HANCOCK JOHN SPECIAL EQUITIES FUND
497, 1998-07-08
Previous: TEXOIL INC /NV/, 8-K/A, 1998-07-08
Next: SELIGMAN HIGH INCOME FUND SERIES, 497, 1998-07-08



 

             Supplement to the John Hancock Growth Funds Prospectus
                 dated March 1, 1998 as revised June 1, 1998


On page 12, the  "Portfolio  Management"  section  has been  changed for Special
Equities Fund as follows:

Laura Allen, CFA, leads the fund's portfolio management team. Other team members
are Bernice S. Behar,  CFA,  and Anurag  Pandit,  CFA.  Ms.  Allen,  senior vice
president,  joined the adviser in 1998. She has been in the investment  business
since 1981. Ms. Behar, senior vice president, joined the adviser in 1991 and has
been in the investment business since 1986. Mr. Pandit,  vice president,  joined
the adviser in 1996 and has been in the  investment  business  since 1984.  Each
joined the fund's management team in 1998.


July 1, 1998

GROPS5 7/98

<PAGE>

       Supplement to the John Hancock Special Equities Class Y Prospectus
                 dated March 1, 1998 as revised June 1, 1998


On page 7, the  "Portfolio  Management"  section  has been  changed  for Special
Equities Fund as follows:

Laura Allen, CFA, leads the fund's portfolio management team. Other team members
are Bernice S. Behar,  CFA,  and Anurag  Pandit,  CFA.  Ms.  Allen,  senior vice
president,  joined the adviser in 1998. She has been in the investment  business
since 1981. Ms. Behar, senior vice president, joined the adviser in 1991 and has
been in the investment business since 1986. Mr. Pandit,  vice president,  joined
the adviser in 1996 and has been in the  investment  business  since 1984.  Each
joined the fund's management team in 1998.


July 1, 1998

18YPS 7/98

<PAGE>



                       JOHN HANCOCK SPECIAL EQUITIES FUND
   
                       Class A, Class B and Class Y Shares
                       Statement of Additional Information


                    March 1, 1998 revised as of July 8, 1998

This Statement of Additional Information provides information about John Hancock
Special Equities Fund (the "Fund"), a diversified open-end investment company,
in addition to the information that is contained in the combined Growth Funds'
Prospectus for Class A and Class B Shares dated March 1, 1998 revised as of June
1, 1998 and the Fund's Class Y Shares Prospectus dated March 1, 1998 revised as
of June 1, 1998 (together, the "Prospectuses").
    

This Statement of Additional Information is not a prospectus.  It should be read
in conjunction  with the  Prospectuses,  copies of which can be obtained free of
charge by writing or telephoning:

                      John Hancock Signature Services, Inc.
                         1 John Hancock Way, Suite 1000
                              Boston, MA 02217-1000
                                 1-800-225-5291

                                Table of Contents

                                                                            Page
Organization of the Fund......................................................2
Investment Objective and Policies.............................................2
Investment Restrictions......................................................15
Those Responsible for Management.............................................18
Investment Advisory and Other Services.......................................28
Distribution Contracts.......................................................30
Net Asset Value..............................................................32
Initial Sales Charge on Class A Shares.......................................33
Deferred Sales Charge on Class B Shares......................................36
Special Redemptions..........................................................39
Additional Services and Programs.............................................40
Description of the Fund's Shares.............................................42
Tax Status...................................................................43
Calculation of Performance...................................................48
Brokerage Allocation.........................................................50
Transfer Agent Services......................................................52
Custody of Portfolio.........................................................52
Independent Auditors.........................................................53
Appendix A - Description of Bond Ratings ...................................A-1
Financial Statements .......................................................F-1

                                       1

<PAGE>


ORGANIZATION OF THE FUND

   
The Fund is a diversified open-end investment  management company organized as a
Massachusetts   business   trust   under  the  laws  of  The   Commonwealth   of
Massachusetts.  The Fund was  organized in 1984 by John Hancock  Advisers,  Inc.
(the  "Adviser").  The Adviser is an indirect  wholly-owned  subsidiary  of 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.
    

INVESTMENT OBJECTIVE AND POLICIES

   
The following  information  supplements the discussion of the Fund's  investment
objective  and  policies  discussed  in the  Prospectus.  The Fund's  investment
objective is fundamental and may only be changed with shareholder approval.
There is no assurance that the Fund will achieve its investment objective.
    

The Fund's  investment  objective is to seek growth of capital by investing in a
diversified  portfolio  of equity  securities  consisting  primarily of emerging
growth companies and of companies in "special situations," collectively referred
to as "Special  Equities." The Fund will invest at least 65% of its total assets
in Special  Equities.  The potential for growth of capital will be the basis for
selection of portfolio  securities.  Current income will not be a factor in this
selection.

The Fund may also invest in:

- - equity  securities of established  companies  that the Adviser  believes offer
growth potential.

- - cash or investment  grade corporate debt  securities  (debt  securities  which
have,  at the time of  purchase,  a rating  within  the four  highest  grades as
determined by Moody's Investors Services, Inc. --Aaa, Aa, A or Baa or Standard &
Poor's Rating Group-- AAA, AA, A or BBB), money market instruments or securities
of  the  United  States   Government   or  its  agencies  or   instrumentalities
("government  securities"),  for temporary  defensive purposes or to provide for
anticipated  redemptions of the Fund's shares.  Debt securities rated Baa or BBB
are considered  medium grade obligations with speculative  characteristics,  and
adverse economic conditions or changing circumstances may weaken capacity to pay
interest and repay principal.  If the rating of a debt security is reduced below
Baa or BBB, the Adviser will consider whatever action is appropriate  consistent
with the Fund's  investment  objectives  and policies.  If in the opinion of the
Adviser,  prevailing economic or market conditions require a temporary defensive
posture, the Fund may invest more than 35% of its total assets in cash and these
securities.

Special Equities,  particularly  equity securities of emerging growth companies,
may have  limited  marketability  due to thin  markets  in which  the  volume of
trading for such  securities is low or due to the fact that there are only a few
market  makers  for such  securities.  Such  limited  marketability  may make it
difficult  for the  Fund to  dispose  of a large  block of such  securities.  To
satisfy  redemption  requests or other needs for cash, the Fund may have to sell
these securities prematurely or at a discount from market prices or to make many
small and more costly sales over a lengthy  period of time.  Investments  by the
Fund may be in existing as well as new issues of  securities  and may be subject
to wide  fluctuations  in  market  value.  The  Fund  will not  concentrate  its
investments in any particular industry.

                                       2
<PAGE>

The Fund  anticipates  that its  investments  generally will be in securities of
companies which it considers to reflect the following characteristics:

- -  Share  prices  which  do not  appear  to take  into  account  adequately  the
underlying value of the company's assets or which appear to reflect  substantial
under  valuation due to factors such as  prospective  reversal of an unfavorable
industry trend, lack of investor recognition or disappointing  earnings believed
to be temporary in comparison with previous earnings trends;

- - Growth potential due to technological advances or discoveries,  new methods in
marketing or  production,  the  offering of new or unique  products or services,
changes  in  demand  for   products  or  services  or  other   significant   new
developments; or

- -  Existing,  contemplated  or  possible  changes in  management  or  management
policies,  corporate  structure or control,  capitalization  or the existence or
possibility  of some  other  circumstances  which  could be  expected  to have a
favorable impact on earnings or market price of such company's shares.

The  emerging  growth  companies  whose  securities  are selected for the Fund's
portfolio  will  generally have annual gross sales of greater than $100 million,
although companies with smaller sales which, in the opinion of the Adviser, have
significant growth potential may also be selected. Thus, there is no requirement
that a company have annual sales of a  pre-selected  minimum  amount  before the
Fund will  invest in its  securities.  In many  cases,  a company may not yet be
profitable when the Fund invests in its securities.

The Fund seeks emerging growth companies that either occupy a dominant  position
in an emerging  industry or have a  significant  and growing  market  share in a
large,  fragmented  industry.  The Fund seeks to invest in those  companies with
potential for high growth, stable earnings, ability to self-finance,  a position
of industry leadership,  and strong, visionary management.  The Adviser believes
that,  while these companies  present  above-average  risks,  properly  selected
emerging growth companies have the potential to increase their earnings at rates
substantially  in excess of the  growth of  earnings  of other  companies.  This
increase  in  earnings  is likely to  enhance  the value of an  emerging  growth
company's equity securities.

The Fund may invest in equity securities of companies in special situations that
the Adviser believes present opportunities for capital growth. A company is in a
"special situation" when an unusual and possibly  non-repetitive  development is
anticipated or is taking place. Since every special situation involves,  to some
extent, a break with past experience,  the uncertainties in the appraisal of the
future value of the company's equity  securities and risk of possible decline in
value of the Fund's investment are significant.

The Fund may effect portfolio transactions without regard to holding periods, if
the Adviser  judges these  transactions  to be advisable in light of a change in
circumstances  of a  particular  company or within a  particular  industry or in
general market,  economic or financial  conditions.  The Fund does not generally
consider  the  length of time it has held a  particular  security  in making its
investment decisions.

The Fund is not intended as a complete investment program. The Fund's shares are
suitable for  investment by persons who can invest  without  concern for current
income, who are in a financial position to assume above-average investment risk,

                                       3

<PAGE>

and who are prepared to experience above-average fluctuations in net asset value
over the intermediate and long term.  Emerging growth companies and companies in
special situations will usually not pay dividends.

Generally,  emerging growth  companies will have high  price/earnings  ratios in
relation to the market. A high price/earnings ratio generally indicates that the
market value of a security is especially  sensitive to  developments  that could
affect the company's  potential for future  earnings.  These  companies may have
limited product lines, market or financial  resources,  or they may be dependent
upon a limited  management  group.  Emerging growth companies may have operating
histories of fewer than three years.

Full development of the potential of emerging growth companies  frequently takes
time. For this reason, the Fund should be considered a long-term  investment and
not a vehicle for seeking short-term profits and income.

The  securities  in  which  the  Fund  invests  will  often  be  traded  in  the
over-the-counter  market or on a  regional  securities  exchange  and may not be
traded  every day or in the volume  typical of trading on a national  securities
exchange.  They may be subject to wide fluctuations in market value. The trading
market for any given security may be  sufficiently  thin as to make it difficult
for the  Fund  to  dispose  of a  substantial  block  of  such  securities.  The
disposition by the Fund of portfolio securities to meet redemptions or otherwise
may require the Fund to sell these  securities  at a discount from market prices
or during  periods when,  in the Adviser's  judgment,  such  disposition  is not
desirable or to make many small sales over a lengthy period of time.

There may be additional  risks inherent in the Fund's  investment  objective and
policies.  For  example,  if the Fund were to assume  substantial  positions  in
particular securities with limited trading markets, such positions could have an
adverse effect upon the liquidity and  marketability  of such securities and the
Fund may not be able to  dispose of its  holdings  in these  securities  at then
current market  prices.  Circumstances  could also exist (to satisfy  redemption
requests,  for example) when portfolio  securities  could have to be sold by the
Fund at times which  otherwise would be considered  disadvantageous  so that the
Fund would receive lower  proceeds from such sales than it might  otherwise have
expected to realize.  Investment in  securities  which are  "restricted"  in the
hands of the Fund  (see the  discussion  below  under  the  caption  "Investment
Restrictions")  could  involve  added  expense  to the Fund  should  the Fund be
required to bear  registration  costs and could  involve  delays in disposing of
such  securities.  Such delays  could have an adverse  effect upon the price and
timing of sales of such securities and the liquidity of the Fund with respect to
redemptions.

Debt Securities and Money Market Instruments. The Fund may purchase or sell debt
securities  (including U.S. corporate bonds and notes, and obligations issued or
guaranteed   by  the  U.S.  or  foreign   governments   or  their   agencies  or
instrumentalities)  and money  market  instruments  (including  short-term  debt
obligations  payable in U.S.  dollars issued by certain banks,  savings and loan
associations and corporations) without regard to the length of time the security
has been held to take advantage of short-term  differentials in yields.  General
changes  in  prevailing  interest  rates  will  affect  the  value  of the  debt
securities  and money market  instruments  held by the Fund,  the value of which
will vary inversely to the changes in such rates. For example, if interest rates
rise after a security is purchased, the value of the security would decline.

                                       4

<PAGE>

Ratings as Investment  Criteria.  In general,  the ratings of Moody's  Investors
Service,  Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent
the opinions of these  agencies as to the quality of the  securities  which they
rate.  It should be  emphasized,  however,  that such  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 portfolio 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 A contains
further  information  concerning  the  ratings  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. Neither of these events will require the sale of the securities by the
Fund,  but the Adviser will consider the event in its  determination  of whether
the Fund should continue to hold the securities.

Investments  in Foreign  Securities.  The Fund may invest in the  securities  of
foreign  issuers,  including  securities in the form of sponsored or unsponsored
American Depository  Receipts (ADRs),  European Depository Receipts (i) or other
securities  convertible  into securities of foreign  issuers.  ADRs are receipts
typically  issued by an American 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.

If securities traded in markets moving in different directions are combined into
a single portfolio,  such as that of the Fund, total portfolio volatility may be
reduced. Since the Fund may invest in securities denominated in currencies other
than U.S.  dollars,  changes in foreign  currency  exchange rates may affect the
value  of its  portfolio  securities.  Exchange  rates  may not move in the same
direction as the securities markets in a particular country. As a result, market
gains may be offset by unfavorable exchange rate fluctuations.

