically established companies such as
utilities, banks and financial services corporations

+ preferred securities have the potential to offer investors favorable yields
relative to other income-producing securities like real estate investment
trusts, corporate bonds and government bonds

+ preferred securities have historically exhibited low correlations relative to
other popular asset classes. Adding preferred securities to a portfolio
offers investors the potential for greater total returns and reduced
portfolio volatility. The Fund offers investors the potential to reduce risk
by investing in a portfolio of preferred securities that are diversified
across multiple issuers and sectors. Historically portfolio diversification
has led to more consistent long-term performance

PORTFOLIO CONTENTS AND PRINCIPAL INVESTMENT STRATEGIES

INDUSTRY AND ISSUER CONCENTRATION
The Fund intends to emphasize investments in preferred securities issued or
guaranteed by U.S. corporations in the utilities sector and will be subject to
certain risks due to such emphasis. The Fund will not invest 25% or more of its
total assets in any one industry, except that the Fund will invest 25% or more
of its total assets in the industries comprising the utilities sector. The Fund
will allocate its investments from time to time among industry sectors and among
issuers in such sectors, based on the Adviser's evaluation of market and
economic conditions.

TAXABLE PREFERRED SECURITIES
Pursuant to the Dividends Received Deduction, corporations may generally deduct
70% of the dividend income they receive from domestic corporations. Corporate
shareholders of a regulated investment company, for which status the Fund
intends to qualify, generally are permitted to claim a deduction with respect to
that portion of their distributions attributable to amounts received by the
regulated investment company that qualify for the Dividends Received Deduction.
However, not all preferred securities pay dividends that are eligible for the
Dividends Received Deduction. The Adviser intends to invest primarily in taxable
preferred securities (often referred to as "hybrid" preferred securities) that
do not qualify for the Dividends Received Deduction. These types of taxable
preferred securities typically offer additional yield spread versus other types
of preferred securities due to the fact that payments made with respect to such
preferred securities do not qualify for the Dividends Received Deduction.

The income from taxable preferred securities in which the Fund intends to invest
does not qualify for Dividends Received Deduction under Section 243 of the Code.
The Dividends Received Deduction generally allows corporations to deduct from
their income 70% of dividends received. Accordingly, any corporate shareholder
should assume that none of the distributions it receives from the Fund will
qualify for the Dividends Received Deduction.

--------------------------------------------------------------------------------
14

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

Taxable preferred securities are a comparatively new asset class. Taxable
preferred securities include but are not limited to:

+ trust originated preferred securities

+ monthly income preferred securities

+ quarterly income bond securities

+ quarterly income debt securities

+ quarterly income preferred securities

+ corporate trust securities

+ public income notes and

+ other trust preferred securities

Taxable preferred securities are typically issued by corporations. Taxable
preferred securities may also be issued by an affiliated business trust of a
corporation, generally in the form of beneficial interests in subordinated
debentures or similarly structured securities. The taxable preferred securities
market consists of both fixed and adjustable coupon rate securities that are
either perpetual in nature or have stated maturity dates. The taxable preferred
securities market is divided into the "$25 par" and the "institutional"
segments. The $25 par segment is typified by securities that are listed on the
New York Stock Exchange, which trade and are quoted "flat" (i.e., without
accrued dividend income) and which are typically callable at par value five
years after their original issuance date. The institutional segment is typified
by $1,000 par value securities that are not exchange-listed, which trade and are
quoted on an "accrued income" basis, and which typically have a minimum of 10
years of call protection (at premium prices) from the date of their original
issuance.

Taxable preferred securities normally constitute junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
taxable preferred securities typically permit the issuer to defer the payment of
income for a specified period, which may be eighteen months or more, without
triggering an event of default. Because of their subordinated position in the
capital structure of an issuer, the ability to defer payments for extended
periods of time without adverse consequence to the issuer, and certain other
features (such as restrictions on common dividend payments by the issuer or
ultimate guarantor when cumulative payments on the taxable preferred securities
have not been made), issuers and investors generally treat taxable preferred
securities as close substitutes for traditional preferred securities. Taxable
preferred securities have many of the key characteristics of equity due to their
subordinated position in an issuer's capital structure and because their quality
and value are heavily dependent on the profitability of the issuer rather than
on any legal claims to specific assets or cash flows.

Taxable preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity
date may be extended and/or the final payment of principal may be deferred at
the issuer's option for a specified time without any adverse consequence to the
issuer. No redemption can typically take place unless all cumulative payment
obligations have been met, although issuers may be able to engage in open-market
repurchases without regard to any cumulative dividends payable. A portion of the
portfolio may include investments in non-cumulative preferred securities,
whereby the issuer does not have an obligation to make up any arrearages to its
shareholders. Should an issuer default on its obligations under such a security,
the amount of dividends the Fund pays may be adversely affected.

Many taxable preferred securities are issued by trusts or other special purpose
entities established by operating companies, and are not direct obligations of
the operating company. At the time a trust or

--------------------------------------------------------------------------------
15

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

special purpose entity sells its preferred securities to investors, the trust or
special purpose entity purchases debt of the operating company (with terms
comparable to those of the securities issued by the trust or special purpose
entity), which enables the operating company to deduct for federal income tax
purposes the interest paid on the debt held by the trust or special purpose
entity. The trust or special purpose entity is generally required to be treated
as transparent for federal income tax purposes such that the holders of the
taxable preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company.

Accordingly, dividend payments made with respect to the taxable preferred
securities are treated as interest rather than dividends for federal income tax
purposes and, as such, are not eligible for the Dividends Received Deduction.
The trust or special purpose entity in turn would be a holder of the operating
company's debt and would have priority with respect to the operating company's
assets over the operating company's common shareholders, but would typically be
subordinated to other classes of the operating company's debt. Typically a
taxable preferred share has a rating that is slightly below that of its
corresponding operating company's senior debt securities.

TRADITIONAL PREFERRED SECURITIES
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual,
with no mandatory redemption date, or issued with a fixed mandatory redemption
date. Certain issues of preferred stock are convertible into other equity
securities. Perpetual preferred stocks provide a fixed dividend throughout the
life of the issue, with no mandatory retirement provisions, but may be callable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. The value of fixed rate preferred stocks can be
expected to vary inversely with interest rates.

Adjustable rate preferred stocks have a variable dividend rate which is
determined periodically, typically quarterly, according to a formula based on a
specified premium or discount to the yield on particular U.S. Treasury
securities, typically the highest base-rate yield of one of three U.S. Treasury
securities: the 90-day Treasury bill; the 10-year Treasury note; and either the
20-year or 30-year Treasury bond or other index. The premium or discount to be
added to or subtracted from this base-rate yield is fixed at the time of
issuance and cannot be changed without the approval of the holders of the
adjustable rate preferred stock. Some adjustable rate preferred stocks have a
maximum and a minimum rate and in some cases are convertible into common stock.

Auction rate preferred stocks pay dividends that adjust based upon periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends upon market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
auction rate preferred stocks generally provide that they are redeemable by the
issuer at certain times or under certain conditions.

DEBT SECURITIES
The Fund may invest in debt securities with ratings equivalent to those of the
preferred securities in which the Fund may invest. Debt securities in which the
Fund may invest include: securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities and custodial receipts therefor; securities
issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies or instrumentalities or by international or
supranational entities; corporate debt securities including notes, bonds and
debentures; certificates of deposit and bankers' acceptances issued or

--------------------------------------------------------------------------------
16

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

guaranteed by, or time deposits maintained at, banks (including U.S. or foreign
branches of U.S. banks or U.S. or foreign branches of foreign banks) having
total assets of more than $1 billion; commercial paper; and mortgage related
securities. These securities may be of any maturity. The value of debt
securities can be expected to vary inversely with interest rates.

COMMON STOCKS
The Fund may invest in common stocks. Common stocks are shares of a corporation
or other entity that entitle the holder to a pro rata share of the profits, if
any, of the corporation without preference over any other shareholder or class
of shareholders, including holders of such entity's preferred stock and other
senior equity securities. Common stock usually carries with it the right to vote
and frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund expects generally to focus more on the security's dividend
paying capacity than on its potential for appreciation.

FOREIGN SECURITIES
While the Fund primarily invests in the securities of U.S. issuers, the Fund may
invest up to 20% of its total assets in securities of corporate and governmental
issuers located outside the United States. The Fund only invests in securities
of foreign issuers that are traded or denominated in U.S. dollars.

ILLIQUID SECURITIES
The Fund may invest up to 20% of its assets in illiquid securities (i.e.,
securities that are not readily marketable). Illiquid securities include, but
are not limited to, restricted securities (securities the disposition of which
is restricted under the federal securities laws), securities that may be resold
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act") but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Trustees or its delegate
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid. Restricted
securities may be sold only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the
Securities Act. Where registration is required, the Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than that which prevailed when it decided to sell. Illiquid
securities will be priced at fair value as determined in good faith by the Board
of Trustees or its delegate.

MONEY MARKET INSTRUMENTS
Money market instruments include short-term U.S. government securities, U.S.
dollar denominated, high quality commercial paper (unsecured promissory notes
issued by corporations to finance their short-term credit needs), certificates
of deposit, bankers' acceptances and repurchase agreements relating to any of
the foregoing. U.S. government securities include Treasury notes, bonds and
bills, which are direct obligations of the U.S. government backed by the full
faith and credit of the United States, and securities issued by agencies and
instrumentalities of the U.S. government, which may be guaranteed by the U.S.
Treasury, may be supported by the issuer's right to borrow from the U.S.
Treasury or may be backed only by the credit of the federal agency or
instrumentality itself.

U.S. GOVERNMENT SECURITIES
U.S. government securities in which the Fund invests include debt obligations of
varying maturities issued by the U.S. Treasury or issued or guaranteed by an
agency or instrumentality of the U.S. government, including the Federal Housing
Administration, Federal Financing Bank, Farmers

--------------------------------------------------------------------------------
17

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association (GNMA), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (FHLMC),
Federal National Mortgage Association (FNMA), Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan Marketing
Association, Resolution Trust Corporation and various institutions that
previously were or currently are part of the Farm Credit System (which has been
undergoing reorganization since 1987). Some U.S. government securities, such as
U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in
their interest rates, maturities and times of issuance, are supported by the
full faith and credit of the United States government. Others are supported by:
(i) the right of the issuer to borrow from the U.S. Treasury, such as securities
of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S.
government to purchase the agency's obligations, such as securities of the FNMA;
or (iii) only the credit of the issuer. No assurance can be given that the U.S.
government will provide financial support in the future to U.S. government
agencies, authorities or instrumentalities that are not supported by the full
faith and credit of the United States. Securities guaranteed as to principal and
interest by the U.S. government, its agencies, authorities or instrumentalities
include: (i) securities for which the payment of principal and interest is
backed by an irrevocable letter of credit issued by the U.S. government or any
of its agencies, authorities or instrumentalities; and (ii) participations in
loans made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore,
may be regarded as illiquid.

REITS
The Fund may invest in common and preferred interests in real estate investment
trusts ("REITs"). REITs primarily invest in income producing real estate or real
estate related loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with the applicable
requirements of the Code. The Fund will in some cases indirectly bear its
proportionate share of any management and other expenses paid by REITs in which
it invests in addition to the expenses paid by the Fund. Debt securities issued
by REITs are, for the most part, general and unsecured obligations and are
subject to risks associated with REITs.

OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies to the
extent that such investments are consistent with the Fund's investment
objectives and principal investment strategies and permissible under the 1940
Act. Under the 1940 Act, the Fund may not acquire the securities of other
investment companies if, as a result, (i) more than 10% of the Fund's total
assets would be invested in securities of other investment companies, (ii) such
purchase would result in more than 3% of the total outstanding voting securities
of any one investment company being held by the Fund and its affiliates, or
(iii) more than 5% of the Fund's total assets would be invested in any one
investment company. These limitations do not apply to the purchase of shares of
any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company. The Fund, as a holder of the securities of other investment
companies, will bear its pro rata portion of the other investment companies'
expenses, including advisory fees. These expenses are in addition to the direct
expenses of the Fund's own operations.

--------------------------------------------------------------------------------
18

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

HEDGING AND INTEREST RATE TRANSACTIONS
The Fund may, but is not required to, use various hedging and interest rate
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Such transactions are generally accepted under modern portfolio
management and are regularly used by many mutual funds and other institutional
investors. Although the Adviser seeks to use the practices to further the Fund's
investment objectives, no assurance can be given that these practices will
achieve this result.

The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, equity, fixed income
and interest rate indices, and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Fund also may purchase derivative instruments that
combine features of these instruments. Collectively, all of the above are
referred to as "Strategic Transactions." The Fund generally seeks to use
Strategic Transactions as a portfolio management or hedging technique to seek to
protect against possible adverse changes in the market value of securities held
in or to be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for investment purposes,
manage the effective interest rate exposure of the Fund, including the effective
yield paid on any preferred shares issued by the Fund, manage the effective
maturity or duration of the Fund's portfolio, or establish positions in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. The Fund may use Strategic Transactions to enhance
potential gain, although no more than 5% of the Fund's total assets will be
committed to initial margin for Strategic Transactions for non-hedging purposes.

Strategic Transactions have risks, including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic Transactions depends on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of Strategic Transactions may result in losses greater
than if they had not been used, may require the Fund to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold a security that it might otherwise
sell. Additionally, amounts paid by the Fund as premiums and cash or other
assets held in margin accounts with respect to Strategic Transactions are not
otherwise available to the Fund for investment purposes.

A more complete discussion of Strategic Transactions and their risks is
contained in the Statement of Additional Information.

TEMPORARY DEFENSIVE STRATEGIES

There may be times when, in the Adviser's judgment, conditions in the securities
market would make pursuit of the Fund's investment strategy inconsistent with
achievement of the Fund's investment objectives. At such times, the Adviser may
employ alternative strategies primarily to seek to reduce fluctuations in the
value of the Fund's assets. In implementing these temporary defensive
strategies, depending on the circumstances, the Fund may invest an unlimited
portion of its portfolio in U.S. dollar denominated corporate debt securities,
short-term money market instruments, U.S. government securities and cash. It is
impossible to predict when, or for how long, the Fund may use these alternative
strategies.

OTHER INVESTMENT POLICIES

WHEN-ISSUED AND DELAYED DELIVERY PURCHASES
The Fund may make contracts to purchase securities on a "when-issued" or
"delayed delivery" basis. Pursuant to such contracts, delivery and payment for
the securities occurs at a date later than the

--------------------------------------------------------------------------------
19

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------

customary settlement date. The payment obligations and the interest rate on the
securities will be fixed at the time the Fund enters into the commitment, but
interest will not accrue to the Fund until delivery of and payment for the
securities. An amount of cash or high quality securities equal to the amount of
the Fund's commitment will be deposited in a segregated account at the Fund's
custodian to secure the Fund's obligation. Although the Fund would generally
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities for its portfolio (or for
delivery pursuant to options or futures contracts it has entered into) and not
for leverage purchases, the Fund could dispose of a security prior to settlement
if the Adviser deemed it advisable. The purchase of securities on a when-issued
or delayed delivery basis involves a risk of loss if the value of the security
to be purchased declines prior to the settlement date. This risk is in addition
to the risk of a decline in value of the Fund's other assets. Furthermore, when
such purchases are made through a dealer, the dealer's failure to consummate the
sale may result in the loss to the Fund of an advantageous yield or price.

PORTFOLIO TURNOVER
The Fund may engage in portfolio trading when considered appropriate, but
short-term trading will not be used as the primary means of achieving the Fund's
investment objectives. Although the Fund cannot accurately predict its annual
portfolio turnover rate, it is not expected to exceed 25% under normal
circumstances. However, there are no limits on the rate of portfolio turnover,
and investments may be sold without regard to length of time held when, in the
opinion of the Adviser, investment considerations warrant such action. A higher
portfolio turnover rate results in correspondingly greater brokerage commissions
and other transactional expenses that are borne by the Fund. High portfolio
turnover may result in the realization of net short-term capital gains by the
Fund which, when distributed to shareholders, will be taxable as ordinary
income. See "U.S. federal income tax matters."

Leverage

The Fund currently anticipates that it will issue, as soon as practicable after
the closing of this offering, preferred shares with an aggregate liquidation
preference of approximately 33 1/3% of the Fund's total assets after giving
effect to such issuance. The Fund may issue preferred shares or borrow or issue
short-term debt securities to increase its assets available for investment. The
Fund is authorized to issue preferred shares or issue debt obligations to the
extent permitted by the 1940 Act. The Fund generally will not issue preferred
shares or borrow unless the Adviser expects that the Fund will achieve a greater
return on such borrowed funds than the additional costs the Fund incurs as a
result of such borrowing. The Fund also may borrow money as a temporary measure
for extraordinary or emergency purposes, including the payment of dividends and
the settlement of securities transactions which otherwise might require untimely
dispositions of the Fund's holdings. When the Fund leverages its assets, the
fees paid to the Adviser for investment advisory and management services will be
higher than if the Fund did not borrow because the Adviser's fees are calculated
based on the Fund's total assets including the proceeds of the issuance of
preferred shares or any outstanding borrowings. Consequently, the Fund and the
Adviser may have differing interests in determining whether to leverage the
Fund's assets. The Board of Trustees will monitor this potential conflict.

The Fund's use of leverage is premised upon the expectation that the Fund's
dividends on its outstanding preferred shares or borrowing cost will be lower
than the return the Fund achieves on its investments with the proceeds of the
issuance of preferred shares or borrowing. Such difference in return may result
from the short-term nature of its borrowing compared to the long-term nature of
its investments or the Fund's higher credit rating. If the assets of the Fund
(including the assets obtained from leverage) are invested in the higher
yielding portfolio investments or portfolio investments that

--------------------------------------------------------------------------------
20

LEVERAGE
--------------------------------------------------------------------------------

appreciate in value, the holders of common shares will be the beneficiaries of
any excess of such return over the cost of leverage. Should the differential
between the return in the underlying assets and cost of leverage narrow, the
incremental return "pick up" will be reduced. Furthermore, if long-term rates
rise or the Fund otherwise incurs losses on its investments, the Fund's net
asset value attributable to its common shares will reflect the decline in the
value of portfolio holdings resulting therefrom.

Leverage creates risks which may adversely affect the return for the holders of
common shares, including:

+ the likelihood of greater volatility of net asset value and market price of
common shares

+ fluctuations in the dividend rates on any preferred shares or in interest
rates on borrowings and short-term debt

+ increased operating costs, which may reduce the Fund's total return to the
holders of common shares

+ the potential for a decline in the value of an investment acquired through
leverage, while the Fund's obligations under such leverage remains fixed

To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return will be greater than if leverage had not been used. Conversely, if
the income or capital appreciation from the securities purchased with such funds
is not sufficient to cover the cost of leverage or if the Fund incurs capital
losses, the return of the Fund will be less than if leverage had not been used,
and therefore the amount available for distribution to shareholders as dividends
and other distributions will be reduced or potentially eliminated. The Adviser
may determine to maintain the Fund's leveraged position if it expects that the
long-term benefits to the Fund's shareholders of maintaining the leveraged
position will outweigh the current reduced return. Capital raised through the
issuance of preferred shares or borrowing will be subject to dividend payments
or interest costs that may or may not exceed the income and appreciation on the
assets purchased. The issuance of additional classes of preferred shares
involves offering expenses and other costs, which will be borne by the holders
of common shares, and may limit the Fund's freedom to pay dividends on common
shares or to engage in other activities. The Fund also may be required to
maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest rate.

The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized statistical rating organizations
which may issue ratings for the preferred shares or short-term debt instruments
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the 1940
Act. Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage,
borrowing base and portfolio composition requirements and additional covenants
that may affect the Fund's ability to pay dividends and distributions on common
shares in certain instances. The Fund may also be required to pledge its assets
to the lenders in connection with certain types of borrowing. The Adviser does
not anticipate that these covenants or restrictions will adversely affect its
ability to manage the Fund's portfolio in accordance with the Fund's investment
objectives and principal investment strategies. Due to these covenants or
restrictions, the Fund may be forced to liquidate investments at times and at
prices that are not favorable to the Fund, or the Fund may be forced to forego
investments that the Adviser otherwise views as favorable.

Under the 1940 Act, the Fund is not permitted to issue preferred shares unless
immediately after such issuance the net asset value of the Fund's portfolio is
at least 200% of the liquidation value of the outstanding preferred shares
(i.e., such liquidation value may not exceed 50% of the value of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other

--------------------------------------------------------------------------------
21

LEVERAGE
--------------------------------------------------------------------------------

distribution on its common shares unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of such liquidation value. In
the event preferred shares are issued, the Fund intends, to the extent possible,
to purchase or redeem preferred shares from time to time to maintain coverage of
any preferred shares of at least 200%. Under the 1940 Act, the Fund is not
permitted to incur indebtedness unless immediately after such borrowing the Fund
has an asset coverage of at least 300% of the aggregate outstanding principal
balance of indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the
value of the Fund's total assets). Additionally, under the 1940 Act, the Fund
may not declare any dividend or other distribution upon any class of its shares,
or purchase any such shares, unless the aggregate indebtedness of the Fund has,
at the time of the declaration of any such dividend or distribution or at the
time of any such purchase, an asset coverage of at least 300% after deducting
the amount of such dividend, distribution, or purchase price, as the case may
be.

If and to the extent that the Fund employs leverage will depend on many factors,
the most important of which are investment outlook, market conditions and
interest rates. Successful use of a leveraging strategy depends on the Adviser's
ability to predict correctly interest rates and market movements. There is no
assurance that a leveraging strategy will be successful during any period in
which it is employed.

Assuming the Fund issues preferred shares with a liquidation preference equal to
approximately 33 1/3% of the Fund's total assets and an annual dividend rate of
3.25% of such liquidation preference (which rate is approximately the rate which
the Adviser expects the Fund to pay), based on an estimate of market rates as of
the date of this Prospectus, the Fund would need to achieve an annual return on
its total assets of 1.08% in order to cover such dividend payments on the
preferred shares.