These risks may be intensified in the case of investments in emerging markets or
countries  with limited or  developing  capital  markets.  These  countries  are
located in the Asia-Pacific region,  Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries,  reflecting the greater  uncertainties of investing
in less  established  markets  and  economies.  Political,  legal  and  economic
structures  in  many  of  these  emerging  market  countries  may be  undergoing
significant  evolution  and  rapid  development,  and they may lack the  social,
political,  legal  and  economic  stability  characteristic  of  more  developed
countries.  Emerging  market  countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments,  present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade  conditions,  and may suffer from  extreme and  volatile  debt  burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable  to  respond  effectively  to  increases  in  trading  volume,
potentially  making prompt  liquidation  of  substantial  holdings  difficult or
impossible at times. The Fund may be required to establish  special custodial or
other  arrangements  before  making  certain  investments  in  those  countries.

                                       5

<PAGE>

Securities of issuers located in these countries may have limited  marketability
and may be subject to more abrupt or erratic price movements.

Foreign Currency Transactions. The Fund's foreign currency exchange transactions
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency  prevailing in the foreign  exchange market.  The Fund may also
enter into forward foreign  currency  exchange  contracts to enhance return,  to
hedge against  fluctuations  in currency  exchange rates  affecting a particular
transaction or portfolio  position,  or as a substitute for the purchase or sale
of a currency or assets  denominated  in that  currency.  Forward  contracts are
agreements to purchase or sell a specified  currency at a specified  future date
and price set at the time of the contract.  Transaction  hedging is the purchase
or  sale  of  forward  foreign  currency  contracts  with  respect  to  specific
receivables or payables of the Fund accruing in connection with the purchase and
sale of its portfolio  securities  quoted or  denominated in the same or related
foreign  currencies.  Portfolio  hedging is the use of forward foreign  currency
contracts to offset portfolio  security  positions  denominated or quoted in the
same or related foreign currencies. The Fund may elect to hedge less than all of
its  foreign  portfolio   positions  deemed   appropriate  by  the  Adviser  and
Subadviser.

If the Fund  purchases  a  forward  contract  or sells a  forward  contract  for
non-hedging purposes, its custodian will segregate cash or liquid securities, of
any type or  maturity,  in a separate  account of the Fund in an amount equal to
the value of the Fund's  total  assets  committed  to the  consummation  of such
forward contract.  The assets in the segregated account will be valued at market
daily and if the  value of the  securities  in the  separate  account  declines,
additional cash or securities will be placed in the account so that the value of
the account will be equal to the amount of the Fund's commitment with respect to
such contracts.

Hedging  against  a  decline  in the  value of a  currency  does  not  eliminate
fluctuations  in the prices of  portfolio  securities  or prevent  losses if the
prices  of  such  securities  decline.   Such  transactions  also  preclude  the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated  that the Fund is not able to  contract  to sell the  currency  at a
price above the devaluation level it anticipates.

The cost to the Fund of engaging in foreign  currency  transactions  varies with
such factors as the currency involved, the length of the contract period and the
market  conditions then prevailing.  Since  transactions in foreign currency are
usually conducted on a principal basis, no fees or commissions are involved.

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.

Because foreign  securities may be denominated in currencies other than the U.S.
dollar,  changes in foreign  currency  exchange rates will affect the Fund's net
asset  value,  the value of  dividends  and  interest  earned,  gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some

                                       6

<PAGE>

foreign  markets may not be settled  promptly so that the Fund's  investments on
foreign  exchanges  may be less  liquid and  subject to the risk of  fluctuating
currency exchange rates pending settlement.

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 or Subadviser 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 and 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

                                       7

<PAGE>

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  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.  In  addition,  the Fund will not enter  into
reverse  repurchase  agreements  and other  borrowings  except  from  banks as a
temporary measure for extraordinary  emergency purposes in amounts not to exceed
33 1/3% of the Fund's  total assets  (including  the amount  borrowed)  taken at
market value. The Fund will not use leverage to attempt to increase income.  The
Fund will not purchase securities while outstanding  borrowings exceed 5% of the
Fund's total assets. The Fund will enter into reverse repurchase agreements only
with federally insured banks which are approved in advance as being creditworthy
by the Trustees.  Under procedures established by the Trustees, the Adviser will
monitor the creditworthiness of the banks involved.
    

Restricted Securities.  The Fund may purchase securities that are not registered
("restricted  securities")  under  the  Securities  Act of  1933  ("1933  Act"),
including  commercial  paper  issued in reliance on section 4(2) of the 1933 act
and securities offered and sold to "qualified  institutional  buyers" under Rule
144A  under the 1933 Act.  The Fund will not  invest  more than 10% of its total
assets in  restricted  securities  (excluding  securities  eligible  for  resale
pursuant  to Rule 144A under the 1933 Act) or more than 15% of its total  assets
in restricted  securities  including  those eligible for resale pursuant to Rule
144A.  The Fund  will not  invest  more than 15% of its net  assets in  illiquid
investments.  If the Trustees determines,  based upon a continuing review of the
trading markets for specific  Section 4(2) paper or Rule 144A  securities,  that
they  are  liquid,  they  will  not be  subject  to the 15%  limit  on  illiquid
investments.  The Trustees may adopt  guidelines and delegate to the Adviser the
daily  function of  determining  the  monitoring  and  liquidity  of  restricted
securities.  The  Trustees,  however,  will retain  sufficient  oversight and be
ultimately  responsible  for the  determinations.  The Trustees  will  carefully
monitor the Fund's  investments in these securities,  focusing on such important
factors, among others, as valuation,  liquidity and availability of information.
This  investment  practice  could  have the  effect of  increasing  the level of
illiquidity  in the Fund if  qualified  institutional  buyers  become for a time
uninterested in purchasing these restricted securities.

Options on Securities,  Securities  Indices and Currency.  The Fund may purchase
and write (sell) call and put options on any  securities in which it may invest,
on any  securities  index based on  securities  in which it may invest or on any
currency in which Fund  investments  may be  denominated.  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 to enhance  total  return,  as a
substitute  for the purchase or sale of  securities  or currency,  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 or currency written by the
Fund obligates the Fund to sell  specified  securities or currency 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 or currency written by the Fund
obligates the Fund to purchase specified  securities or currency 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

                                       8

<PAGE>

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 or foreign  currency  assets 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 or foreign  currency assets 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,
either of which may be quoted or  denominated  in any currency,  in a segregated
account  maintained by the Fund's  custodian  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 or currencies 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 or currency 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 or the
currencies in which they are  denominated.  Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of  securities or  currencies  which it does not own. The Fund would  ordinarily
realize  a gain if,  during  the  option  period,  the  value of the  underlying
securities or currency  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.

                                       9

<PAGE>

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
currencies  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 Trustees.

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.  To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange  rates,  the  Fund  may  purchase  and sell  various  kinds of  futures
contracts,  and  purchase  and  write  call and put  options  on  these  futures
contracts.  The Fund may also enter into closing purchase and sale  transactions

                                       10

<PAGE>

with respect to any of these contracts and options. The futures contracts may be
based on various  securities (such as U.S.  Government  securities),  securities
indices, foreign currencies and any other financial instruments and indices. All
futures  contracts  entered  into by the  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 or currency 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.

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  portfolio  securities  are  quoted  or
denominated.  When interest  rates are rising or 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  interest  rates are
falling or  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.  The Fund may
seek to  offset  anticipated  changes  in the value of a  currency  in which its
portfolio securities,  or securities that it intends to purchase,  are quoted or
denominated by purchasing and selling futures contracts on such currencies.

The Fund may,  for  example,  take a "short"  position in the futures  market by
selling futures  contracts in an attempt to hedge against an anticipated rise in
interest  rates or a decline  in market  prices or foreign  currency  rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures  contracts may include  contracts for the future  delivery of securities
held by the Fund or  securities  with  characteristics  similar  to those of the
Fund's portfolio securities.  Similarly,  the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one  currency  to  hedge  against   fluctuations  in  the  value  of  securities
denominated  in a  different  currency  if  there is an  established  historical
pattern of correlation between the two currencies.

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

                                       11

<PAGE>

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.  This  would be done,  for  example,  when the Fund  anticipates  the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency  exchange  rates then available in the applicable
market to be less favorable than prices that are currently  available.  The Fund
may  also  purchase  futures  contracts  as a  substitute  for  transactions  in
securities or foreign currency,  to alter the investment  characteristics  of or
currency  exposure  associated with portfolio  securities or to gain or increase
its exposure to a particular securities market or currency.

Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in 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,
the 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 the 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.  The 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 purposes or to seek to increase total
return as  permitted by the CFTC.  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  (or the currency in which
they are quoted or denominated)  that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the  currency in which they are quoted or  denominated)  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

                                       12

<PAGE>

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 (or assets  denominated in the related currency) 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.  The Fund will  engage in
transactions  in futures  contracts and related  options only to the extent such
transactions  are consistent with the  requirements of the Internal Revenue Code
of 1986,  as amended  (the  "Code"),  for  maintaining  its  qualification  as a
regulated investment company for federal income tax purposes.

   
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 or  currencies,  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  or
currency exchange rates 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.  In  addition,  it is not  possible to hedge  fully or protect  against
currency fluctuations  affecting the value of securities  denominated in foreign
currencies  because the value of such  securities  is likely to  fluctuate  as a
result of independent factors not related to currency fluctuations.
    

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.

Lending  of  Securities.  The Fund may lend  portfolio  securities  to  brokers,
dealers,  and financial  institutions if the loan is  collateralized  by cash or
U.S. Government securities according to applicable regulatory requirements.  The
Fund may reinvest any cash collateral in short-term  securities and money market
funds.  When the  Fund  lends  portfolio  securities,  there is a risk  that the
borrower may fail to return the  securities  involved in the  transaction.  As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a

                                       13

<PAGE>

fundamental  policy of the Fund not to lend portfolio  securities having a total
value exceeding 33 1/3% of its total assets.

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.

Short  Sales.  The Fund may  engage in short  sales in order to  profit  from an
anticipated  decline  in the value of a  security.  The Fund may also  engage in
short sales to attempt to limit its exposure to a possible market decline in the
value of its portfolio  securities  through short sales of securities  which the
Adviser  believes  possess  volatility  characteristics  similar to those  being
hedged.  To effect such a  transaction,  the Fund must borrow the security  sold
short to make  delivery to the buyer.  The Fund then is obligated to replace the
security  borrowed  by  purchasing  it at  the  market  price  at  the  time  of
replacement.  Until the security is replaced, the Fund is required to pay to the
lender any accrued  interest or dividends  and may be required to pay a premium.
The Fund may only make short sales  "against the box," meaning that the Fund, by
virtue of its ownership of other securities,  has the right to obtain securities
equivalent  in kind and  amount  to the  securities  sold  and,  if the right is
conditional, the sale is made upon the same conditions.

The Fund will realize a gain if the security  declines in price between the date
of the short sale and the date on which the Fund replaces the borrowed security.
On the other  hand,  the Fund will incur a loss as a result of the short sale if
the price of the security  increases between those dates. The amount of any gain
will be decreased,  and the amount of any loss  increased,  by the amount of any
premium or interest or dividends  the Fund may be required to pay in  connection
with a short sale.  The  successful use of short selling as a hedging device may
be adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.

Under  applicable  guidelines  of the staff of the SEC,  if the Fund  engages in
short sales, it must put in a segregated account (not with the broker) an amount
of cash or U.S.  Government  securities equal to the difference  between (a) the
market value of the  securities  sold short at the time they were sold short and
(b)  any  cash  or  U.S.  Government  Securities  required  to be  deposited  as
collateral  with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount  deposited in it plus the amount  deposited with the broker as collateral
will equal the current market value of the securities sold short.

Short selling may produce higher than normal portfolio turnover which may result
in increased transaction costs to the Fund and may result in gains from the sale
of securities  deemed to have been held for less than three months,  which gains

                                       14

<PAGE>

must be less than 30% of the Fund's gross income for a taxable year in order for
the Fund to qualify as a regulated  investment  company  under the Code for that
year.

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,  of any type or maturity, equal 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.

Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively  brief
period of time.  The Fund may engage in short-term  trading in response to stock
market  conditions,  changes  in  interest  rates or other  economic  trends and
developments,  or to take advantage of yield  disparities  between various fixed
income  securities in order to realize  capital gains or improve  income.  Short
term trading may have the effect of increasing  portfolio  turnover rate. A high
rate of portfolio  turnover (100% or greater)  involves  correspondingly  higher
brokerage expenses. The Fund's portfolio turnover rate is set forth in the table
under the caption "Financial Highlights" in the prospectus.

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  Prospectuses  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
Fund's  outstanding  shares are  present in person or by proxy at the meeting or
(2) more than 50% of the Fund's outstanding shares.

         The Fund may not:

                                       15

<PAGE>

         (1) Issue senior securities, except as permitted by paragraphs (2), (6)
         and (7) below. For purposes of this restriction, the issuance of shares
         of beneficial  interest in multiple classes or series,  the purchase or
         sale of options,  futures  contracts and options on futures  contracts,
         and  forward  foreign  exchange  contracts,   forward  commitments  and
         repurchase  agreements  entered  into in  accordance  with  the  Fund's
         investment  policy,  and the pledge,  mortgage or  hypothecation of the
         Fund's assets within the meaning of paragraph (3) below, are not deemed
         to be senior securities.

         (2)  Borrow  money,  except  from  banks  as a  temporary  measure  for
         extraordinary  emergency  purposes  in amounts not to exceed 33 1/3% of
         the Fund's total assets (including the amount borrowed) taken at market
         value.  The Fund will not use  leverage to attempt to increase  income.
         The Fund will not  purchase  securities  while  outstanding  borrowings
         exceed 5% of the Fund's total assets.