The following table illustrates the hypothetical effect on the return to a
holder of the Fund's common shares of the leverage obtained by issuing preferred
shares with a liquidation value equal to 33 1/3% of the Fund's total assets,
assuming hypothetical annual returns of the Fund's portfolio of minus 10% to
plus 10%. As the table shows, leverage generally increases the return to
shareholders when portfolio return is positive and greater than the cost of
leverage and decreases the return when the portfolio return is negative or less
than the cost of leverage. The figures appearing in the table are hypothetical
and actual returns may be greater or less than those appearing in the table.

Assumed portfolio return (net of expenses)..... (10.00)% (5.00)% 0.00% 5.00% 10.00%
Corresponding common share return.............. (16.63)% (9.13)% (1.63)% 5.88% 13.38%

Until the Fund issues preferred shares or borrows, the Fund's common shares will
not be leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the common
shares cannot be fully achieved until the proceeds resulting from the use of
leverage have been invested in longer term debt instruments in accordance with
the Fund's investment objectives and policies.

Risk factors

GENERAL

The Fund is a diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading tool. An investment in
the Fund's common shares may be speculative in that it involves risk. The Fund
should not constitute a complete investment program and should only be
considered as an addition to an investor's existing diversified portfolio of
investments.

--------------------------------------------------------------------------------
22

RISK FACTORS
--------------------------------------------------------------------------------

Due to the uncertainty in all investments, there can be no assurance that the
Fund will achieve its investment objectives.

NO OPERATING HISTORY

The Fund is a newly organized closed-end management investment company and has
no operating history or history of public trading.

LEVERAGE

The Fund may issue preferred shares, borrow money or issue debt securities with
a liquidation preference or principal amount to the extent permitted by the 1940
Act. Leverage creates risks which may adversely affect the return for the
holders of common shares, including:

+ the likelihood of greater volatility of net asset value and market price of
common shares

+ fluctuations in the dividend rates on any preferred shares or in interest
rates on borrowings and short-term debt

+ increased operating costs, which may reduce the Fund's total return to the
holders of common shares

+ the potential for a decline in the value of an investment acquired through
leverage, while the Fund's obligations under such leverage remain fixed

Certain types of borrowings may result in the Fund being subject to covenants in
credit agreements, including those relating to asset coverage, borrowing base
and portfolio composition requirements and additional covenants that may affect
the Fund's ability to pay dividends and distributions on common shares in
certain instances. The Fund may also be required to pledge its assets to the
lenders in connection with certain types of borrowing. The Fund may be subject
to certain restrictions on investments imposed by guidelines of one or more
nationally recognized rating organizations which may issue ratings for the
preferred shares or short-term debt instruments issued by the Fund. These
guidelines may impose asset coverage or portfolio composition requirements that
are more stringent than those imposed by the 1940 Act.

Since the Adviser's fee is a percentage of the Fund's managed assets, the
Adviser's fee will be higher if the Fund is leveraged and the Adviser will have
an incentive to leverage the Fund.

INTEREST RATE RISK

Fixed income securities are subject to certain common risks, including:

+ if interest rates go up, the value of debt securities in the Fund's portfolio
generally will decline

+ during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Preferred securities and other fixed income securities
frequently have call features that allow the issuer to repurchase the
security prior to its stated maturity. An

--------------------------------------------------------------------------------
23

RISK FACTORS
--------------------------------------------------------------------------------

issuer may redeem an obligation if the issuer can refinance the debt at a
lower cost due to declining interest rates or an improvement in the credit
standing of the issuer

+ during periods of rising interest rates, the average life of certain types of
securities may be extended because of the right of the issuer to defer
payments or slower than expected principal payments. This may lock in a below
market interest rate, increase the security's duration (the estimated period
until the security is paid in full) and reduce the value of the security.
This is known as extension risk

CREDIT RISK

Credit risk is the risk that preferred securities or debt securities in the
Fund's portfolio will decline in price or fail to make dividend payments when
due because the issuer of the security experiences a decline in its financial
status. Although the Fund will primarily invest in investment grade securities,
the Fund is authorized to invest up to 20% of its total assets in preferred
securities and other fixed income securities that are rated below investment
grade at the time of acquisition. These securities may be rated as low as B by
Moody's and S&P. Securities rated "Baa" by Moody's are considered by Moody's as
medium to lower medium grade securities; they are neither highly protected nor
poorly secured; dividend or interest payments and capital or principal security,
as the case may be, appear to Moody's to be adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
time; and in the opinion of Moody's, securities in this rating category lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated "BBB" by S&P are regarded by S&P as
having an adequate capacity to pay dividends or interest and repay capital or
principal, as the case may be; whereas such securities normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely, in the opinion of S&P, to lead to a weakened capacity to pay
dividends or interest and repay capital or principal for securities in this
category than in higher rating categories. Below investment grade securities and
comparable unrated securities involve substantial risk of loss, are considered
speculative with respect to the issuer's ability to pay interest and any
required redemption or principal payments and are susceptible to default or
decline in market value due to adverse economic and business developments. The
ratings of Moody's and S&P represent their opinions as to the quality of those
securities that they rate; ratings are relative and subjective and are not
absolute standards of quality.

SECTOR RISK

Under normal market conditions, the Fund will emphasize investments in preferred
securities issued or guaranteed by U.S. corporations in the utilities sector.
The Fund will not invest 25% or more of its total assets in any one industry,
except that the Fund will invest 25% or more of its total assets in the
industries comprising the utilities sector.

The utilities industries in which the Fund may invest include companies engaged
in:

+ the generation, transmission, sale or distribution of electric energy

+ the distribution, purification and treatment of water

+ the provision of sewage management, treatment or other sanitary services

+ the production, transmission or distribution of natural gas

+ the provision of pollution control or abatement services

+ telecommunications, including telephone, telegraph, satellite, microwave and
other communications media (but not companies engaged primarily in public
broadcasting industry)

--------------------------------------------------------------------------------
24

RISK FACTORS
--------------------------------------------------------------------------------

+ high interest costs in connection with capital construction programs

+ governmental regulation of rates charged to customers

+ costs associated with environmental and other regulations

+ the effects of economic slowdowns and surplus capacity

+ increased competition from other providers of utility services

+ technological innovations that may render existing plants, equipment or
products obsolete

+ increased costs and reduced availability of certain types of fuel,
occasionally reduced availability and high costs of natural gas for resale,
the effects of energy conservation, and the potential that costs incurred by
the utility, such as the cost of fuel, change more rapidly than the rate the
utility is permitted to charge its customers

+ the effects of a national energy policy and lengthy delays and greatly
increased costs and other problems associated with the design, construction,
licensing, regulation and operation of nuclear facilities for electric
generation, including, among other considerations, the problems associated
with the use of radioactive materials and the disposal of radioactive wastes

There are substantial differences between the regulatory practices and policies
of various jurisdictions, and any given regulatory agency may make major shifts
in policy from time to time. There is no assurance that regulatory authorities
will, in the future, grant rate increases or that such increases will be
adequate to permit the payment of dividends on common stocks. Additionally,
existing and possible future regulatory legislation may make it even more
difficult for these utilities to obtain adequate relief. Certain of the issuers
of securities held in the Fund's portfolio may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing
policies and impose additional requirements governing the licensing,
construction and operation of nuclear power plants. Prolonged changes in
climatic conditions can also have a significant impact on both the revenues of
an electric and gas utility as well as the expenses of a utility, particularly a
hydro-based electric utility.

The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. In recent years, changes in regulation
in the United States increasingly have allowed utility companies to provide
services and products outside their traditional geographic areas and lines of
business, creating new areas of competition within the industries. In some
instances, utility companies are operating on an unregulated basis. Because of
trends toward deregulation and the evolution of independent power producers as
well as new entrants to the field of telecommunications, non-regulated providers
of utility services have become a significant part of their respective
industries. The emergence of competition and deregulation may result in certain
utility companies being able to earn more than their traditional regulated rates
of return, while others may be forced to defend their core business from
increased competition and may be less profitable. Reduced profitability, as well
as new uses of funds (such as for expansion, operations or stock buybacks) could
result in cuts in dividend payout rates.

--------------------------------------------------------------------------------
25

RISK FACTORS
--------------------------------------------------------------------------------

subject to extensive regulation at the federal and/or state level and, to the
extent that they operate internationally, in other countries. Each of these
industries may also be significantly affected by changes in prevailing interest
rates, general economic conditions and industry specific risks. The enactment of
new legislation and regulation, as well as changes in the interpretation and
enforcement of existing laws and regulations, may directly affect the manner of
operations and profitability of participants in the financial services sector.
From time to time, changes in law and regulation have permitted greater
diversification of their financial products, but their ability to expand by
acquisition or branching across state lines and to engage in non-banking
activities continues to be limited. Federal or state law and regulations require
banks, bank holding companies, broker-dealers and insurance companies to
maintain minimum levels of capital and liquidity. Bank regulators have broad
authority and can impose sanctions, including conservatorship or receivership,
on non-complying banks even when these banks continue to be solvent, thereby
possibly resulting in the elimination of stockholders' equity.

SPECIAL RISKS RELATED TO PREFERRED SECURITIES

There are special risks associated with investing in preferred securities:

+ LIMITED VOTING RIGHTS. Generally, holders of preferred securities (such as
the Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods at
which time the preferred security holders may elect a number of directors to
the issuer's board. Generally, once the issuer pays all the arrearages, the
preferred security holders no longer have voting rights.

+ LIQUIDITY. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. government securities.

+ SUPPLY OF TAXABLE PREFERRED SECURITIES. The Financial Accounting Standards
Board is reviewing accounting guidelines relating to taxable preferred
securities. To the extent that a change in the guidelines could adversely
affect the market for, and availability of, these securities, the Fund may be
adversely affected.

+ NEW TYPES OF SECURITIES. From time to time, preferred securities, including
taxable preferred securities have been, and may in the future be, offered
having features other than those described herein. The Fund reserves the
right to invest in these securities if the Adviser believes that doing so
would be consistent with the Fund's investment objectives and principal
investment strategies. Since the market for these instruments would be new,
the Fund may have difficulty disposing of them at a suitable price and time.
In addition to limited liquidity, these instruments may present other risks,
such as high price volatility.

--------------------------------------------------------------------------------
26

RISK FACTORS
--------------------------------------------------------------------------------

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities. Convertible fixed income
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. As with all fixed income
securities, market values of convertible securities tend to decline as interest
rates increase and, conversely, to increase as interest rates decline. However,
when the market price of the common stock underlying a convertible security
exceeds the conversion price, the convertible security tends to reflect the
market price of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis and thus may not decline in price to the same
extent as the underlying common stock. Convertible securities rank senior to
common stock in an issuer's capital structure and consequently entail less risk
than the issuer's common stock. The Fund may invest in convertible securities of
any maturity and will determine whether to hold, sell or convert any security in
which it has invested depending upon the Adviser's outlook for the market value
for such security and the security into which it converts.

COMMON STOCKS

The common stocks and other non-preferred equity securities in which the Fund
invests may experience substantially more volatility in their market value than
the Fund's investments in preferred securities. Such securities may also be more
susceptible to adverse changes in market value due to issuer specific events,
such as unfavorable earnings reports. The market values of common stocks are
also generally sensitive to general movements in the equities markets.

ILLIQUID SECURITIES

The Fund may invest up to 20% of its total assets in illiquid securities.
Illiquid securities may be difficult to dispose of at a fair price at the times
when the Adviser believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
the Adviser's judgment may play a greater role in the valuation process.
Investment of the Fund's assets in illiquid securities may restrict the Fund's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which the Fund's
operations require cash and could result in the Fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.

FOREIGN SECURITIES

Although the Fund will invest primarily in the securities of U.S. issuers, the
Fund may invest up to 20% of its total assets in securities of corporate and
governmental issuers located outside the U.S. Although the Fund only invests in
securities of non-U.S. issuers that are traded or denominated in U.S. dollars,
the Fund's investments in non-U.S. issuers may involve unique risks compared to
investing in securities of U.S. issuers. These risks are more pronounced to the
extent that the Fund invests a significant portion of its non-U.S. investments
in one region or in the securities of emerging market issuers. These risks may
include:

+ less information about non-U.S. issuers or markets may be available due to
less rigorous disclosure or accounting standards or regulatory practices

+ adverse effect of currency exchange rates or controls on the value of the
Fund's investments

+ the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession

--------------------------------------------------------------------------------
27

RISK FACTORS
--------------------------------------------------------------------------------

+ economic, political and social developments may adversely affect the
securities markets

+ withholding and other non-U.S. taxes may decrease the Fund's return

There may be less publicly available information about non-U.S. markets and
issuers than is available with respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The trading markets for most non-U.S. securities are
generally less liquid and subject to greater price volatility than the markets
for comparable securities in the U.S. The markets for securities in certain
emerging markets are in the earliest stages of their development. Even the
markets for relatively widely traded securities in certain non-U.S. markets,
including emerging market countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the U.S. Additionally,
market making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity.

Economies and social and political climate in individual countries may differ
unfavorably from the U.S. Non-U.S. economies may have less favorable growth
rates of gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions. Many
countries have experienced substantial, and in some cases extremely high, rates
of inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, very negative effects on the economies and
securities markets of certain emerging countries. Unanticipated political or
social developments may also affect the values of the Fund's investments and the
availability to the Fund of additional investments in such countries.

MARKET PRICE OF SHARES

Shares of closed-end funds frequently trade at a prices lower than their net
asset value. This is commonly referred to as "trading at a discount." This
characteristic of shares of closed-end funds is a risk separate and distinct
from the risk that the Fund's net asset value may decrease. Investors who sell
their shares within a relatively short period after completion of the public
offering are likely to be exposed to this risk. Accordingly, the Fund is
designed primarily for long-term investors and should not be considered a
vehicle for trading purposes. Net asset value will be reduced following the
offering by the underwriting discount and the amount of offering expenses paid
by the Fund.

Whether investors will realize a gain or loss upon the sale of the Fund's common
shares will depend upon whether the market value of the shares at the time of
sale is above or below the price the investor paid for the shares, taking into
account transaction costs, and is not directly dependent upon the Fund's net
asset value. Because the market value of the Fund's shares will be determined by
factors such as the relative demand for and supply of the shares in the market,
general market conditions and other factors beyond the control of the Fund, the
Fund cannot predict whether its common shares will trade at, below or above net
asset value, or below or above the initial offering price for the shares.

DERIVATIVES

--------------------------------------------------------------------------------
28

RISK FACTORS
--------------------------------------------------------------------------------

amounts paid by the Fund as premiums and cash or other assets held in margin
accounts with respect to Strategic Transactions are not otherwise available to
the Fund for investment purposes.

There are several risks associated with the use of futures contracts and futures
options. A purchase or sale of a futures contract may result in losses in excess
of the amount invested in the futures contract. While the Fund may enter into
futures contracts and options on futures contracts for hedging purposes, the use
of futures contracts and options on futures contracts might result in a poorer
overall performance for the Fund than if it had not engaged in any such
transactions. There may be an imperfect correlation between the Fund's portfolio
holdings and futures contracts or options on futures contracts entered into by
the Fund, which may prevent the Fund from achieving the intended hedge or expose
the Fund to risk of loss. The degree of imperfection of correlation depends on
circumstances such as variations in market demand for futures, futures options
and the related securities, including technical influences in futures and
futures options trading, and differences between the securities markets and the
securities underlying the standard contracts available for trading. Further, the
Fund's use of futures contracts and options on futures contracts to reduce risk
involves costs and will be subject to the Adviser's ability to predict correctly
changes in interest rate relationships or other factors.

Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of short-term interest rates at that point in time, a default by a counterparty
could negatively impact the performance of the common shares. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund would not be able to obtain a
replacement transaction or that the terms of the replacement would not be as
favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the common shares. If the Fund fails to
maintain a required 200% asset coverage of the liquidation value of the
outstanding preferred shares or if the Fund loses its expected rating on the
preferred shares or fails to maintain other covenants, the Fund may be required
to redeem some or all of the preferred shares. Similarly, the Fund could be
required to prepay the principal amount of any borrowings. Such redemption or
prepayment would likely result in the Fund seeking to terminate early all or a
portion of any swap or cap transaction. Early termination of a swap could result
in a termination payment by or to the Fund. Early termination of a cap could
result in a termination payment to the Fund. The Fund intends to maintain, in a
segregated account, cash or liquid securities having a value at least equal to
the Fund's net payment obligations under any swap transaction, marked to market
daily. The Fund will not enter into interest rate swap or cap transactions
having a notional amount that exceeds the outstanding amount of the Fund's
leverage.

The use of interest rate swaps and caps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. Depending on the state of interest
rates in general, the Fund's use of interest rate swaps or caps could enhance or
harm the overall performance on the common shares. To the extent there is a
decline in interest rates, the value of the interest rate swap or cap could
decline, and could result in a decline in the net asset value of the common
shares. In addition, if short-term interest rates are lower than the Fund's
fixed rate of payment on the interest rate swap, the swap will reduce common
share net earnings. If, on the other hand, short-term interest rates are higher
than the fixed rate of payment on the interest rate swap, the swap will enhance
common share net earnings. Buying interest rate caps could enhance the
performance of the common shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the common shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap.

--------------------------------------------------------------------------------
29

RISK FACTORS
--------------------------------------------------------------------------------

Interest rate swaps and caps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the counterparty defaults, the Fund
would not be able to use the anticipated net receipts under the swap or cap to
offset the dividend payments on the Fund's preferred shares or interest payments
on borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such a
default could negatively impact the performance of the common shares.

ANTI-TAKEOVER PROVISIONS

The Fund's Agreement and Declaration of Trust and By-laws include provisions
that could limit the ability of other entities or persons to acquire control of
the Fund or to change the composition of its Board of Trustees. Such provisions
could limit the ability of holders of common shares to sell their shares at a
premium over prevailing market prices by discouraging a third-party from seeking
to obtain control of the Fund. These provisions include staggered terms of
office for the Trustees, advance notice requirements for shareholder proposals,
and super-majority voting requirements for open-ending the Fund or a merger,
liquidation, asset sales and similar transactions.

RECENT EVENTS

The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The Fund does not know how long the
securities markets will continue to be affected by these events and cannot
predict the effects of similar events in the future on the U.S. economy.

Management of the Fund

TRUSTEES AND OFFICERS

The Fund's Board of Trustees provides broad supervision over the affairs of the
Fund. The officers of the Fund are responsible for the Fund's operations. The
Trustees and officers of the Fund, together with their principal occupations
during the past five years, are listed in the Statement of Additional
Information. Each of the Trustees serves as a Trustee of each of the other
leveraged closed-end investment companies for which the Adviser acts as
investment adviser.

INVESTMENT ADVISER AND ADMINISTRATOR

The Fund has contracted with John Hancock Advisers, LLC to act as its investment
adviser. The Adviser serves as the investment adviser to the Patriot Group of
Trusts, consisting of Patriot Premium Dividend Fund I, Patriot Premium Dividend
Fund II, Patriot Select Dividend Trust, Patriot Preferred Dividend Fund and
Patriot Global Dividend Fund, all leveraged dual-class, closed-end investment
companies. The Adviser was organized in 1968 and had, as of March 31, 2002
approximately $29 billion in assets under management, of which approximately
$1.3 billion was invested in preferred securities. The Adviser is an indirect
wholly-owned subsidiary of John Hancock Financial Services, Inc., a financial
services company.

The Adviser has been managing closed-end funds since 1971 and has a long history
of delivering regular dividends through several market cycles. The Adviser is an
industry leader in preferred stock fund management and is the only firm to
actively manage five closed-end preferred stock funds.

--------------------------------------------------------------------------------
30

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

The Adviser will employ a team of seasoned investment professionals to manage
the Fund. This experienced team has been successful in managing preferred assets
through John Hancock's similarly structured Patriot group of funds as well as
open-end funds and institutional portfolios. The team consists of 59
professionals with an average of 16 years of investment experience. In addition
to developing a structured process to manage interest rate risk, the management
team has a track record of maintaining regular dividends through difficult
market cycles. The Adviser uses a total team approach in which portfolio
managers and analysts work together to research and identify investment
opportunities resulting in a free-flowing exchange of ideas. The Adviser's goal
is to deliver consistent investment results, where its investment philosophy can
be maintained through teamwork rather than individual efforts.

Under the terms of an investment advisory agreement between the Fund and the
Adviser (the "Advisory Agreement"), the Fund has retained the Adviser to provide
overall investment advice and to manage the investment of the Fund's assets and
to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating research, economic and
statistical data and, subject to the supervision of the Board of Trustees, for
formulating and implementing investment programs in furtherance of the Fund's
investment objective. The Adviser will furnish to the Fund the services of such
members of its organization as may be duly elected officers of the Fund. The
Adviser will not be liable to the Fund except for willful malfeasance, bad
faith, gross negligence or reckless disregard of its duties and obligations.

The Adviser will also provide administrative services to the Fund (to the extent
such services are not provided to the Fund pursuant to other agreements)
including (i) providing supervision of the Fund's non-investment operations,
(ii) providing the Fund with personnel to perform such executive, administrative
and clerical services as are reasonably necessary to provide effective
administration of the Fund, (iii) arranging for the preparation, at the Fund's
expense, of the Fund's tax returns, reports to shareholders and reports filed
with the Securities and Exchange Commission and other regulatory authorities,
(iv) providing the Fund with adequate office space and certain related office
equipment and services, and (v) maintaining all of the Fund's records other than
those maintained pursuant to such other agreements.