         (3)  Pledge,  mortgage  or  hypothecate  its  assets,  except to secure
         indebtedness  permitted  by  paragraph  (2) above and then only if such
         pledging,  mortgaging or  hypothecating  does not exceed 33 1/3% of the
         Fund's total assets taken at market value.

         (4) 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.

         (5) Purchase or sell real estate or any interest  therein,  except that
         the Fund may invest in securities of corporate or governmental entities
         secured by real estate or  marketable  interests  therein or securities
         issued by companies that invest in real estate or interests therein.

         (6) Make loans,  except that the Fund may lend portfolio  securities in
         accordance with the Fund's investment policies.  The Fund does not, for
         this purpose, consider repurchase agreements,  the purchase of all or a
         portion  of  an  issue  of  publicly   distributed   bonds,  bank  loan
         participation  agreements,   bank  certificates  of  deposit,  bankers'
         acceptances,  debentures  or  other  securities,  whether  or  not  the
         purchase is made upon the original  issuance of the  securities,  to be
         the making of a loan.

         (7) Invest in commodities or in commodity  contracts or in puts, calls,
         or  combinations  of both,  except options on securities and securities
         indices,  futures  contracts on securities and  securities  indices and
         options on such futures,  forward foreign exchange  contracts,  forward
         commitments,  securities  index  put or call  warrants  and  repurchase
         agreements  entered  into in  accordance  with  the  Fund's  investment
         policies.

         (8) Purchase  the  securities  of issuers  conducting  their  principal
         business  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 each
         investment.   This   limitation   does  not  apply  to  investments  in
         obligations  of  the  U.S.   Government  or  any  of  its  agencies  or
         instrumentalities.

         (9) Purchase  securities of an issuer (other than the U.S.  Government,
         its agencies or instrumentalities), if

                                       16

<PAGE>

                  (i) such purchase would cause more than 5% of the Fund's total
                  assets taken at market value to be invested in the  securities
                  of such issuer, or

                  (ii) such  purchase  would at the time result in more than 10%
                  of the outstanding voting securities of such issuer being held
                  by the Fund.

In  connection  with the lending of portfolio  securities  under item (6) above,
such loans must at all times be fully  collateralized  and the Fund's  custodian
must take possession of the collateral  either physically or in book entry form.
Securities used as collateral must be marked to market daily.

Non-Fundamental   Investment   Restrictions.   The  following  restrictions  are
designated as nonfundamental and may be
changed by the Trustees without shareholder approval.

The Fund may not:

         (a) Participate on a joint or joint-and-several basis in any securities
         trading  account.  The "bunching" of orders for the sale or purchase of
         marketable   portfolio   securities   with  other  accounts  under  the
         management  of the  Adviser to save  commissions  or to average  prices
         among  them is not  deemed  to  result  in a joint  securities  trading
         account.

         (b)  Purchase  securities  on margin  or make  short  sales,  except in
         connection  with  arbitrage  transactions,  or  unless by virtue of its
         ownership  of  other  securities,  the Fund  has the  right  to  obtain
         securities equivalent in kind and amount to the securities sold and, if
         the right is  conditional,  the sale is made upon the same  conditions,
         except  that the Fund may  obtain  such  short-term  credits  as may be
         necessary for the clearance of purchases and sales of securities and in
         connection  with   transactions   involving  forward  foreign  currency
         exchange contracts.

         (c)  Purchase  a  security  if, as a  result,  (i) more than 10% of the
         Fund's  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 such investment company being
         held by the Fund,  or (iii) more than 5% of the Fund's  assets would be
         invested in any one such investment company.


         (d) Invest for the purpose of exercising control over or management of
         any company.

         (e) Invest more than (1) 10% of its total  assets in  securities  which
         are  restricted  under  the  Securities  Act of 1933 (the  "1933  Act")
         (excluding  securities  eligible for resale pursuant to Rule 144A under
         the  1933  Act)  or (2) 15% of its  total  assets  in  such  restricted
         securities  (including  securities eligible for resale pursuant to Rule
         144A).

         (f) Invest more than 15% of its net assets in illiquid securities.

         (g)  Notwithstanding  any investment  restriction to the contrary,  the
         Fund may, in connection  with the John Hancock Group of Funds  Deferred
         Compensation   Plan  for   Independent   Trustees/Directors,   purchase
         securities of other investment  companies within the John Hancock Group
         of Funds provided that, as a result, (i) no more than 10% of the Fund's
         assets  would  be  invested  in  securities  of  all  other  investment
         companies,  (ii) such purchase  would not result in more than 3% of the
         
                                       17

<PAGE>

         total outstanding  voting securities of any one such investment company
         being held by the Fund and (iii) no more than 5% of the  Fund's  assets
         would be invested in any one such investment company.

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 values or the total costs of the Fund's
assets will not be considered a violation of the restriction.

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  and  Directors  of the Adviser or  Subadviser  or  officers  and
Directors of the Fund's principal  distributor,  John Hancock Funds, Inc. ("John
Hancock Funds").

                                       18

<PAGE>

<TABLE>
<CAPTION>

   
                                        Positions Held                         Principal Occupation(s)
Name and Address                        With the Company                       During the Past Five Years
- ----------------                        ----------------                       --------------------------
     <S>                                     <C>                                     <C>
Edward J. Boudreau, Jr. *               Trustee, Chairman and Chief            Chairman, Director and Chief
101 Huntington Avenue                   Executive Officer (1, 2)               Executive Officer, the Adviser;
Boston, MA  02199                                                              Chairman, Director and Chief
October 1944                                                                   Executive Officer, The Berkeley
                                                                               Financial Group, Inc. ("The        
                                                                               Berkeley Group"); Chairman and     
                                                                               Director, NM Capital Management,   
                                                                               Inc. ("NM Capital"), John Hancock  
                                                                               Advisers International Limited     
                                                                               ("Advisers International") and     
                                                                               Sovereign Asset Management         
                                                                               Corporation ("SAMCorp"); Chairman, 
                                                                               Chief Executive Officer and        
                                                                               President, John Hancock Funds, Inc.
                                                                               ("John Hancock Funds"); Chairman,  
                                                                               First Signature Bank and Trust     
                                                                               Company; Director, John Hancock    
                                                                               Insurance Agency, Inc. ("Insurance 
                                                                               Agency, Inc."), John Hancock       
                                                                               Advisers International (Ireland)   
                                                                               Limited ("International Ireland"), 
                                                                               John Hancock Capital Corporation   
                                                                               and New England/Canada Business    
                                                                               Council; Member, Investment Company
                                                                               Institute Board of Governors;      
                                                                               Director, Asia Strategic Growth    
                                                                               Fund, Inc.; Trustee, Museum of     
                                                                               Science; Director, John Hancock    
                                                                               Freedom Securities Corporation     
                                                                               (until September 1996); Director,  
                                                                               John Hancock Signature Services,   
                                                                               Inc. ("Signature Services") (until 
                                                                               January 1997).                     
                                                                               

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>

    


                                       19
<PAGE>

<TABLE>
<CAPTION>

   
                                        Positions Held                         Principal Occupation(s)
Name and Address                        With the Company                       During the Past Five Years
- ----------------                        ----------------                       --------------------------
     <S>                                     <C>                                       <C>
Dennis S. Aronowitz                     Trustee                                Professor of Law, Emeritus, Boston
1216 Falls Boulevard                                                           University School of Law (as of
Fort Lauderdale, FL  33327                                                     1996); Trustee, Brookline Savings
June 1931                                                                      Bank.

Richard P. Chapman, Jr.                 Trustee (1)                            President, Brookline Savings Bank
160 Washington Street                                                          (lending); Director, Lumber
Brookline, MA  02147                                                           Insurance Companies (fire and
February 1935                                                                  casualty insurance); Trustee,
                                                                               Northeastern University (education);
                                                                               Director, Depositors Insurance Fund,
                                                                               Inc. (insurance).

William J. Cosgrove                     Trustee                                Vice President, Senior Banker and
20 Buttonwood Place                                                            Senior Credit Officer, Citibank,
Saddle River, NJ  07458                                                        N.A. (retired September 1991);
January 1933                                                                   Executive Vice President, Citadel
                                                                               Group Representatives, Inc.; EVP
                                                                               Resource Evaluation, Inc.
                                                                               (consulting) (until October 1993);
                                                                               Trustee, the Hudson City Savings
                                                                               Bank (since 1995).

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
    

                                       20
<PAGE>


<TABLE>
<CAPTION>

   
                                        Positions Held                         Principal Occupation(s)
Name and Address                        With the Company                       During the Past Five Years
- ----------------                        ----------------                       --------------------------
    <S>                                      <C>                                     <C>
Douglas M. Costle                       Trustee (1)                            Director, Chairman and Distinguished
RR2 Box 480                                                                    Senior Fellow, Institute for
Woodstock, VT  05091                                                           Sustainable Communities, Montpelier,
July 1939                                                                      Vermont (since 1991); Dean, Vermont
                                                                               Law School (until 1991); Director, 
                                                                               Air and Water Technologies (until  
                                                                               1996) (environmental services and  
                                                                               equipment), Niagara Mohawk Power   
                                                                               Corp. (electric services); Concept 
                                                                               Five Technologies (until 1997);    
                                                                               Mitretek Systems (governmental     
                                                                               consulting services); Conversion   
                                                                               Technologies, Inc.; Living         
                                                                               Technologies, Inc.                 
                                                                               
Leland O. Erdahl                        Trustee                                Vice President, Chief Financial
8046 Mackenzie Court                                                           Officer and Director of Amax Gold,
Las Vegas, NV  89129                                                           Inc.; Uranium Resources Corporation;
December 1928                                                                  Hecla Mining Company, Canyon
                                                                               Resources Corporation and Original
                                                                               Sixteen to One Mines, Inc.
                                                                               (1984-1987 and 1991-1995)
                                                                               (management consultant).

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
    

                                       21

<PAGE>

<TABLE>
<CAPTION>

   

                                         Positions Held                        Principal Occupation(s)
Name and Address                         With the Company                      During the Past Five Years
- ----------------                         ----------------                      --------------------------
     <S>                                     <C>                                     <C>
Richard A. Farrell                       Trustee                               President of Farrell, Healer & Co.,
The Venture Capital Fund of New England                                        (venture capital management firm)
160 Federal Street                                                             (since 1980);  Prior to 1980, headed
23rd Floor                                                                     the venture capital group at Bank of
Boston, MA  02110                                                              Boston Corporation.
November 1932

Gail D. Fosler                           Trustee                               Senior Vice President and Chief
3054 So. Abingdon Street                                                       Economist, The Conference Board
Arlington, VA  22206                                                           (non-profit economic and business
December 1947                                                                  research); Director, Unisys Corp.;
                                                                               and H.B. Fuller Company.  Director,
                                                                               National Bureau of Economic Research
                                                                               (academic).

William F. Glavin                        Trustee                               President  Emeritus,  Babson College 
120 Paget Court - John's  Island                                               (as  of  1997);  Vice  Chairman,  Xerox  
Vero  Beach,  FL  32963                                                        Corporation (until June 1989); 
March 1932                                                                     Director, Caldor Inc., Reebok, Inc.
                                                                               (since 1994) and Inco Ltd.

Anne C. Hodsdon *                        Trustee and President (1,2)           President, Chief Operating Officer
101 Huntington Avenue                                                          and Director, the Adviser, The
Boston, MA  02199                                                              Berkeley Group; Director, John
April 1953                                                                     Hancock Funds, Advisers
                                                                               International, Insurance Agency,
                                                                               Inc. and International Ireland;
                                                                               President and Director, SAMCorp. and
                                                                               NM Capital; Executive Vice
                                                                               President, the Adviser (until
                                                                               December 1994); Director, Signature
                                                                               Services (until January 1997).

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
    

                                       22

<PAGE>

<TABLE>
<CAPTION>

   

                                        Positions Held                         Principal Occupation(s)
Name and Address                        With the Company                       During the Past Five Years
- ----------------                        ----------------                       --------------------------
     <S>                                     <C>                                       <C>
Dr. John A. Moore                       Trustee                                President and Chief Executive
Institute for Evaluating Health Risks                                          Officer, Institute for Evaluating
1629 K Street NW                                                               Health Risks, (nonprofit
Suite 402                                                                      institution) (since September 1989).
Washington, DC  20006-1602
February 1939

Patti McGill Peterson                   Trustee                                Executive Director, Council for
CIES                                                                           International Exchange of Scholars
3007 Tilden Street, N.W.                                                       (since January 1998), Vice
Washington, D.C.  20008                                                        President, Institute of
May 1943                                                                       International Education (since
                                                                               January 1998); Cornell Institute of
                                                                               Public Affairs, Cornell University 
                                                                               (until December 1997); President   
                                                                               Emerita of Wells College and St.   
                                                                               Lawrence University; Director,     
                                                                               Niagara Mohawk Power Corporation   
                                                                               (electric utility).                
                                                                               
John W. Pratt                           Trustee                                Professor of Business Administration
2 Gray Gardens East                                                            Emeritus, Harvard University
Cambridge, MA  02138                                                           Graduate School of Business
September 1931                                                                 Administration (as of June 1998).

Michael P. DiCarlo*                     Trustee                                Principal, DFS Advisors LLC;
75 State Street                                                                Executive Vice President, the
Suite 2530                                                                     Adviser (until 1996); Senior Vice
Boston, Massachusetts 02109                                                    President of certain John Hancock
March 1956                                                                     funds (until 1995).

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
    

                                       23
<PAGE>


<TABLE>
<CAPTION>

   
                                        Positions Held                         Principal Occupation(s)
Name and Address                        With the Company                       During the Past Five Years
- ----------------                        ----------------                       --------------------------
     <S>                                     <C>                                     <C>
Richard S. Scipione *                   Trustee (1)                            General Counsel, John Hancock Life
John Hancock Place                                                             Company; Director, the Adviser,
P.O. Box 111                                                                   Advisers International, John Hancock
Boston, MA  02117                                                              Funds, John Hancock Distributors,
August 1937                                                                    Inc., Insurance Agency, Inc., John
                                                                               Hancock Subsidiaries, Inc., SAMCorp.
                                                                               and NM Capital; Director, The
                                                                               Berkeley Group; Director, JH
                                                                               Networking Insurance Agency, Inc.;
                                                                               Director, Signature Services (until
                                                                               January 1997).

Edward J. Spellman, CPA                 Trustee                                Partner, KPMG Peat Marwick LLP
259C Commercial Bld.                                                           (retired June 1990).
Ft. Lauderdale, FL  33308
November 1932

Robert G. Freedman                      Vice Chairman and Chief Investment     Vice Chairman and Chief Investment
101 Huntington Avenue                   Officer (2)                            Officer, the Adviser; Director, the
Boston, MA  02199                                                              Adviser, Advisers International,
July 1938                                                                      John Hancock Funds, SAMCorp.,
                                                                               Insurance Agency, Inc.,            
                                                                               Southeastern Thrift & Bank Fund and
                                                                               NM Capital; Director and Senior    
                                                                               Vice President, The Berkeley Group;
                                                                               President, the Adviser (until      
                                                                               December 1994); Director, Signature
                                                                               Services (until January 1997).     
                                                                               

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
    

                                       24
<PAGE>


<TABLE>
<CAPTION>

   
                                        Positions Held                         Principal Occupation(s)
Name and Address                        With the Company                       During the Past Five Years
- ----------------                        ----------------                       --------------------------
     <S>                                     <C>                                     <C>
James B. Little                         Senior Vice President and Chief        Senior Vice President, the Adviser,
101 Huntington Avenue                   Financial Officer                      The Berkeley Group, John Hancock
Boston, MA  02199                                                              Funds.
February 1935

John A. Morin                           Vice President                         Vice President and Secretary, the
101 Huntington Avenue                                                          Adviser, The Berkeley Group,
Boston, MA  02199                                                              Signature Services and John Hancock
July 1950                                                                      Funds; Secretary, NM Capital and
                                                                               SAMCorp.; Clerk, Insurance Agency, 
                                                                               Inc.; Counsel, John Hancock Mutual 
                                                                               Life Insurance Company (until      
                                                                               February 1996), and Vice President 
                                                                               of John Hancock Distributors, Inc. 
                                                                               (until April 1994).                
                                                                               
Susan S. Newton                         Vice President and Secretary           Vice President, the Adviser; John
101 Huntington Avenue                                                          Hancock Funds, Signature Services
Boston, MA  02199                                                              and The Berkeley Group, NM Capital;
March 1950                                                                     Vice President, John Hancock
                                                                               Distributors, Inc. (until April
                                                                               1994).

James J. Stokowski                      Vice President and Treasurer           Vice President, the Adviser.
101 Huntington Avenue
Boston, MA  02199
November 1946

- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
    

                                       25

<PAGE>


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.  Messrs.  Boudreau and Scipione and Ms.
Hodsdon,  and each of the  officers  of the Fund are  interested  persons of the
Adviser,  are  compensated by the Adviser and receive no  compensation  from the
Fund for their  services.  The  compensation to the Trustees from the Fund shown
below is for the fiscal year ended October 31, 1997.


<TABLE>
<CAPTION>
                                                            Total Compensation From All 
                                 Aggregate Compensation     Funds in John Hancock Fund 
Independent Trustees             From the Fund              Complex to Trustees(*)
- --------------------             -------------              ----------------------
     <S>                              <C>                        <C>
Dennis S. Aronowitz              $  13,031                  $ 72,000
Richard P. Chapman, Jr.+            13,516                    75,000
William J. Cosgrove+                13,031                    72,000
Douglas M. Costle                   13,516                    75,000
Leland O. Erdahl                    13,031                    72,000
Richard A. Farrell                  13,516                    75,000
Gail D. Fosler                      13,031                    72,000
William F. Glavin+                  13,010                    72,000
John A. Moore+                      13,031                    72,000
Patti McGill Peterson               13,031                    72,000
John W. Pratt                       13,031                    72,000
Edward J. Spellman                  13,516                    75,000
                                 ---------                  ----------
Total                             $158,291                  $876,000
</TABLE>

(*) The  total  compensation  paid  by the  John  Hancock  Fund  Complex  to the
Independent  Trustees is as of the calendar year ended  December 31, 1997. As of
that date, there were sixty seven funds in the John Hancock  Complex,  with each
of these Independent Trustees serving on thirty-two funds.

+As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock fund complex for Mr.
Chapman was $69,148, for Mr. Cosgrove was $167,829, for Mr. Glavin was $193,514,
and for Mr. Moore was $84,315 under the John Hancock Deferred Compensation Plan
for Independent Trustees.

All of the  officers  listed are  officers  or  employees  of the  Adviser,  the
Subadviser,  or the 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 February 2, 1998,  the  officers and Trustees of the Fund as a group owned
less  than 1% of the  outstanding  shares  of the  Fund.  As of that  date,  the
following  shareholders  beneficially owned 5% or more of the outstanding shares
of the Fund listed below:

                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                    Percentage of 
                                                                    Total Outstanding 
Name and Address                                                    Shares of the 
 of Shareholder                              Class of Shares        Class of the Fund
 --------------                              ---------------        -----------------
     <S>                                          <C>                      <C>
MLPF&S For The Sole Benefit Of Its                 A                   5.42%
Customers
Attn: Fund Administration
4800 Deerlake Drive East
Jacksonville FL 32246-5484

MLPF&S For The Sole Benefit Of Its                 B                  19.91%
Customers
Attn: Fund Administration
4800 Deerlake Drive East
Jacksonville FL 32246-5484

   
Louisville Gas & Electric                          Y                  28.19%
Master Trust
National City Bank of Kentucky TTEE
Attn: Trust Mutual Funds
PO Box 94777
Cleveland OH 44101-4777

Saturn & Co.                                       Y                  22.86%
A/C 4600712 FBO The JHMLICO Pension Plan 
c/o Investors Bank and Trust Co.
PO Box 1537 To P57
Boston, MA 02205-1537

Avondale Mills Inc. P/S & SVGS                     Y                  11.50%
Wachovia Bank of NC
301 North Main Street
PO Box 3073
Winston Salem NC 27101-3819
    

                                       27

<PAGE>


   
Hampshire County Retirement System                  Y                 8.98%
Harry Chadwick TTEE
Patricia E. Brock TTEE
Warren E. White TTEE
99 Main Street
Northampton MA 01060-3119

UST Inc.                                           Y                  7.66%
c/o Wachovia Bank NA
PO Box 3073
301 Main Street MC NC 31057
Winston-Salem NC 27150-0001
</TABLE>

    

INVESTMENT ADVISORY AND OTHER SERVICES

   
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was  organized in 1968 and has more than $30 billion in assets under  management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly  traded  investment  companies in the John Hancock group of funds which
have a  combined  total  of  over  1,400,000  shareholders.  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 more
than $100  billion,  the Life Company is one of the ten largest  life  insurance
companies in the United States,  and carries high ratings from Standard & Poor's
and A.M. Best's.  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  shareholders.
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 Adviser has entered into a Subadvisory  Agreement  with DiCarlo,  Forbes and
St.  Pierre  of  DFS  Advisors,  LLC,  75  State  Street,  Suite  2530,  Boston,
Massachusetts  02109. Under the Subadvisory  Agreement,  the Subadviser provides
the Fund with advice and recommendations  regarding the Fund's investments.  The
Subadviser  also  provides  the Fund on a  continuous  basis with  economic  and
financial  information,  as well as other  research  and  assistance.  Under the
Subadvisory  Agreement  the  Subadviser  pays all  expenses  that it  incurs  in
connection with the performance of its duties under the Agreement.  The Adviser,
and not the Fund, pays all Subadvisory  fees. Under the Sub-Advisory  Agreement,
the Adviser pays the Subadviser a fee at the annual rate of 0.25% of the average
daily net assets of the Fund.  The  Subadvisory  Agreement  has been  terminated
effective August 30, 1998.
    

In addition,  the Adviser and the Subadviser have entered into a separate letter
agreement  (the  "Letter  Agreement").  The Letter  Agreement  provides  for the
Adviser to receive a 10% equity  interest in the  Subadviser and for the payment
of  compensation to the Subadviser if the  Sub-Advisory  Agreement is terminated

                                       28

<PAGE>

without cause within a five year period.  The Letter Agreement also requires Mr.
DiCarlo to provide  certain  marketing  services and  contains a  noncompetition
clause.

The Fund bears all costs of its organization and operation,  including  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 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
expense 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 membership; insurance premiums; and any extraordinary expenses.

As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser  monthly a fee based on a stated  percentage of the average of the daily
net assets of the Fund as follows:

Net Asset Value                            Annual Rate

First $250,000,000                         0.85%
Amount Over $250,000,000                   0.80%

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 average daily net assets.
The Adviser  retains the right to re-impose 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.

For the years ended October 31, 1995, 1996 and 1997, the Adviser received a fee
of $5,538,912, $12,884,307 and $15,145,304, respectively.

Securities  held by the  Fund may  also be held by  other  funds  or  investment
advisory clients for which the Adviser, the Subadviser 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 are selling the same  security.  If  opportunities  for purchase or sale of
securities by the Adviser or the  Subadviser  for the Fund or for other funds or
clients to which the Adviser or Subadviser 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,  the  Subadviser  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 and the Sub-Advisory  Agreement,  neither the
Adviser nor the  Subadviser  is liable to the Fund or its  shareholders  for any
error of  judgment  or  mistake of law or for any loss  suffered  by the Fund in

                                       29

<PAGE>

connection  with the  matters to which  such  Agreements  relate,  except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser or  Subadviser  in the  performance  of its duties or from  reckless
disregard by the Adviser or Subadviser of its  obligations and duties under such
Agreements.

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 permitted by law) 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  continuation of the Advisory  Agreement,
Sub-Advisory  Agreement and the  Distribution  Agreement  (discussed  below) was
approved by all Trustees.  The Advisory  Agreement,  Sub-Advisory  Agreement and
Distribution  Agreement will continue in effect from year to year, provided that
its  continuance  is approved  annually 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.  Each  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.  For the fiscal years ended October 31, 1997 and 1996,  the
Fund paid the Adviser  $345,059 and $264,274,  respectively,  for services under
this Agreement.

In order to avoid conflicts with portfolio trades for the Fund, the Adviser, the
Subadviser  and  the  Fund  have  adopted  extensive  restrictions  on  personal
securities  trading by personnel of the Adviser and its affiliates.  In the case
of the Adviser,  some of these restrictions are:  pre-clearance for all personal
trades  and a ban on the  purchase  of  initial  public  offerings,  as  well as
contributions to specified charities of profits on securities held for less than
91 days. The Subadviser has adopted similar restrictions, which may differ where
appropriate,  as long as they have the same  intent.  These  restrictions  are a
continuation  of the  basic  principle  that the  interests  of the Fund and its
shareholders come first.

DISTRIBUTION CONTRACTS

The Fund has a  Distribution  Agreement  with  John  Hancock  Funds.  Under  the
agreement,  John  Hancock  Funds is  obligated  to use its best  efforts to sell
shares of each class of the Fund.  Shares of the Fund are also sold by  selected
broker-dealers  (the "Selling  Brokers")  which have entered into selling agency
agreements  with John Hancock  Funds.  John Hancock Funds accepts orders for the
purchase  of the shares of the Fund which are  continually  offered at net asset
value next determined,  plus an applicable  sales charge,  if any. In connection
with the sale of Class A or Class B  shares,  John  Hancock  Funds  and  Selling
Brokers receive compensation from a sales charge imposed, in the case of Class A
shares, at the time of sale. In the case of Class B shares,  the broker receives
compensation  immediately  but John Hancock Funds is  compensated  on a deferred

                                       30

<PAGE>

basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.

Total  underwriting  commissions  for sales of the Fund's Class A shares for the
fiscal  periods  ended  October  31,  1997,  1996  and  1995  were   $3,592,665,
$10,815,398 and $4,505,322, respectively, and $560,137, $1,662,406 and $685,379,
respectively,  were  retained  by John  Hancock  Funds in 1997,  1996 and  1995,
respectively.  The remainder of the  underwriting  commissions were reallowed to
dealers.

The Fund's Trustees adopted Distribution Plans with respect to Class A and Class
B shares (the "Plans")  pursuant to Rule 12b-1 under the Investment  Company Act
of 1940.  Under the Plans, the Fund will pay distribution and service fees at an
aggregate  annual  rate of up to 0.30% and  1.00%,  respectively,  of the Fund's
average  daily net assets  attributable  to shares of that class.  However,  the
service  fee will not  exceed  0.25% of the  Fund's  average  daily  net  assets
attributable  to each class of  shares.  The  distribution  fees will be used to
reimburse John Hancock Funds for their distribution expenses,  including but not
limited to: (i) initial and ongoing sales  compensation  to Selling  Brokers and
others  engaged in the sale of Fund  shares;  (ii)  marketing,  promotional  and
overhead  expenses  incurred in connection with the distribution of Fund shares;
and (iii) with respect to Class B shares only, interest expenses on unreimbursed
distribution  expenses.  The  service  fees will be used to  compensate  Selling
Brokers and others for providing  personal and account  maintenance  services to
shareholders.  In the event the John Hancock Funds is not fully  reimbursed  for
payments or expenses they incur under the Class A Plan,  these expenses will not
be carried beyond twelve months from the date they were  incurred.  Unreimbursed
expenses under the Class B Plan will be carried  forward  together with interest
on the  balance  of  these  unreimbursed  expenses.  The  Fund  does  not  treat
unreimbursed  expenses under the Class B Plan as a liability of the Fund because
the Trustees  may  terminate  the Class B Plan at any time.  For the fiscal year
ended October 31, 1997, an aggregate of $4,156,261 of  distribution  expenses or
0.45% of the  average  net  assets of the  Class B shares  of the Fund,  was not
reimbursed  or recovered by John Hancock  Funds  through the receipt of deferred
sales charges or Rule 12b-1 fees in prior periods.