COMPENSATION AND EXPENSES

For its advisory and administrative services, the Fund will accrue and pay to
the Adviser daily, as compensation for the services rendered and expenses paid
by it, a fee on an annual basis equal to 0.75% of the Fund's average daily
managed assets. Because the fee paid to the Adviser is determined on the basis
of the Fund's managed assets, the Adviser's interest in determining whether to
leverage the Fund may differ from the interests of the Fund. "Managed assets"
means the total assets of the Fund (including any assets attributable to any
leverage that may be outstanding) minus the sum of accrued liabilities (other
than liabilities representing financial leverage). The liquidation preference of
the preferred shares is not a liability. Pursuant to a separate Accounting and
Legal Services Agreement, the Adviser is reimbursed for certain tax, and
accounting and legal services.

The Adviser has contractually agreed to waive a portion of its advisory fees.
The Adviser has agreed that, until the fifth anniversary of investment advisory
agreement, the Adviser will limit its advisory fee to 0.55% of average daily
managed assets, in the sixth year to 0.60% of average daily managed assets, in
the seventh year to 0.65% of average daily managed assets, and in the eighth
year to 0.70% of average daily managed assets. After the eighth year, the
Adviser will no longer waive a portion of its advisory fee.

--------------------------------------------------------------------------------
31

MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------

Gregory K. Phelps is Vice President and Portfolio Manager with over 21 years of
experience. He has extensive expertise in managing preferred securities within
closed-end funds and in researching securities in the utility, bank, and oil and
gas industries.

Mark T. Maloney is a Senior Equity Research Officer and Assistant Portfolio
Manager with over five years of investment experience focusing on electric
utilities, gas distribution and local distribution companies.

Barry H. Evans, CFA, is Senior Vice President and Chief Fixed Income Officer at
John Hancock Advisers, LLC. He oversees fixed income strategies, which include
both corporate high grade and high yield mandates. He has 16 years of investment
experience.

SHAREHOLDER SERVICING AGENT

The Adviser has retained UBS Warburg LLC to act as shareholder servicing agent
for the Fund. In consideration of these services, the Adviser will pay UBS
Warburg LLC a fee equal on an annual basis to 0.10% of the Fund's average daily
managed assets. This fee will be an expense of the Adviser and not the Fund. See
"Custodian, transfer agent, registrar, dividend disbursing agent and shareholder
servicing agent."

Dividends and distributions; Automatic Dividend Reinvestment Plan

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute dividends of all or a portion of its investment
company taxable income monthly to holders of common shares. It is expected that
its initial distribution will be declared approximately 45 days, and paid
approximately 60 to 90 days, after the completion of this offering. Dividends
and distributions may be payable in cash or common shares, with the option to
receive cash in lieu of the shares. The Fund may at times in its discretion pay
out less than the entire amount of investment company taxable income earned in
any particular period and may at times pay out such accumulated undistributed
income in addition to investment company taxable income earned in other periods
in order to permit the Fund to maintain a more stable level of distributions. As
a result, the dividend paid by the Fund to holders of common shares for any
particular period may be more or less than the amount of investment company
taxable income earned by the Fund during such period. The Fund is not required
to maintain a stable level of distributions to shareholders. For federal tax
purposes, the Fund is required to distribute substantially all of its investment
company taxable income for each year. All, or substantially all of the Fund's
net capital gains, if any, will be distributed to the Fund's shareholders at
least annually.

Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of at least
300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the 1940 Act, the Fund may not declare any dividend or other
distribution upon any class of its capital shares, or purchase any such capital
shares, unless the aggregate indebtedness of the Fund has, at the time of the
declaration of any such dividend or distribution or at the time of any such
purchase, an asset coverage of at least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the case may be.

While any preferred shares are outstanding, the Fund may not declare any cash
dividend or other distribution on its common shares, unless at the time of such
declaration, (1) all accumulated preferred dividends have been paid and (2) the
net asset value of the Fund's portfolio (determined after

--------------------------------------------------------------------------------
32

DIVIDENDS AND DISTRIBUTIONS; AUTOMATIC DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------

deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of the outstanding preferred shares (expected to be equal
to the original purchase price per share plus any accumulated and unpaid
dividends thereon).

In addition to the limitations imposed by the 1940 Act described above, certain
lenders or rating agencies rating the Fund's preferred shares may impose
additional restrictions on the payment of dividends or distributions on the
common shares. If the Fund's ability to make distributions on its common shares
is limited, such limitation could under certain circumstances impair the ability
of the Fund to maintain its qualification for taxation as a regulated investment
company, which would have adverse tax consequences for shareholders. See
"Leverage" and "U.S. federal income tax matters."

See "AUTOMATIC DIVIDEND REINVESTMENT PLAN" for information concerning the manner
in which dividends and distributions to common shareholders may be automatically
reinvested in common shares. Dividends and distributions may be taxable to
shareholders whether they are reinvested in shares of the Fund or received in
cash. See "U.S. federal income tax matters."

The yield on the Fund's common shares will vary from period to period depending
on factors including, but not limited to, market conditions, the timing of the
Fund's investment in portfolio securities, the securities comprising the Fund's
portfolio, changes in interest rates including changes in the relationship
between short-term rates and long-term rates, the amount and timing of the use
of borrowings and other leverage by the Fund, the effects of leverage on the
common shares discussed above under "Leverage," the timing of the investment of
leverage proceeds in portfolio securities, the Fund's net assets and its
operating expenses. Consequently, the Fund cannot guarantee any particular yield
on its shares and the yield for any given period is not an indication or
representation of future yields on the Fund's shares.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"), unless
a shareholder is ineligible or elects otherwise, all dividend and capital gains
distributions are automatically reinvested by Mellon Bank N.A., as agent for
shareholders in administering the Plan (the "Plan Agent"), in additional common
shares of the Fund. In the event a dividend or capital gains distribution is
declared in shares with the option to take cash and the shares are trading at a
"market discount," as described below, the Plan provides that its distribution
will be taken in cash and reinvested in accordance with the Plan. Shareholders
who are ineligible or who elect not to participate in the Plan will receive all
dividends and distributions payable in cash paid by check mailed directly to the
shareholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by the Plan Agent, as dividend paying agent. Such
shareholders may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to the Plan Agent, as dividend paying agent, at the address set
forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent not less than ten days prior to any dividend record date;
otherwise, such termination will be effective with respect to any subsequently
declared dividend or capital gains distribution.

Whenever the Fund declares an ordinary income dividend or a capital gain
distribution (collectively referred to as "dividends") payable either in shares
or in cash, non-participants in the Plan will receive cash, and participants in
the Plan will receive shares of common shares. The shares are acquired by the
Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized common shares from the Fund ("newly issued shares") or (ii) by
purchase of outstanding common shares on the open market ("open-market
purchases") on the New York Stock Exchange or elsewhere. If, on the payment date
for any dividend

--------------------------------------------------------------------------------
33

DIVIDENDS AND DISTRIBUTIONS; AUTOMATIC DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------

or distribution, the net asset value per share of the common shares is equal to
or less than the market price per common share as determined on the payment date
(such condition being referred to herein as "market premium"), the Plan Agent
will invest the amount of such dividend or distribution in newly issued shares
on behalf of the participant. The number of newly issued common shares to be
credited to the participant's account will be determined by dividing the dollar
amount of the dividend by the higher of the net asset value per share on the
date the shares are issued or 95% of the market price per share on such date. If
on the dividend payment date the net asset value per share is greater than the
market price (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount (less a pro rata share of any
brokerage commissions) in shares acquired on behalf of the participant in
open-market purchases.

In the event of a market discount on the payment date for any dividend or
distribution, the Plan Agent will be purchasing shares shortly after the payment
date of the dividend and in no event later than the day preceding the next
ex-dividend date, except where temporary curtailment or suspension of purchase
is necessary to comply with the federal securities laws ("last purchase date")
to invest the dividend amount in shares acquired in open-market purchases. It is
contemplated that the Fund will pay monthly income dividends. Therefore, the
period during which open-market purchases can be made will exist only from the
payment date on the dividend through the date before the next ex-dividend date,
which typically will be approximately ten days.

The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account within 60 days,
including information needed by shareholders for tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in non-
certificated form in the name of the participant, and each shareholder's proxy
will include those shares purchased or received pursuant to the Plan. The Plan
Agent will forward all proxy solicitation materials to participants and vote
proxies for shares held pursuant to the Plan in accordance with the instructions
of the participants.

In the case of shareholders such as banks, brokers or nominees which hold shares
for others who are the beneficial owners, the Plan Agent will administer the
Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.

There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.

The automatic reinvestment of dividend and capital gain distributions will not
relieve participants of any federal, state or local income tax that may be
payable (or required to be withheld) on such distributions. See "U.S. federal
income tax matters."

Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price of the Fund's
shares is higher than the net asset value, participants in the Plan will receive
shares of the Fund at less than they could otherwise purchase them and will have
shares with a cash value greater than the value of any cash distribution they
would have received on their shares. If the market price is below the net asset
value, participants receive distributions of shares with a net asset value
greater than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in the market
to make distributions in shares at prices below the net asset value. Also, since
the Fund does not redeem its shares, the price on resale may be more or less
than the net asset value.

--------------------------------------------------------------------------------
34

DIVIDENDS AND DISTRIBUTIONS; AUTOMATIC DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------

Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.

All correspondence concerning the Plan should be directed to Mellon Investor
Services, P.O. Box 3338, South Hackensack, NJ 07606-1938 (800-852-0218).

Closed-end fund structure

The Fund is a newly organized, diversified, closed-end management investment
company (commonly referred to as a closed-end fund). Closed-end funds differ
from open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This means that if
you wish to sell your shares of a closed-end fund you must trade them on the
market like any other stock at the prevailing market price at that time. In a
mutual fund, if the shareholder wishes to sell shares of the fund, the mutual
fund will redeem or buy back the shares at "net asset value." Also, mutual funds
generally offer new shares on a continuous basis to new investors, and
closed-end funds generally do not. The continuous inflows and outflows of assets
in a mutual fund can make it difficult to manage the fund's investments. By
comparison, closed-end funds are generally able to stay more fully invested in
securities that are consistent with their investment objectives and also have
greater flexibility to make certain types of investments and to use certain
investment strategies, such as financial leverage and investments in illiquid
securities.

Shares of closed-end funds frequently trade at a discount to their net asset
value. Common shares of closed-end investment companies like the Fund that
invest predominantly in preferred securities have during some periods traded at
prices higher than their net asset value (at a "premium") and during other
periods traded at prices lower than their net asset value (at a "discount").
This is in part because the market price reflects the dividend yield on the
common shares. When the yield on the net asset value per share is higher than
yields generally available in the market for comparable securities, the market
price will tend to reflect this by trading higher than the net asset value per
share to adjust the yield to a comparable market rate. To the extent the common
shares do trade at a discount, the Fund's Board of Trustees may from time to
time engage in open market repurchases or tender offers for shares after
balancing the benefit to shareholders of the increase in the net asset value per
share resulting from such purchases against the decrease in the assets of the
Fund and potential increase in the expense ratio of expenses to assets of the
Fund and consequent reduction in yield. The Board of Trustees believes that in
addition to the beneficial effects described above, any such purchases or tender
offers may result in the temporary narrowing of any discount but will not have
any long-term effect on the level of any discount.

U.S. federal income tax matters

--------------------------------------------------------------------------------
35

U.S. FEDERAL INCOME TAX MATTERS
--------------------------------------------------------------------------------

risk, a constructive sale, or conversion transaction, shareholders who are
subject to the alternative minimum tax, or tax-exempt or tax-deferred plans,
accounts, or entities. In addition, the discussion does not address any state,
local, or foreign tax consequences, and it does not address any federal tax
consequences other than U.S. federal income tax consequences. The discussion
reflects applicable tax laws of the United States as of the date of this
prospectus, which tax laws may be changed or subject to new interpretations by
the courts or the Internal Revenue Service ("IRS") retroactively or
prospectively. No attempt is made to present a detailed explanation of all U.S.
federal income tax concerns affecting the Fund and its shareholders, and the
discussion set forth herein does not constitute tax advice. Investors are urged
to consult their own tax advisers to determine the specific tax consequences to
them of investing in the Fund, including the applicable federal, state, local
and foreign tax consequences to them and the effect of possible changes in tax
laws.

The Fund intends to elect to be treated and to qualify each year as a "regulated
investment company" under Subchapter M of the Code and to comply with applicable
distribution requirements so that it generally will not pay U.S. federal income
tax on income and capital gains distributed to shareholders. In order to qualify
as a regulated investment company, which qualification the following discussion
assumes, the Fund must satisfy certain tests regarding the sources of its income
and the diversification of its assets. If the Fund qualifies as a regulated
investment company and, for each taxable year, it distributes to its
shareholders an amount equal to or exceeding the sum of (i) 90% of its
"investment company taxable income" as that term is defined in the Code (which
includes, among other things, dividends, taxable interest, and the excess of any
net short-term capital gains over net long-term capital losses, as reduced by
certain deductible expenses) without regard to the deduction for dividends paid
and (ii) 90% of the excess of its gross tax-exempt interest, if any, over
certain disallowed deductions, the Fund generally will be relieved of U.S.
federal income tax on any income of the Fund, including "net capital gains" (the
excess of net long-term capital gain over net short-term capital loss),
distributed to shareholders. However, if the Fund retains any investment company
taxable income or net capital gain, it generally will be subject to U.S. federal
income tax at regular corporate rates on the amount retained. The Fund intends
to distribute at least annually all or substantially all of its investment
company taxable income, net tax-exempt interest, and net capital gain. If for
any taxable year the Fund did not qualify as a regulated investment company, it
would be treated as a corporation subject to U.S. federal income tax.

Unless a shareholder is ineligible to participate or elects otherwise,
distributions will be automatically reinvested in additional common shares of
the Fund pursuant to the Plan. For U.S. federal income tax purposes, assuming
the Fund has sufficient current or accumulated earnings and profits, such
distributions generally will be taxable whether a shareholder takes them in cash
they are reinvested pursuant to the Plan in additional shares of the Fund. In
general, dividends from investment company taxable income are taxable as
ordinary income, and dividends from net capital gain (if any) that are
designated as capital gain dividends are taxable as long-term capital gains for
U.S. federal income tax purposes without regard to the length of time the
shareholder has held shares of the Fund. Shareholders receiving distributions in
the form of additional shares issued by the Fund will be treated for federal
income tax purposes as receiving a distribution in an amount equal to the amount
of cash they would have received had they elected to receive cash, except when
the Fund distributes newly issued shares, in which case the amount of the
distribution will be equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
amount of the distribution. The source and U.S. federal income tax status of all
distributions will be reported

--------------------------------------------------------------------------------
36

U.S. FEDERAL INCOME TAX MATTERS
--------------------------------------------------------------------------------

to shareholders annually, and shareholders receiving distributions in the form
of additional shares of the Fund will receive a report as to the net asset value
of those shares.

If the Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.

Distributions from the Fund to its corporate shareholders are not expected to
qualify for the 70% corporate Dividends Received Deduction to the extent of the
income received by the Fund from its investment in taxable preferred securities.
See "Taxable preferred securities" on page 14.

Sales and other dispositions of the Fund's shares generally are taxable events
for shareholders that are subject to tax. Shareholders should consult their own
tax advisers with reference to their individual circumstances to determine
whether any particular transaction in the Fund's shares is properly treated as a
sale for tax purposes, as the following discussion assumes, and the tax
treatment of any gains or losses recognized in such transactions. In general, if
shares of the Fund are sold, the shareholder will recognize gain or loss equal
to the difference between the amount realized on the sale and the shareholder's
adjusted basis in the shares. Such gain or loss generally will be treated as
long-term gain or loss if the shares were held for more than one year and
otherwise generally will be treated as short-term gain or loss. Any loss
recognized by a shareholder upon the sale or other disposition of shares with a
tax holding period of six months or less generally will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares. Losses on sales or other
dispositions of shares may be disallowed under "wash sale" rules in the event of
other investments in the Fund (including those made pursuant to reinvestment of
dividends and/or capital gains distributions) within a period of 61 days
beginning 30 days before and ending 30 days after a sale or other disposition of
shares.

The Fund is required in certain circumstances to backup withhold on reportable
payments, including dividends, capital gains distributions, and proceeds of
sales or other dispositions of the Fund's shares paid to certain holders of the
Fund's shares who do not furnish the Fund with their correct Social Security
number or other taxpayer identification number and make certain other
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to
a shareholder may be refunded or credited against such shareholder's U.S.
federal income tax liability, if any, provided that the required information is
furnished to the IRS.

The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations in effect as they generally affect the taxation of
the Fund and its shareholders. As noted above, these provisions are subject to
change by legislative, judicial or administrative action, and any such change
may be retroactive. A further discussion of the U.S. federal income tax rules
applicable to the Fund can be found in the statement of additional information
which is incorporated by reference into this prospectus. Shareholders are urged
to consult their tax advisers regarding specific questions as to U.S. federal,
foreign, state, and local income or other taxes.

Net asset value

The Fund calculates a net asset value for its common shares every day the New
York Stock Exchange is open when regular trading closes (normally 4:00 p.m.
Eastern time). For purposes of determining the

--------------------------------------------------------------------------------
37

NET ASSET VALUE
--------------------------------------------------------------------------------

net asset value of a common share, the value of the securities held by the Fund
plus any cash or other assets (including interest accrued but not yet received)
minus all liabilities (including accrued expenses and indebtedness) and the
aggregate liquidation value of any outstanding preferred shares is divided by
the total number of common shares outstanding at such time. Currently, the net
asset values of shares of publicly traded closed-end investment companies
investing in debt securities are published in Barron's, the Monday edition of
The Wall Street Journal and the Monday and Saturday editions of The New York
Times.

The Fund generally values its portfolio securities using closing market prices
or readily available market quotations. When closing market prices or market
quotations are not available or, in the opinion of the Adviser, are not
representative of the true market value, the fair value of a security may be
determined in accordance with procedures approved by the Trustees. Debt
investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices. Short-term debt investments which have a remaining maturity
of 60 days or less are generally valued at amortized cost which approximates
market value. If market quotations are not readily available or if, in the
opinion of the Adviser, any quotation or price is not representative of true
market value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees. Foreign securities are
valued on the basis of quotations from the primary market in which they are
traded. If quotations are not readily available, or the value has been
materially affected by the events occurring after closing of a foreign market,
assets are valued by a method that Trustees believe accurately reflects fair
value. The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. Positions in options are valued at the last sale price on the market
where any such option is principally traded. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on which
they are traded. Repurchase agreements are valued at cost plus accrued interest.

Description of shares

The Fund is authorized to issue an unlimited number of common shares. The Fund
is also authorized to issue an unlimited number of preferred shares. After the
completion of this offering, the Fund will only have common shares outstanding.
The Fund currently anticipates that it will issue preferred shares as soon as
practicable after the closing of this offering. See "Leverage." The Fund is also
authorized to issue other securities, including debt securities.

The Board of Trustees is authorized to classify and reclassify any unissued
shares into one or more additional classes or series of shares. The Board of
Trustees may establish such series or class, including preferred shares, from
time to time by setting or changing in any one or more respects the
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of any
existing class or series. The Board of Trustees, without shareholder approval,
is authorized to amend the Agreement and Declaration of Trust and By-laws to
reflect the terms of any such class or series, including any class of preferred
shares.

Under Massachusetts law, shareholders of the Fund, including holders of the
common shares and any preferred shares, could, in certain circumstances, be held
personally liable for the obligations of the Fund. However, the Agreement and
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Fund. Notice of such disclaimer may be given in any agreement, obligation or
instrument entered into or executed by the Fund or the Trustees on behalf of the
Fund. The Agreement

--------------------------------------------------------------------------------
38

DESCRIPTION OF SHARES
--------------------------------------------------------------------------------

and Declaration of Trust provides for indemnification out of Fund property for
all loss and expense of any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund would be unable to meet its obligations.

The Agreement and Declaration of Trust further provides that obligations of the
Fund are not binding upon the Trustees or officers individually but only upon
the property of the Fund and that the Trustees or officers will not be liable
for actions or failures to act. Nothing in the Agreement and Declaration of
Trust, however, protects a Trustee or officer against any liability to which
such Trustee or officer may be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Trustee's or officer's office.

COMMON SHARES

Common shares, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to common shareholders upon liquidation of
the Fund. Common shareholders are entitled to one vote for each share held.

In the event that the Fund issues preferred shares and so long as any shares of
the Fund's preferred shares are outstanding, holders of common shares will not
be entitled to receive any net income of or other distributions from the Fund
unless all accumulated dividends on preferred shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to preferred shares
would be at least 200% after giving effect to such distributions. See
"Leverage."

The Fund will send unaudited reports at least semiannually and audited annual
financial statements to all of its shareholders.

The Adviser provided the initial capital for the Fund by purchasing 6,409 common
shares of the Fund for $153,015. As of the date of this Prospectus, the Adviser
owned 100% of the outstanding common shares. The Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.

PREFERRED SHARES

The Fund in the future may elect to issue preferred shares as part of its
leverage strategy. The Fund currently anticipates issuing, as soon as
practicable after the closing of this offering, preferred shares with an
aggregate liquidation preference of up to 33 1/3% of the Fund's total assets.
The Board of Trustees reserves the right to issue preferred shares to the extent
permitted by the 1940 Act, which currently limits the aggregate liquidation
preference of all outstanding preferred shares to 50% of the value of the Fund's
total assets less the Fund's liabilities and indebtedness. Although the terms of
any preferred shares, including dividend rate, liquidation preference and
redemption provisions, will be determined by the Board of Trustees, subject to
applicable law and the Agreement and Declaration of Trust, it is likely that the
preferred shares will be structured to carry a relatively short-term dividend
rate reflecting interest rates on short-term bonds by providing for the periodic
redetermination of the dividend rate at relatively short intervals through an
auction, remarketing or other procedure. The Fund also believes that it is
likely that the liquidation preference, voting rights and redemption provisions
of the preferred shares will be similar to those stated below.