The Plans were approved by a majority of the voting  securities of the Fund. The
Plans and all amendments were approved by the Trustees,  including a majority of
the Trustees who are not  interested  persons of the Fund and who have no direct
or indirect  financial  interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.

Pursuant to the Plans, at least  quarterly,  John Hancock Funds provide the Fund
with a written  report of the amounts  expended  under the Plans and the purpose
for which these  expenditures  were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.

The  Plans  provide  that  they will  continue  in effect  only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent  Trustees.  The Plans  provide that they may be  terminated  without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority  of the Fund's  outstanding  shares of the  applicable  class upon 60
days' written notice to John Hancock Funds,  and (c)  automatically in the event
of  assignment.  The  Plans  further  provide  that they may not be  amended  to
increase  the  maximum  amount of the fees for the  services  described  therein

                                       31

<PAGE>

without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan.  Each Plan provides that
no material  amendment to the Plans will be effective unless it is approved by a
majority  vote of the Trustees  and the  Independent  Trustees of the Fund.  The
holders of Class A and Class B shares have exclusive  voting rights with respect
to the Plan  applicable  to their  respective  class of shares.  In adopting the
Plans,  the Trustees  concluded that, in their  judgment,  there is a reasonable
likelihood  that the Plans will benefit the holders of the  applicable  class of
shares of the Fund.

Amounts paid to John  Hancock  Funds by any class of shares of the Fund will not
be used to pay the expenses  incurred  with respect to any other class of shares
of the Fund;  provided,  however,  that expenses  attributable  to the Fund as a
whole will be allocated,  to the extent permitted by law, according to a formula
based upon gross  sales  dollars  and/or  average  daily net assets of each such
class,  as may be approved  from time to time by vote of a majority of Trustees.
From time to time,  the Fund may  participate in joint  distribution  activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Funds.

During the fiscal year ended October 31, 1997,  the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services of the Fund:

<TABLE>
<CAPTION>

                                                    Expense Items
                                                    -------------

                                         Printing and                                       Interest
                                         Mailing of                           Expenses of   Carrying or
                                         Prospectus to      Compensation      John          Other 
                                         New                to Selling        Hancock       Finance  
                       Advertising       Shareholders       Brokers           Funds         Charges
                       -----------       ------------       -------           -----         -------
                         <S>                 <C>            <C>                 <C>           <C>
Class A shares         $293,600           $ 3,714            $1,270,025      $1,023,094      $--

Class B shares         $749,942           $49,269            $3,229,521      $2,705,401      $2,574,560
</TABLE>


   
Class Y shares of the Fund are not subject to any  Distribution  Plan.  Expenses
associated  with the obligation of John Hancock Funds to use its best efforts to
sell Class Y shares  will be paid by the  Adviser or by John  Hancock  Funds and
will not be paid from the fees paid under Class A or Class B Plans.
    

NET ASSET VALUE

For purposes of  calculating  the net asset value ("NAV") of the Fund's  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.

                                       32

<PAGE>

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 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 any determination of the Fund's NAV. If quotations
are not readily available,  or the value has been materially  affected by events
occurring after the closing of a foreign  market,  assets are valued by a method
that the Trustees believe accurately reflects fair value.

The NAV for each fund and class 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 a class's  net asset by the number of its 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  redeemable  securities  may be  significantly  affected  on days  when a
shareholder has no access to the Fund.

INITIAL SALES CHARGE ON CLASS A SHARES

Shares of the Fund are  offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the  "initial  sales charge  alternative")  or on a contingent
deferred basis (the "deferred  sales charge  alternative").  Share  certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive the  Fund's  minimum  investment  requirements  and to reject any order to
purchase  shares  (including  purchase by exchange)  when in the judgment of the
Adviser such rejection is in the Fund's best interest.

   
The sales  charges  applicable  to  purchases  of Class A shares of the Fund are
described in the Class A and Class B  Prospectus.  Methods of obtaining  reduced
sales  charges  referred to generally in the Class A and Class B Prospectus  are
described in detail below. In calculating the sales charge applicable to current
purchases  of Class A shares of the Fund,  the  investor is entitled to cumulate
current  purchases with the greater of the current value (at offering  price) of
the  Class A  shares  of the Fund  owned by the  investor  or,  if John  Hancock
Signature Services,  Inc.  ("Signature  Services") is notified by the investor's
dealer  or the  investor  at the time of the  purchase,  the cost of the Class A
shares owned.
    

                                       33

<PAGE>

Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:

       

   
*        A Trustee or officer of the Trust; a Director or officer of the Adviser
         and  its   affiliates,   or  Selling   Brokers;   employees   or  sales
         representatives of any of the foregoing; retired officers, employees or
         Directors of any of the  foregoing;  a member of the  immediate  family
         (spouse,  children,  grandchildren,  mother, father,  sister,  brother,
         mother-in-law,  father-in-law,   daughter-in-law,   son-in-law,  niece,
         nephew,  grandparents  and same  sex  domestic  partner)  of any of the
         foregoing;  or any fund, pension,  profit sharing or other benefit plan
         for the individuals described above.
    

*        A  broker,   dealer,   financial  planner,   consultant  or  registered
         investment advisor that has entered into an agreement with John Hancock
         Funds  providing  specifically  for the use of Fund shares in fee-based
         investment products or services made available to their clients.

*        A former  participant  in an employee  benefit  plan with John  Hancock
         funds,  when he or she withdraws from his or her plan and transfers any
         or all of his or her plan distributions directly to the Fund.

*        A member of a class action lawsuit against insurance companies who is
         investing settlement proceeds.

       

*        Retirement plans participating in Merrill Lynch servicing programs, if
         the Plan has more than $3 million in assets or 500 eligible employees
         at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
         Service Agreement. See your Merrill Lynch financial consultant for
         further information.

   
*        Retirement plans investing through the PruArray Program sponsored by
         Prudential Securities.
    

*        Existing  full  service  clients  of the Life  Company  who were  group
         annuity  contract  holders as of  September  1, 1994,  and  participant
         directed  retirement plans with at least 100 eligible  employees at the
         inception of the Fund  account.  Each of these  investors  may purchase
         Class A shares with no initial sales charge. However, if the shares are
         redeemed  within 12 months after the end of the calendar  year in which
         the purchase was made, a CDSC will be imposed at the following rate:

         Amount Invested                                 CDSC Rate
         ---------------                                 ---------

         $1 to $4,999,999                                   1.00%
         Next $5 million to $9,999,999                      0.50%
         Amounts to $10 million and over                    0.25%

Class A shares  may  also be  purchased  without  an  initial  sales  charge  in
connection  with  certain  liquidation,   merger  or  acquisition   transactions
involving other investment companies or personal holding companies.

       

Combination  Privilege.  In calculating the sales charge applicable to purchases
of Class A shares  made at one time,  the  purchases  will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children

                                       34

<PAGE>

under the age of 21, purchasing  securities for his or their own account,  (b) a
trustee or other  fiduciary  purchasing for a single trust,  estate or fiduciary
account and (c) groups  which  qualify  for the Group  Investment  Program  (see
below).   Further  information  about  combined  purchases,   including  certain
restrictions on combined group purchases,  is available from Signature  Services
or a Selling Broker's representative.

   
Accumulation Privilege.  Investors (including investors combining purchases) who
are  already  Class A  shareholders  may also  obtain the benefit of the reduced
sales charge by taking into account not only the amount being  invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock  funds which carry a sales charge  already held by such person.  Class A
shares  of John  Hancock  money  market  funds  will  only be  eligible  for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater  than $1 million.  Retirement  plans
must notify Signature Services to utilize.
    

Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their  individual  purchases of Class A shares to
potentially  qualify for breakpoints in the sales charge schedule.  This feature
is  provided  to any  group  which (1) has been in  existence  for more than six
months,  (2) has a  legitimate  purpose  other than the  purchase of mutual fund
shares at a discount for its members,  (3) utilizes salary  deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.

   
Letter of Intention.  Reduced sales charges are also  applicable to  investments
pursuant to a Letter of Intention  (the "LOI"),  which should be read  carefully
prior to its execution by an investor. The Fund offers two options regarding the
specified  period for making  investments  under the LOI. All investors have the
option of making  their  investments  over a specified  period of thirteen  (13)
months.  Investors  who are using the Fund as a funding  medium for a retirement
plan, however,  may opt to make the necessary  investments called for by the LOI
over  a  forty-eight   (48)  month  period.   These   retirement  plans  include
Traditional,  Roth and Education IRAs, SEP, SARSEP,  401(k),  403(b)  (including
TSAs),  SIMPLE IRA, SIMPLE 401(k),  Money Purchase  Pension,  Profit Sharing and
Section 457 plans.  Non-qualified  and  retirement  plans  cannot be combined to
satisfy an LOI of 48 months.  Such an investment  (including  accumulations  and
combinations but not including  reinvested  dividends) must aggregate $50,000 or
more  invested  during the  specified  period from the date of the LOI or from a
date within ninety (90) days prior  thereto,  upon written  request to Signature
Services.  The sales charge  applicable to all amounts invested under the LOI is
computed as if the  aggregate  amount  intended to be invested had been invested
immediately.  If such aggregate amount is not actually invested,  the difference
in the sales charge  actually paid and the sales charge  payable had the LOI not
been in effect is due from the investor.  However,  for the  purchases  actually
made  within the  specified  period  (either 13 or 48 months)  the sales  charge
applicable  will not be higher  than that which  would have  applied  (including
accumulations  and  combinations)  had the LOI  been  for  the  amount  actually
invested.
    

The LOI  authorizes  Signature  Services  to hold in  escrow a number of Class A
shares  (approximately 5% of the aggregate) sufficient to make up any difference
in sales charges on the amount  intended to be invested and the amount  actually
invested,  until such investment is completed  within the specified  period,  at
which time the escrowed Class A shares will be released. If the total investment
specified in the LOI is not completed,  the Class A shares held in escrow may be

                                       35

<PAGE>

redeemed  and the  proceeds  used as required to pay such sales charge as may be
due. By signing the LOI, the investor  authorizes  Signature  Services to act as
his or her attorney-in-fact to redeem any escrowed Class A shares and adjust the
sales charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase,  or by the Fund to sell, any additional Class A shares and
may be terminated at any time.

   
Because Class Y shares are sold at net asset value without the imposition of any
sales charge, none of the privileges described under these captions is available
to Class Y investors, with the following exception:

Combination  Privilege.  As is explained in the Prospectus for Class Y shares, a
Class Y investor  may  qualify for the minimum  $1,000,000  investment  (or such
other  amount as may be  determined  by the Fund's  officers)  if the  aggregate
amount of his or her current and prior investments in Class Y shares of the Fund
and Class Y shares of any other John Hancock fund exceeds $1,000,000.
    

DEFERRED SALES CHARGE ON CLASS B SHARES

Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so that the Fund will receive the full
amount of the purchase payment.

Contingent  Deferred Sales Charge.  Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Class A and Class B Prospectus  as a percentage of
the dollar amount  subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the Class B shares  being  redeemed.  No CDSC will be  imposed on  increases  in
account value above the initial  purchase  prices,  including all shares derived
from reinvestment of dividends or capital gains distributions.

   
Class B shares are not available to full-service  retirement plans  administered
by  Signature  Services  or the Life  Company  that had more  than 100  eligible
employees at the inception of the Fund account.
    

The amount of the CDSC, if any, will vary  depending on the number of years from
the  time of  payment  for the  purchase  of Class B  shares  until  the time of
redemption  of such shares.  Solely for purposes of  determining  this number of
years,  all payments  during a month will be aggregated  and deemed to have been
made on the first day of the month.

In determining  whether a CDSC applies to a redemption,  the calculation will be
determined in a manner that results in the lowest  possible rate being  charged.
It will be assumed  that your  redemption  comes first from shares you have held
beyond  the  six-year  CDSC  redemption  period  or those you  acquired  through
dividend and capital gain  reinvestment,  and next from the shares you have held
the longest  during the six-year  period.  For this  purpose,  the amount of any
increase in a share's value above its initial  purchase price is not regarded as
a share exempt from CDSC.  Thus,  when a share that has  appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.

                                       36

<PAGE>

When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar  amount  requested.  If not  indicated,
only the  specified  dollar  amount will be redeemed  from your  account and the
proceeds will be less any applicable CDSC.

Example:

You have  purchased  100  shares at $10 per share.  The  second  year after your
purchase,  your  investment's  net asset value per share has  increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment.  If
you redeem 50 shares at this time your CDSC will be calculated as follows:

   oProceeds of 50 shares redeemed at $12 per shares (50 x 12)         $600.00
   o*Minus Appreciation ($12 - $10) x 100 shares                       (200.00)
   oMinus proceeds of 10 shares not subject to CDSC 
    (dividend reinvestment)                                            (120.00)
                                                                       -------
   oAmount subject to CDSC                                             $280.00

   *The appreciation is based on all 100 shares in the lot not just the 
    shares being redeemed.

Proceeds  from the CDSC are paid to John Hancock  Funds and are used in whole or
in part by John  Hancock  Funds to defray  its  expenses  related  to  providing
distribution-related  services  to the Fund in  connection  with the sale of the
Class B shares,  such as the payment of  compensation  to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service  fees  facilitates  the  ability  of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase.

Waiver  of  Contingent  Deferred  Sales  Charge.  The  CDSC  will be  waived  on
redemptions  of Class B shares and of Class A shares  that are  subject to CDSC,
unless indicated otherwise, in the circumstances defined below:

For all account types:

*        Redemptions made pursuant to the Fund's right to liquidate your account
         if you own shares worth less than $1,000.

*        Redemptions  made  under  certain  liquidation,  merger or  acquisition
         transactions  involving other investment  companies or personal holding
         companies.

   
*        Redemptions due to death or disability. (Does not apply to Trust
         accounts unless trust is being dissolved.)
    

*        Redemptions made under the Reinstatement Privilege, as described in
         "Sales Charge Reductions and Waivers" in the Prospectus.

   
*        Redemptions where the proceeds are used to purchase a John Hancock
         Declaration Variable Annuity.

*        Redemptions of Class B shares made under a periodic withdrawal plan, or
         redemptions  for  fees  charged  by  planners,  advisors  for  advisory
         services,  as long as your annual redemptions do not exceed 12% of your
         account  value,  including  reinvested  dividends,   at  the  time  you
         established  your  periodic  withdrawal  plan  and 12% of the  value of

                                       37

<PAGE>

         subsequent  investments (less  redemptions) in that account at the time
         you notify Signature  Services.  (Please note that this waiver does not
         apply to periodic  withdrawal  plan  redemptions of Class A shares that
         are subject to a CDSC.)
    

*        Redemptions  by  Retirement   plans   participating  in  Merrill  Lynch
         servicing  programs,  if the Plan has less than $3 million in assets or
         500 eligible  employees at the date the Plan Sponsor  signs the Merrill
         Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
         consultant for further information.

*        Redemptions of Class A shares by retirement plans that invested through
         the PruArray Program sponsored by Prudential Securities.

   
For Retirement  Accounts (such as Traditional,  Roth and Education IRAs,  SIMPLE
IRA,  SIMPLE  401(k),  Rollover IRA, TSA, 457,  403(b),  401(k),  Money Purchase
Pension Plan,  Profit-Sharing  Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
    

*        Redemptions made to effect mandatory or life expectancy distributions
         under the Internal Revenue Code.

*        Returns of excess contributions made to these plans.

*        Redemptions   made  to  effect   distributions   to   participants   or
         beneficiaries  from employer  sponsored  retirement plans under Section
         401(a)  of the Code  (such as  401(k),  Money  Purchase  Pension  Plan,
         Profit-Sharing Plan).

*        Redemptions from certain IRA and retirement plans that purchased shares
         prior to October 1, 1992 and  certain IRA plans that  purchased  shares
         prior to May 15, 1995.

Please see matrix for reference.

                                       38

<PAGE>

   
CDSC Waiver Matrix for Class B.
    

<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
<S>                   <C>                <C>               <C>              <C>              <C>
Type of               401 (a) Plan       403 (b)           457              IRA, IRA         Non-retirement
Distribution          (401 (k), MPP,                                        Rollover
                      PSP)
- --------------------------------------------------------------------------------------------------------------
Death or Disability   Waived             Waived            Waived           Waived           Waived

- --------------------------------------------------------------------------------------------------------------
Over 70 1/2           Waived             Waived            Waived           Waived for       12% of account
                                                                            mandatory        value annually
                                                                            distributions    in periodic
                                                                            or 12% of        payments
                                                                            account value
                                                                            annually in
                                                                            periodic
                                                                            payments
- --------------------------------------------------------------------------------------------------------------
Between 59 1/2 and      Waived             Waived            Waived         Waived for       12% of account
70 1/2                                                                      Life             value annually
                                                                            Expectancy or    in periodic
                                                                            12% of account   payments
                                                                            value annually
                                                                            in periodic
                                                                            payments
- --------------------------------------------------------------------------------------------------------------
Under 59 1/2          Waived for         Waived for        Waived for       Waived for       12% of account
                      annuity payments   annuity           annuity          annuity          value annually
                      (72t) or 12% of    payments (72t)    payments (72t)   payments (72t)   in periodic
                      account value      or 12% of         or 12% of        or 12% of        payments
                      annually in        account value     account value    account value
                      periodic payments  annually in       annually in      annually in
                                         periodic          periodic         periodic
                                         payments          payments         payments
- --------------------------------------------------------------------------------------------------------------
Loans                 Waived             Waived            N/A              N/A              N/A
- --------------------------------------------------------------------------------------------------------------
Termination of Plan   Not Waived         Not Waived        Not Waived       Not Waived       N/A
- --------------------------------------------------------------------------------------------------------------
Hardships             Waived             Waived            Waived           N/A              N/A
- --------------------------------------------------------------------------------------------------------------
Return of Excess      Waived             Waived            Waived           Waived           N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>

If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.

SPECIAL REDEMPTIONS

Although  it  would  not  normally  do so,  the  Fund  has the  right to pay the
redemption  price  of  shares  of the  Fund in  whole  or in  part in  portfolio
securities as prescribed by the Trustees.  When the shareholder  sells portfolio
securities  received in this  fashion,  the  shareholder  will incur a brokerage
charge.  Any such  securities  would be valued for the  purposes  of making such
payment at the same value as used in determining net asset value.  The Fund has,
however,  elected to be governed by Rule 18f-1 under the Investment Company Act.

                                       39

<PAGE>

Under that rule,  the Fund must  redeem its shares for cash except to the extent
that the redemption  payments to any shareholder  during any 90-day period would
exceed  the  lesser of  $250,000  or 1% of the  Fund's  net  asset  value at the
beginning of such period.

ADDITIONAL SERVICES AND PROGRAMS

Exchange Privilege.  The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.

Exchanges  between funds with shares that are not subject to a CDSC are based on
their  respective  net asset values.  No sales charge or  transaction  charge is
imposed.  Shares of the Fund which are subject to a CDSC may be  exchanged  into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however,  the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's  CDSC  schedule).  For  purposes  of  computing  the  CDSC  payable  upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.

If a shareholder  exchanges  Class B shares  purchased  prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired  shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.

The Fund  reserves the right to require that  previously  exchanged  shares (and
reinvested  dividends)  be in the  Fund  for 90 days  before  a  shareholder  is
permitted a new exchange.

The Fund may  refuse  any  exchange  order.  The Fund may  change or cancel  its
exchange policies at any time, upon 60 days' notice to its shareholders.

An exchange of shares is treated as a  redemption  of shares of one fund and the
purchase of shares of another for Federal  Income Tax purposes.  An exchange may
result in a taxable gain or loss. See "TAX STATUS".

Systematic  Withdrawal Plan. The Fund permits the  establishment of a Systematic
Withdrawal  Plan.  Payments under this plan represent  proceeds arising from the
redemption  of Fund shares which may result in  realization  of gain or loss for
purposes  of  Federal,  state and  local  income  taxes.  The  maintenance  of a
Systematic  Withdrawal Plan concurrently with purchases of additional Class A or
Class B shares of the Fund could be disadvantageous to a shareholder  because of
the initial  sales  charge  payable on such  purchases of Class A shares and the
CDSC  imposed on  redemptions  of Class B shares  and  because  redemptions  are
taxable events. Therefore, a shareholder should not purchase Class A and Class B
shares at the same time a  Systematic  Withdrawal  Plan is in  effect.  The Fund
reserves the right to modify or discontinue  the Systematic  Withdrawal  Plan of
any  shareholder  on 30 days' prior written  notice to such  shareholder,  or to
discontinue  the  availability  of such plan in the future.  The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.


                                       40
<PAGE>

Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:

The investments will be drawn on or about the day of the month indicated.

The privilege of making investments through the MAAP may be revoked by Signature
Services  without  prior  notice  if  any  investment  is  not  honored  by  the
shareholder's  bank.  The  bank  shall  be under no  obligation  to  notify  the
shareholder as to the non-payment of any checks.

The program may be discontinued by the shareholder  either by calling  Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the processing date of any investment.

Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of  redemption,  reinvest  without  payment of a sales charge any
part of the  redemption  proceeds  in  shares  of the same  class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds  from the  redemption  of Class A shares may be  reinvested  at net
asset value  without  paying a sales  charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional  shares  of the  class  from  which  the  redemption  was  made.  The
shareholder's  account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The  holding  period of the  shares  acquired  through  reinvestment  will,  for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.

To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment  privilege  of any parties  that,  in the opinion of the Fund,  are
using market timing  strategies or making more than seven exchanges per owner or
controlling  party per calendar year. Also, the Fund may refuse any reinvestment
request.

The Fund may change or cancel its reinvestment policies at any time.

A  redemption  or exchange of Fund shares is a taxable  transaction  for Federal
income tax purposes even if the  reinvestment  privilege is  exercised,  and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."

Retirement plans participating in Merrill Lynch's servicing programs:

Class A shares  are  available  at net asset  value for plans with $3 million in
plan assets or 500 eligible  employees  at the date the Plan  Sponsor  signs the
Merrill Lynch Recordkeeping Service Agreement.  If the plan does not meet either
of these limits, Class A shares are not available.

For  participating  retirement  plans  investing in Class B shares,  shares will
convert  to Class A shares  after  eight  years,  or sooner if the plan  attains
assets of $5 million (by means of a CDSC-free  redemption/purchase  at net asset
value).

                                       41

<PAGE>

DESCRIPTION OF THE FUND'S SHARES

   
The Trustees of the Fund are  responsible  for the management and supervision of
the Fund.  The  Declaration  of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial  interest of the Fund without
par value.  Under the  Declaration of Trust,  the Trustees have the authority to
create and classify shares of beneficial  interest in separate  series,  without
further action by  shareholders.  As of the date of this Statement of Additional
Information,  the Trustees have not authorized any additional  series other than
the Fund,  although they may do so in the future.  The Declaration of Trust also
authorizes  the Trustees to classify and  reclassify  the shares of the Fund, or
any new  series of the Fund,  into one or more  classes.  As of the date of this
Statement of Additional  Information,  the Trustees have authorized the issuance
of three  classes  of shares of the Fund,  designated  as Class A,  Class B, and
Class Y.

The shares of each class of the Fund represent an equal  proportionate  interest
in the aggregate net assets  attributable to that class of the Fund.  Holders of
Class A shares,  Class B and Class Y shares have certain exclusive voting rights
on matters  relating  to their  respective  distribution  plans.  The  different
classes of the Fund may bear different  expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.

Class Y shares of the Fund are offered only to certain  institutional  investors
as described  in the Fund's  Prospectuses.  Some  individual  investors  who are
currently  eligible  to  purchase  Class  A and  Class  B  shares  may  also  be
participants in  "participant-directed  plans" (as defined in the  Prospectuses)
that are eligible to purchase Class Y shares.  The different classes of the Fund
may bear different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.

Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner,  at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution  and  service  fees  relating to Class A and Class B shares will be
borne   exclusively  by  that  class;  (ii)  Class  B  shares  will  pay  higher
distribution  and  service  fees than  Class A shares and (iii) each of Class A,
Class B and Class Y shares will bear any class  expenses  properly  allocable to
that class of shares,  subject to the  conditions the Internal  Revenue  Service
imposes with respect to the multiple-class structures.  Similarly, the net asset
value per share may vary  depending  whether Class A shares,  Class B or Class Y
shares  are  purchased.  No  interest  will  be  paid on  uncashed  dividend  or
redemption checks.
    

In the event of liquidation,  shareholders are entitled to share pro rata in the
net assets of the Fund available for distribution to such  shareholders.  Shares
entitle their holders to one vote per share, are freely transferable and have no
preemptive,  subscription or conversion  rights.  When issued,  shares are fully
paid and non-assessable by the Fund, except as set forth below.

Unless  otherwise  required by the Investment  Company Act or the Declaration of
Trust,  the Fund has no intention of holding  annual  meetings of  shareholders.
Fund  shareholders  may  remove a Trustee  by the  affirmative  vote of at least
two-thirds of the Fund's outstanding shares and the Trustees shall promptly call
a meeting  for such  purpose  when  requested  to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Fund. Shareholders
may,  under  certain  circumstances,  communicate  with  other  shareholders  in

                                       42

<PAGE>

connection with a request for a special meeting of shareholders. However, at any
time that less than a majority of the  Trustees  holding  office were elected by
the  shareholders,  the Trustees will call a special meeting of shareholders for
the purpose of electing Trustees.

Under Massachusetts law,  shareholders of a Massachusetts  business trust could,
under certain  circumstances,  be held personally liable for acts or obligations
of the Fund.  However,  the  Fund's  Declaration  of Trust  contains  an express
disclaimer of  shareholder  liability for acts,  obligations  and affairs of the
Fund.  The  Declaration  of Trust also provides for  indemnification  out of the
Fund's  assets for all losses and expenses of any  shareholder  held  personally
liable by reason of being or having  been a  shareholder.  Furthermore,  no Fund
included in this Fund's  prospectus  shall be liable for the  liabilities of any
other John Hancock  Fund.  Liability is therefore  limited to  circumstances  in
which  the  Fund  itself  would  be  unable  to meet  its  obligations,  and the
possibility of this occurrence is remote.