In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Fund, the holders of preferred shares will be entitled to receive a
preferential liquidating distribution, which is expected to equal the original
purchase price per preferred share plus accrued and unpaid dividends, whether or
not declared, before any distribution of assets is made to holders of common
shares. After

--------------------------------------------------------------------------------
39

DESCRIPTION OF SHARES
--------------------------------------------------------------------------------

payment of the full amount of the liquidating distribution to which they are
entitled, the holders of preferred shares will not be entitled to any further
participation in any distribution of assets by the Fund.

The 1940 Act requires that the holders of any preferred shares, voting
separately as a single class, have the right to elect at least two Trustees at
all times. The remaining Trustees will be elected by holders of common shares
and preferred shares, voting together as a single class. In addition, subject to
the prior rights, if any, of the holders of any other class of senior securities
outstanding, the holders of any preferred shares have the right to elect a
majority of the Trustees at any time two years' dividends on any preferred
shares are unpaid. The 1940 Act also requires that, in addition to any approval
by shareholders that might otherwise be required, the approval of the holders of
a majority of any outstanding preferred shares, voting separately as a class,
would be required to (1) adopt any plan of reorganization that would adversely
affect the preferred shares, and (2) take any action requiring a vote of
security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's subclassification as a closed-end investment
company or changes in its fundamental investment restrictions. See "Certain
provisions of the Agreement and Declaration of Trust and By-Laws." As a result
of these voting rights, the Fund's ability to take any such actions may be
impeded to the extent that there are any preferred shares outstanding. The Board
of Trustees presently intends that, except as otherwise indicated in this
Prospectus and except as otherwise required by applicable law, holders of
preferred shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the 1940 Act) and will vote
together with holders of common shares as a single class.

The affirmative vote of the holders of a majority of the outstanding preferred
shares, voting as a separate class, will be required to amend, alter or repeal
any of the preferences, rights or powers of holders of preferred shares so as to
affect materially and adversely such preferences, rights or powers, or to
increase or decrease the authorized number of preferred shares. The class vote
of holders of preferred shares described above will in each case be in addition
to any other vote required to authorize the action in question.

The terms of the preferred shares are expected to provide that (i) they are
redeemable by the Fund in whole or in part at the original purchase price per
share plus accrued dividends per share, (ii) the Fund may tender for or purchase
preferred shares and (iii) the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of preferred shares by the
Fund will reduce the leverage applicable to the common shares, while any resale
of shares by the Fund will increase that leverage.

The discussion above describes the possible offering of preferred shares by the
Fund. If the Board of Trustees determines to proceed with such an offering, the
terms of the preferred shares may be the same as, or different from, the terms
described above, subject to applicable law and the Agreement and Declaration of
Trust. The Board of Trustees, without the approval of the holders of common
shares, may authorize an offering of preferred shares or may determine not to
authorize such an offering, and may fix the terms of the preferred shares to be
offered.

Certain provisions of the Agreement and Declaration of Trust and By-laws

The Agreement and Declaration of Trust includes provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status.

--------------------------------------------------------------------------------
40

CERTAIN PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS
--------------------------------------------------------------------------------

Specifically, the Agreement and Declaration of Trust requires a vote by holders
of at least 75% of the outstanding common and preferred shares, voting together
as a single class, to authorize:

+ a conversion of the Fund from a closed-end to an open-end investment company

+ a merger of the Fund, or a series of the Fund, with or into or a
consolidation or exchange of shares with any other entity

+ a sale, or conveyance of all or substantially all of the Fund's assets (other
than in the ordinary course of the Fund's business)

+ a termination of the Fund, or a series of the Fund

+ a removal of Trustees by shareholders, and then only for cause

unless, with respect to the forgoing (other than the removal of Trustees), such
transaction has already been authorized by the affirmative vote of 75% of the
total number of Trustees fixed in accordance with the Agreement and Declaration
of Trust or the By-laws, in which case the affirmative vote of the holders of at
least a majority of the Fund's common and preferred shares outstanding at the
time, voting together as a single class, is required, provided, however, that
where only a particular class or series is affected (or, in the case of removing
a Trustee, when the Trustee has been elected by only one class), only the
required vote by the applicable class or series will be required. Approval of
shareholders is not required, however, for any transaction, whether deemed a
merger, consolidation, reorganization or otherwise whereby the Fund issues
shares in connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity. None of the
foregoing provisions may be amended except by the vote of at least 75% of the
outstanding common shares and preferred shares, voting together as a single
class. In the case of the conversion of the Fund to an open-end investment
company, or in the case of any of the foregoing transactions constituting a plan
of reorganization which adversely affects the holders of the Fund's preferred
shares, the action in question will also require the affirmative vote of the
holders of at least 75% of the outstanding preferred shares, voting as a
separate class, or, if such action has been authorized by the affirmative vote
of 75% of the total number of Trustees fixed in accordance with the Agreement
and Declaration of Trust or the By-laws, the affirmative vote of the holders of
at least a majority of the Fund's outstanding preferred shares, voting as a
separate class.

The votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of the Fund's preferred
shares are higher than those required by the 1940 Act. The Board of Trustees
believes that the provisions of the Agreement and Declaration of Trust relating
to such higher votes are in the best interest of the Fund and its shareholders.

The Board of Trustees is divided into three classes of approximately equal size.
The terms of the Trustees of the different classes are staggered so that
approximately one third of the Board of Trustees is elected by shareholders each
year.

The provisions of the Agreement and Declaration of Trust described above could
have the effect of depriving the common shareholders of opportunities to sell
their common shares at a premium over the then current market price of the
common shares by discouraging a third-party from seeking to obtain control of
the Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the
assumption of control by a third-party. They provide, however, the advantage of
potentially requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the continuity of the
Fund's investment objectives and principal investment strategies. The Board of

--------------------------------------------------------------------------------
41

CERTAIN PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS
--------------------------------------------------------------------------------

Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its common
shareholders.

The Fund's By-laws generally require that advance notice be given to the Fund in
the event a shareholder desires to nominate a person for election to the Board
of Trustees or to transact any other business at an annual meeting of
shareholders. With respect to an annual meeting following the first annual
meeting of shareholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not less
than 90 calendar days nor more than 120 calendar days prior to the anniversary
date of the prior year's annual meeting (subject to certain exceptions). In the
case of the first annual meeting of shareholders, the notice must be given no
later than the tenth calendar day following public disclosure as specified in
the By-laws of the date of the meeting. Any notice by a shareholder must be
accompanied by certain information as provided in the By-laws.

--------------------------------------------------------------------------------
42

--------------------------------------------------------------------------------

Underwriting

The underwriters named below (the "Underwriters"), acting through UBS Warburg
LLC, 299 Park Avenue, New York, New York and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, 4 World Financial Center, New York, New York, as lead
managers, and Prudential Securities Incorporated, Legg Mason Wood Walker,
Incorporated, RBC Dain Rauscher Inc., Wachovia Securities, Inc., H&R Block
Financial Advisors, Inc., Quick & Reilly, Inc. and Signator Investors, Inc. as
their representatives (together with the lead managers, the "Representatives")
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement with the Fund and the Adviser, to purchase from the Fund the number of
common shares set forth opposite their respective names. The Underwriters are
committed to purchase and pay for all of such common shares (other than those
covered by the over-allotment option described below) if any are purchased.

NUMBER OF
UNDERWRITERS COMMON SHARES
---------------------------------------------------------------------------

UBS Warburg LLC............................................. 4,250,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 4,250,000
Prudential Securities Incorporated.......................... 3,200,000
Legg Mason Wood Walker, Incorporated........................ 2,500,000
RBC Dain Rauscher Inc. ..................................... 2,500,000
Wachovia Securities, Inc. .................................. 2,500,000
H&R Block Financial Advisors, Inc. ......................... 1,000,000
Quick & Reilly, Inc. ....................................... 1,000,000
Advest, Inc. ............................................... 100,000
Crowell, Weedon & Co. ...................................... 100,000
Fahnestock & Co. Inc. ...................................... 100,000
J.J.B. Hilliard, W.L. Lyons, Inc. .......................... 100,000
Janney Montgomery Scott LLC................................. 100,000
Morgan Keegan & Company, Inc. .............................. 100,000
U.S. Bancorp Piper Jaffray Inc. ............................ 100,000
Ryan, Beck & Co. LLC........................................ 100,000
Signator Investors, Inc. ................................... 100,000
Stifel, Nicolaus & Company, Incorporated.................... 100,000
SunTrust Capital Markets, Inc. ............................. 100,000
TD Waterhouse Investor Services, Inc. ...................... 100,000
Wedbush Morgan Securities Inc. ............................. 100,000
-------------
Total.................................................. 22,500,000
=============

The Fund has granted to the Underwriters an option, exercisable for 45 days from
the date of this Prospectus, to purchase up to an additional 3,375,000 common
shares to cover over-allotments, if any, at the initial offering price. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the common shares offered hereby. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment, subject to certain conditions, to purchase an additional
number of common shares proportionate to such Underwriter's initial commitment.

The Fund has agreed to pay a commission to the Underwriters in the amount of up
to $1.125 per common share (4.50% of the public offering price per common
share). The Representatives have advised the Fund that the Underwriters may pay
up to $0.75 per common share from such

--------------------------------------------------------------------------------
43

UNDERWRITING
--------------------------------------------------------------------------------

commission to selected dealers who sell the common shares and that such dealers
may reallow a concession of up to $0.10 per common share to certain other
dealers who sell shares. Investors must pay for any common shares purchased on
or before August 27, 2002.

Prior to this offering, there has been no public or private market for the
common shares or any other securities of the Fund. Consequently, the offering
price for the common shares was determined by negotiation among the Fund, the
Adviser and the Representatives. There can be no assurance, however, that the
price at which common shares sell after this offering will not be lower than the
price at which they are sold by the Underwriters or that an active trading
market in the common shares will develop and continue after this offering. The
minimum investment requirement is 100 common shares.

The Fund and the Adviser have agreed to indemnify the several Underwriters for
or to contribute to the losses arising out of certain liabilities, including
liabilities under the Securities Act of 1933, as amended.

The Fund has agreed not to offer, sell or register with the Securities and
Exchange Commission any equity securities of the Fund, other than issuances of
common shares, including pursuant to the Fund's Automatic Dividend Reinvestment
Plan, and issuances in connection with any offering of preferred shares, each as
contemplated in this Prospectus, for a period of 180 days after the date of the
Underwriting Agreement without the prior written consent of the Representatives.

The Representatives have informed the Fund that the Underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.

In connection with this offering, the Underwriters may purchase and sell common
shares in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the common shares and syndicate short positions involve
the sale by the Underwriters of a greater number of common shares than they are
required to purchase from the Fund in this offering. The Underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the common shares sold in this offering
for their account, may be reclaimed by the syndicate if such common shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
common shares, which may be higher than the price that might otherwise prevail
in the open market; and these activities, if commenced, may be discontinued at
any time without notice. These transactions may be effected on the New York
Stock Exchange or otherwise.

The Fund anticipates that the Representatives and certain other Underwriters may
from time to time act as brokers and dealers in connection with the execution of
its portfolio transactions after they have ceased to be Underwriters and,
subject to certain restrictions, may act as such brokers while they are
Underwriters.

The Adviser has also agreed to pay from its own assets to certain of the
Underwriters an incentive fee at an annual rate equal to up to 0.10% of the
Fund's managed assets. This fee will be payable in arrears at the end of each
calendar quarter so long as the Advisory Agreement remains in effect between the
Fund and the Adviser or any successor in interest or affiliate of the Adviser,
as and to the extent that such Advisory Agreement is renewed periodically in
accordance with the 1940 Act. If an Underwriter meets certain requirements
established by the Adviser (each a "Qualifying Underwriter") (which may be
waived or modified in the discretion of the Adviser), it will receive an annual
fee equal to 0.10% of the Fund's managed assets multiplied by the percentage of
the Fund's common shares sold by the Qualifying Underwriter in this offering.
The total amount of the incentive fee payments, discounted to the closing date
of this offering, plus the amounts paid by the Fund to reimburse certain

--------------------------------------------------------------------------------
44

UNDERWRITING
--------------------------------------------------------------------------------

Underwriter expenses, will not exceed the maximum compensation allowed under the
conduct rules of the National Association of Securities Dealers, as such rules
are then in effect.

As described below under "Custodian, transfer agent, registrar, dividend
disbursing agent and shareholder servicing agent," UBS Warburg LLC will provide
shareholder services to the Fund pursuant to a shareholder servicing agreement
with the Adviser.

Custodian, transfer agent, registrar, dividend disbursing agent and shareholder
servicing agent

The Adviser (and not the Fund) has agreed to pay from its own assets to UBS
Warburg LLC a shareholder servicing fee (the "Shareholder Servicing Fee") at an
annual rate of 0.10% of the average daily managed assets of the Fund pursuant to
a shareholder servicing agreement between the Adviser and UBS Warburg LLC (the
"Shareholder Servicing Agreement"). Pursuant to the Shareholder Servicing
Agreement, UBS Warburg LLC will: (i) undertake to make public information
pertaining to the Fund on an ongoing basis and to communicate to investors and
prospective investors the Fund's features and benefits (including periodic
seminars or conference calls, responses to questions from current or prospective
shareholders and specific shareholder contact where appropriate); (ii) make
available to investors and prospective investors market price, net asset value,
yield and other information regarding the Fund, if reasonably obtainable, for
the purpose of maintaining the visibility of the Fund in the investor community;
(iii) at the request of the Adviser, provide certain economic research and
statistical information and reports, if reasonably obtainable, on behalf of the
Fund, and consult with representatives and Trustees of the Fund in connection
therewith, which information and reports shall include: (a) statistical and
financial market information with respect to the Fund's market performance and
(b) comparative information regarding the Fund and other closed-end management
investment companies with respect to (1) the net asset value of their respective
shares, (2) the respective market performance of the Fund and such other
companies, (3) other relevant performance indicators; and (iv) at the request of
the Adviser, provide information to and consult with the Board of Trustees with
respect to applicable modifications to dividend policies or capital structure,
repositioning or restructuring of the Fund, conversion of the Fund to an
open-end investment company, or a Fund liquidation or merger; provided, however,
that under the terms of the Shareholder Servicing Agreement, UBS Warburg LLC is
not obligated to render any opinions, valuations or recommendations of any kind
or to perform any such similar services. Under the terms of the Shareholder
Servicing Agreement, UBS Warburg LLC is relieved from liability to the Adviser
for any act or omission in the course of its performances under the Shareholder
Servicing Agreement in the absence of gross negligence or willful misconduct.
The Shareholder Servicing Agreement will remain in effect until August 27, 2004
and may be continued thereafter upon the mutual agreement of the Adviser and UBS
Warburg LLC.

The Fund's securities and cash are held under a custodian agreement with The
Bank of New York. Mellon Investor Services, LLC is the Fund's transfer agent,
registrar and dividend disbursing agent for the Fund's shares.

Validity of common shares

Certain legal matters in connection with the common shares offered hereby are
passed on for the Fund by Hale and Dorr LLP, Boston, Massachusetts. Certain
matters have been passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom (Illinois), Chicago, Illinois and its affiliates.

--------------------------------------------------------------------------------
45

--------------------------------------------------------------------------------

Table of contents for the
Statement of Additional Information

PAGE
------------------------------------------------------------------

Use of Proceeds............................................. 2
Organization of the Fund.................................... 2
Investment Objectives and Policies.......................... 2
Investment Restrictions..................................... 15
Those Responsible for Management............................ 17
Investment Advisory and Other Services...................... 24
Net Asset Value............................................. 27
Brokerage Allocation........................................ 27
Repurchase of Common Shares................................. 30
U.S. Federal Income Tax Matters............................. 31
Performance................................................. 35
Transfer Agent Services..................................... 36
Custodian of Portfolio...................................... 36
Independent Auditor......................................... 36
Additional Information...................................... 36
Appendix A--More About Risks................................ A-1
Appendix B--Description of Ratings.......................... B-1
Financial Statements........................................ F-1

PRIVACY PRINCIPLES OF THE FUND
--------------------------------------------------------------------------------

The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following information is
provided to help you understand what personal information the Fund collects, how
the Fund protects that information and why, in certain cases, the Fund may share
information with select other parties.

Generally, the Fund does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Fund. The Fund does not disclose
any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third-party
administrator).

The Fund restricts access to non-public personal information about its
shareholders to employees of the Fund's investment adviser and its affiliates
with a legitimate business need for the information. The Fund maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders.

--------------------------------------------------------------------------------
46

(This page has been left blank intentionally.)

[JHF LOGO]

P80PN 8/02

JOHN HANCOCK PREFERRED INCOME FUND

Statement of Additional Information

August 22, 2002

John Hancock Preferred Income Fund (the "Fund") is a newly organized,
diversified, closed-end management investment company. This Statement of
Additional Information provides information about John Hancock Preferred Income
Fund (the "Fund") in addition to the information that is contained in the Fund's
current Prospectus, dated August 22, 2002 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing common shares, is not a prospectus
and investors should obtain and read the Prospectus prior to purchasing common
shares. A copy of the Prospectus can be obtained free of charge by writing or
telephoning:

John Hancock Advisers, LLC
Closed-End Fund Product Management
101 Huntington Avenue, 12th Floor
Boston, MA 02199
1-800-225-6020

You may also obtain a copy of the Prospectus on the Securities and
Exchange Commission's web site (http://www.sec.gov).

TABLE OF CONTENTS

Use of Proceeds..............................................................2
Organization of the Fund.....................................................2
Investment Objectives and Policies...........................................2
Investment Restrictions.....................................................15
Those Responsible for Management............................................17
Investment Advisory and Other Services......................................24
Net Asset Value.............................................................27
Brokerage Allocation........................................................27
Repurchase of Common Shares.................................................30
U.S. Federal Income Tax Matters.............................................31
Performance.................................................................35
Transfer Agent Services.....................................................36
Custody of Portfolio........................................................36
Independent Auditors........................................................36
Additional Information......................................................36
Appendix A - More About Risk...............................................A-1
Appendix B - Description of Ratings........................................B-1
Financial Statements.......................................................F-1

USE OF PROCEEDS

Pending investment in securities that meet the Fund's investment
objectives and policies, the net proceeds will be invested in accordance with
the Fund's investment objectives and policies during a period not to exceed
three months from the closing of this offering. Pending such investment, the net
proceeds may be invested in high quality, short-term debt securities. If
necessary, the Fund may also purchase, as temporary investments, securities of
other open- or closed-end investment companies that invest primarily in
preferred stocks to the extent permitted by the Investment Company Act of 1940,
as amended (the "1940 Act").

ORGANIZATION OF THE FUND

The Fund is a diversified, closed-end investment management company
organized as a Massachusetts business trust on June 27, 2002 under the laws of
The Commonwealth of Massachusetts as John Hancock Preferred Equity Income Fund.
On August 22, 2002, the Fund changed its name to John Hancock Preferred Income
Fund.

John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock
Advisers, Inc.) (the "Adviser") is the Fund's investment adviser. The Adviser is
an indirect, wholly-owned subsidiary of John Hancock Life Insurance Company
(formerly John Hancock Mutual Life Insurance Company) (the "Life Company"), a
Massachusetts life insurance company chartered in 1862, with national
headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is
wholly owned by John Hancock Financial Services, Inc., a Delaware corporation
organized in February, 2000.

INVESTMENT OBJECTIVES AND POLICIES

The following information supplements the discussion of the Fund's
investment objectives and policies discussed in the Prospectus. Appendix A
contains further information describing investment risks. The investment
objectives are non-fundamental and may be changed by the Trustees without
shareholder approval. There is no assurance that the Fund will achieve its
investment objectives.

Portfolio contents. Under normal market conditions, the Fund invests at
least 80% of its assets (net assets plus borrowing for investment purposes) in
preferred stocks and other preferred securities, including convertible preferred
securities. The Fund will invest at least 80% of its total assets in preferred
securities and other fixed income securities which are rated investment grade
(i.e., at least "Baa" by Moody's Investors Service, Inc. ("Moody's") or "BBB" by
Standard & Poor's Rating Group ("S&P")) or in unrated securities determined by
the Adviser to be of comparable quality. The Fund may invest up to 20% of its
total assets in (i) preferred securities or other fixed income securities rated
below investment grade or unrated preferred securities or unrated fixed income
securities determined by the Adviser to be of comparable quality, and (ii)
common stocks or other equity securities that are not considered preferred
securities. The weighted average credit rating of the Fund's portfolio of
preferred securities and other fixed income securities will be at least
investment grade. The Fund intends to invest primarily in fully taxable
preferred securities. The Fund's portfolio may include both fixed rate and
adjustable rate securities. The allocation of the Fund's assets in various types
of preferred, debt and equity securities may vary from time to time depending on
the Adviser's assessment of market conditions.

The Adviser will perform its own investment analysis when making
investment decisions for the Fund and will not rely solely on the ratings
assigned to rated securities. Securities ratings are based largely on an
issuer's historical financial information and each rating agency's investment
analysis at the time of rating. Consequently, the rating assigned to any
particular security is not necessarily a reflection of the issuer's current
financial condition, which may be better or worse than the rating indicates. The
Adviser's analysis may include consideration of the issuer's experience and
managerial strength, changing financial condition, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest or dividend rates. The Adviser will

also consider relative values based on anticipated cash flow, interest or
dividend coverage, asset coverage, earnings prospects, current yield and price
stability.

Industry and issuer concentration. The Fund intends to emphasize
investments in preferred securities issued or guaranteed by U.S. corporations in
the utilities sector and will be subject to certain risks due to such emphasis.
The Fund will not invest 25% or more of its total assets in any one industry,
except that the Fund will invest 25% or more of its total assets in the
industries comprising the utilities sector. The Fund will allocate its
investments among industry sectors and among issuers in such sectors, based on
the Adviser's evaluation of market and economic conditions.

Foreign securities. Although the Fund will invest primarily in the
securities of U.S. issuers, the Fund may invest up to 20% of its total assets in
securities of corporate and governmental issuers located outside the United
States that are traded or denominated in U.S. dollars.

Illiquid securities. The Fund may invest up to 20% of its total assets
in illiquid securities, which are securities that can not be disposed of by the
Fund within seven days in the ordinary course of business at approximately the
amount at which the Fund values the securities. The Fund may invest in
securities that are sold in direct private placement transactions and are
neither listed on an exchange nor traded in the over-the-counter market.

Other securities. Normally, the Fund will invest substantially all of
its assets to meet its investment objectives. The Fund may invest the remainder
of its assets in securities with remaining maturities of less than one year,
cash equivalents or may hold cash. For temporary defensive purposes, the Fund
may depart from its principal investment strategies and invest part or all of
its assets in securities with remaining maturities of less than one year or cash
equivalents or may hold cash. During such periods, the Fund may not be able to
achieve its investment objectives.

Traditional Fixed Rate Preferred Stock. Traditional fixed rate
preferred stocks have fixed dividend rates for the life of the issue and
typically pay dividends that qualify for the dividend received deduction. These
securities can be perpetual with no maturity date or subject to mandatory
redemptions such as through a sinking fund. Certain fixed rate preferred stocks
have features intended to provide some degree of price stability. These features
may include an auction mechanism at some specified future date. The auction
feature is normally intended to enhance the probability that a preferred stock
shareholder will be able to dispose of his holdings close to a pre-specified
price, typically equal to par or stated value. Other price stability mechanisms
include convertibility into an amount of common equity of the same issuer at
some specified future date, typically in amounts not greater than par value of
the underlying preferred stocks. Another common form of fixed rate preferred
stock is the traditional convertible preferred stock, which permits the holder
to convert into a specified number of shares at the holder's option at any time
prior to some specified date.

Adjustable Rate Preferred Stock. Unlike traditional fixed rate
preferred stocks, adjustable rate preferred stocks are preferred stocks that
have a dividend rate that adjusts periodically to reflect changes in the general
level of interest rates. The adjustable dividend rate feature is intended to
make the market value of these securities less sensitive to changes in interest
rates than similar securities with fixed dividend rates. Nonetheless, adjustable
rate preferred stocks have fluctuated in market value and are expected to do so
in the future.

The dividend rate on an adjustable rate preferred stock is determined
typically each quarter by applying an adjustment formula established at the time
of issuance of the stock. Although adjustment formulas vary among issues, they
typically involve a fixed relationship either to (1) rates on specific classes
of debt securities issued by the U.S. Treasury or (2) LIBOR, with limits (known
as "collars") on the minimum and maximum dividend rates that may be paid. As the
maximum dividend rate is approached, any further increase in interest rates may
adversely affect the market value of the stock. Conversely, as the minimum
dividend rate is approached, any further decrease in interest rates may
positively affect the market value of the stock. The adjustment formula is fixed
at the time of issuance of the adjustable rate preferred stock and cannot be
changed without the approval of the holders thereof.

The market values of outstanding issues of adjustable rate preferred
stock may fluctuate in response to changing market conditions. In the event that
market participants in a particular issue demand a different dividend yield than
the adjustment formula produces, the market price will change to produce the
desired yield. The dividend

yield demanded by market participants may vary with changing perceptions of
credit quality and the relative levels of short-term and long-term interest
rates, as well as other factors.

Preferred Securities. Generally, preferred stocks receive dividends
prior to distributions on common stock and usually have a priority of claim over
common stockholders if the issuer of the stock is liquidated. The income paid by
an issuer to holders of its preferred and common stocks is typically eligible
for the dividends received deduction. Preferred stocks do not usually have
voting rights equivalent to common stock of the same issue but may be
convertible into common stock. Perpetual preferred stocks are issued with no
mandatory retirement provisions, but typically are callable after a period of
time at the option of the issuer. Generally, no redemption can occur if full
cumulative dividends have not been paid, although issuers may be able to engage
in open-market repurchases without regard to any cumulative dividends payable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. Preferred securities other than preferred stock have
certain characteristics of both debt and equity securities. Like debt
securities, preferred securities' rate of income is contractually fixed. Like
equity securities, preferred securities do not have rights to precipitate
bankruptcy filings or collection activities in the event of missed payments.
Furthermore, preferred securities are in a subordinated position in an issuer's
capital structure and their value are heavily dependent on the profitability of
the issuer rather than on any legal claims to specific assets or cash flows.
Taxable preferred securities, are a comparatively new asset class, having first
been introduced late in 1993. Income paid on these securities is not eligible
for the dividends received deduction, but does constitute deductible interest
expense for issuers thereof. The universe of issuers of taxable preferred
securities consists overwhelmingly of fixed coupon rate issues with final stated
maturity dates. However, certain issues have adjustable coupon rates, which
reset quarterly in a manner similar to adjustable rate preferred stocks
described above. The preferred securities universe is divided into the "$25 par"
and the "institutional" segments. The $25 par segment is typified by securities
that are listed on the New York Stock Exchange, which trade and are quoted
"flat", i.e., without accrued dividend income, and which are typically callable
at par value five years after their original issuance date. The institutional
segment is typified by $1,000 par value securities that are not exchange-listed,
which trade and are quoted on an "accrued income" basis, and which typically
have a minimum of ten years of call protection (at premium prices) from the date
of their original issuance.

Taxable preferred securities are not eligible for the dividends
received deduction and are not considered equity of an issuer for certain
purposes. They are typically junior and fully subordinated liabilities of an
issuer or the beneficiary of a guarantee that is junior and fully subordinated
to the other liabilities of the guarantor. In addition, taxable preferred
securities typically permit an issuer to defer the payment of income for
specified periods triggering an event of default. Because of their subordinated
position in the capital structure of an issuer, the ability to defer payments
for extended periods of time without adverse consequence to the issuer, and
certain other features (such as restrictions on common dividend payments by the
issuer or ultimate guarantor when cumulative payments on the hybrids have not
been made), taxable preferred securities may also be treated in a similar
fashion to traditional preferred stocks by several regulatory agencies,
including the Federal Reserve Bank, and by credit rating agencies, for various
purposes, such as the assignment of minimum capital ratios,
over-collateralization rates and diversification limits. Taxable preferred
securities may be convertible into underlying common stock of the issuer or
associated grantor.

Taxable preferred securities are typically issued with a final maturity
date, although, in certain instances the date may be extended and/or the final
payment of principal may be deferred at the issuer's option for a specified time
without any adverse consequences to the issuer. No redemption can typically take
place unless all cumulative payment obligations have been met, although issuers
may be able to engage in open-market repurchases without regard to any
cumulative dividends payable.

In order to be payable, dividends on preferred stock must be declared
by the issuer's board of directors. In addition, distributions on taxable
preferred securities are also subject to deferral and are thus not automatically
payable. Income payments on the typical preferred securities currently
outstanding are cumulative, causing dividends and distributions to accrue even
if not declared by the board of directors or otherwise made payable. There is,
of course, no assurance that dividends or distributions on the preferred
securities in which the Fund invests will be declared or otherwise made payable.
The Fund may acquire non-cumulative preferred securities subject to the
restrictions on quality adopted by the Fund.

Because the claim on an issuer's earnings represented by preferred
securities may become onerous when interest rates fall below the rate payable on
the stock or for other reasons, the issuer may redeem the securities. Thus, in
declining interest rate environments in particular, the Fund's holdings of
higher coupon-paying preferred securities may be reduced and the Fund would be
unable to acquire securities paying comparable coupons with the redemption
proceeds.

From time to time, preferred securities issues have been, and may in
the future be, offered having features other than those described in the
Prospectus on this Statement of Additional Information that are typical for
fixed rate, adjustable rate, or auction rate preferred securities. The Fund
reserves the right to invest in these securities if the Adviser believes that
doing so would be consistent with the Fund's investment objectives and policies.
Since the market for these instruments would be new, the Fund may have
difficulty disposing of them at a suitable price and time. In addition to
limited liquidity, these instruments may present other risks, such as high price
volatility.

RISKS OF CONCENTRATION IN UTILITY INDUSTRIES. Risks that are intrinsic
to the utility industries include:

- difficulty in obtaining an adequate return on invested
capital,

- difficulty in financing large construction programs during an
inflationary period,

- restrictions on operations and increased cost and delays
attributable to environmental considerations and regulation,

- difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled
capital markets,

- technological innovations that may render existing plants,
equipment or products obsolete,

- the potential impact of natural or man-made disasters,

- increased costs and reduced availability of certain types of
fuel,

- occasionally reduced availability and high costs of natural
gas for resale,

- the effects of energy conservation,

- the effects of a national energy policy, and

- lengthy delays and greatly increased costs and other problems
associated with the design, construction, licensing,
regulation and operation of nuclear facilities for electric
generation, including, among other considerations, the
problems associated with the use of radioactive materials and
the disposal of radioactive wastes.

Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also

regulated in the United States and in foreign countries with the intention of
protecting the public while ensuring that the rate of return earned by utility
companies is sufficient to allow them to attract capital in order to grow and
continue to provide appropriate services. There can be no assurance that such
pricing policies or rates of return will continue in the future.

Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the U.S., generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that may cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.

The revenues of domestic and foreign utility companies generally
reflect the economic growth and development in the geographic areas in which
they do business. The Adviser will take into account anticipated economic growth
rates and other economic developments when selecting securities of utility
companies.

Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. In the past, electric
utility companies, in general, have been favorably affected by lower fuel and
financing costs and the full or near completion of major construction programs.
In addition, many of these companies have generated cash flows in excess of
current operating expenses and construction expenditures, permitting some degree
of diversification into unregulated businesses. Some electric utilities have
also taken advantage of the right to sell power outside of their traditional
geographic areas. Electric utility companies have historically been subject to
the risks associated with increases in fuel and other operating costs, high
interest costs on borrowings needed for capital construction programs, costs
associated with compliance with environmental and safety regulations and changes
in the regulatory climate. As interest rates declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage.
Regulators, however, lowered allowed rates of return as interest rates declined
and thereby caused the benefits of the rate declines to be shared wholly or in
part with customers.

The construction and operation of nuclear power facilities are subject
to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies having comparable jurisdiction. Increased scrutiny
might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or
complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for
decommissioning such plants.

The rating agencies are taking a closer look at the business profile of
utilities. Ratings for companies are expected to be impacted to a greater extent
in the future by the division of their asset base. Electric utility companies
that focus more on the generation of electricity may be assigned less favorable
ratings as this business is expected to be competitive and the least regulated.
On the other hand, companies that focus on transmission and distribution which
is expected to be the least competitive and the more regulated part of the
business may see higher ratings given the greater predictability of cash flow.

Currently, several states are considering deregulation proposals. The
introduction of competition into the industry as a result of deregulation may
result in lower revenue, lower credit ratings, increased default risk, and lower
electric utility security prices. Such increased competition may also cause
long-term contracts, which electric utilities previously entered into to buy
power, to become "stranded assets" which have no economic value. Any loss

associated with such contracts must be absorbed by ratepayers and investors. In
addition, in anticipation of increasing competition, some electric utilities
have acquired electric utilities overseas to diversify, enhance earnings and
gain experience in operating in a deregulated environment. In some instances,
such acquisitions have involved significant borrowings, which have burdened the
acquirer's balance sheet. There is no assurance that current deregulation
proposals will be adopted. However, deregulation in any form could significantly
impact the electric utilities industry.

Telecommunications. The telecommunications industry today includes both
traditional telephone companies, with a history of broad market coverage and
highly regulated businesses, and cable companies, which began as small, lightly
regulated businesses focused on limited markets. Today these two historically
different businesses are converging in an industry which is trending toward
larger, competitive, national and international markets with an emphasis on
deregulation. Companies that distribute telephone services and provide access to
the telephone networks still comprise the greatest portion of this segment, but
non-regulated activities such as cellular telephone services, paging, data
processing, equipment retailing, computer software and hardware services are
becoming increasingly significant components as well. The presence of
unregulated companies in this industry and the entry of traditional telephone
companies into unregulated or less regulated businesses provide significant
investment opportunities with companies which may increase their earnings at
faster rates than had been allowed in traditional regulated businesses. Still,
increasing competition, technological innovations and other structural changes
could adversely affect the profitability of such utilities and the growth rate
of their dividends. Given mergers, certain marketing tests currently underway
and proposed legislation and enforcement changes, it is likely that both
traditional telephone companies and cable companies will soon provide a greatly
expanded range of utility services, including two-way video and informational
services to both residential, corporate and governmental customers.

In February 1996, the Telecommunications Act of 1996 (the "Act") became
law. The Act removed regulatory restrictions on entry that prevented local and
long-distance telephone companies and cable television companies from competing
against one another. The Act also removed most cable rate controls and allows
broadcasters to own more radio and television stations. Litigation concerning
the constitutionality of certain major provisions of the Act has slowed the
implementation of such provisions.

Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected
by disruptions in the oil industry and have also been affected by increased
concentration and competition.

Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth.

There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.

RISKS OF INVESTMENTS IN THE FINANCIAL SERVICES SECTOR. Since a
significant portion of the Fund's investments may be focused in issuers in the
financial services sector, the Fund will be subject to risks or events which
significantly affect the sector as a whole or a particular segment in which the
Fund invests.

Most financial services companies are subject to extensive governmental
regulation which limits their activities and may (as with insurance rate
regulation) affect the ability to earn a profit from a given line of business.
Certain financial services businesses are subject to intense competitive
pressures, including market share and price competition. The removal of
regulatory barriers to participation in certain segments of the financial
services sector may also increase competitive pressures on different types of
firms. For example, recent legislation removing traditional barriers between
banking and investment banking activities will allow large commercial banks to
compete for business that previously was the exclusive domain of securities
firms. Similarly, the removal of

regional barriers in the banking industry has intensified competition within the
industry. The availability and cost of funds to financial services firms is
crucial to their profitability. Consequently, volatile interest rates and
general economic conditions can adversely affect their financial performance.

Financial services companies in foreign countries are subject to
similar regulatory and interest rate concerns. In particular, government
regulation in certain foreign countries may include controls on interest rates,
credit availability, prices and currency movements. In some cases, foreign
governments have taken steps to nationalize the operations of banks and other
financial services companies.

As deregulation of various financial services businesses continues and
new segments of the financial services sector are opened to certain larger
financial services firms formerly prohibited from doing business in these
segments, (such as national and money center banks) certain established
companies in these market segments (such as regional banks or securities firms)
may become attractive acquisition candidates for the larger firm seeking
entrance into the segment.

In addition, financial services companies in growth segments (such as
securities firms during times of stock market expansion) or geographically
linked to areas experiencing strong economic growth (such as certain regional
banks) are likely to participate in and benefit from such growth through
increased demand for their products and services. Many financial services
companies which are actively and aggressively managed and are expanding services
as deregulation opens up new opportunities also show potential for capital
appreciation, particularly in expanding into areas where nonregulatory barriers
to entry are low.

RATINGS AS INVESTMENT CRITERIA. In general, the ratings of Moody's and
S&P represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Fund as initial criteria for the selection of debt securities. Among the
factors which will be considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. Appendix B contains further
information concerning the rating of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund or the average weighted credit quality of the Fund's portfolio may
cease to be investment grade. None of these events will require the sale of the
securities by the Fund.

SHORT-TERM BANK AND CORPORATE OBLIGATIONS. The Fund may invest in
depository-type obligations of banks and savings and loan associations and other
high quality money market instruments consisting of short-term obligations of
the U.S. Government or its agencies and commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations and finance companies. Depository-type
obligations in which the Fund may invest include certificates of deposit,
bankers' acceptances and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return.

Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument at maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.

INVESTMENTS IN FOREIGN SECURITIES. The Fund may invest directly in the
securities of foreign issuers as well as securities in the form of sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts (GDRs) or other securities convertible
into foreign securities. ADRs are receipts typically issued by a U.S. bank or
trust company which evidence ownership of

underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe which evidence a similar ownership arrangement. Issuers of unsponsored
ADRs are not contractually obligated to disclose material information, including
financial information, in the United States. Generally, ADRs are designed for
use in the United States securities markets and EDRs are designed for use in
European securities markets.

An investment in foreign securities including ADRs may be affected by
changes in currency rates and in exchange control regulations. Issuers of
unsponsored ADRs are not contractually obligated to disclose material
information including financial information, in the United States and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. Foreign companies may not be subject to
accounting standards or government supervision comparable to U.S. companies, and
there is often less publicly available information about their operations.
Foreign companies may also be affected by political or financial instability
abroad. These risk considerations may be intensified in the case of investments
in ADRs of foreign companies that are located in emerging market countries. ADRs
of companies located in these countries may have limited marketability and may
be subject to more abrupt or erratic price movements.

RISKS OF FOREIGN SECURITIES. Investments in foreign securities may
involve a greater degree of risk than those in domestic securities. There is
generally less publicly available information about foreign companies in the
form of reports and ratings similar to those that are published about issuers in
the United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.

Foreign securities will be purchased in the best available market,
whether through over-the-counter markets or exchanges located in the countries
where principal offices of the issuers are located. Foreign securities markets
are generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.

With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.

The dividends, in some cases capital gains and interest payable on
certain of the Fund's foreign portfolio securities, may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income or
gains available for distribution to the Fund's shareholders.

REPURCHASE AGREEMENTS. In a repurchase agreement the Fund buys a
security for a relatively short period (usually not more than 7 days) subject to
the obligation to sell it back to the issuer at a fixed time and price plus
accrued interest. The Fund will enter into repurchase agreements only with
member banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.

The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights.

REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse
repurchase agreements, which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. To minimize various risks associated
with reverse repurchase agreements, the Fund will establish and maintain a
separate account consisting of liquid securities, of any type or maturity, in an
amount at least equal to the repurchase prices of the securities (plus any
accrued interest thereon) under such agreements.

OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may purchase and
write (sell) call and put options on any securities and securities indices.
These options may be listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. The Fund may
write covered put and call options and purchase put and call options as a
substitute for the purchase or sale of securities or to protect against declines
in the value of portfolio securities and against increases in the cost of
securities to be acquired.

WRITING COVERED OPTIONS. A call option on securities written by the
Fund obligates the Fund to sell specified securities to the holder of the option
at a specified price if the option is exercised at any time before the
expiration date. A put option on securities written by the Fund obligates the
Fund to purchase specified securities from the option holder at a specified
price if the option is exercised at any time before the expiration date. Options
on securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.

All call and put options written by the Fund are covered. A written
call option or put option may be covered by (i) maintaining cash or liquid
securities in a segregated account with a value at least equal to the Fund's
obligation under the option, (ii) entering into an offsetting forward commitment
and/or (iii) purchasing an offsetting option or any other option which, by
virtue of its exercise price or otherwise, reduces the Fund's net exposure on
its written option position. A written call option on securities is typically
covered by maintaining the securities that are subject to the option in a
segregated account. The Fund may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of the
underlying index.

The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."

PURCHASING OPTIONS. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.

The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities or currency at a specified price
during the option period. The Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities or currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option.

The purchase of a put option would entitle the Fund, in exchange for
the premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities. Put
options may also be purchased by

the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities which it does not own. The Fund would ordinarily realize a gain
if, during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs; otherwise the Fund would realize either no gain or a loss on the purchase
of the put option. Gains and losses on the purchase of put options may be offset
by countervailing changes in the value of the Fund's portfolio securities.

The Fund's options transactions will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded. These limitations govern the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which the
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.

RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that
a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the Fund
is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.

Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.

The Fund's ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. The Adviser will determine the liquidity of each over-the-counter
option in accordance with guidelines adopted by the Board of Trustees (the
"Board").

The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may
purchase and sell futures contracts based on various securities (such as U.S.
Government securities) and securities indices, and any other financial
instruments and indices and purchase and write call and put options on these
futures contracts. The Fund may also enter into closing purchase and sale
transactions with respect to any of these contracts and options. All futures
contracts entered into by a Fund are traded on U.S. or foreign exchanges or
boards of trade that are licensed, regulated or approved by the Commodity
Futures Trading Commission ("CFTC").

FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).

Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities will usually
be liquidated in this manner, the Fund may instead make, or take, delivery of
the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures contracts are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.

A Fund may, for example, take a "short" position in the futures market
by selling futures contracts in an attempt to hedge against an anticipated
decline in market prices that would adversely affect the value of the Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by a Fund or securities with characteristics
similar to those of the Fund's portfolio securities.

HEDGING AND OTHER STRATEGIES. Hedging is an attempt to establish with
more certainty than would otherwise be possible the effective price or rate of
return on portfolio securities or securities that the Fund proposes to acquire
or the exchange rate of currencies in which the portfolio securities are quoted
or denominated. When securities prices are falling, the Fund can seek to offset
a decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.

If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by
having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the
Fund's portfolio securities.

When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of the Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position. On other
occasions, the Fund may take a "long" position by purchasing futures contracts.

OPTIONS ON FUTURES CONTRACTS. The purchase of put and call options on
futures contracts will give the Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.

The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by each Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.

The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.

OTHER CONSIDERATIONS. The Fund will engage in futures and related
options transactions either for bona fide hedging or for other purposes as
permitted by the CFTC. These purposes may include using futures and options on
futures as a substitute for the purchase or sale of securities to increase or
reduce exposure to particular markets. To

the extent that the Fund is using futures and related options for hedging
purposes, futures contracts will be sold to protect against a decline in the
price of securities that the Fund owns or futures contracts will be purchased to
protect the Fund against an increase in the price of securities it intends to
purchase. The Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or securities or
instruments which it expects to purchase. As evidence of its hedging intent, the
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities in the cash market at the time when the futures or
option position is closed out. However, in particular cases, when it is
economically advantageous for the Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.

To the extent that the Fund engages in nonhedging transactions in
futures contracts and options on futures, the aggregate initial margin and
premiums required to establish these nonhedging positions will not exceed 5% of
the net asset value of the Fund's portfolio, after taking into account
unrealized profits and losses on any such positions and excluding the amount by
which such options were in-the-money at the time of purchase.

Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Fund to purchase securities, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.

While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.

Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.

Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.

INTEREST RATE SWAPS, COLLARS, CAPS AND FLOORS. In order to hedge the
value of the Fund's portfolio against interest rate fluctuations or to enhance
the Fund's income, the Fund may, but is not required to, enter into various
interest rate transactions such as interest rate swaps and the purchase or sale
of interest rate caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date or to manage the Fund's interest rate exposure on any debt securities or
preferred shares issued by the Fund for leverage purposes. The Fund intends to
use these transactions primarily as a hedge. However, the Fund also may invest
in interest rate swaps to enhance income or to increase the Fund's yield, for
example, during periods of steep interest rate yield curves (i.e., wide
differences between short-term and long-term interest rates). The Fund is not
required to hedge its portfolio and may choose not to do so. The Fund cannot
guarantee that any hedging strategies it uses will work.

In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). For example, if the Fund holds a debt
instrument with an interest rate that is reset only once each year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset every week. This would enable the Fund to
offset a decline in the value of the debt instrument due to rising interest
rates but would also limit its ability to benefit from falling interest rates.
Conversely, if the Fund holds a debt instrument with an interest rate that is
reset every week

and it would like to lock in what it believes to be a high interest rate for one
year, it may swap the right to receive interest at this variable weekly rate for
the right to receive interest at a rate that is fixed for one year. Such a swap
would protect the Fund from a reduction in yield due to falling interest rates
and may permit the Fund to enhance its income through the positive differential
between one week and one year interest rates, but would preclude it from taking
full advantage of rising interest rates.

The Fund usually will enter into interest rate swaps on a net basis
(i.e., the two payment streams are netted out with the trust receiving or
paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis, and an
amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
the Fund's custodian. If the interest rate swap transaction is entered into on
other than a net basis, the full amount of the Fund's obligations will be
accrued on a daily basis, and the full amount of the Fund's obligations will be
maintained in a segregated account by the Fund's custodian.

The Fund also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (i.e., the reference amount with respect to which interest obligations
are determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor.

Typically, the parties with which the Fund will enter into interest
rate transactions will be broker-dealers and other financial institutions. The
Fund will not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or
whose creditworthiness is believed by the Adviser to be equivalent to such
rating. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with other similar instruments
traded in the interbank market. Caps and floors, however, are less liquid than
swaps. Certain federal income tax requirements may limit the Fund's ability to
engage in interest rate swaps.

CREDIT DEFAULT SWAP AGREEMENTS. The Fund may enter into credit default
swap agreements. The "buyer" in a credit default contract is obligated to pay
the "seller" a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation has
occurred. If an event of default occurs, the seller must pay the buyer the "par
value" (full notional value) of the reference obligation in exchange for the
reference obligation. The Fund may be either the buyer or seller in the
transaction. If the Fund is a buyer and no event of default occurs, the Fund
loses its investment and recovers nothing. However, if an event of default
occurs, the buyer receives full notional value for a reference obligation that
may have little or no value. As a seller, the Fund receives a fixed rate of
income throughout the term of the contract, which typically is between six
months and three years, provided that there is no default event. If an event of
default occurs, the seller must pay the buyer the full notional value of the
reference obligation.

Credit default swaps involve greater risks than if the Fund had
invested in the reference obligation directly. In addition to general market
risks, credit default swaps are subject to illiquidity risk, counterparty risk
and credit risks. The Fund will enter into swap agreements only with
counterparties who are rated investment grade quality by at least one nationally
recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the Adviser to be
equivalent to such rating. A buyer also will lose its investment and recover
nothing should no event of default occur. If an event of default were to occur,
the value of the reference obligation received by the seller, coupled with the
periodic payments previously received, may be less than the full notional value
it pays to the buyer, resulting in a loss of value to the trust. When the Fund
acts as a seller of a credit

default swap agreement it is exposed to the risks of leverage since if an event
of default occurs the seller must pay the buyer the full notional value of the
reference obligation.

The Fund may in the future employ new or additional investment
strategies and hedging instruments if those strategies and instruments are
consistent with the trust's investment objectives and are permissible under
applicable regulations governing the Fund.

RIGHTS AND WARRANTS. The Fund may purchase warrants and rights which
are securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restriction. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.

FORWARD COMMITMENT AND WHEN-ISSUED SECURITIES. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.

When the Fund engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The failure
of the issuer or seller to consummate the transaction may result in the Fund's
losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued or forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.

On the date the Fund enters into an agreement to purchase securities on
a when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal, of any type or maturity, in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT RESTRICTIONS. The following investment
restrictions will not be changed without the approval of a majority of the
Fund's outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means the approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if more
than 50% of the Fund's outstanding shares are present in person or by proxy at
that meeting or (2) more than 50% of the Fund's outstanding shares.

The Fund may not:

1. Issue senior securities, except as permitted by the 1940 Act and the
rules and interpretive positions of the Securities and Exchange
Commission (the "SEC") thereunder. Senior securities that the Fund may
issue in accordance with the 1940 Act include preferred shares,
borrowing, futures, when-issued and delayed delivery securities and
forward foreign currency exchange transactions.

2. Borrow money, except as permitted by the 1940 Act and the rules and
interpretive positions of the SEC thereunder.

3. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.

4. Purchase, sell or invest in real estate, but subject to its other
investment policies and restrictions may invest in securities of
companies that deal in real estate or are engaged in the real estate
business. These companies include real estate investment trusts and
securities secured by real estate or interests in real estate. The Fund
may hold and sell real estate acquired through default, liquidation or
other distributions of an interest in real estate as a result of the
Fund's ownership of securities.

5. Invest in commodities or commodity futures contracts, other than
financial derivative contracts. Financial derivatives include forward
currency contracts; financial futures contracts and options on
financial futures contracts; options and warrants on securities,
currencies and financial indices; swaps, caps, floors, collars and
swaptions; and repurchase agreements entered into in accordance with
the Fund's investment policies.

6. Make loans, except that the Fund may (i) lend portfolio securities in
accordance with the Fund's investment policies, (ii) enter into
repurchase agreements, and (iii) purchase all or a portion of an issue
of publicly distributed debt securities, bank loan participation
interests, bank certificates of deposit, bankers' acceptances,
debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities.

7. Purchase the securities of issuers conducting their principal activity
in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets
taken at market value at the time of such investment, except that the
Fund will invest 25% or more of its total assets in the industries
comprising the utilities sector. This limitation does not apply to
investments in securities issued by the U.S. Government or any of its
agencies, instrumentalities or authorities.

8. With respect to 75% of the fund's total assets, the Fund may not invest
more than 5% of the fund's total assets in the securities of any single
issuer or own more than 10% of the outstanding voting securities of any
one issuer, in each case other than (i) securities issued or guaranteed
by the U.S. Government, its agencies or its instrumentalities or (ii)
securities of other investment companies.

NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval.

1. Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund in
connection with lending of the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Subject to the above percentage
limitations, the fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Directors (a
means for the Fund's trustee to deferred receipt of their fees as
trustee), purchase securities of other investment companies within the
investment companies for which the Adviser acts an investment adviser
(the "John Hancock Group of Funds").

2. Invest more than 20% of its net assets in securities which are
illiquid.

If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value of the Fund's assets will not
be considered a violation of the restriction.

The Fund intends to apply for ratings for its preferred shares from a
nationally recognized statistical rating organization ("NRSRO"). In order to
obtain and maintain the required ratings, the Fund may be required to comply
with investment quality, diversification and other guidelines established by the
NRSRO. Such guidelines will likely be more restrictive than the restrictions set
forth above. The Fund may also be subject to certain restrictions and guidelines
imposed by lenders if the Fund engages in borrowings. The Fund does not
anticipate that such guidelines would have a material adverse effect on its
common shareholders or the Fund's ability to achieve its investment objectives.

The Fund will invest only in countries on the Adviser's Approved
Country Listing. The Approved Country Listing is a list maintained by the
Adviser's investment department that outlines all countries, including the
United States, that have been approved for investment by Funds managed by the
Adviser.

If allowed by the Fund's other investment policies and restrictions,
the Fund may invest up to 5% of its total assets in Russian equity securities
and up to 10% of its total assets in Russian fixed income securities. All
Russian securities must be: (1) denominated in U.S. dollars; (2) traded on a
major exchange; and (3) held physically outside of Russia.

THOSE RESPONSIBLE FOR MANAGEMENT

The business of the Fund is managed by its Trustees, who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers or Directors of the Adviser, or officers and Directors of
the Fund's principal distributor, John Hancock Funds, LLC (prior to February 1,
2002, John Hancock Funds, Inc.) ("John Hancock Funds").

John Hancock Fund Complex means the open and closed-end investment
companies for which the Adviser acts as investment adviser.

------------------------------------------------------------------------------------------------------------------------
NUMBER OF
FUNDS IN
POSITION(S) TRUSTEE/ THE JOHN
NAME, ADDRESS (1) HELD WITH OFFICER PRINCIPAL OCCUPATION(S) HANCOCK OTHER
AND AGE FUND SINCE(2) DURING PAST 5 YEARS FUND DIRECTORSHIPS
COMPLEX
OVERSEEN BY
TRUSTEE

------------------------------------------------------------------------------------------------------------------------
INDEPENDENT
TRUSTEES
------------------------------------------------------------------------------------------------------------------------
James F. Carlin Trustee 2002 Chairman and CEO, alpha Analytical 29 Massachusetts
(Age 62) Laboratories (chemical analysis); Health and
Part Owner and Treasurer, Lawrence Education Tax
Carlin Insurance Agency, Inc. Exempt Trust;
(since 1995); Part owner and Vice Uno Restaurant
President, Mone Lawrence Carlin Corp. (until
Insurance Agency, Inc. (since 2001), Arbella
1996); Director/Treasurer, Rizzo Mutual
Associates (until 2000); Chairman (insurance)
and CEO, Carlin Consolidated, Inc. (until 2000),
(management/investments); HealthPlan
Director/Partner, Proctor Carlin & Services, Inc.
Co., Inc. (until 1999). (until 1999),
Flagship
Healthcare,
Inc. (until
1999), Carlin
Insurance
Agency, Inc.
(until 1999),
Chairman,
Massachusetts
Board of Higher
Education
(until 1999).

------------------------------------------------------------------------------------------------------------------------
Charles L. Ladner Trustee 2002 Chairman and Trustee, Dunwoody 29 Parks and
(Age 64) Village, Inc. (continuing care History
retirement community); Senior Vice Association
President and Chief Financial (since 2001).
Officer, UGI Corporation (Public
Utility Holding Company) (retired
1998); Vice President and Director
for AmeriGas, Inc. (retired 1998).
Director of AmeriGas Partners, L.P.
(until 1997) (gas distribution).
------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------------------------
Maureen R. Ford (3) Trustee, 2002 Executive Vice President, John 59 None
(Age 47) Chairman, Hancock Financial Services, Inc.,
President John Hancock Life Insurance
and Chief Company; Chairman, Director,
Executive President and Chief Executive
Officer 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, Inc.; Senior
Vice President, MassMutual
Insurance Co. (until 1999);

------------------------------------------------------------------------------------------------------------------------

The following persons are not Trustees as of the date of this Statement of
Additional Information but have been elected to serve as Members of the Board of
Trustees effective August 27, 2002.

INTERESTED TRUSTEES
------------------------------------------------------------------------------------------------------------------------
John M. DeCiccio Trustee 2002 Executive Vice President and Chief 59 None
(Age 54) 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).
------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------
William H. Cunningham Trustee 2002 Former Chancellor, University of 29 Hire.com
(Age 58) Texas System and former President (since 2000),
of the University of Texas, Austin, STC
Texas; Chairman, IBT Technologies; Broadcasting,
Director of the following: The Inc. and
University of Texas Investment Sunrise
Management Company (until 2000), Television
Hire.com (since 2000), STC Corp. (since
Broadcasting, Inc. and Sunrise 2000), Symtx,
Television Corp. (since 2000), Inc. (since
Symtx, Inc. (since 2001), 2001),
Adorno/Rogers Technology, Inc. Adorno/Rogers
(since 2001), Pinnacle Foods Technology,
Corporation (since 2000), Inc. (since
rateGenius (since 2000), LaQuinta 2001),
Motor Inns, Inc. (hotel management Pinnacle
company) (until 1998), Foods
Jefferson-Pilot Corporation Corporation
(diversified life insurance (since 2000),
company), New Century Equity rateGenius
Holdings (formerly Billing (since 2000),
Concepts) (until 2001), eCertain Southwest
(until 2001), ClassMap.com (until Airlines and
2001), Agile Ventures (until 2001), Introgen;
LBJ Foundation (until 2000), LBJ Advisory
Foundation (until 2000), Golfsmith Director, Q
International, Inc. (until 2000), Investments;
Metamor Worldwide (until 2000), Advisory
AskRed.com (until 2001), Southwest Director,
Airlines and Introgen; Advisory Chase Bank
Director, Q Investments; Advisory (formerly
Director, Chase Bank (formerly Texas
Texas Commerce Bank - Austin). Commerce Bank
- Austin).
------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
Ronald R. Dion Trustee 2002 Chairman and Chief Executive 29 The New
(Age 56) Officer, R.M. Bradley & Co., Inc. England
Council and
Massachusetts
Roundtable;
North Shore
Medical
Center; BJ's
Wholesale
Club, Inc.
and a
corporator of
the Eastern
Bank;
Emmanuel
College.

------------------------------------------------------------------------------------------------------------------------
John A. Moore Trustee 2002 President and Chief Executive 37 CIIT
(Age 63) Officer, Institute for Evaluating (nonprofit
Health Risks, (nonprofit research)
institution) (until 2001); Senior (since 2002).
Scientist, Sciences International
(health research)(since 1998);
Principal, Hollyhouse
(consulting)(since 2000).
------------------------------------------------------------------------------------------------------------------------
Patti McGill Peterson Trustee 2002 Executive Director, Council for 37 Niagara
(Age 59) International Exchange of Scholars Mohawk Power
(since 1998); Vice President, Corporation
Institute of International (electric
Education (since 1998); Senior utility).
Fellow, Cornell Institute of Public
Affairs, Cornell University (until
1997); President Emerita of Wells
College and St. Lawrence
University.
------------------------------------------------------------------------------------------------------------------------
Steven R. Pruchansky Trustee 2002 Chairman and Chief Executive 29 None
(Age 57) Officer, Mast Holdings, Inc. (since
2000); Director and President, Mast
Holdings, Inc. (until 2000);
Managing Director, JonJames,
LLC (real estate)(since 2001).
------------------------------------------------------------------------------------------------------------------------
Norman H. Smith Trustee 2002 Lieutenant General, United States 29 None
(Age 69) Marine Corps; Deputy Chief of Staff
for Manpower and Reserve Affairs,
Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
John P. Toolan Trustee 2002 Chairman, Smith Barney Trust 29 The Smith
(Age 71) Company (retired 1991); Director, Barney Muni
Smith Barney, Inc., Mutual Bond Funds,
Management Company and Smith Barney The Smith
Advisers, Inc. (investment Barney
advisers) (retired 1991); Senior Tax-Free
Executive Vice President, Director Money Funds,
and member of the Executive Inc., Vantage
Committee, Smith Barney, Harris Money Market
Upham & Co., Incorporated Funds (mutual
(investment bankers) (until 1991). funds), The
Inefficient-Market
Fund, Inc.
(closed-end
investment
company) and
Smith Barney
Trust Company
of Florida;
------------------------------------------------------------------------------------------------------------------------

The following persons are the officers of the Fund who are not also members of
the Board of Trustees.

PRINCIPAL OFFICERS
WHO ARE NOT TRUSTEES
------------------------------------------------------------------------------------------------------------------------
William L. Braman Executive 2002 Executive Vice President and Chief N/A
(Age 48) Vice Investment Officer, the Adviser and
President each of the John Hancock Group of
and Chief Funds; Director, SAMCorp.,
Investment Executive Vice President and Chief
Officer Investment Officer, Barring Asset
Management, London U.K. (until
2000).

------------------------------------------------------------------------------------------------------------------------
Richard A. Brown Senior Vice 2002 Senior Vice President, Chief N/A
(Age 53) President Financial Officer and Treasurer,
and Chief the Adviser, John Hancock Group of
Financial Funds, and The Berkeley Group;
Officer Second Vice President and Senior
Associate Controller, Corporate Tax
Department, John Hancock Financial
Services, Inc. (until 2001).

------------------------------------------------------------------------------------------------------------------------
Thomas H. Connors Vice 2002 Vice President and Compliance N/A
(Age 43) President Officer, the Adviser and each of
and the John Hancock Funds; Vice
Compliance President, John Hancock Group of
Officer Funds.
------------------------------------------------------------------------------------------------------------------------
William H. King Vice 2002 Vice President and Assistant N/A
(Age 49) President Treasurer, the Adviser; Vice
and President and Treasurer of each of
Treasurer the John Hancock Group of Funds;
Assistant Treasurer of each of the
John Hancock Group of Funds (until
2001).
------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
Susan S. Newton Senior Vice 2002 Senior Vice President, Secretary N/A
(Age 52) President, and Chief Legal Officer, SAMCorp.,
Secretary the Adviser and each of the John
and Chief Hancock Group of Funds, John
Legal Hancock Funds and The Berkeley
Officer Group; Vice President, Signature
Services (until 2000), Director,
Senior Vice President and
Secretary, NM Capital.
------------------------------------------------------------------------------------------------------------------------

(1) Business address for independent and interested Trustees and officers
is 101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or
his successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and/or certain other affiliates.

The Fund's Board of Trustees currently has five standing Committees:
the Audit Committee, the Administration Committee, the Contracts/Operations
Committee, the Investment Performance Committee and the Coordinating Committee.
Each Committee is comprised of Independent Trustees who are not "interested
persons".

The Audit Committee members are expected to be Messrs. Carlin
(Chairman), Ladner and Toolan. All of the members of the Audit Committee are
independent under the New York Stock Exchange's Revised Listing Rules, and each
member is financially literate with at least one having accounting or financial
management expertise. The Board has adopted a written charter for the Audit
Committee. The Audit Committee recommends to the full board auditors for the
Fund, monitors and oversees the audits of the Fund, communicates with both
independent auditors and internal auditors on a regular basis and provides a
forum for the auditors to report and discuss any matters they deem appropriate
at any time.

The Administration Committee's members are expected to be Messrs. Smith
(Chairman), Carlin, Cunningham, Dion, Ladner, Pruchansky and Toolan. The
Administration Committee reviews the activities of the other four standing
committees and makes the final selection and nomination of candidates to serve
as Independent Trustees. The Administration Committee will consider nominees
recommended by shareholders to serve as Independent Trustees, provided that
shareholders submit recommendations in compliance with all of the pertinent
provisions of Rule 14a-8 under the Securities Exchange Act of 1934. The
Administration Committee also works with all Trustees on the selection and
election of officers of the Fund.

The Contracts/Operations Committee members are expected to be Messrs.
Cunningham (Chairman) and Pruchansky. The Contracts/Operations Committee
oversees the initiation, operation, and renewal of contracts between the Fund
and other entities. These contracts include advisory and subadvisory agreements,
custodial and transfer agency agreements and arrangements with other service
providers.

The Investment Performance Committee is expected to consist of Messrs.
Dion (Chairman) and Smith. The Investment Performance Committee monitors and
analyzes the performance of the Fund generally, consults with the adviser as
necessary if the Fund requires special attention, and reviews peer groups and
other comparative standards as necessary.

The Coordinating Committee members are the chairpersons of the other
four standing committees. The Coordinating Committee assures consistency of
action among committees, reviews Trustee compensation, evaluates Trustee
performance and considers committee membership rotations as well as relevant
corporate governance issues.

The following table provides a dollar range indicating each Trustee's
ownership of equity securities of the Fund, as well as aggregate holdings of
shares of equity securities of all funds in the John Hancock Fund Complex
overseen by the Trustee, as of December 31, 2001.

---------------------------------------------------------------------------------------------------
Aggregate Dollar Range of
Dollar Range of Fund Shares Holdings in Funds in John
Name of Trustee Owned by Trustee Hancock Fund Complex
Overseen by Trustee(1)
---------------------------------------------------------------------------------------------------

INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------------------
James F. Carlin None $10,001-$50,000
---------------------------------------------------------------------------------------------------
William H. Cunningham None $10,001-$50,000
---------------------------------------------------------------------------------------------------
Ronald R. Dion None Over $100,000
---------------------------------------------------------------------------------------------------
Charles L. Ladner None Over $100,000
---------------------------------------------------------------------------------------------------
John A. Moore None Over $100,000
---------------------------------------------------------------------------------------------------
Patti McGill Peterson None Over $100,000
---------------------------------------------------------------------------------------------------
Steven R. Pruchansky None Over $100,000
---------------------------------------------------------------------------------------------------
Norman H. Smith None Over $100,000
---------------------------------------------------------------------------------------------------
John P. Toolan None Over $100,000

---------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
---------------------------------------------------------------------------------------------------
John M. DeCiccio None Over $100,000
---------------------------------------------------------------------------------------------------
Maureen R. Ford None Over $100,000
---------------------------------------------------------------------------------------------------

(1) Under the John Hancock Deferred Compensation Plan for Independent Trustees,
an Independent Trustee may elect to earn a return on his deferred fees
equal to the amount that he would have earned if the deferred fees amount
were invested in one or more funds in the John Hancock Fund Complex. Under
these circumstances, a trustee is not the legal owner of the underlying
shares, but participates in any positive or negative return on those shares
to the same extent as other shareholders. If the Trustees were deemed to
own the shares used in computing the value of his deferred compensation, as
of December 31, 2001, the respective "Dollar Range of Fund Shares Owned by
Trustee" and the "Aggregate Dollar Range of Holdings in Funds in the John
Hancock Fund Complex Overseen by Trustee" would be none and over $100,000
for Mr. Cunningham, none and over $100,000 for Mr. Dion, none and $10,000-
$50,000 for Mr. Pruchansky, none and $50,000-$100,000 for Mr. Smith, none
and over $100,000 for Mr. Toolan.

The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Ms. Ford and John M. DeCiccio,
interested Trustees, and each of the officers of the Fund who are interested
persons of the Adviser, and/or affiliates are compensated by the Adviser and
receive no compensation from the Fund for their services.

Aggregate Total Compensation from all Funds
Compensation in John Hancock Fund Complex to
Trustees From the Fund(1) Trustees (2)
-------- ---------------- ----------------------------------

James F. Carlin $50 $75,000
William H. Cunningham* $50 $72,100
Ronald R. Dion* $50 $75,000
Charles L. Ladner $50 $75,100
John A. Moore $50 $75,100
Patti McGill Peterson $50 $72,000
Steven R. Pruchansky* $50 $72,000
Norman H. Smith* $50 $78,000
John P. Toolan* $50 $72,000
------------------------------------ ------------------ -----------------------------------

Total $450 $666,300

(1) Since the Fund is newly organized, this figure is estimated
for the calendar year ending December 31, 2002.

(2) Total compensation paid by the John Hancock Fund Complex to
the Independent Trustees is for the calendar year ended December 31, 2001. As of
that date, there were sixty-six funds in the John Hancock Fund Complex, with
each of these Independent Trustees serving on thirty-six funds.

(*) As of December 31, 2001 the value of the aggregate accrued
deferred compensation from all Funds in the John Hancock Fund Complex for Mr.
Cunningham was $540,844, for Mr. Dion was $112,044, for Mr. Moore was $238,982,
for Mr. Pruchansky was $117,545, for Mr. Smith was $202,737 and for Mr. Toolan
was $621,800 under the John Hancock Deferred Compensation Plan for Independent
Trustees (the "Plan").

All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.

As of June 30, 2002 officers and Trustees of the Fund as a group owned
less than 1% of the outstanding shares of the Fund. To the knowledge of the
Trust, no persons owned of record or beneficially 5% or more of any class of the
Fund's outstanding shares of the Fund.

INVESTMENT ADVISORY AND OTHER SERVICES

The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and has approximately $29 billion in assets
under management as of March 31, 2002 in its capacity as investment adviser to
the Fund and other funds in the John Hancock Fund Complex as well as retail and
institutional privately managed accounts. The Adviser is an affiliate of the
Life Company, one of the most recognized and respected financial institutions in
the nation. With total assets under management of approximately $125 billion as
of March 31, 2002, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating with S&P and A. M.
Best. Founded in 1862, the Life Company has been serving clients for over 130
years.

The Fund has entered into an investment management contract (the
"Advisory Agreement") with the Adviser, which was approved by the Fund's sole
shareholder. Pursuant to the Advisory Agreement, the Adviser will: (a) furnish
continuously an investment program for the Fund and determine, subject to the
overall supervision and review of the Trustees, which investments should be
purchased, held, sold or exchanged, and (b) provide supervision over all aspects
of the Fund's operations except those which are delegated to a custodian,
transfer agent or other agent.

The Fund bears all costs of its organization and operation, including
but not limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit, and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Fund); the compensation and expenses of Trustees
who are not otherwise affiliated with the Trust, the Adviser or any of their
affiliates; expenses of Trustees' and shareholders' meetings; trade association
memberships; insurance premiums; and any extraordinary expenses.

managed assets, the Adviser's interest in determining whether to leverage the
Fund may differ from the interests of the Fund. "Managed assets" means the total
assets of the Fund (including any assets attributable to any leverage that may
be outstanding) minus the sum of accrued liabilities (other than liabilities
representing financial leverage). The liquidation preference of any preferred
shares is no a liability.

The Adviser has contractually agreed to waive a portion of its advisory
fee. The Adviser has agreed that, until the fifth anniversary of investment
advisory agreement, the Adviser will limit its advisory fee to 0.55% of average
daily managed assets, in the sixth year to 0.60% of average daily managed
assets, in the seventh year to 0.65% of average daily managed assets, and in the
eighth year to 0.70% of average daily managed assets. After the eighth year the
Adviser will no longer waive a portion of its advisory fee.

From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of its
average daily net assets. The Adviser retains the right to reimpose a fee and
recover any other payments to the extent that, at the end of any fiscal year,
the Fund's annual expenses fall below this limit.

The Adviser has also agreed to pay from its own assets to certain of
the Underwriters an incentive fee at an annual rate equal to up to 0.10% of the
Fund's managed assets. This fee will be payable in arrears at the end of each
calendar quarter so long as the Advisory Agreement remains in effect between the
Fund and the Adviser or any successor in interest or affiliate of the Adviser,
as and to the extent that such Advisory Agreement is renewed periodically in
accordance with the 1940 Act. If an Underwriter meets certain requirements
established by the Adviser (each a "Qualifying Underwriter") (which may be
waived or modified in the discretion of the Adviser), it will receive an annual
fee equal to 0.10% of the Fund's managed assets multiplied by the percentage of
the Fund's common shares sold by the Qualifying Underwriter in this offering.
The total amount of the incentive fee payments, discounted to the closing date
of this offering, plus the amounts paid by the Fund to reimburse certain
Underwriter expenses, will not exceed the maximum compensation allowed under the
conduct rules of the National Association of Securities Dealers, as such rules
are then in effect.

Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more other funds or clients are selling the same security. If opportunities for
purchase or sale of securities by the Adviser for the Fund or for other funds or
clients for which the Adviser renders investment advice arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.

Pursuant to its Advisory Agreement, the Adviser is not liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless disregard
by the Adviser of its obligations and duties under the Advisory Agreement.

Under the Advisory Agreement, the Fund may use the name "John Hancock"
or any name derived from or similar to it only for so long as the Advisory
Agreement or any extension, renewal or amendment thereof remains in effect. If
the Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such a name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the nonexclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.

The Board is responsible for overseeing the performance of the Adviser
and determining whether to approve and renew the Advisory Agreement. Prior to
the July 17, 2002 meeting, the Board requested and received from the Adviser
certain information the Board deemed important in evaluating the Adviser's
qualifications and the reasonableness of the proposed fee. The Board also met
with the proposed portfolio management team for the Fund.

In addition, the Board drew upon its experience in acting as trustees for other
investment companies. The primary factors that the Board considered to be
favorable in approving the Advisory Agreement were:

- The Adviser's experience in managing other investment
companies, including investment companies that invest in
preferred securities and employ a leverage structure (the
"Comparable Funds"). In considering this factor, the Board
considered the experience of the portfolio management team in
managing portfolios of preferred securities. The members of
the Board also considered their experience, as trustees of the
Comparable Funds, with the quality of the compliance and
administrative staff of the Adviser.

- The investment performance of the Comparable Fund, both in
absolute terms and relative to their performance benchmarks.

- The reasonableness of the proposed fee. In making that
determination, the Board took into consideration the fees
charged by similar funds managed by other investment advisers
and the fees charged by the Adviser for managing the
Comparable Funds.

- The Adviser's commitment to waive a portion of its advisory
fee for a period of eight years.

- The reasonableness of the estimated total expenses of the
Fund, both with and without the advisory fee waiver.

The Advisory Agreement was approved by all Trustees who were serving as
Trustees on July 27, 2002. The Board was subsequently increased from 3 members
to 11 members. The Advisory Agreement will continue in effect from year to year,
provided that its continuance is approved annually after its initial two year
term both (i) by the holders of a majority of the outstanding voting securities
of the Trust or by the Trustees, and (ii) by a majority of the Trustees who are
not parties to the Agreement or "interested persons" of any such parties. The
Advisory Agreement may be terminated on 60 days written notice by any party or
by vote of a majority of the outstanding voting securities of the Fund and will
terminate automatically if assigned.

ACCOUNTING AND LEGAL SERVICES AGREEMENT. The Trust, on behalf of the
Fund, is a party to an Accounting and Legal Services Agreement with the Adviser.
Pursuant to this agreement, the Adviser provides the Fund with certain tax,
accounting and legal services.

SHAREHOLDER SERVICING AGENT. The Adviser has retained UBS Warburg LLC
to act as shareholder servicing agent for the Fund. Pursuant to the Shareholder
Servicing Agreement, UBS Warburg LLC will: (i) undertake to make public
information pertaining to the Fund on an ongoing basis and to communicate to
investors and prospective investors the Fund's features and benefits (including
periodic seminars or conference calls, responses to questions from current or
prospective shareholders and specific shareholder contact where appropriate);
(ii) make available to investors and prospective investors market price, net
asset value, yield and other information regarding the Fund, if reasonably
obtainable, for the purpose of maintaining the visibility of the Fund in the
investor community; (iii) at the request of the Adviser, provide certain
economic research and statistical information and reports, if reasonably
obtainable, on behalf of the Fund, and consult with representatives and Trustees
of the Fund in connection therewith, which information and reports shall
include: (a) statistical and financial market information with respect to the
Fund's market performance and (b) comparative information regarding the Fund and
other closed-end management investment companies with respect to (1) the net
asset value of their respective share, (2) the respective market performance of
the Fund and such other companies, (3) other relevant performance indicators;
and (iv) at the request of the Adviser, provide information to and consult with
the Board with respect to applicable modifications to dividend policies or
capital structure, repositioning or restructuring of the Fund, conversion of the
Fund to an open-end investment company, or a Fund liquidation or merger;
provided, however, that under the terms of the Shareholder Servicing Agreement,
UBS Warburg LLC is not obligated to render any opinions, valuations or
recommendations of any kind or to perform any such similar services. Under the
terms of the Shareholder Servicing Agreement, UBS Warburg LLC is relieved from
liability to the Adviser for any act or omission in the course of its
performances under the Shareholder Servicing Agreement in the absence of gross
negligence or willful misconduct. In consideration of these services, the
Adviser will pay UBS Warburg LLC a fee equal on an annual basis to 0.10% of the
Fund's average daily-managed assets. This fee will be an expense of the Adviser
and not the Fund. The Shareholder Services Agreement has an initial term of two
years and is renewable thereafter with the consent of both parties.

DIRECT REGISTRATION OF TRUST SHARES. Through Mellon Investor Services,
LLC ("Mellon") the Fund has made its common shares eligible for inclusion in the
direct registration system (DRS) administered by The Depository Trust Company
("DTC"), wherein Mellon will process transfers of common shares utilizing DTC's
Profile Modification System.

CODE OF ETHICS. Personnel of the Adviser and its affiliates may trade
securities for their personal accounts. The Fund also may hold, or may be buying
or selling, the same securities. To prevent the Fund from being disadvantaged,
the adviser(s), principal underwriter and the Fund have adopted a code of
ethics, which restricts the trading activity of those personnel.

NET ASSET VALUE

For purposes of calculating the net asset value ("NAV") of the Fund's
common shares, the following procedures are utilized wherever applicable.

Debt investment securities are valued on the basis of valuations
furnished by a principal market-maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.

Equity securities traded on a principal exchange or NASDAQ National
Market Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.

Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Board of Trustees.

Foreign securities are valued on the basis of quotations from the
primary market in which they are traded. Any assets or liabilities expressed in
terms of foreign currencies are translated into U.S. dollars by the custodian
bank based on London currency exchange quotations as of 5:00 p.m., London time
(12:00 noon, New York time) on the date of a determination of the Fund's NAV. If
quotations are not readily available, or the value has been materially affected
by the events occurring after the closing of a foreign market, assets are valued
by a method that the Board of Trustees believes accurately reflects fair value.

The NAV of the Fund's common shares is determined each business day at
the close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
Eastern Time) by dividing the net assets by the number of its common shares
outstanding. On any day an international market is closed and the New York Stock
Exchange is open, any foreign securities will be valued at the prior day's close
with the current day's exchange rate. Trading of foreign securities may take
place on Saturdays and U.S. business holidays on which the Fund's NAV is not
calculated. Consequently, the Fund's portfolio securities may trade and the NAV
of the Fund's common shares may be significantly affected on days when a
shareholder has no access to the New York Stock Exchange.

BROKERAGE ALLOCATION

Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and officers and
Trustees who are interested persons of the Fund. Orders for purchases and sales
of securities are placed in a manner which, in the opinion of the Adviser, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer, and transactions with dealers serving as market
makers reflect a "spread". Debt securities are generally traded on a net

basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on these transactions.

In the U.S. Government securities market, securities are generally
traded on a "net" basis with dealers acting as principal for their own account
without a stated commission, although the price of the security usually includes
a profit to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.

The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed.

To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and, to a lesser extent, statistical assistance furnished to the Adviser and
their value and expected contribution to the performance of the Fund.

As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Board of Trustees that such
commission is reasonable in light of the services provided and to such policies
as the Board of Trustees may adopt from time to time.

Research services received from broker-dealers supplement the Adviser's
own research (and the research of its affiliates), and may include the following
types of information: statistical and background information on the U.S. and
foreign economies, industry groups and individual companies; forecasts and
interpretations with respect to the U.S. and foreign economies, securities,
markets, specific industry groups and individual companies; information on
federal, state, local and foreign political developments; portfolio management
strategies; performance information on securities, indexes and investment
accounts; and information concerning prices of securities. Broker-dealers may
communicate such information electronically, orally, in written form or on
computer software. Research services may also include the providing of
electronic communication of trade information and the providing of custody
services, as well as the providing of equipment used to communicate research
information, the providing of specialized consultations with the Adviser's
personnel with respect to computerized systems and data furnished to the Adviser
as a component of other research services, the arranging of meetings with
management of companies, and the providing of access to consultants who supply
research information.

The outside research assistance is useful to the Adviser since the
broker-dealers used by the Adviser tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
the research provides the Adviser with a diverse perspective on financial
markets. Research services provided to the Adviser by broker-dealers are
available for the benefit of all accounts managed or advised by the Adviser or
by its affiliates. Some broker-dealers may indicate that the provision of
research services is dependent upon the generation of certain specified levels
of commissions and underwriting concessions by the Adviser's clients, including
the Fund. However, the Fund is not under any obligation to deal with any
broker-dealer in the execution of transactions in portfolio securities. In some
cases, the research services are available only from the broker-dealer providing
them. In other cases, the research services may be obtainable from alternative
sources in return for cash payments.

The Adviser believes that the research services are beneficial in
supplementing the Adviser's research and analysis and that they improve the
quality of the Adviser's investment advice. It is not possible to place a dollar
value on information and services to be received from brokers and dealers, since
it is only supplementary to the research efforts of the Adviser. The advisory
fee paid by the Fund is not reduced because the Adviser receives such services.
However, to the extent that the Adviser would have purchased research services
had they not been provided by broker-dealers, the expenses to the Adviser could
be considered to have been reduced accordingly. The

research information and statistical assistance furnished by brokers and dealers
may benefit the Life Company or other advisory clients of the Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitment to allocate portfolio
transactions upon any prescribed basis.

While the Adviser's officers, will be primarily responsible for the
allocation of the Fund's brokerage business, the policies and practices of the
Adviser in this regard must be consistent with the foregoing and at all times be
subject to review by the Trustees.

The Adviser may determine target levels of commission business with
various brokers on behalf of its clients (including the Fund) over a certain
time period. The target levels will be based upon the following factors, among
others: (1) the execution services provided by the broker; (2) the research
services provided by the broker; and (3) the broker's interest in mutual funds
in general and in the Fund and other mutual funds advised by the Adviser in
particular, including sales of the Fund. In connection with (3) above, the
Fund's trades may be executed directly by dealers that sell shares of the John
Hancock funds or by other broker-dealers with which such dealers have clearing
arrangements, consistent with obtaining best execution and the Conduct Rules of
the National Association of Securities Dealers, Inc. The Adviser will not use a
specific formula in connection with any of these considerations to determine the
target levels.

The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Pursuant
to procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through the Affiliated Broker.

Signator may act as broker for the Fund on exchange transactions,
subject, however, to the general policy of the Fund set forth above and the
procedures adopted by the Trustees pursuant to the 1940 Act. Commissions paid to
an Affiliated Broker must be at least as favorable as those which the Trustees
believe to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is
affiliated with the Affiliated Broker, has, as an investment adviser to the
Fund, the obligation to provide investment management services, which include
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Broker as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.

Other investment advisory clients advised by the Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transactions as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. Because of this, client accounts in a particular style may sometimes not
sell or acquire securities as quickly or at the same prices as they might if
each were managed and traded individually.

For purchases of equity securities, when a complete order is not
filled, a partial allocation will be made to each account pro rata based on the
order size. For high demand issues (for example, initial public offerings),
shares will be allocated pro rata by account size as well as on the basis of
account objective, account size ( a small account's allocation may be increased
to provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, strategies, duration benchmarks and credit and sector exposure. For
example, value

funds will likely not participate in initial public offerings as frequently as
growth funds. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtainable
for it. On the other hand, to the extent permitted by law, the Adviser may
aggregate securities to be sold or purchased for the Fund with those to be sold
or purchased for other clients managed by it in order to obtain best execution.

REPURCHASE OF COMMON SHARES

The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), NAV, dividend stability, relative demand for and
supply of such shares in the market, general market and economic conditions and
other factors. Shares of closed-end funds frequently trade at a discount to
their NAV. Common shares of closed-end investment companies like the Fund that
invest predominantly in preferred securities have during some periods traded at
prices higher than their NAV (at a "premium") and during other periods traded at
prices lower than their NAV (at a "discount"). This is in part because the
market price reflects the dividend yield on the common shares. When the yield on
the NAV per share is higher than yields generally available in the market for
comparable securities, the market price will tend to reflect this by trading
higher than the net asset value per share to adjust the yield to a comparable
market rate. To the extent the common shares do trade at a discount, the Board
may from time to time engage in open market repurchases or tender offers for
shares after balancing the benefit to shareholders of the increase in the net
asset value per share resulting from such purchases against the decrease in the
assets of the Fund and potential increase in the expense ratio of expenses to
assets of the Fund and consequent reduction in yield. The Board of Trustees
believes that in addition to the beneficial effects described above, any such
purchases or tender offers may result in the temporary narrowing of any discount
but will not have any long-term effect on the level of any discount.

At any time when the Fund's preferred shares are outstanding, the Fund
may not purchase, redeem or otherwise acquire any of its common shares unless
(1) all accrued preferred shares dividends have been paid and (2) at the time of
such purchase, redemption or acquisition, the net asset value of the Fund's
portfolio (determined after deducting the acquisition price of the common
shares) is at least 200% of the liquidation value of the outstanding preferred
shares (expected to equal the original purchase price per share plus any accrued
and unpaid dividends thereon). Any service fees incurred in connection with any
tender offer made by the Fund will be borne by the Fund and will not reduce the
stated consideration to be paid to tendering shareholders.

Subject to its investment restrictions, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Fund's Board of Trustees would have to comply with the Securities
Exchange Act of 1934, the 1940 Act and the rules and regulations thereunder.

Although the decision to take action in response to a discount from NAV
will be made by the Board at the time it considers such issue, it is the Board's
present policy, which may be changed by the Board, not to authorize repurchases
of common shares or a tender offer for such shares if: (1) such transactions, if
consummated, would (a) result in the delisting of the common shares from the New
York Stock Exchange, or (b) impair the Fund's status as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), (which
would make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase shares; or (3) there is, in the board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the New York Stock Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by United States or
New York banks, (d) material limitation affecting the Fund or the issuers of its
portfolio securities by federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (e) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board may in the future
modify these conditions in light of experience.

The repurchase by the Fund of its shares at prices below NAV will
result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tender offers at or
below NAV will result in the Fund's shares trading at a price equal to their
NAV. Nevertheless, the fact that the Fund's shares may be the subject of
repurchase or tender offers from time to time, or that the Fund may be converted
to an open-end investment company, may reduce any spread between market price
and net asset value that might otherwise exist.

In addition, a purchase by the Fund of its common shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its common shares at a time
when preferred shares are outstanding will increase the leverage applicable to
the outstanding common shares then remaining.

Before deciding whether to take any action if the common shares trade
below NAV, the Board would likely consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board may determine that, in the interest of the
Fund and its shareholders, no action should be taken.

U.S. FEDERAL INCOME TAX MATTERS

The following is a summary discussion of certain U.S. federal income
tax consequences that may be relevant to a shareholder of acquiring, holding and
disposing of common shares of the Fund. This discussion only addresses U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their shares
as or in a hedge against currency risk, a constructive sale, or conversion
transaction, holders who are subject to the alternative minimum tax, or
tax-exempt or tax-deferred plans, accounts, or entities. In addition, the
discussion does not address any state, local, or foreign tax consequences, and
it does not address any federal tax consequences other than U.S. federal income
tax consequences. The discussion reflects applicable tax laws of the United
States as of the date of this Prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
(the "IRS") retroactively or prospectively. No attempt is made to present a
detailed explanation of all U.S. federal income tax concerns affecting the Fund
and its shareholders, and the discussion set forth herein does not constitute
tax advice. Investors are urged to consult their own tax advisers to determine
the tax consequences to them of investing in the Fund, including the applicable
federal, state, local and foreign tax consequences to them and the effect of
possible changes in tax laws.

The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code so that it
generally will not pay U.S. federal income tax on income and capital gains
distributed to shareholders. In order to qualify as a regulated investment
company under Subchapter M of the Code, which qualification this discussion
assumes, the Fund must, among other things, derive at least 90% of its gross
income for each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including gains from options, futures
and forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "90% income test") and satisfy certain
quarterly asset diversification requirements. For purposes of the 90% income
test, the character of income earned by certain entities in which the Fund
invests that are not treated as corporations for U.S. federal income tax
purposes (e.g., partnerships or trusts) will generally pass through to the Fund.
Consequently, the Fund may be required to limit its equity investments in such
entities that earn fee income, rental income or other nonqualifying income.

If the Fund qualifies as a regulated investment company and, for each
taxable year, it distributes to its shareholders an amount equal to or exceeding
the sum of (i) 90% of its "investment company taxable income" as

that term is defined in the Code (which includes, among other things, dividends,
taxable interest, and the excess of any net short-term capital gains over net
long-term capital losses, as reduced by certain deductible expenses) without
regard to the deduction for dividends paid and (ii) 90% of the excess of its
gross tax-exempt interest, if any, over certain disallowed deductions, the Fund
will generally be relieved of U.S. federal income tax on any income of the Fund,
including "net capital gains" (the excess of net long-term capital gain over net
short-term capital loss), distributed to shareholders. However, if the Fund
retains any investment company taxable income or net capital gain, it generally
will be subject to U.S. federal income tax at regular corporate rates on the
amount retained. The Fund intends to distribute at least annually all or
substantially all of its investment company taxable income, net tax-exempt
interest, and net capital gain. If for any taxable year the Fund did not qualify
as a regulated investment company, it would be treated as a corporation subject
to U.S. federal income tax (even if it distributed all of its income to its
shareholders) and all distributions out of earnings and profits would be taxed
to shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay taxes and make distributions (which could be
subject to interest charges) before requalifying as a regulated investment
company.

Under the Code, the Fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gain
net income if it fails to meet certain distribution requirements with respect to
each calendar year. For purposes of the excise tax, any ordinary income or
capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed. The Fund intends
to make distributions in a timely manner and accordingly does not expect to be
subject to the excise tax, but, as described below, there can be no assurance
that the Fund's distributions will be sufficient to avoid entirely this tax.

Commencing within approximately 90 days from the date of this
prospectus, the Fund intends to declare dividends from all or a portion of its
investment company taxable income on a monthly basis. The Fund intends to
distribute any net capital gains at least annually. Dividends may also be paid
at such other times as may be necessary for the Fund to avoid U.S. federal
income or excise tax.

Unless a shareholder is ineligible to participate or elects otherwise,
distributions from the Fund will be automatically reinvested in additional
common shares of the Fund pursuant to the Automatic Dividend Reinvestment Plan
(the "Plan"). For U.S. federal income tax purposes, such distributions generally
will be taxable whether a shareholder takes them in cash or they are reinvested
pursuant to the Plan in additional shares of the Fund. In general, assuming that
the Fund has sufficient earnings and profits, dividends from investment company
taxable income are taxable as ordinary income, and dividends from net capital
gain (if any) that are designated as capital gains dividends, are taxable as
long-term capital gains for U.S. federal income tax purposes without regard to
the length of time the shareholder has held shares of the Fund. Distributions by
the Fund in excess of the Fund's current and accumulated earnings and profits
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in its shares and any such amount in excess of that
basis will be treated as gain from the sale of shares, as discussed below. The
source and U.S. federal income tax status of all distributions will be reported
to shareholders annually, and shareholders receiving distributions in the form
of additional shares of the Fund will receive a report as to the NAV of those
shares.

If the Fund retains any net capital gain for a taxable year, the Fund
may designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.

Although dividends generally will be treated as distributed when paid,
any dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared. In addition, certain other distributions made
after the close of a taxable year of the Fund may be "spilled back" and treated
as paid by the Fund (except for purposes of the 4% excise tax) during such
taxable year. In such case, shareholders will be treated as having received such
dividends in the taxable year in which the distributions were actually made.

If the Fund acquires any equity interest (under Treasury regulations
that may be promulgated in the future, generally including not only stock but
also an option to acquire stock such as is inherent in a convertible bond) in
certain foreign corporations that receive at least 75% of their annual gross
income from passive sources (such as interest, dividends, certain rents and
royalties, or capital gains) or that hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to U.S. federal income tax and additional
interest charges on "excess distributions" received from such companies or on
gain from the disposition of stock in such companies, even if all income or gain
actually received by the Fund is timely distributed to its shareholders. The
Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may generally be available that would
ameliorate these adverse tax consequences, but any such election could require
the Fund to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash. These investments could
also result in the treatment of capital gains from the sale of stock of passive
foreign investment companies as ordinary income. The Fund may limit and/or
manage its holdings in passive foreign investment companies to limit its tax
liability or maximize its return from these investments.

The Fund may invest to a limited extent in debt obligations that are in
the lowest rating categories or are unrated, including debt obligations of
issuers not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Fund. Tax rules are not entirely clear about issues such as when the Fund may
cease to accrue interest, original issue discount or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.

If the Fund utilizes leverage through borrowing or issuing preferred
shares, a failure by the Fund to meet the asset coverage requirements imposed by
the 1940 Act or by any rating organization that has rated such leverage or
additional restrictions that may be imposed by certain lenders on the payment of
dividends or distributions potentially could limit or suspend the Fund's ability
to make distributions on its common shares. Such a suspension or limitation
could prevent the Fund from distributing at least 90% of its investment company
taxable income as is required under the Code and therefore might jeopardize the
Fund's qualification for taxation as a regulated investment company and/or might
subject the Fund to the 4% excise tax. Upon any failure to meet such asset
coverage requirements, the Fund may, in its sole discretion, purchase or redeem
shares of preferred stock in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders of
failing to satisfy the distribution requirement. There can be no assurance,
however, that any such action would achieve these objectives. The Fund will
endeavor to avoid restrictions on its ability to distribute dividends.

If the Fund invests in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, any other securities
with original issue discount (or with market discount if the Fund elects to
include market discount in income currently), the Fund generally must accrue
income on such investments for each taxable year, which generally will be prior
to the receipt of the corresponding cash payments. However, the Fund must
distribute, at least annually, all or substantially all of its investment
company taxable income, including such accrued income, to shareholders to
qualify as a regulated investment company under the Code and avoid U.S. federal
income and excise taxes. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to borrow the cash, to satisfy distribution requirements.

At the time of an investor's purchase of the Fund's shares, a portion
of the purchase price may be attributable to realized or unrealized appreciation
in the Fund's portfolio or undistributed taxable income of the Fund.
Consequently, subsequent distributions by the Fund with respect to these shares
from such appreciation or income may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares and the distributions
economically represent a return of a portion of the investment.

following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if Fund shares are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted basis in the shares.
Such gain or loss generally will be treated as long-term gain or loss if the
shares were held for more than one year and otherwise generally will be treated
as short-term gain or loss. Any loss recognized by a shareholder upon the sale
or other disposition of shares with a tax holding period of six months or less
generally will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain with respect to such
shares. Losses on sales or other dispositions of shares may be disallowed under
"wash sale" rules in the event of other investments in the Fund (including those
made pursuant to reinvestment of dividends and/or capital gain distributions)
within a period of 61 days beginning 30 days before and ending 30 days after a
sale or other disposition of shares.

Options written or purchased and futures contracts entered into by the
Fund on certain securities and indices may cause the Fund to recognize gains or
losses from marking-to-market even though such options may not have lapsed, been
closed out, or exercised, or such futures or forward contracts may not have been
performed or closed out. The tax rules applicable to these contracts may affect
the characterization of some capital gains and losses recognized by the Fund as
long-term or short-term. Additionally, the Fund may be required to recognize
gain if an option, futures contract, forward contract, short sale or other
transaction that is not subject to the mark-to-market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any net mark-to-market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though the Fund may receive no corresponding
cash amounts, possibly requiring the Fund to dispose of portfolio securities or
borrow to obtain the necessary cash. Losses on certain options, futures or
forward contracts and/or offsetting positions (portfolio securities or other
positions with respect to which the Fund's risk of loss is substantially
diminished by one or more options, futures or forward contracts) may also be
deferred under the tax straddle rules of the Code, which may also affect the
characterization of capital gains or losses from straddle positions and certain
successor positions as long-term or short-term. Certain tax elections may be
available that would enable the Fund to ameliorate some adverse effects of the
tax rules described in this paragraph. The tax rules applicable to options,
futures, forward contracts and straddles may affect the amount, timing and
character of the Fund's income and gains or losses and hence of its
distributions to shareholders.

The income to be received by the Fund from its investment in taxable
preferred securities is not expected to qualify for the dividends received
deduction under the Code. As a result, the Fund does not expect that its
distributions to its corporate shareholders will qualify for such deduction.

The federal income tax treatment of the Fund's investment in preferred
securities or other securities and its transactions involving interest rate
swaps, caps, floors and collars is uncertain and may be subject to
recharacterization by the IRS. To the extent the tax treatment of such
securities or transactions differs from the tax treatment expected by the Fund,
the timing or character of income recognized by the Fund could be affected, and
the Fund may be required to purchase or sell securities, or otherwise change its
portfolio, in order to comply with the tax rules applicable to regulated
investment companies under the Code.

The IRS has taken the position that if a regulated investment company
has two classes of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including dividends qualifying for the corporate
dividends-received deduction (if any) and net capital gains. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the regulated investment company to
such class. Consequently, if both common shares and preferred shares are
outstanding, the Fund intends to designate distributions made to the classes of
particular types of income in accordance with the classes' proportionate shares
of such income. Thus, the Fund will designate dividends qualifying for the
corporate dividends-received deduction (if any), income not qualifying for the
dividends-received deduction and net capital gains in a manner that allocates
such income between the holders of common shares and preferred shares in
proportion to the total dividends paid to each class during or for the taxable
year, or otherwise as required by applicable law.

The Fund may be subject to withholding and other taxes imposed by
foreign countries, including taxes on interest, dividends and capital gains with
respect to its investments in those countries, which would, if imposed, reduce
the yield on or return from those investments. Tax conventions between certain
countries and the U.S. may

reduce or eliminate such taxes in some cases. The Fund does not expect to
satisfy the requirements for passing through to its shareholders their pro rata
shares of qualified foreign taxes paid by the Fund, with the general result that
shareholders would not include such taxes in their gross incomes and would not
be entitled to a tax deduction or credit for such taxes on their own tax
returns.

Federal law requires that the Fund withhold (as "backup withholding")
on reportable payments, including dividends, capital gain distributions and the
proceeds of sales or other dispositions of the Fund's shares paid to certain
shareholders who have not complied with IRS regulations. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on separate IRS Forms W-9, that the Social Security Number or
other taxpayer identification number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to backup
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of income.

The description of certain federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. Investors other than
U.S. persons may be subject to different U.S. federal income tax treatment,
including a non-resident alien U.S. withholding tax on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8BEN or
other authorized withholding certificate is on file, to backup withholding on
certain other payments from the Fund. Shareholders should consult their own tax
advisers on these matters and on any specific questions as to U.S. federal,
foreign, state, local and other applicable tax laws.

PERFORMANCE

From time to time, in reports and promotional literature, the Fund's
total return will be compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper - Mutual Fund Performance Analysis," a
monthly publication which tracks net assets, total return and yield on mutual
funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C.
Towers are also used for comparison purposes, as well as the Russell and
Wilshire Indices.

Performance rankings and ratings reported periodically in, and excerpts
from, national financial publications such as MONEY Magazine, FORBES, BUSINESS
WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and
BARRON'S may also be utilized. The Fund's promotional and sales literature may
make reference to the Fund's "beta". Beta is a reflection of the market related
risk of the Fund by showing how responsive the Fund is to the market.

The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.

The Fund may be an appropriate addition to an investor's existing
portfolio. The Fund allows investors to diversify their portfolios with a low
correlated asset class that offers a high level of current income through
regular, monthly dividends. The Fund offers investors the potential to reduce
risk by investing in a portfolio of preferred securities that are diversified
across multiple issuers and sectors. Performance should be less volatile and
potentially less risky when a portfolio includes a variety of investments.

CHARACTERISTICS OF PREFERRED SECURITIES. Favorable yields: preferred
securities have the potential to offer investors favorable yields relative to
other income0producing securities like real estate investment trusts, corporate
bonds and government bonds. Low correlation: preferred securities have
historically exhibited low correlations relative to other popular asset classes.
Adding preferred securities to a portfolio offers investors the potential for
greater total returns and reduced portfolio volatility. Established Companies:
issuers of preferred securities are typically established companies such as
utilities, banks and financial services corporations.

[THIS PAGE REFERENCES THREE BAR CHARTS]

TRANSFER AGENT SERVICES

Mellon, P.O. Box 3338, South Hackensack, NJ 07606-1938, is the transfer
and dividend paying agent for the Fund.

CUSTODY OF PORTFOLIO

Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and The Bank of New York, One Wall Street, New York,
New York 10286. Under the custodian agreement, The Bank of New York is
performing custody, portfolio, foreign custody manager and fund accounting
services.

INDEPENDENT AUDITORS

The independent auditors of the Fund are Deloitte & Touche LLP, 200
Berkeley Street, Boston, MA 02116, audits and renders an opinion on the Fund's
annual financial statements, and reviews the Fund's annual federal income tax
return.

ADDITIONAL INFORMATION

A Registration Statement on Form N-2, relating to the shares offered
hereby, has been filed by the Fund with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. The Prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
Prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.

APPENDIX A - MORE ABOUT RISK

A fund's risk profile is largely defined by the fund's primary
securities and investment practices. You may find the most concise description
of the fund's risk profile in the Prospectus.

A fund is permitted to utilize -- within limits established by the
Trustees -- certain other securities and investment practices that have higher
risks and opportunities associated with them. To the extent that the Fund
utilizes these securities or practices, its overall performance may be affected,
either positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objective and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.

As with any mutual fund, there is no guarantee that the Fund will earn
income or show a positive return over any period of time -- days, months or
years.

TYPES OF INVESTMENT RISK

CORRELATION RISK The risk that changes in the value of a hedging
instrument will not match those of the asset being hedged (hedging is the use of
one investment to offset the effects of another investment). Incomplete
correlation can result in unanticipated risks. (e.g., short sales, financial
futures and options; securities and index options, currency contracts).

CREDIT RISK The risk that the issuer of a security, or the counterparty
to a contract, will default or otherwise become unable to honor a financial
obligation. (e.g., borrowing; reverse repurchase agreements, repurchase
agreements, securities lending, non-investment-grade securities, financial
futures and options; securities and index options).

INFORMATION RISK The risk that key information about a security or
market is inaccurate or unavailable. (e.g., non-investment-grade securities,
foreign equities).

INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values. (e.g., non-investment-grade securities, financial futures and options;
securities and index options).

LEVERAGE RISK Associated with securities or practices (such as
borrowing) that multiply small index or market movements into large changes in
value. (e.g., borrowing; reverse repurchase agreements, when-issued securities
and forward commitments).

- HEDGED When a derivative (a security whose value is based on
another security or index) is used as a hedge against an
opposite position that the fund also holds, any loss generated
by the derivative should be substantially offset by gains on
the hedged investment, and vice versa. While hedging can
reduce or eliminate losses, it can also reduce or eliminate
gains. (e.g., short sales, financial futures and options
securities and index options; currency contracts).

- SPECULATIVE To the extent that a derivative is not used as a
hedge, the fund is directly exposed to the risks of that
derivative. Gains or losses from speculative positions in a
derivative may be substantially greater than the derivative's
original cost. (e.g., short sales, financial futures and
options securities and index options; currency contracts).

- LIQUIDITY RISK The risk that certain securities may be
difficult or impossible to sell at the time and the price that
the seller would like. The seller may have to lower the price,
sell other securities instead or forego an investment
opportunity, any of which could have a negative effect on fund
management or performance. (e.g., non-investment-grand
securities, short sales, restricted and illiquid securities,
financial futures and options securities and index options;
currency contracts).

A-1

MANAGEMENT RISK The risk that a strategy used by a fund's management
may fail to produce the intended result. Common to all mutual funds.

MARKET RISK The risk that the market value of a security may move up
and down, sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less than it
was worth at an earlier time. Market risk may affect a single issuer, industry,
sector of the economy or the market as a whole. Common to all stocks and bonds
and the mutual funds that invest in them. (e.g., short sales, short-term
trading, when-issued securities and forward commitments, non-investment-grade
securities, foreign equities, financial futures and options; securities and
index options restricted and illiquid securities).

NATURAL EVENT RISK The risk of losses attributable to natural
disasters, crop failures and similar events. (e.g., foreign equities).

OPPORTUNITY RISK The risk of missing out on an investment opportunity
because the assets necessary to take advantage of it are tied up in less
advantageous investments. (e.g., short sales, when-issued securities and forward
commitments; financial futures and options; securities and index options,
currency contracts).

POLITICAL RISK The risk of losses attributable to government or
political actions, from changes in tax or trade statutes to governmental
collapse and war.(e.g., foreign equities).

VALUATION RISK The risk that a fund has valued certain of its
securities at a higher price than it can sell them for. (e.g.,
non-investment-grade securities, restricted and illiquid securities).

A-2

APPENDIX B - DESCRIPTION OF RATINGS

The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group represent their opinions as to the quality of various debt
instruments they undertake to rate. It should be emphasized that ratings are not
absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.

MOODY'S INVESTORS SERVICE, INC. - PREFERRED SECURITIES RATINGS

aaa: Preferred stocks which are rated "aaa" are considered to be top quality.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.

aa: Preferred stocks which are rated "aa" are considered to be high grade. This
rating indicates that there is reasonable assurance that earnings and asset
proection will remain relatively well maintained in the foreseeable future.

a: Preferred stocks which are rated "a" are considered to be upper-medium grade.
While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.

baa: Preferred stocks which are rated "baa" are judged lower0medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.

ba: Preferred stocks which are rated "ba" are considered to have speculative
elements and their future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.

MOODY'S INVESTORS SERVICE, INC.- BOND RATINGS

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.

A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

A-3

B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Bonds which are rated Ca represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

A-4

STANDARD & POOR'S RATINGS GROUP - PREFERRED SECURITIES RATINGS

AAA: This is the highest rating that may be assigned to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.

AA: A preferred stock issue rated AA also qualifies as a high quality fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.

A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.

BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Although it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for preferred stock in
this category for issues in the A category.

BB: An issue rated BB is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay the preferred stock obligation. While
such issues will likely have some quality and protective characteristics, there
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

STANDARD & POOR'S RATINGS GROUP - BOND RATINGS

AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.

A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.

CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.

CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.

B-1

FINANCIAL STATEMENTS

Following are the audited financial statements for the initial capitalization of
the John Hancock Preferred Income Fund dated August 9, 2002 and the report of
Deloitte and Touche LLP.

John Hancock Preferred Income Fund

STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------

August 9, 2002

Assets:
Cash $153,015
--------
TOTAL ASSETS $153,015
========

Liabilities:
Payable for organization expenses $53,000
-------
TOTAL LIABILITIES $53,000
=======

Net Assets:
Capital paid-in $153,015
Accumulated net investment loss (53,000)
--------
NET ASSETS $100,015
========

Net assets value per share:
(Based on net assets and 6,409 shares
of beneficial interest outstanding -
22 million shares authorized
with no par value) $15.61
======
================================================================================
1. STATEMENT OF OPERATIONS

For the period from June 27, 2002 (date of inception) to August 9, 2002
================================================================================

Organization expenses $53,000
--------
NET INVESTMENT LOSS ($53,000)
========

================================================================================

F-1

================================================================================
2. STATEMENT OF CHANGES IN NET ASSETS

For the period from June 27, 2002 (date of inception) to August 9, 2002

INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment loss ($53,000)
--------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (53,000)
========
================================================================================
From Fund share transactions:

Net proceeds from the issuance of common shares 153,015
========

NET ASSETS
Beginning of period -
END OF PERIOD $100,015
========
See notes to financial statements.

================================================================================

F-2

NOTES TO FINANCIAL STATEMENTS

Note 1. Organization

John Hancock Preferred Income Funds was organized on June 27, 2002 as a
diversified closed-end management investment company registered under the
Investment Company Act of 1940. The Fund's primary investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund's secondary investment objective is to provide growth of capital. The
Fund will invest at least 80% of its managed assets (net assets plus borrowing
for investment purposes) in preferred stocks and other preferred securities,
including convertible preferred securities, in various industry sectors.

At August 9, 2002, the Fund is inactive except for matters relating to its
organization, registration and the sale of 6,409 shares for $153,015 ($23.875
per share) to John Hancock Advisers, LLC (the "Adviser"), an indirect,
wholly-owned subsidiary of John Hancock Life Insurance Company.

================================================================================

Note 2. Agreements

The Fund has entered into an investment management contract with the Adviser.
The Fund also has an administrative agreement with the Adviser under which the
Adviser will oversee the custodial, auditing, valuation, accounting, legal,
stock transfer and dividend disbursing services and will maintain the Fund's
communications with shareholders. Upon commencement of the Fund's operations,
the Adviser will receive a daily management fee from the Fund at an annual rate
of 0.75% of the Fund's average daily managed assets. The Adviser has agreed to
limit the Fund's management fee to the following: 0.55% of the Fund's average
daily managed assets until the fifth anniversary of the commencement of the
Fund's operations, 0.60% of such assets in the sixth year, 0.65% of such assets
in the seventh year, and 0.70% of average daily managed assets in the eighth
year. After the eighth year the Adviser will no longer waive a portion of the
management fee.

Note 3. Organization Expenses and Offering Costs

Organization expenses, which amount to $53,000, have been expensed by the Fund.
Offering costs, estimated to be approximately $401,000, will be charged to the
Fund's capital paid-in at the time shares of beneficial interest are sold.

F-3

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholder of
John Hancock Preferred Income Fund

We have audited the accompanying statement of assets and liabilities of John
Hancock Preferred Income Fund (the "Fund") as of August 9, 2002 and the related
statements of operations and changes in net assets for the period from June 27,
2002 (date of inception) to August 9, 2002. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Fund at August 9, 2002 and the results
of its operations and changes in its net assets for the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
Boston, Massachusetts
August 12, 2002

F-4