   
The Fund reserves the right to reject any  application  which conflicts with the
Fund's  internal  policies or the  policies of any  regulatory  authority.  John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a  redemption  was made or dividend  paid.  Information
provided  on the  account  application  may be used by the  Fund to  verify  the
accuracy of the information or for background or financial history  purposes.  A
joint  account  will  be   administered   as  a  joint  tenancy  with  right  of
survivorship,  unless the joint owners notify Signature  Services of a different
intent.  A shareholder's  account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller,  such as asking for name,  account number,
Social Security or other taxpayer ID numbers and other relevant information.  If
appropriate  measures are taken,  the transfer agent is not  responsible for any
losses that may occur to any account due to an unauthorized telephone call.
    

TAX STATUS

The Fund has qualified as a "regulated investment company" under Subchapter M of
the Internal  Revenue  Code of 1986,  as amended  (the  "Code"),  and intends to
continue to so qualify for each taxable year. As such and by complying  with the
applicable  provisions  of the Code  regarding  the sources of its  income,  the
timing of its  distributions,  and the  diversification  of its assets, the Fund
will not be subject to Federal income tax on its taxable  income  (including net
realized  capital gains) which is distributed to shareholders in accordance with
the timing requirements of the Code.

The Fund will be subject  to a 4%  nondeductible  Federal  excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance  with annual  minimum  distribution  requirements.  The Fund
intends under normal  circumstances  to seek to avoid or minimize  liability for
such tax by satisfying such distribution requirements.

Distributions  from the  Fund's  current or  accumulated  earnings  and  profits
("E&P") will be taxable  under the Code for investors who are subject to tax. If
these  distributions  are  paid  from the  Fund's  "investment  company  taxable
income," they will be taxable as ordinary income;  and if they are paid from the
Fund's "net capital  gain," they will be taxable as capital  gain.  (Net capital
gain is the excess (if any) of net  long-term  capital gain over net  short-term
capital loss,  and investment  company  taxable income is all taxable income and
capital  gains,  other than those  gains and losses  included in  computing  net
capital gain,  after  reduction by deductible  expenses.) As a result of federal
tax legislation enacted on August 5, 1997 (the "Act"), gain recognized after May
6, 1997 from the sale of a capital asset is taxable to individual (noncorporate)

                                       43

<PAGE>

investors at different  maximum  federal income tax rates,  depending  generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer,  and the dates  the  asset was  acquired  and/or  sold.  The  Treasury
Department  has  issued  guidance  under the Act that  enables  the Fund to pass
through to its  shareholders  the benefits of the capital gains rates enacted in
the Act.  Shareholders  should  consult  their own tax  advisers  on the correct
application  of  these  new  rules  in  their  particular  circumstances.   Some
distributions  may be paid in January but may be taxable to  shareholders  as if
they had been  received on December 31 of the previous  year.  The tax treatment
described above will apply without regard to whether  distributions are received
in cash or reinvested in additional shares of the Fund.

Distributions,  if any,  in excess of E&P will  constitute  a return of  capital
under the Code, which will first reduce an investor's  federal tax basis in Fund
shares and then, to the extent such basis is exceeded,  will generally give rise
to capital gains.  Shareholders who have chosen automatic  reinvestment of their
distributions  will have a federal tax basis in each share received  pursuant to
such a  reinvestment  equal to the amount of cash they would have  received  had
they  elected  to receive  the  distribution  in cash,  divided by the number of
shares received in the reinvestment.

The amount of the Fund's net realized  capital gains,  if any, in any given year
will vary  depending  upon the  current  investment  strategy of the Adviser and
Subadviser and whether the Adviser and Subadviser  believes it to be in the best
interest  of the Fund to  dispose  of  portfolio  securities  and/or  engage  in
options, futures, forward transactions or derivatives that will generate capital
gains.  At the time of an investor's  purchase of Fund shares,  a portion of the
purchase price is often  attributable to realized or unrealized  appreciation in
the Fund's portfolio or undistributed  taxable income of the Fund.  Consequently
subsequent distributions on those 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  in reality  represent a portion of the purchase
price.

Upon a  redemption  or other  disposition  of shares of the Fund  (including  by
exercise of the exchange  privilege) in a transaction  that is treated as a sale
for tax  purposes,  a shareholder  may realize a taxable gain or loss  depending
upon the amount of the proceeds  and the  investor's  basis in his shares.  Such
gain or loss will be treated as capital  gain or loss if the shares are  capital
assets in the  shareholder's  hands.  A sales charge paid in purchasing  Class A
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the  redemption or exchange of such shares within 90 days after their
purchase to the extent  Class A shares of the Fund or another  John Hancock fund
are  subsequently  acquired  without  payment of a sales charge  pursuant to the
reinvestment or exchange  privilege.  This disregarded  charge will result in an
increase  in the  shareholder's  tax  basis in the  Class A shares  subsequently
acquired.  Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares  disposed of are replaced with other shares of the Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to automatic dividend reinvestments. In
such a case,  the basis of the shares  acquired  will be adjusted to reflect the
disallowed  loss.  Any loss  realized  upon the  redemption of shares with a tax
holding period of six months or less 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.  Shareholders should consult their own tax advisers
regarding their particular  circumstances to determine  whether a disposition of

                                       44

<PAGE>

Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing  discussion.  Also,  future  Treasury  Department  guidance  issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various  periods,  including  the  treatment of
losses  on  the  sales  of  shares   held  for  six  months  or  less  that  are
recharacterized as long-term capital losses, as described above.

Although its present  intention is to  distribute,  at least  annually,  all net
capital  gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess,  as computed for Federal income tax purposes,  of net
long-term  capital gain over net  short-term  capital loss in any year. The Fund
will not in any event  distribute  net capital gain  realized in any year to the
extent that a capital  loss is carried  forward  from prior years  against  such
gain.  To  the  extent  such  excess  was  retained  and  not  exhausted  by the
carryforward  of prior  years'  capital  losses,  it would be subject to Federal
income tax in the hands of the Fund.  Upon proper  designation of this amount by
the Fund, each  shareholder  would be treated for Federal income tax purposes as
if the Fund had  distributed  to him on the last day of its taxable year his pro
rata share of such excess,  and he had paid his pro rata share of the taxes paid
by the  Fund  and  reinvested  the  remainder  in the  Fund.  Accordingly,  each
shareholder  would (a) include his pro rata share of such excess as capital gain
in his return for his taxable  year in which the last day of the Fund's  taxable
year falls,  (b) be  entitled  either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the  difference
between his pro rata share of such excess and his pro rata share of such taxes.

For Federal  income tax  purposes,  the Fund is permitted to carry forward a net
realized  capital loss in any year to offset net capital gains,  if any,  during
the eight years  following  the year of the loss. To the extent  subsequent  net
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above,  would not be distributed as such
to shareholders. The Fund has $12,225,234 of capital loss carryforward available
to the extent  provided by  regulations  to offset  future net realized  capital
gains. The carryforward expires October 31, 2004.

Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement  distributions and certain
prohibited  transactions,  is  accorded  to  accounts  maintained  as  qualified
retirement  plans.  Shareholders  should  consult  their tax  advisers  for more
information.

For purposes of the  dividends-received  deduction  available  to  corporations,
dividends  received by the Fund,  if any,  from U.S.  domestic  corporations  in
respect of the stock of such  corporations  held by the Fund,  for U.S.  Federal
income  tax  purposes,  for at least  46 days  (91  days in the case of  certain
preferred  stock)  during a prescribed  period  extending  before and after each
dividend and distributed  and properly  designated by the Fund may be treated as
qualifying  dividends.  Corporate  shareholders  must  meet the  holding  period
requirements  stated  above with  respect  to their  shares of the Fund for each
dividend in order to qualify for the  deduction  and, if they have any debt that
is deemed under the Code directly  attributable to Fund shares,  may be denied a
portion of the dividends  received  deduction.  The entire qualifying  dividend,
including the  otherwise-deductible  amount, will be included in determining the
excess (if any) of a corporate  shareholder's adjusted current earnings over its
alternative  minimum taxable income,  which may increase its alternative minimum
tax liability.  Additionally,  any corporate  shareholder should consult its tax
adviser  regarding the possibility  that its basis in its shares may be reduced,

                                       45

<PAGE>

for Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares and, to the extent such basis would be reduced  below
zero, that current recognition of income would be required.

If the Fund  invests  in stock  (including  an  option  to  acquire  stock as is
inherent in a convertible bond) of 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 gain) or hold at least 50% of
their assets in  investments  producing such passive  income  ("passive  foreign
investment  companies"),  the Fund could be  subject  to federal  income tax and
additional  interest  charges  on  "excess  distributions"  received  from  such
companies or gain from the sale 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 be  available  to  ameliorate  these
adverse tax consequences, but could require the Fund to recognize taxable income
or gain without the concurrent  receipt of cash.  These  investments  could also
result in the treatment of associated capital gains as ordinary income. The Fund
may limit and/or manage its holdings in passive foreign investment  companies or
make an available  election to minimize its tax liability or maximize its return
from these investments.

Foreign  exchange  gains and  losses  realized  by the Fund in  connection  with
certain  transactions  involving foreign  currency-denominated  debt securities,
foreign  currency  forward  contracts,   foreign  currencies,   or  payables  or
receivables  denominated  in foreign  currency are subject to Section 988 of the
Code,  which  generally  causes  such gains and losses to be treated as ordinary
income  and  losses  and  may  affect  the  amount,   timing  and  character  of
distributions to shareholders.  Transactions in foreign  currencies that are not
directly-related  to the Fund's  investment  in stock or  securities,  including
speculative  currency positions could under future Treasury  regulations produce
income  not among  the types of  "qualifying  income"  from  which the Fund must
derive  at least 90% of its  gross  income  for each  taxable  year.  If the net
foreign exchange loss for a year treated as ordinary loss under Section 988 were
to exceed the Fund's  investment  company taxable income computed without regard
to such loss,  the  resulting  overall  ordinary loss for such year would not be
deductible by the Fund or its shareholders in future years.

Limitations imposed by the Code on regulated  investment companies like the Fund
may  restrict  the Fund's  ability to enter into  options and  futures,  foreign
currency positions and foreign currency forward contracts.

Certain options,  futures and forward foreign currency  contracts  undertaken by
the Fund may cause the Fund to recognize  gains or losses from marking to market
even  though  its  positions  have not been sold or  terminated  and  affect the
character  as  long-term  or  short-term  (or,  in the case of foreign  currency
contracts,  as  ordinary  income or loss) and timing of some  capital  gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option,  short sale or other transaction is treated as
a  constructive  sale  of  an  appreciated  financial  position  in  the  Fund's
portfolio.  Also,  certain of the Fund's  losses on its  transactions  involving
options, futures or forward contracts,  and/or offsetting or successor portfolio
positions  may be deferred  rather than being taken into  account  currently  in
calculating the Fund's taxable income or gains. These transactions may therefore
affect  the  amount,  timing  and  character  of  the  Fund's  distributions  to
shareholders. Certain of such transactions may also cause the Fund to dispose of
investments  sooner than would otherwise have occurred.  The Fund will take into

                                       46

<PAGE>

account  the  special  tax rules  applicable  to  options,  futures  or  forward
contracts,  including  consideration of available elections, in order to seek to
minimize any potential adverse tax consequences.

The Fund may be  subject  to  withholding  and other  taxes  imposed  by foreign
countries  with  respect  to its  investments  in foreign  securities.  Some tax
conventions  between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes  ("qualified
foreign taxes"),  paid by the Fund subject to certain provisions and limitations
contained in the Code,  if the Fund so elects.  If more than 50% of the value of
the Fund's total  assets at the close of any taxable  year  consists of stock or
securities  of  foreign  corporations,  the Fund may file an  election  with the
Internal  Revenue  Service  pursuant to which  shareholders  of the Fund will be
required  to (i)  include  in  ordinary  gross  income (in  addition  to taxable
dividends  and  distributions  actually  received)  their  pro  rata  shares  of
qualified  foreign  taxes paid by the Fund even though not actually  received by
them,  and (ii) treat such  respective  pro rata  portions as qualified  foreign
taxes paid by them.

If the Fund makes this  election,  shareholders  may then  deduct  such pro rata
portions of qualified  foreign  taxes in computing  their taxable  incomes,  or,
alternatively,   use  them  as  foreign  tax  credits,   subject  to  applicable
limitations,  against their U.S.  Federal income taxes.  Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct  their pro rata  portion  of  qualified  foreign  taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross  income.  Shareholders  who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends  received from the Fund as
a separate  category of income for purposes of computing the  limitations on the
foreign tax credit.  Tax-exempt  shareholders  will  ordinarily not benefit from
this  election.  Each year (if any) that the Fund files the  election  described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified  foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. If the Fund
does not satisfy the 50% requirement  described above or otherwise does not make
the election,  the Fund will deduct the foreign taxes it pays in determining the
amount it has available for distribution to shareholders,  and shareholders will
not include these  foreign  taxes in their income,  nor will they be entitled to
any tax deductions or credits with respect to such taxes.

The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market  discount,  if the Fund  elects  to  include  market  discount  in income
currently) prior to the receipt of the corresponding cash payments.  The mark to
market or  constructive  sale  rules  applicable  to certain  options,  futures,
forwards,  short  sales  or other  transactions  may  also  require  the Fund to
recognize  income or gain  without a concurrent  receipt of cash.  Additionally,
some countries  restrict  repatriation which may make it difficult or impossible
for the Fund to obtain  cash  corresponding  to its  earnings or assets in those
countries.  However,  the Fund must distribute to shareholders  for each taxable
year  substantially all of its net income and net capital gains,  including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under  disadvantageous  circumstances to generate cash,
or borrow the cash to satisfy these distribution requirements.

                                       47

<PAGE>

A state  income (and  possibly  local income  and/or  intangible  property)  tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible  property taxes, the
value of its assets is  attributable  to) certain U.S.  Government  obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting  requirements are satisfied.  The Fund will not seek to satisfy
any  threshold or reporting  requirements  that may apply in  particular  taxing
jurisdictions,   although  it  may  in  its  sole  discretion  provide  relevant
information to shareholders.

The Fund will be required to report to the Internal  Revenue Service (the "IRS")
all taxable  distributions to  shareholders,  as well as gross proceeds from the
redemption  or exchange  of Fund  shares,  except in the case of certain  exempt
recipients,  i.e.,  corporations  and certain other investors  distributions  to
which are exempt from the information  reporting  provisions of the Code.  Under
the backup withholding  provisions of Code Section 3406 and applicable  Treasury
regulations,  all such reportable  distributions  and proceeds may be subject to
backup  withholding  of  federal  income  tax at the  rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain  certifications  required by the IRS or if the
IRS or a broker  notifies the Fund that the number  furnished by the shareholder
is  incorrect  or that the  shareholder  is subject to backup  withholding  as a
result of failure to report interest or dividend income.  The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or  certification  that the number  provided  is  correct.  If the backup
withholding  provisions are  applicable,  any such  distributions  and proceeds,
whether taken in cash or  reinvested  in shares,  will be reduced by the amounts
required  to be  withheld.  Any  amounts  withheld  may be  credited  against  a
shareholder's U.S. federal income tax liability.  Investors should consult their
tax advisers about the applicability of the backup withholding provisions.

Non-U.S. investors not engaged in a U.S. trade or business with which their Fund
investment is effectively  connected will be subject to U.S.  Federal income tax
treatment that is different from that described  above.  These  investors may be
subject to  non-resident  alien  withholding  tax at the rate of 30% (or a lower
rate under an applicable  tax treaty) on amounts  treated as ordinary  dividends
from the Fund and, unless an affective IRS Form W-8 or authorized substitute for
Form W-8 is on file,  31% backup  withholding on certain other payments from the
Fund.  Non-U.S.  investors  should  consult  their tax advisers  regarding  such
treatment and the application of foreign taxes to an investment in the Fund.

The Fund is not subject to  Massachusetts  corporate  excise or franchise taxes.
The Fund  anticipates  that,  provided  that the Fund  qualifies  as a regulated
investment  company  under  the  Code,  it  will  also  not be  required  to pay
Massachusetts income tax.

The  foregoing  discussion  relates  solely to U.S.  Federal  income  tax law as
applicable to U.S. persons (i.e.,  U.S.  citizens or residents and U.S. domestic
corporations,  partnerships,  trusts or estates)  subject to tax under such law.
The discussion does not address special tax rules  applicable to certain classes
of investors,  such as tax-exempt  entities,  insurance  companies and financial
institutions.  Dividends, capital gain distributions,  and ownership of or gains
realized on the  redemption  (including  an  exchange) of shares of the Fund may
also be subject to state and local taxes.  Shareholders should consult their own
tax advisers as to the Federal, state or local tax consequences of ownership of,
and  receipt  of  distribution  from,  shares  of the Fund in  their  particular
circumstances.

                                       48

<PAGE>

CALCULATION OF PERFORMANCE

The average  annual total return on Class A shares of the Fund for the 1 year, 5
year and 10 year periods ended October 31, 1997 was 1.93%,  18.51%,  and 20.45%,
respectively.


   
The  average  annual  total  return on Class B shares of the Fund for the 1 year
ended  October  31,  1997 and  since  inception  on March 1,  1993 was 1.51% and
17.19%,  respectively.  The average annual total return on Class Y shares of the
Fund for the 1 year and  since  inception  on  September  1,  1993 was 7.83% and
15.74%, respectively.
    

The Fund's  total  return is computed by finding the average  annual  compounded
rate of return over the 1 year, 5 year and 10 year periods that would equate the
initial  amount  invested  to  the  ending  redeemable  value  according  to the
following formula:

                                n ______
                           T = \ /ERV/P - 1

Where:

P =   a hypothetical initial investment of $1,000.
T =   average annual total return.
n =   number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
      beginning of the 1 year, 5 year and 10 year periods.

Because each class has its own sales charge and fee structures, the classes have
different  performance  results.  In the case of Class A or Class B shares, this
calculation  assumes  the  maximum  sales  charge  is  included  in the  initial
investment  or the CDSC  applied at the end of the  period,  respectively.  This
calculation  assumes that all dividends and  distributions are reinvested at net
asset value on the reinvestment dates during the period. The "distribution rate"
is determined by  annualizing  the result of dividing the declared  dividends of
the Fund  during the period  stated by the maximum  offering  price or net asset
value at the end of the  period.  Excluding  the Fund's  sales  charge  from the
distribution rate produces a higher rate.

In addition to average  annual total returns,  the Fund may quote  unaveraged or
cumulative total returns  reflecting the simple change in value of an investment
over a stated period.  Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single  investment,  a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without  taking the Fund's  sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Fund's sales charge on
Class A shares and the CDSC on Class B shares  from a total  return  calculation
produces a higher total return figure.

The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment  income per share  determined for a 30-day period by the
maximum  offering price per share (which  includes the full sales charge) on the
last day of the period, according to the following standard formula:

                                       49

<PAGE>
                          a - b
                          ___       6
          Yield = 2 ( [ ( cd ) +1 ] - 1



Where:

         a =      dividends and interest earned during the period.
         b =      net expenses accrued during the period.
         c =      the average daily number of fund shares outstanding during
                  the period that would be entitled to receive dividends.
         d =      the maximum  offering price per share on the last day of the
                  period (NAV where applicable).

From time to time,  in reports  and  promotional  literature,  the Fund's  total
return  will be ranked or  compared  to indices  of mutual  funds such as Lipper
Analytical  Services,  Inc.'s "Lipper -Mutual  Performance  Analysis," a monthly
publication  which tracks net assets,  total return,  and yield on equity 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 national  financial
publications  such as Money  Magazine,  Forbes,  Business  Week, The Wall Street
Journal,  Micropal,  Inc.  Morningstar,  Barron's,  and  Stanger'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 risks 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.

BROKERAGE ALLOCATION

Decisions  concerning the purchase and sale of portfolio  securities of the Fund
and the  allocation  of  brokerage  commission  are made by officers of the Fund
pursuant to  recommendations  made by an  investment  committee  of the Adviser,
which  consists of officers  and  directors  of the  Adviser  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 officers of
the Fund,  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 maker reflect a "spread." Debt securities are generally traded

                                       50

<PAGE>

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. and in some other countries,  debt securities are traded principally
in the  over-the-counter  market on a net basis through dealers acting for their
own  account  and not as  brokers.  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.  Consistent with the foregoing  primary  policy,  the
Rules of Fair Practice of the National  Association of Securities Dealers,  Inc.
and such other  policies  as the  Trustees  may  determine,  the Adviser and the
Subadviser may consider sales of shares of the Fund as a factor in the selection
of broker-dealers to execute the Fund's portfolio transactions.

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  the
Subadviser  of the  Fund  and  their  value  and  expected  contribution  to the
performance  of the  Fund.  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 and Subadviser.  The
receipt of research  information  is not  expected to reduce  significantly  the
expenses  of the  Adviser  and the  Subadviser.  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.
Similarly,  research  information  and assistance  provided to the Subadviser by
brokers and dealers may benefit  other  advisory  clients or  affiliates  of the
Subadviser.  The Fund will make no commitment to allocate portfolio transactions
upon any prescribed  basis.  While the Adviser's  together with the Subadviser'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 will at all times be subject to review
by the Trustees. For the years ended on October 31, 1997, 1996 and 1995 the Fund
paid negotiated brokerage commissions of $1,279,921,  $1,298,680,  and $468,191,
respectively.

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 Trustees that such price is reasonable in light
of the  services  provided  and to such  policies as the Trustees may adopt from
time to time.  During the fiscal  year ended  October  31,  1997,  the Fund paid
$158,888 in  commissions  to  compensate  brokers for research  services such as
industry and company reviews and evaluations of the securities.

                                       51

<PAGE>

The  Adviser's  indirect  parent,  the  Life  Company,   is  the  indirect  sole
shareholder of John Hancock Distributors,  Inc. broker-dealers  ("Distributor s"
or "Affiliated Broker").  Pursuant to procedures established by the Trustees and
consistent  with the above  policy of obtaining  best net results,  the Fund may
execute portfolio  transactions with or through  Affiliated  Broker.  During the
year ended October 31, 1997, the Fund did not execute any portfolio transactions
with Affiliated Broker.

Distributors 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 Investment Company 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  Investment  Company
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
includes 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.  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.

TRANSFER AGENT SERVICES

   
John Hancock Signature  Services,  Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000,  a wholly-owned  indirect  subsidiary of the Life Company, is the
transfer  and  dividend  paying  agent  for the Fund.  The Fund  pays  Signature
Services an annual fee of $19.00 for each Class A  shareholder  account,  $21.50
for each Class B  shareholder  account and 0.10% of the average daily net assets
attributable to the Class Y shares, plus certain out-of-pocket expenses.
    

CUSTODY OF PORTFOLIO

Portfolio  securities  of the Fund are held  pursuant to a  custodian  agreement
between the Fund and  Investors  Bank & Trust  Company,  200  Clarendon  Street,
Boston,  Massachusetts  02116. Under the custodian  agreement,  Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.

                                       52
<PAGE>


INDEPENDENT AUDITORS

The  independent  auditors  of the Fund are  Ernst & Young  LLP,  200  Clarendon
Street,  Boston,  Massachusetts  02116.  Ernst & Young LLP audits and renders an
opinion on the Fund's annual financial statements and prepares the Fund's annual
Federal income tax return.


                                       53

<PAGE>


APPENDIX A

RATINGS

Bonds.

Standard & Poor's 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.

To provide more detailed  indications of credit  quality,  the ratings AA to BBB
may be  modified  by the  addition  of a plus or  minus  sign  to show  relative
standing within the major rating categories.

A provisional rating,  indicated by "p" following a rating, is sometimes used by
Standard & Poor's.  It assumes the  successful  completion  of the project being
financed by the issuance of the bonds being rated and indicates  that payment of
debt service  requirements is largely or entirely  dependent upon the successful
and timely  completion of the project.  This rating,  however,  while addressing
credit quality subsequent to completion,  makes no comment on the likelihood of,
or the risk of default upon failure of, such completion.

Moody's 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.  Generally speaking, the safety of
obligations of this class is so absolute that with the  occasional  exception of
oversupply in a few specific instances,  characteristically,  their market value
is affected solely by money market fluctuations.

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  fluctuation 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.  The market
value of Aa bonds is virtually immune to all but money market  influences,  with
the occasional exception of oversupply in a few specific instances.

                                      A-1

<PAGE>

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 sometime 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.

Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier
1 indicates that the security  ranks at the high end, 2 in the mid-range,  and 3
nearer the low end, of the generic  category.  These modifiers of rating symbols
Aa, A and Baa are to give  investors a more precise  indication of relative debt
quality in each of the historically defined categories.

Conditional  ratings,  indicated by "Con", are sometimes given when the security
for the bond depends upon the completion of some act or the  fulfillment of some
condition.  Such  bonds,  are given a  conditional  rating  that  denotes  their
probably  credit  statute upon  completion  of that act or  fulfillment  of that
condition.

Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier
1 indicates that the security  ranks at the high end, 2 in the mid-range,  and 3
nearer  the low  end,  of the  generic  category.  These  modifiers  are to give
investors a more  precise  indication  of relative  debt  quality in each of the
historically defined categories.

Commercial Paper.

Standard & Poor's Commercial Paper Ratings

A Standard  & Poor's  Commercial  Paper  Rating is a current  assessment  of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two highest categories are as follows:

AIssues  assigned  this  highest  rating are  regarded  as having  the  greatest
capacity for timely  payment.  Issues in this category are further  refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.

A-1This designation indicates that the degree of safety regarding timely payment
is either  overwhelming  or very  strong.  Those  issues  determined  to possess
overwhelming safety characteristics are denoted with a plus(+) sign designation.

The  Commercial  Paper  Rating is not a  recommendation  to  purchase  or sell a
security.  The ratings are based on current information  furnished to Standard &
Poor's by the issuer and  obtained by  Standard & Poor's  from other  sources it
considers  reliable.  The ratings may be changed,  suspended,  or withdrawn as a
result of changes in, or unavailability of, such information.

Moody's Commercial Paper Ratings

Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually  promissory  obligations not having an original maturity in excess of

                                      A-2

<PAGE>

nine months. Moody's employs the following designations, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.

Issuers  rated  Prime-1 (or  related  supporting  institutions)  have a superior
capacity for repayment of short-term promissory  obligations.  Prime-1 repayment
capacity will normally be evidenced by the  following  characteristics:  leading
market positions in well established  industries;  high rates of return on funds
employed;  conservative capitalization structures with moderate reliance on debt
and  ample  asset  protection;  broad  margins  in  earnings  coverage  of fixed
financial charges and high internal cash generation;  well established access to
a range of financial markets and assured sources of alternate liquidity.

Issuers  rated  Prime-2  (or  related  supporting  institutions)  have a  strong
capacity for repayment of short-term promissory obligations.  This will normally
be evidenced by many of the characteristics  cited above but to a lesser degree.
Earnings  trends and  coverage  ratios,  while  sound,  will be more  subject to
variation. Capitalization characteristics,  while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

                                      A-3

<PAGE>


                                                        

                              FINANCIAL STATEMENTS

                                      F-1



© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission