Edgar Filing: NICHOLAS APPLEGATE CONVERTIBLE & INCOME FUND

As filed with the Securities and Exchange Commission on March 26, 2003

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1933 Act File No. 333-102624
1940 Act File No. 811-21284

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2

[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[X] Pre-Effective Amendment No. 3

[_] Post-Effective Amendment No.
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

[X] Amendment No. 3

Nicholas-Applegate Convertible & Income Fund
(Exact Name of Registrant as Specified in Declaration of Trust)

c/o PIMCO Advisors Fund Management LLC
1345 Avenue of the Americas
New York, New York 10105
(Address of Principal Executive Offices)
(Number, Street, City, State, Zip Code)

(212) 739-3369
(Registrant's Telephone Number, including Area Code)

Newton B. Schott, Jr.
c/o PIMCO Advisors Distributors LLC
2187 Atlantic Street
Stamford, Connecticut 06902
(Name and Address (Number, Street, City, State, Zip Code) of Agent for Service)

Copies of Communications to:

Joseph B. Kittredge, Jr., Esq. Thomas A. Hale, Esq.
Ropes & Gray Skadden, Arps, Slate, Meagher & Flom LLP
One International Place 333 West Wacker Drive, Suite 2100
Boston, Massachusetts 02110 Chicago, Illinois 60606

Approximate Date of Proposed Public Offering:

As soon as practicable after the effective date of this Registration Statement

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If any of the securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [_]

It is proposed that this filing will become effective (check appropriate
box)

[X] when declared effective pursuant to section 8(c)

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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum Proposed Maximum
Amount Being Offering Price Per Aggregate Amount of
Title of Securities Being Registered Registered Unit Offering Price/1/ Registration Fee/2/
------------------------------------ ------------ ------------------ ---------------- -------------------

Common Shares, par value $0.00001 73,500,000 Shares $ 15.00 $ 1,102,500,000 $ 89,193.62
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/1/ Estimated solely for the purpose of calculating the registration fee.
/2/ $1.38 of which was previously paid.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS Subject to Completion , 2003

Shares
[LOGO] PIMCO
ADVISORS

Nicholas-Applegate Convertible & Income Fund

Common Shares
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Investment Objective. The Fund is a newly organized, diversified, closed-end
management investment company. The Fund's investment objective is to provide
total return through a combination of capital appreciation and high current
income.

Portfolio Contents. Under normal circumstances, the Fund will invest at least
80% of its total assets in a diversified portfolio of convertible securities
and non-convertible income-producing securities. The Fund may invest up to 20%
of its total assets in other types of securities. The portion of the Fund's
assets invested in convertible securities, on the one hand, and non-convertible
income-producing securities, on the other, will vary from time to time
consistent with the Fund's investment objective, although the Fund will
normally invest at least 50% of its total assets in convertible securities. In
making allocation decisions, the Fund's portfolio manager will consider factors
such as changes in equity prices, changes in interest rates and other economic
and market factors. The Fund may invest without limit in securities that are
below investment grade quality and expects that ordinarily the portfolio
manager's strategies will result in the Fund investing primarily in these
securities. Securities of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal, and are commonly referred to as "high yield"
securities or "junk bonds." They involve greater risk of loss, are subject to
greater price volatility and are less liquid, especially during periods of
economic uncertainty or change, than higher rated securities. Due to the risks
involved in investing in high yield securities, an investment in the Fund
should be considered speculative. There can be no assurance that the Fund will
achieve its investment objective.

No Prior History. Because the Fund is newly organized, its common shares have
no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. The common shares
have been authorized for listing on the New York Stock Exchange, subject to
notice of issuance. The trading or "ticker" symbol of the common shares is
expected to be "NCV."

Before buying any common shares you should read the discussion of the material
risks of investing in the Fund in "Risks" beginning on page 26. Certain of
these risks are summarized in "Prospectus summary--Special Risk Considerations"
beginning on page 6.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Proceeds
Price to Public Sales Load to Fund
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Per Share $15.000 $0.675 $14.325
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Total $ $ $
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In addition to the sales load, the Fund will pay offering expenses of up to
$0.03 per share, estimated to total $ , which will reduce the "Proceeds to
Fund" set forth above. PIMCO Advisors Fund Management LLC has agreed to pay all
of the Fund's organizational expenses and the amount by which the Fund's
offering costs (other than the sales load) exceeds $0.03 per share.

The underwriters expect to deliver the common shares to purchasers on or about
March 31, 2003.

UBS Warburg

Prudential Securities Wachovia Securities

Legg Mason Wood Walker RBC Capital Markets Wells Fargo Securities, LLC
Incorporated

Advest, Inc. H&R Block Financial Advisors, Inc.Fahnestock & Co. Inc.

Ferris, Baker Watts
Incorporated

McDonald Investments Inc. Wedbush Morgan Securities Inc.

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(continued from previous page)

The Fund presently intends to use leverage by issuing preferred shares
representing approximately 35% of the Fund's capital immediately after their
issuance. The Fund may also leverage the portfolio by borrowing money, issuing
debt securities and utilizing reverse repurchase agreements and other
derivative instruments, although these forms of leverage will generally be
used, if at all, as a substitute for, rather than in addition to, the leverage
obtained through the issuance of preferred shares. By using leverage, the Fund
will seek to obtain a higher return for holders of common shares than if the
Fund did not use leverage. Leveraging is a speculative technique and there are
special risks involved. There can be no assurance that a leveraging strategy
will be used or that it will be successful during any period in which it is
employed. Fees and expenses paid by the Fund are borne entirely by the holders
of the Fund's common shares (and not by the holders of preferred shares, if
any). See "Preferred Shares and related leverage" and "Risks--Leverage Risk."

You should read this Prospectus, which contains important information about the
Fund, before deciding whether to invest, and retain it for future reference. A
Statement of Additional Information, dated , 2003, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 49 of this Prospectus. You may request a free copy of the Statement of
Additional Information by calling (877) 819-2224 or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities
and Exchange Commission's web site (http://www.sec.gov).

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

The underwriters named in this Prospectus may purchase, at the initial offering
price per common share minus a commission as set forth under "Underwriting," up
to additional common shares from the Fund under certain circumstances.

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

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

TABLE OF CONTENTS
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Prospectus summary.................................................... 1
Summary of Fund expenses.............................................. 11
The Fund.............................................................. 13
Use of proceeds....................................................... 13

The Fund's investment objective and strategies........................ 13
Preferred Shares and related leverage................................. 24
Risks................................................................. 26
How the Fund manages risk............................................. 32
Management of the Fund................................................ 34
Net asset value....................................................... 36
Distributions......................................................... 37
Dividend reinvestment plan............................................ 37

Description of shares................................................. 38
Anti-takeover and other provisions in the Declaration of Trust........ 41
Repurchase of Common Shares; conversion to open-end fund.............. 42
Tax matters........................................................... 43
Underwriting.......................................................... 45
Shareholder servicing agent, custodian and transfer agent............. 47
Legal matters......................................................... 48
Table of contents for the Statement of Additional Information......... 49
Appendix A--Description of Securities Ratings......................... 50

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Prospectus summary

This is only a summary. This summary may not contain all of the information
that you should consider before investing in the common shares. You should
review the more detailed information contained in this Prospectus and in the
Statement of Additional Information.

THE FUND

Nicholas-Applegate Convertible & Income Fund (the "Fund") is a newly organized,
diversified, closed-end management investment company. See "The Fund."

THE OFFERING

The Fund is offering common shares of beneficial interest, with a par
value of $0.00001 per share, at $15.00 per share through a group of
underwriters (the "Underwriters") led by UBS Warburg LLC. The common shares of
beneficial interest are called "Common Shares" in the rest of this Prospectus.
You must purchase at least 100 Common Shares. The Fund has given the
Underwriters an option to purchase up to additional Common Shares to
cover orders in excess of Common Shares. See "Underwriting." PIMCO
Advisors Fund Management LLC (the "Manager"), the Fund's investment manager,
has agreed to pay all of the Fund's organizational expenses and the amount by
which the Fund's offering costs (other than the sales load) exceeds $0.03 per
Common Share.

INVESTMENT OBJECTIVE AND STRATEGIES

Investment Objective
The Fund's investment objective is to provide total return through a
combination of capital appreciation and high current income. The Fund attempts
to achieve this objective by investing in a diversified portfolio of
convertible securities and non-convertible income-producing securities
described under "Portfolio Contents" below. As described below, in seeking to
achieve its investment objective, the Fund expects ordinarily to invest
primarily in "high yield" securities or "junk bonds" and to leverage the Fund
by offering preferred shares of beneficial interest ("Preferred Shares")
representing approximately 35% of the Fund's capital immediately after their
issuance. The Fund cannot assure you that it will achieve its investment
objective.

Portfolio Management Strategies
In selecting investments for the Fund, Nicholas-Applegate Capital Management
LLC ("NACM"), the Fund's portfolio manager, attempts to identify issuers that
successfully adapt to change. NACM uses traditional credit analysis combined
with a disciplined, fundamental bottom-up research process that facilitates the
early identification of issuers demonstrating an ability to improve their
fundamental characteristics. See "Independent Credit Analysis" below. NACM
attempts to identify potential investments that it expects will exceed minimum
credit statistics and exhibit the highest visibility of future expected
operating performance. NACM's sell discipline is clearly defined and designed
to drive the Fund's portfolio continually toward strength, taking into account
factors such as a change in credit fundamentals, a decline in attractiveness
relative to other securities and a decline in industry fundamentals.

NACM ordinarily looks for several of the following characteristics:
above-average per share earnings growth; high return on invested capital; a
healthy balance sheet; sound financial and accounting policies and overall
financial strength; strong competitive advantages; effective research and
product development and marketing; development of new technologies; efficient
service; pricing flexibility; strong management; and general operating
characteristics that will enable the companies to compete successfully in their
respective markets. NACM will consider selling a particular convertible
security when any of those factors materially changes.

Independent Credit Analysis
NACM relies heavily on its own analysis of the credit quality and risks
associated with individual securities considered for the Fund, rather than
relying exclusively on rating agencies or third-party research. The team
managing the Fund utilizes this information in an attempt to minimize credit
risk and identify issuers, industries or sectors that are undervalued or that
offer attractive capital appreciation potential or high current income relative
to NACM's assessment of their credit characteristics.

Portfolio Contents
Under normal circumstances, the Fund will invest at least 80% of its total
assets in a diversified portfolio of convertible securities and non-convertible
income-producing securities. The portion of the Fund's assets invested in
convertible securities, on the one hand, and non-convertible income-producing
securities, on the other, will vary from time to time consistent with the
Fund's investment objective, although the Fund will normally invest at least
50% of its total assets in convertible securities. In making allocation
decisions, NACM will consider factors such as changes in equity prices, changes
in interest rates and other economic and market factors. The Fund may invest
without limit in convertible securities and non-convertible income-producing
securities that are below investment grade quality, and expects that ordinarily
NACM's portfolio strategies will result in the Fund investing primarily in
these securities. The Fund invests in securities with a broad range of
maturities. The weighted average maturity of the Fund will typically range from
five to ten years, although the weighted average maturity of obligations held
by the Fund may be shorter or longer at any time or from time to time depending
on market conditions. The Fund may invest up to 20% of its total assets in
other types of securities. The Fund may invest in securities of companies with
smaller market capitalizations. The principal types of securities in which the
Fund will invest are described below. For more detailed descriptions, see "The
Fund's investment objective and strategies--Portfolio Contents and Other
Information."

Convertible Securities
The Fund may invest without limit in convertible securities, and these
securities will ordinarily constitute a principal component of the Fund's
investment program. Under normal circumstances, the Fund will invest at least
50% of its total assets in convertible securities. Convertible securities are
bonds, debentures, notes, preferred stocks or other securities that may be
converted or exchanged (by the holder or by the issuer) into shares of the
underlying common stock (or cash or securities of equivalent value) at a stated
exchange ratio or predetermined price (the "conversion price"). A convertible
security is designed to provide current income and also the potential for
capital appreciation through the conversion feature, which enables the holder
to benefit from increases in the market price of the underlying common stock. A
convertible security may be called for redemption or conversion by the issuer
after a particular date and under certain circumstances (including a specified
price) established upon issue. Depending upon the relationship of the
conversion price to the market value of the underlying security, a convertible
security may trade more like an equity security than a debt instrument. See
"The Fund's investment objective and strategies--Portfolio Contents and Other
Information--Convertible Securities."

income-producing security ("income-producing component") and the right to
acquire an equity security ("convertible component"). The income-producing
component is achieved by investing in non-convertible, income-producing
securities such as bonds, preferred stocks and money market instruments. The
convertible component is achieved by investing in warrants or options to buy
common stock at a certain exercise price, or options on a stock index. A simple
example of a synthetic convertible security is the combination of a traditional
corporate bond with a warrant to purchase equity securities of the issuer of
the bond. The Fund may also purchase synthetic securities created by other
parties, typically investment banks, including convertible structured notes.
The income-producing and convertible components of a synthetic convertible
security may be issued separately by different issuers and at different times.
The Fund's holdings of synthetic convertible securities are considered
convertible securities for purposes of the Fund's policy to invest at least 50%
of its total assets in convertible securities and 80% of its total assets in a
diversified portfolio of convertible securities and non-convertible
income-producing securities. See "The Fund's investment objective and
strategies--Synthetic Convertible Securities."

Non-Convertible Income-Producing Securities
The Fund will also invest in non-convertible income-producing securities,
including, but not limited to, corporate bonds, debentures, notes and other
similar types of corporate debt instruments, as well as non-convertible
preferred stocks, bank loans and loan participations, commercial paper, real
estate investment trusts ("REITs") and commercial and other mortgage-related
and asset-backed securities, payment-in-kind securities, credit-linked trust
certificates and other securities issued by special purpose or structured
vehicles, zero-coupon bonds, bank certificates of deposit, fixed time deposits,
bankers' acceptances and U.S. Government securities. The Fund's investments in
non-convertible income-producing securities may have fixed or variable
principal payments and all types of interest rate and dividend payment and
reset terms, including fixed rate, adjustable rate, zero-coupon, contingent,
deferred, payment-in-kind and auction-rate features. See "The Fund's investment
objective and strategies--Portfolio Contents and Other Information."

High Yield Securities
The Fund may invest without limit in convertible securities and non-convertible
income-producing securities that are below investment grade quality, and
expects that ordinarily NACM's portfolio strategies will result in the Fund
investing primarily in these securities. Below investment grade securities are
securities rated, at the time of investment, below the four highest grades
(i.e., rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB
or lower by Standard & Poor's (" S&P")) or securities that are unrated but
judged to be of comparable quality by NACM. Below investment grade securities
are sometimes referred to as "high yield" securities or "junk bonds." The Fund
may invest in high yield securities of any rating, including securities given
the lowest non-default rating (C by Moody's or S&P, as described in Appendix A)
or unrated securities judged to be of comparable quality by NACM. Securities of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities in the lowest investment grade category (i.e., Baa by Moody's or BBB
by S&P) also may be considered to possess some speculative characteristics. The
Fund may purchase distressed securities that are in default or the issuers of
which are in bankruptcy. See "The Fund's investment objective and
strategies--Portfolio Contents and Other Information--High Yield Securities."

Foreign (Non-U.S.) Investments
The Fund may invest up to 20% of its total assets in U.S. dollar-denominated
securities of foreign issuers based in developed countries. For this purpose,
foreign securities include, but are not limited to, foreign convertible
securities and non-convertible income-producing securities, foreign equity
securities (including preferred securities of foreign issuers), foreign bank
obligations, and obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and

supranational entities. For this purpose, foreign securities do not include
American Depository Receipts ("ADRs") or securities guaranteed by a United
States person, but may include foreign securities in the form of Global
Depository Receipts ("GDRs") or other securities representing underlying shares
of foreign issuers. See "The Fund's investment objective and
strategies--Portfolio Contents and Other Information--Foreign (Non-U.S.)
Investments."

Rule 144A Securities
The Fund may invest without limit in securities that have not been registered
for public sale, but that are eligible for purchase and sale pursuant to Rule
144A under the Securities Act of 1933, as amended ("Rule 144A Securities").
Rule 144A permits certain qualified institutional buyers, such as the Fund, to
trade in privately placed securities that have not been registered for sale
under that Act. Rule 144A Securities may be deemed illiquid and thus subject to
the Fund's limit on illiquid securities, although the Fund may determine that
certain Rule 144A Securities are liquid in accordance with procedures adopted
by the Board of Trustees.

PROPOSED OFFERING OF PREFERRED SHARES AND OTHER FORMS OF LEVERAGE

Subject to market conditions, approximately one to three months after
completion of this offering, the Fund presently intends to offer Preferred
Shares representing approximately 35% of the Fund's capital immediately after
their issuance. The issuance of Preferred Shares will leverage your investment
in Common Shares. Leverage involves special risks. There is no assurance that
the Fund will issue Preferred Shares or that, if Preferred Shares are issued,
the Fund's leveraging strategy will be successful. See "Risks--Leverage Risk."
The net proceeds the Fund obtains from selling the Preferred Shares will be
invested in accordance with the Fund's investment objective and policies as
described in this Prospectus. The Preferred Shares will pay dividends typically
based on short-term interest rates, which normally will be reset frequently. So
long as the rate of return, net of applicable Fund expenses, on the convertible
securities, non-convertible income-producing securities and other investments
purchased by the Fund exceeds Preferred Share dividend rates as reset
periodically, the investment of the proceeds of the Preferred Shares will
generate more income than will be needed to pay dividends on the Preferred
Shares. If so, the excess will be used to pay higher dividends to holders of
Common Shares ("Common Shareholders") than if the Fund were not so leveraged
through the issuance of Preferred Shares. The Fund may also leverage the
portfolio by borrowing money, issuing debt securities and utilizing reverse
repurchase agreements and other derivative instruments, although these forms of
leverage will generally be used as a substitute for, rather than in addition
to, the leverage obtained through the issuance of Preferred Shares. The Fund
cannot assure you that the issuance of Preferred Shares or the use of other
forms of leverage will result in a higher yield on your Common Shares. Once
Preferred Shares are issued and/or other forms of leverage are used, the net
asset value and market price of the Common Shares and the yield to Common
Shareholders will be more volatile. The holders of Preferred Shares ("Preferred
Shareholders"), if any are issued, would have certain voting rights in addition
to and separate from the voting rights of the Common Shareholders. See
"Preferred shares and related leverage," "Description of shares--Preferred
Shares" and "Risks--Leverage Risk." In addition, fees and expenses paid by the
Fund are borne entirely by the Common Shareholders (and not by Preferred
Shareholders, if any). These include costs associated with any offering of
Preferred Shares by the Fund (which costs are estimated to be approximately 35%
of the total dollar amount of a Preferred Share offering), which will be borne
immediately by Common Shareholders and result in a reduction of the net asset
value of the Common Shares. The Fund's Board of Trustees will determine whether
any Preferred Shares will be issued based in part on recommendations from the
Manager and NACM as to market conditions and other factors. See "Description of
shares--Preferred Shares."

INVESTMENT MANAGER

PIMCO Advisors Fund Management LLC (the "Manager") serves as the investment
manager of the Fund. Subject to the supervision of the Board of Trustees, the
Manager is responsible for managing, either directly or through others selected
by it, the investment activities of the Fund and the Fund's business affairs
and other administrative matters. The Manager will receive an annual fee,
payable monthly, in an amount equal to 0.70% of the Fund's average daily total
managed assets. "Total managed assets" means the total assets of the Fund
(including any assets attributable to any Preferred Shares or other forms of
leverage that may be outstanding) minus accrued liabilities (other than
liabilities representing leverage). The Manager is located at 1345 Avenue of
the Americas, New York, New York 10105. Organized in 2000 as a subsidiary
successor in the restructuring of a business originally organized in 1987, the
Manager provides investment management and advisory services to several
closed-end and open-end investment company clients. As of December 31, 2002,
the Manager had approximately $16.6 billion in assets under management. Allianz
Dresdner Asset Management of America L.P. is the direct parent company of PIMCO
Advisors Retail Holdings LLC, of which the Manager is a wholly-owned
subsidiary. As of December 31, 2002, Allianz Dresdner Asset Management of
America L.P. and its subsidiary partnerships, including NACM, had approximately
$357 billion in assets under management.

The Manager has retained its affiliate, NACM, as a sub-adviser to manage the
Fund's portfolio investments. See "--Portfolio Manager" below.

PORTFOLIO MANAGER

NACM will serve as the Fund's sub-adviser responsible for managing the Fund's
portfolio investments, and is sometimes referred to herein as the "portfolio
manager." Subject to the supervision of the Manager, NACM has full investment
discretion and makes all determinations with respect to the investment of the
Fund's assets.

NACM is located at 600 West Broadway, 30th Floor, San Diego, California 92101.
Founded in 1984, NACM currently manages discretionary assets for numerous
clients, including investment companies, employee benefit plans, corporations,
public retirement systems and unions, university endowments, foundations, and
other institutional investors and individuals. As of December 31, 2002, NACM
had approximately $16.6 billion in assets under management.

The Manager (and not the Fund) will pay a portion of the fees it receives to
NACM in return for NACM's services.

DISTRIBUTIONS

Commencing with the Fund's first dividend, the Fund intends to make regular
monthly cash distributions to you at a level rate based on the projected
performance of the Fund. The dividend rate that the Fund pays on its Common
Shares will depend on a number of factors, including dividends payable on any
Preferred Shares and the expenses of any other leveraging transactions. As
portfolio and market conditions change, the rate of dividends on the Common
Shares and the Fund's dividend policy could change. Over time, the Fund will
distribute substantially all of its net investment income (after it pays
accrued dividends on any outstanding Preferred Shares). In addition, at least
annually, the Fund intends to distribute to you your pro rata share of any
available net capital gain. Your initial distribution is expected to be
declared approximately 45 days, and paid approximately 60 to 90 days, from the
completion of this offering, depending on market conditions. Unless you elect
to receive distributions in cash, all of your distributions will be
automatically reinvested in additional Common Shares under the Fund's dividend
reinvestment plan. See "Distributions" and "Dividend reinvestment plan."

LISTING

The Common Shares have been authorized for listing on the New York Stock
Exchange, subject to notice of issuance. The trading or "ticker" symbol of the
Common Shares is expected to be "NCV." See "Description of shares--Common
Shares."

SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT

UBS Warburg LLC will serve as a shareholder servicing agent for the Fund. Brown
Brothers Harriman & Co. will serve as custodian of the Fund's assets. PFPC Inc.
will serve as the Fund's transfer and dividend disbursement agent. See
"Shareholder servicing agent, custodian and transfer agent."

MARKET PRICE OF SHARES

Shares of closed-end investment companies frequently trade at prices lower than
net asset value. Shares of closed-end investment companies have during some
periods traded at prices higher than net asset value and during other periods
traded at prices lower than net asset value. The Fund cannot assure you that
Common Shares will trade at a price higher than net asset value in the future.
Net asset value will be reduced immediately following the offering by the sales
load and the amount of offering expenses paid by the Fund and immediately
following any offering of Preferred Shares by the costs of that offering paid
by the Fund. See "Use of proceeds." In addition to net asset value, market
price may be affected by such factors relating to the Fund or its portfolio
holdings as dividend levels (which are in turn affected by expenses), dividend
stability, portfolio credit quality and liquidity and call protection and
market supply and demand. See "Preferred Shares and related leverage," "Risks,"
"Description of shares" and "Repurchase of Common Shares; conversion to
open-end fund" in this Prospectus, and the Statement of Additional Information
under "Repurchase of Common Shares; Conversion to Open-End Fund." The Common
Shares are designed primarily for long-term investors, and you should not view
the Fund as a vehicle for trading purposes.

SPECIAL RISK CONSIDERATIONS

No Operating History
The Fund is a newly organized, diversified, closed-end management investment
company with no history of operations.

Market Discount Risk

As with any stock, the price of the Fund's shares will fluctuate with market
conditions and other factors. If shares are sold, the price received may be
more or less than the original investment. Net asset value will be reduced
immediately following the initial offering by a sales load and selling expenses
paid by the Fund and immediately following any offering of Preferred Shares by
the costs of that offering paid by the Fund. The Common Shares are designed for
long-term investors and should not be treated as trading vehicles. Shares of
closed-end management investment companies frequently trade at a discount from
their net asset value. The Fund's shares may trade at a price that is less than
the initial offering price. This risk may be greater for investors who sell
their shares relatively shortly after completion of the initial offering.

Convertible Securities Risk
The Fund may invest without limit in convertible securities, and these
securities will ordinarily constitute a principal component of the Fund's
investment program. Under normal circumstances, the Fund will invest at least
50% of its total assets in convertible securities. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. The market values of convertible securities tend
to decline as interest rates increase and, conversely, to increase as interest
rates decline. However, a convertible security's market value tends to reflect
the market price of the common stock of the issuing company when that stock
price is greater than the convertible security's "conversion price." The
conversion price is defined as the predetermined price at which the convertible
security could be exchanged for the associated stock. As the market price of
the underlying common stock declines, the

price of the convertible security tends to be influenced more by the yield of
the convertible security. Thus, it may not decline in price to the same extent
as the underlying common stock. In the event of a liquidation of the issuing
company, holders of convertible securities would be paid before the company's
common stockholders but after holders of any senior debt obligations of the
company. Consequently, the issuer's convertible securities generally entail
less risk than its common stock but more risk than its debt obligations. See
"Risks--Convertible Securities Risk."

Synthetic Convertible Securities Risk
The Fund may invest without limit in synthetic convertible securities. The
value of a synthetic convertible security will respond differently to market
fluctuations than a traditional convertible security because a synthetic
convertible is composed of two or more separate securities or instruments, each
with its own market value. Because the convertible component is typically
achieved by investing in warrants or options to buy common stock at a certain
exercise price, or options on a stock index, synthetic convertible securities
are subject to the risks associated with derivatives. See "Risks--Convertible
Securities Risk" and "Risks--Derivatives Risk." In addition, if the value of
the underlying common stock or the level of the index involved in the
convertible component falls below the exercise price of the warrant or option,
the warrant or option may lose all value. See "Risks--Synthetic Convertible
Securities Risk."

Credit Risk/High Yield Risk
Credit risk is the risk that one or more securities in the Fund's portfolio
will decline in price, or fail to pay interest or principal when due, because
the issuer of the obligation or the issuer of a reference security experiences
a decline in its financial status. The Fund may invest without limit in
securities that are below investment grade quality, and expects that ordinarily
NACM's portfolio strategies will result in the Fund investing primarily in
these securities. Securities of below investment grade quality (commonly
referred to as "high yield" securities or "junk bonds") are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal when due, and therefore involve a greater risk of default. The prices
of these lower grade obligations are more sensitive to negative developments,
such as a decline in the issuer's revenues or a general economic downturn, than
are the prices of higher grade securities. The Fund may purchase distressed
securities that are in default or the issuers of which are in bankruptcy.
Securities in the lowest investment grade category also may be considered to
possess some speculative characteristics by certain rating agencies. See "The
Fund's investment objective and strategies--Portfolio Contents and Other
Information--High Yield Securities," "Risks--Credit Risk" and "Risks--High
Yield Risk" for additional information. Due to the risks involved in investing
in high yield securities, an investment in the Fund should be considered
speculative.

Interest Rate Risk
Generally, when market interest rates fall, the prices of convertible and
non-convertible income-producing obligations rise, and vice versa. Interest
rate risk is the risk that the securities in the Fund's portfolio will decline
in value because of increases in market interest rates. Because market interest
rates are currently near their lowest levels in many years, there is a greater
risk that the Fund's portfolio will decline in value. The prices of longer-term
obligations generally fluctuate more than prices of shorter-term obligations as
interest rates change. Because the weighted average maturity of the Fund's
securities typically will range from five to ten years, the Common Share net
asset value and market price per share will tend to fluctuate more in response
to changes in market interest rates than if the Fund invested mainly in
short-term obligations. The Fund's use of leverage, as described below, will
tend to increase Common Share interest rate risk. See "Risks--Interest Rate
Risk" for additional information.

Issuer Risk
The value of securities in the Fund's portfolio may decline for a number of
reasons which directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's goods and services.

Equity Securities Risk
The Fund will often have substantial exposure to equity securities by virtue of
the equity component of the convertible securities in which the Fund invests.
The Fund may also hold equity securities in its portfolio upon conversion of a
convertible security or through direct investments in preferred stocks. The
market price of equity securities may go up or down, sometimes rapidly or
unpredictably. Equity securities may decline in value due to factors affecting
equity securities markets generally, particular industries represented in those
markets or the issuer itself, including the historical and prospective earnings
of the issuer and the value of its assets. Equity securities generally have
greater price volatility than debt and other income-producing securities.

Leverage Risk
The Fund presently intends to use leverage by issuing Preferred Shares
representing approximately 35% of the Fund's capital immediately after their
issuance. The Fund may also leverage the portfolio by borrowing money, issuing
debt securities and utilizing reverse repurchase agreements and other
derivative instruments, although these forms of leverage will generally be
used, if at all, as a substitute for, rather than in addition to, the leverage
obtained through the issuance of Preferred Shares. The Fund's use of leverage
creates the opportunity for increased Common Share net income, but also creates
special risks for Common Shareholders. There is no assurance that the Fund's
leveraging strategy will be successful. It is anticipated that dividends on
Preferred Shares will be based on short-term rates of return (which would be
redetermined periodically, pursuant to an auction process), and that the Fund
will invest the net proceeds of the Preferred Shares offering principally in
convertible securities and non-convertible income-producing securities. So long
as the Fund's securities portfolio provides a higher rate of return (net of
Fund expenses) than the Preferred Share dividend rate, as reset periodically,
the leverage will allow Common Shareholders to receive a higher current rate of
return than if the Fund were not leveraged. If, however, long- and/or
short-term rates rise, which may be more likely because market interest rates
are currently near their lowest levels in many years, the Preferred Share
dividend rate could approach or exceed the rate of return on the investments
held by the Fund that were acquired during periods of generally lower interest
rates, reducing returns to Common Shareholders. Preferred Shares are expected
to pay cumulative dividends, which may tend to increase leverage risk. Leverage
creates two major types of risks for Common Shareholders:

.. the likelihood of greater volatility of net asset value and market price of
Common Shares, because changes in the value of the Fund's portfolio
securities (including securities bought with the proceeds of the Preferred
Shares offering) are borne entirely by the Common Shareholders; and

.. the possibility either that Common Share income will fall if the Preferred
Share dividend rate rises, or that Common Share income will fluctuate
because the Preferred Share dividend rate varies.

Because the fees received by the Manager and NACM are based on the total
managed assets of the Fund (including assets attributable to any Preferred
Shares or other forms of leverage that may be outstanding), the Manager and
NACM each have a financial incentive for the Fund to issue Preferred Shares or
utilize other forms of leverage, which may create a conflict of interest
between the Manager/NACM and the holders of the Common Shares.

Liquidity Risk
The Fund may invest up to 5% of its total assets in securities which are
illiquid at the time of investment (determined using the Securities and
Exchange Commission's standard applicable to open-end investment companies,
i.e., securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the value at which the Fund has valued the
securities). Illiquid securities may trade at a discount from comparable, more
liquid investments, and may be subject to wide fluctuations in market value.
Also, the Fund may not be able to dispose of illiquid securities when that
would be beneficial at a favorable time or price.

Foreign (Non-U.S.) Investment Risk
The Fund's investments in U.S. dollar-denominated securities of foreign issuers
involve special risks. For example, the value of these investments may decline
in response to unfavorable political and legal developments, unreliable or
untimely information, or economic and financial instability. Foreign settlement
procedures also may involve additional risks.

Smaller Company Risk
The general risks associated with corporate income-producing and equity
securities are particularly pronounced for securities issued by companies with
smaller market capitalizations. These companies may have limited product lines,
markets or financial resources, or they may depend on a few key employees. As a
result, they may be subject to greater levels of credit, market and issuer
risk. Securities of smaller companies may trade less frequently and in lesser
volume than more widely held securities and their values may fluctuate more
sharply than other securities. Companies with medium-sized market
capitalizations may have risks similar to those of smaller companies.

Derivatives Risk
The Fund may utilize derivative instruments for investment purposes, as well as
to leverage its portfolio, generally as a substitute for, rather than in
addition to, the issuance of Preferred Shares. These may include derivatives
used as a component of a synthetic convertible security or to gain exposure to
high yield securities and other securities in which the Fund may invest
(pending investment of the proceeds of this offering). Such derivative
instruments include, but are not limited to, warrants, options on common stock
or stock indexes and futures contracts. The Fund may also have exposure to
derivatives, such as credit default swaps and interest rate swaps, through
investments in credit-linked trust certificates or other securities issued by
special purpose or structured vehicles. Derivatives are subject to a number of
risks described elsewhere in this Prospectus, such as liquidity risk, equity
securities risk, issuer risk, credit risk, interest rate risk, leveraging risk,
management risk and, if applicable, smaller company risk. They also involve the
risk of mispricing or improper valuation, the risk of ambiguous documentation,
and the risk that changes in the value of the derivative may not correlate
perfectly with an underlying asset, interest rate or index. Suitable derivative
transactions may not be available in all circumstances and there can be no
assurance that the Fund will engage in these transactions when that would be
beneficial.

Counterparty Risk
The Fund will be subject to credit risk with respect to the counterparties to
derivative contracts. If a counterparty becomes bankrupt or otherwise fails to
perform its obligations under a derivative contract due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery under the derivative contract in a bankruptcy or other reorganization
proceeding. The Fund may obtain only a limited recovery or may obtain no
recovery in such circumstances.

REITs and Mortgage-Related Risk
Investing in REITs involves certain unique risks in addition to investing in
the real estate industry in general. REITs are subject to interest rate risks
(especially mortgage REITs) and the risk of default by lessees or borrowers. An
equity REIT may be affected by changes in the value of the underlying
properties owned by the REIT. A mortgage REIT may be affected by the ability of
the issuers of its portfolio mortgages to repay their obligations. REITs whose
underlying assets are concentrated in properties used by a particular industry
are also subject to risks associated with such industry. REITs may have limited
financial resources, may trade less frequently and in a limited volume and may
be subject to more abrupt or erratic price movements than larger company
securities.

rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk--the risk that
borrowers may pay off their mortgages sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates. The Fund's
investments in other asset-backed securities are subject to risks similar to
those associated with mortgage-backed securities, as well as additional risks
associated with the nature of the assets and the servicing of those assets.

Reinvestment Risk
Income from the Fund's portfolio will decline if and when the Fund invests the
proceeds from matured, traded or called obligations at market interest rates
that are below the portfolio's current earnings rate. A decline in income could
affect the Common Shares' market price or their overall return.

Inflation Risk
Inflation risk is the risk that the value of assets or income from the Fund's
investments will be worth less in the future as inflation decreases the value
of payments at future dates.

Management Risk
The Fund is subject to management risk because it is an actively managed
portfolio. NACM and the portfolio management team will apply investment
techniques and risk analyses in making investment decisions for the Fund, but
there can be no guarantee that these will produce the desired results.

Anti-Takeover Provisions
The Fund's Amended and Restated Agreement and Declaration of Trust (the
"Declaration") includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or convert the Fund to
open-end status. Holders of Preferred Shares, if any are issued, will have
voting rights in addition to and separate from the voting rights of Common
Shareholders with respect to certain of these matters. See "Anti-takeover and
other provisions in the Declaration of Trust." The holders of Preferred Shares,
on the one hand, and the holders of Common Shares, on the other, may have
interests that conflict in these situations. These provisions in the
Declaration could have the effect of depriving the Common Shareholders of
opportunities to sell their Common Shares at a premium over the then current
market price of the Common Shares.

Market Disruption and Geopolitical Risk

The recent outbreak of war with Iraq is likely to have a substantial impact on
the U.S. and world economies and securities markets. The nature, scope and
duration of the war and such impact cannot be predicted with any certainty.
Terrorist attacks on the World Trade Center and the Pentagon on September 11,
2001 closed some of the U.S. securities markets for a four-day period and
similar events cannot be ruled out. The war, terrorism and related geopolitical
risks have led, and may in the future lead to, increased short-term market
volatility and may have adverse long-term effects on U.S. and world economies
and markets generally. Those events could also have an acute effect on
individual issuers or related groups of issuers. These risks could adversely
affect interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Shares.

Summary of Fund expenses

The following table and the expenses shown assume the issuance of Preferred
Shares in an amount equal to 35% of the Fund's capital (after their issuance),
and show Fund expenses as a percentage of net assets attributable to Common
Shares. Footnote 4 to the table also shows Fund expenses as a percentage of net
assets attributable to Common Shares, but assumes that no Preferred Shares are
issued or outstanding (such as will be the case prior to the Fund's expected
issuance of Preferred Shares).

Shareholder Transaction Expenses
Sales Load (as a percentage of offering price)...................... 4.50%
Offering Costs Borne by the Fund (as a percentage of offering price) 0.20%(1)(2)
Dividend Reinvestment Plan Fees..................................... None (3)

Percentage of Net Assets
Attributable to
Common Shares
(assuming the issuance
of Preferred Shares)(4)
-----------------------------------------------

Annual Expenses
Management Fees+..... 1.08%
Other Expenses....... [ ]%(1)(2)
Total Annual Expenses [ ]%

(1) The Manager has agreed to pay all of the Fund's organizational expenses and
the amount by which the Fund's offering costs (other than the sales load)
exceeds $0.03 per Common Share (0.2% of the offering price).

(2) If the Fund offers Preferred Shares, costs of that offering, estimated to
be approximately 1.4% of the total dollar amount of the Preferred Share
offering, will be borne immediately by Common Shareholders and result in a
reduction of the net asset value of the Common Shares. Assuming the
issuance of Preferred Shares in an amount equal to 35% of the Fund's
capital (after their issuance) these offering costs are estimated to be
approximately $[ ] or approximately $[ ] per Common Share ([ ]% of the
offering price). These offering costs are not included among the expenses
shown in these tables.

(3) You will pay brokerage charges if you direct the plan agent to sell your
Common Shares held in a dividend reinvestment account.

(4) The table presented in this footnote estimates what the Fund's annual
expenses would be stated as percentages of the Fund's net assets
attributable to Common Shares but, unlike the table above, assumes that no
Preferred Shares are issued or outstanding. This will be the case, for
instance, prior to the Fund's expected issuance of Preferred Shares. In
accordance with these assumptions, the Fund's expenses would be estimated
to be as follows:

Percentage of Net Assets
Attributable to
Common Shares
(assuming no Preferred
Shares are issued or
outstanding)
-----------------------------------------------

Annual Expenses
Management Fees+..... 0.70%
Other Expenses....... [ ]%(1)
Total Annual Expenses [ ]%

+ Although the Fund's management fees are calculated based on total managed
assets, the Fund's total managed assets are expected to be the same as its
net assets because the Fund has no present intention to utilize leverage or
other borrowings except through the issuance of Preferred Shares.

The purpose of the table above is to help you understand all fees and expenses
that you, as a Common Shareholder, would bear directly or indirectly. The Other
Expenses shown in the table and related footnotes are based on estimated
amounts for the Fund's first year of operations and assume that the Fund issues
approximately [ ] Common Shares. If the Fund issues fewer Common Shares,
all other things being equal, these expenses would increase. See "Management of
the Fund" and "Dividend reinvestment plan."

As required by relevant Securities and Exchange Commission regulations, the
following example illustrates the expenses (including the sales load of $45,
estimated, offering expenses of this offering of $2 and the estimated offering
costs of issuing Preferred Shares assuming the Fund issues Preferred Shares
representing 35% of the Fund's capital (after their issuance) of $[ ]) that
you would pay on a $1,000 investment in Common Shares, assuming the sales load
and the offering expenses listed in the parenthetical above, and (a) total
annual expenses of [ ]% of net assets attributable to Common Shares
(assuming the issuance of Preferred Shares) in years 1 through 10, and (b) a 5%
annual return(1):

1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------------------------------------

$[ ] $[ ] $[ ] $[ ]

The example above should not be considered a representation of future expenses.
Actual expenses may be higher or lower than those shown.

(1) The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate and that all dividends and distributions
are reinvested at net asset value. Actual expenses may be greater or less
than those assumed. Moreover, the Fund's actual rate of return may be
greater or less than the hypothetical 5% annual return shown in the example.

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

The Fund

The Fund is a newly organized, diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder (the "1940 Act"). The Fund was organized
as a Massachusetts business trust on January 17, 2003, pursuant to the
Declaration, which is governed by the laws of The Commonwealth of
Massachusetts. As a newly organized entity, the Fund has no operating history.
The Fund's principal office is located at 1345 Avenue of the Americas, New
York, New York 10105, and its telephone number is (800) 331-1710.

Use of proceeds

The net proceeds of the offering of Common Shares will be approximately
$ (or $ if the Underwriters exercise the over-allotment option in full)
after payment of the estimated offering costs. The Manager has agreed to pay
all of the Fund's organizational expenses and the amount by which the Fund's
offering costs (other than the sales load) exceeds $0.03 per Common Share. The
Fund will invest the net proceeds of the offering in accordance with the Fund's
investment objective and policies as stated below. It is presently anticipated
that the Fund will be able to invest substantially all of the net proceeds in
convertible securities and non-convertible income-producing securities within
three months after the completion of this offering. Pending such investment, it
is anticipated that the proceeds will be invested in high grade, short-term
securities, credit-linked trust certificates, and/or high yield securities
index futures contracts or similar derivative instruments designed to give the
Fund market exposure while NACM selects specific securities.

The Fund's investment objective and strategies

INVESTMENT OBJECTIVE

The Fund's investment objective is to provide total return through a
combination of capital appreciation and high current income. The Fund attempts
to achieve its investment objective by investing in a diversified portfolio of
convertible securities and non-convertible income-producing securities
described under "--Portfolio Contents and Other Information" below. In seeking
to achieve its investment objective, the Fund expects to invest primarily in
"high yield" securities or "junk bonds" and to leverage the Fund by offering
Preferred Shares representing approximately 35% of the Fund's capital
immediately after their issuance. The Fund cannot assure you that it will
achieve its investment objective.

PORTFOLIO MANAGEMENT STRATEGIES

In selecting investments for the Fund, NACM attempts to identify issuers that
successfully adapt to change. NACM uses traditional credit analysis combined
with a disciplined, fundamental bottom-up research process that facilitates the
early identification of issuers demonstrating an ability to improve their
fundamental characteristics. See "Independent Credit Analysis" below. NACM
attempts to identify potential investments that it expects will exceed minimum
credit statistics and exhibit the highest visibility of future expected
operating performance. NACM's sell discipline is clearly defined and designed
to drive the Fund's portfolio continually toward strength. A series of sell
alerts triggering further verification research, such as changes in credit
fundamentals, declines in relative attractiveness to other issues and declines
in industry fundamentals, are utilized, and NACM will consider selling a
particular security if any of the original reasons for purchase materially
changes.

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

The Fund's investment objective and strategies

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

In selecting convertible securities for investment by the Fund, NACM evaluates
each convertible security's investment characteristics as an income-producing
security, using the techniques described above, as well as its potential for
capital appreciation, using techniques that focus on the security's equity
characteristics. NACM seeks to capture approximately 70-80% of any increase in
the market price of the underlying equities (upside potential) and 50% or less
of any decrease in the market price of the underlying equities (downside
exposure). In analyzing specific companies for possible investment, NACM
ordinarily looks for several of the following characteristics: above-average
per share earnings growth; high return on invested capital; a healthy balance
sheet; sound financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product development and
marketing; development of new technologies; efficient service; pricing
flexibility; strong management; and general operating characteristics that will
enable the companies to compete successfully in their respective markets. NACM
will consider selling a particular convertible security when any of those
factors materially changes.

Credit Quality
The Fund may invest without limit in securities that are below investment grade
quality, including unrated securities judged to be of comparable quality by
NACM, and expects that ordinarily NACM's portfolio strategies will result in
the Fund investing primarily in these securities. The Fund may invest in
issuers of any credit quality (including securities in the lowest ratings
categories). The Fund may purchase distressed securities that are in default or
the issuers of which are in bankruptcy. As described under "Portfolio Contents
and Other Information--High Yield Securities" below, securities of below
investment grade quality are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as "high yield" securities or "junk bonds."
Securities in the lowest investment grade category also may be considered to
possess some speculative characteristics.

Independent Credit Analysis
NACM relies heavily on its own analysis of the credit quality and risks
associated with individual securities considered for the Fund, rather than
relying exclusively on rating agencies or third-party research. NACM has a
devoted team of professionals that conducts fundamental credit research and
analysis of individual issuers, industries and sectors and uses analytical
tools to assess and monitor credit risk. The team managing the Fund utilizes
this information in an attempt to minimize credit risk and identify issuers,
industries or sectors that are undervalued or that offer attractive capital
appreciation potential or current income relative to NACM's assessment of their
credit characteristics.

PORTFOLIO CONTENTS AND OTHER INFORMATION

Under normal circumstances, the Fund will invest at least 80% of its total
assets in a diversified portfolio of convertible securities and non-convertible
income-producing securities. The portion of the Fund's assets invested in
convertible securities, on the one hand, and non-convertible income-producing
securities, on the other, will vary from time to time consistent with the
Fund's investment objective, although the Fund will normally invest at least
50% of its total assets in convertible securities. In making allocation
decisions, NACM will consider factors such as changes in equity prices, changes
in interest rates and other economic and market factors. The Fund invests in
securities with a broad range of maturities. The weighted average maturity of
the Fund will typically range from five to ten years, although the weighted
average maturity of obligations held by the Fund may be shorter or longer at
any time or from time to time depending on market conditions.

The Fund may invest up to 20% of its total assets in securities other than
convertible securities and non-convertible income-producing securities. The
Fund may invest up to 5% of its total assets in illiquid securities (which is
determined using the Securities and Exchange Commission's standard applicable
to open-end investment companies, i.e., securities that cannot be disposed of
within seven days in the

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

The Fund's investment objective and strategies

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

ordinary course of business at approximately the value at which the Fund has
valued the securities). The Fund may invest in securities of companies with
smaller market capitalizations.

The Fund cannot change its investment objective without the approval of the
holders of a "majority of the outstanding" Common Shares and any Preferred
Shares voting together as a single class, and of the holders of a "majority of
the outstanding" Preferred Shares voting as a separate class. A "majority of
the outstanding" shares (whether voting together as a single class or voting as
a separate class) means (i) 67% or more of such shares present at a meeting, if
the holders of more than 50% of those shares are present or represented by
proxy, or (ii) more than 50% of such shares, whichever is less. See
"Description of shares--Preferred Shares--Voting Rights" for additional
information with respect to the voting rights of holders of Preferred Shares.

The Fund currently intends to leverage its portfolio through the issuance of
Preferred Shares. The Fund may also leverage the portfolio by borrowing money,
issuing debt securities and utilizing reverse repurchase agreements and other
derivative instruments, although these forms of leverage will generally be used
as a substitute for, rather than in addition to, the leverage obtained through
the issuance of Preferred Shares. See "Preferred Shares and related leverage."

Upon NACM's recommendation, for temporary defensive purposes and in order to
keep the Fund's cash fully invested, including during the period in which the
net proceeds of this offering are being invested, the Fund may deviate from its
investment objective and policies and invest some or all of its net assets in
investments such as high grade, short-term debt securities. The Fund may not
achieve its investment objective when it does so.

It is the policy of the Fund not to engage in trading for short-term profits
although portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Fund. Frequent changes in the Fund's
investments (i.e., portfolio turnover), which are more likely in periods of
volatile market movements, involve some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs, and may
increase the amount of capital gains (and, in particular, short-term gains)
realized by the Fund, on which shareholders may pay tax. Please see "Investment
Objective and Policies--Portfolio Trading and Turnover Rate" in the Statement
of Additional Information for more information regarding portfolio turnover.

The following provides additional information regarding the types of securities
and other instruments in which the Fund will ordinarily invest. A more detailed
discussion of these and other instruments and investment techniques that may be
used by the Fund is provided under "Investment Objective and Policies" in the
Statement of Additional Information.

Convertible Securities
The Fund may invest without limit in convertible securities, and these
securities will ordinarily constitute a principal component of the Fund's
investment program. Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted or exchanged (by the
holder or by the issuer) into shares of the underlying common stock (or cash or
securities of equivalent value) at a stated exchange ratio or predetermined
price (the "conversion price"). A convertible security is designed to provide
current income and also the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases in the
market price of the underlying common stock. A convertible security may be
called for redemption or conversion by the issuer after a particular date

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

The Fund's investment objective and strategies

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

and under certain circumstances (including a specified price) established upon
issue. If a convertible security held by the Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption, convert it
into the underlying common stock or sell it to a third party. Convertible
securities have general characteristics similar to both debt securities and
equity securities. Although to a lesser extent than with debt obligations, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the
underlying common stocks and, therefore, it will also react to variations in
the general market for equity securities. Depending upon the relationship of
the conversion price to the market value of the underlying security, a
convertible security may trade more like an equity security than a debt
instrument.

Convertible securities are designed to provide for a stable stream of income
with generally higher yields than common stocks. There can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar credit
quality because of the potential for capital appreciation.

Synthetic Convertible Securities
The Fund also may invest without limit in "synthetic" convertible securities,
which combine separate securities that possess the two principal
characteristics of a traditional convertible security, i.e., an
income-producing security ("income-producing component") and the right to
acquire an equity security ("convertible component"). The income-producing
component is achieved by investing in non-convertible, income-producing
securities such as bonds, preferred stocks and money market instruments. The
convertible component is achieved by investing in warrants or options to buy
common stock at a certain exercise price, or options on a stock index. A simple
example of a synthetic convertible security is the combination of a traditional
corporate bond with a warrant to purchase equity securities of the issuer of
the bond. The Fund may also purchase synthetic securities created by other
parties, typically investment banks or other financial institutions, including
convertible structured notes. The income-producing and convertible components
of a synthetic convertible security may be issued separately by different
issuers and at different times. Unlike a traditional convertible security,
which is a single security having a unitary market value, a synthetic
convertible comprises two or more separate securities, each with its own market
value. Therefore, the market value of a synthetic convertible security is the
sum of the values of its debt component and its convertibility component. For
this reason, the values of a synthetic convertible and a traditional
convertible security may respond differently to market fluctuations. The Fund's
holdings of synthetic convertible securities are considered convertible
securities for purposes of the Fund's policy to invest at least 50% of its
total assets in convertible securities and 80% of its total assets in a
diversified portfolio of convertible securities and non-convertible
income-producing securities.

Non-Convertible Income-Producing Securities
The Fund will also invest in non-convertible income-producing securities,
including, but not limited to, corporate bonds, debentures, notes and other
similar types of corporate debt instruments, as well as non-convertible
preferred stocks, bank loans and loan participations, commercial paper, REITs
and commercial and other mortgage-related and asset-backed securities,
payment-in-kind securities, credit-linked trust certificates and other
securities issued by special purpose or structured vehicles, zero-coupon bonds,
bank certificates of deposit, fixed time deposits, bankers' acceptances and
U.S. Government securities. The Fund's investments in non-convertible
income-producing securities may have fixed or variable principal payments and
all types of interest rate and dividend payment and reset terms, including
fixed rate, adjustable rate, zero-coupon, contingent, deferred, payment-in-kind
and auction-rate features.

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High Yield Securities
As noted above, the Fund may invest without limit in securities rated lower
than Baa by Moody's or BBB by S&P (including securities in the lowest ratings
categories (C by Moody's or S&P)), or in unrated securities judged to be of
comparable quality by NACM, and expects that ordinarily NACM's portfolio
strategies will result in the Fund investing primarily in these securities.
These securities are sometimes referred to as "high yield" securities or "junk
bonds." Investing in high yield securities involves greater risks (in
particular, greater risk of default) and special risks in addition to the risks
associated with investments in investment grade obligations. While offering a
greater potential opportunity for capital appreciation and higher yields, high
yield securities typically entail greater potential price volatility and may be
less liquid than higher-rated securities. High yield securities may be regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. They also may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
higher-rated securities. The Fund may purchase distressed securities that are
in default or the issuers of which are in bankruptcy. Securities in the lowest
investment grade category also may be considered to possess some speculative
characteristics.

The market values of high yield securities tend to reflect individual
developments of the issuer to a greater extent than do higher-quality
securities, which tend to react mainly to fluctuations in the general level of
interest rates. In addition, lower-quality securities tend to be more sensitive
to economic conditions.

Credit Ratings and Unrated Securities
Rating agencies are private services that provide ratings of the credit quality
of debt obligations, including convertible securities. Appendix A to this
Prospectus describes the various ratings assigned to debt obligations by
Moody's and S&P. Ratings assigned by a rating agency are not absolute standards
of credit quality and do not evaluate market risks. Rating agencies may fail to
make timely changes in credit ratings and an issuer's current financial
condition may be better or worse than a rating indicates. The Fund will not
necessarily sell a security when its rating is reduced below its rating at the
time of purchase. As described above under "Portfolio Management
Strategies--Independent Credit Analysis," NACM does not rely solely on credit
ratings, and develops its own analysis of issuer credit quality. The ratings of
a security may change over time. Moody's and S&P monitor and evaluate the
ratings assigned to securities on an ongoing basis. As a result, instruments
held by the Fund could receive a higher rating (which would tend to increase
their value) or a lower rating (which would tend to decrease their value)
during the period in which they are held.

The Fund may purchase unrated securities (which are not rated by a rating
agency). Unrated securities may be less liquid than comparable rated securities
and involve the risk that NACM may not accurately evaluate the security's
comparative credit rating. Analysis of creditworthiness may be more complex for
issuers of high yield securities than for issuers of higher-quality
obligations. The Fund expects that ordinarily NACM's portfolio strategies will
result in the Fund investing primarily in high yield and/or unrated securities.
Therefore, the Fund's success in achieving its investment objective may depend
more heavily on NACM's creditworthiness analysis than if the Fund invested
exclusively in higher-quality and rated securities.

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governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. For this purpose, foreign
securities do not include ADRs or securities guaranteed by a United States
person, but may include foreign securities in the form of GDRs or other
securities representing underlying shares of foreign issuers. See
"Risks--Foreign (Non-U.S.) Investment Risk."

The U.S. dollar-denominated foreign securities in which the Fund may invest
include Eurodollar obligations and "Yankee Dollar" obligations. Eurodollar
obligations are U.S. dollar-denominated certificates of deposit and time
deposits issued outside the U.S. capital markets by foreign branches of U.S.
banks and by foreign banks. Yankee Dollar obligations are U.S.
dollar-denominated obligations issued in the U.S. capital markets by foreign
banks. Eurodollar and Yankee Dollar obligations are generally subject to the
same risks that apply to domestic debt issues, notably credit risk, market risk
and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee
Dollar) obligations are subject to certain sovereign risks. One such risk is
the possibility that a sovereign country might prevent capital, in the form of
U.S. dollars, from flowing across its borders. Other risks include adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and the expropriation or nationalization of foreign issuers.

The Fund also may invest in sovereign debt issued by foreign governments, their
agencies or instrumentalities or other government-related entities. As a holder
of sovereign debt, the Fund may be requested to participate in the rescheduling
of such debt and to extend further loans to governmental entities. In addition,
there are generally no bankruptcy proceedings similar to those in the United
States by which defaulted sovereign debt may be collected. The Fund also may
invest in Brady Bonds, which are securities created through the exchange of
existing commercial bank loans to sovereign entities for new obligations in
connection with a debt restructuring. Investments in Brady Bonds may be viewed
as speculative. Brady Bonds acquired by the Fund may be subject to
restructuring arrangements or to requests for new credit, which may cause the
Fund to realize a loss of interest or principal on any of its portfolio
holdings.

Please see "Investment Objective and Policies--Foreign (Non-U.S.) Securities"
in the Statement of Additional Information for a more detailed description of
the types of foreign investments in which the Fund may invest and their related
risks.

Rule 144A Securities
The Fund may invest without limit in Rule 144A Securities. Rule 144A under the
Securities Act of 1933, as amended, provides a non-exclusive safe harbor
exemption from the registration requirements of the Act for the resale of
certain "restricted" securities to certain qualified institutional buyers, such
as the Fund. Rule 144A Securities may be deemed illiquid and thus may be
subject to the Fund's limit on illiquid securities, although the Fund may
determine that certain Rule 144A Securities are liquid in accordance with
procedures adopted by the Board of Trustees.

Corporate Bonds
The Fund may invest in a wide variety of bonds of varying maturities issued by
U.S. and foreign corporations and other business entities. Bonds are fixed or
variable rate debt obligations, including bills, notes, debentures, money
market instruments and similar instruments and securities. Bonds generally are
used by corporations as well as governments and other issuers to borrow money
from investors. The issuer pays the investor a fixed or variable rate of
interest and normally must repay the amount borrowed on or before maturity.
Certain bonds are "perpetual" in that they have no maturity date.

Preferred Stocks
The Fund may invest in preferred stocks. The Fund's investments in preferred
stocks typically will be convertible securities, although the Fund may also
invest in non-convertible preferred stocks. Preferred stock represents an
equity interest in a company that generally entitles the holder to receive, in
preference

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The Fund's investment objective and strategies

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to the holders of other stocks such as common stocks, dividends and a fixed
share of the proceeds resulting from liquidation of the company. Some preferred
stocks entitle their holders to receive additional liquidation proceeds on the
same basis as holders of a company's common stock, and thus also represent an
ownership interest in the company. Some preferred stocks offer a fixed rate of
return with no maturity date. Because they never mature, these preferred stocks
act like long-term bonds and can be more volatile than other types of preferred
stocks and may have heightened sensitivity to changes in interest rates. Other
preferred stocks have a variable dividend, generally determined on a quarterly
or other periodic basis, either according to a formula based upon a specified
premium or discount to the yield on particular U.S. Treasury securities or
based on an auction process, involving bids submitted by holders and
prospective purchasers of such stocks. Because preferred stocks represent an
equity ownership interest in a company, their value usually will react more
strongly than bonds and other debt instruments to actual or perceived changes
in a company's financial condition or prospects, or to fluctuations in the
equity markets.

Investments in Equity Securities
Consistent with its investment objective, the Fund may hold or have exposure to
equity securities. The Fund will often have substantial exposure to equity
securities by virtue of the equity component of the convertible securities in
which the Fund invests. The Fund may also hold equity securities in its
portfolio upon conversion of a convertible security or through direct
investments in preferred stocks. Equity securities, such as common stock,
generally represent an ownership interest in a company. Although equity
securities have historically generated higher average returns than debt
securities, equity securities have also experienced significantly more
volatility in those returns. An adverse event, such as an unfavorable earnings
report, may depress the value of a particular equity security held by the Fund.
Also, the price of equity securities, particularly common stocks, are sensitive
to general movements in the stock market. A drop in the stock market may
depress the price of equity securities held by the Fund.

U.S. Government Securities
The Fund may invest in U.S. Government securities, which are obligations of, or
guaranteed by, the U.S. Government, its agencies or government-sponsored
enterprises. U.S. Government securities include a variety of securities that
differ in their interest rates, maturities and dates of issue. Securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government
may or may not be supported by the full faith and credit of the United States
or by the right of the issuer to borrow from the U.S. Treasury.

Derivatives
The Fund may utilize derivative instruments for investment purposes, as well as
to leverage its portfolio, generally as a substitute for, rather than in
addition to, the issuance of Preferred Shares. Generally, derivatives are
financial contracts whose value depends upon, or is derived from, the value of
any underlying asset, reference rate or index, and may relate to, among others,
individual securities, interest rates and related indexes. The Fund may use
derivatives as a component of a synthetic convertible security or to gain
exposure to high yield securities and other securities in which the Fund may
invest (pending investment of the proceeds of this offering). Such derivative
instruments include, but are not limited to, warrants, options on common stock
or stock indexes, futures contracts and swap agreements. In connection with its
investments in synthetic convertible securities, the Fund may purchase
warrants, call options on common stock and call options on stock indexes. A
warrant is a certificate that gives the holder of the warrant the right to buy,
at a specified time or specified times, from the issuer of the warrant, the
common stock of the issuer at a specified price. A call option is a contract
that gives the holder of the option, in return for a premium, the right to buy
from the writer of the option the common stock underlying the option (or the
cash value of the index) at a specified exercise price at any time during the
term of the option. The Fund may also have exposure to derivatives, such as
credit default swaps and interest rate swaps, through investments in
credit-linked trust certificates and related instruments. The Fund's use of
derivative instruments involves risks different from, or possibly greater

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The Fund's investment objective and strategies

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than, the risks associated with investment directly in securities and other
more traditional investments. See "Risks--Derivatives Risk." Please see
"Investment Objective and Policies--Derivative Instruments" in the Statement of
Additional Information for additional information about these and other
derivative instruments that the Fund may use and the risks associated with such
instruments. There is no assurance that these derivative strategies will be
available at any time or that NACM will determine to use them for the Fund or,
if used, that the strategies will be successful. In addition, the Fund may be
subject to certain restrictions on its use of derivative strategies imposed by
guidelines of one or more ratings agencies that may issue ratings for Preferred
Shares issued by the Fund.

Credit-Linked Trust Certificates

Among the income-producing securities in which the Fund may invest are
credit-linked trust certificates, which are investments in a limited purpose
trust or other vehicle formed under State law which, in turn, invests in a
basket of derivative instruments, such as credit default swaps, interest rate
swaps and other securities, in order to provide exposure to the high yield or
another fixed income market.

Subject to the investment limitations described in this Prospectus, the Fund
may invest in credit-linked trust certificates during the period when the net
proceeds of this offering and any offering of Preferred Shares are being
invested, and during such period the high yield exposure will be broadly
diversified. Thereafter, the Fund may invest up to 5% of its total assets in
these instruments.

Like an investment in a bond, investments in these credit-linked trust
certificates represent the right to receive periodic income payments (in the
form of distributions) and payment of principal at the end of the term of the
certificate. However, these payments are conditioned on the trust's receipt of
payments from, and the trust's potential obligations to, the counterparties to
the derivative instruments and other securities in which the trust invests. For
instance, the trust may sell one or more credit default swaps, under which the
trust would receive a stream of payments over the term of the swap agreements
provided that no event of default has occurred with respect to the referenced
debt obligation upon which the swap is based. If a default occurs, the stream
of payments may stop and the trust would be obligated to pay to the
counterparty the par (or other agreed upon value) of the referenced debt
obligation. This, in turn, would reduce the amount of income and principal that
the Fund would receive as an investor in the trust. Please see "Investment
Objective and Policies--Derivative Instruments" in the Statement of Additional
Information for additional information about credit default swaps. The Fund's
investments in these instruments are indirectly subject to the risks associated
with derivative instruments, including, among others, credit risk, default or
similar event risk, interest rate risk, leverage risk and management risk. It
is expected that the trusts which issue credit-linked trust certificates will
constitute "private" investment companies, exempt from registration under the
1940 Act. Therefore, the certificates will be subject to the risks described
under "Other Investment Companies" below, and will not be subject to applicable
investment limitations and other regulation imposed by the 1940 Act (although
the Fund will remain subject to such limitations and regulation, including with
respect to its investments in the certificates). Although the trusts are
typically private investment companies, they are generally not actively managed
such as a "hedge fund" might be. It is also expected that the certificates will
be exempt from registration under the Securities Act of 1933. Accordingly,
there may be no established trading market for the certificates and they may
constitute illiquid investments. See "Risks--Liquidity Risk." If market
quotations are not readily available for the certificates, they will be valued
by the Fund at fair value as determined by the Board of Trustees or persons
acting at its direction. See "Net asset value." The Fund may lose its entire
investment in a credit-linked trust certificate. The Fund intends to invest in
credit-linked trust certificates mainly as a cash management tool in order to
gain exposure to the high yield markets and/or to remain fully invested when
more traditional income-producing securities are not available, including
during the period when the net proceeds of this offering and any offering of
Preferred Shares are being invested.

Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities
Zero-coupon bonds pay interest only at maturity rather than at intervals during
the life of the security. Like zero-coupon bonds, "step up" bonds pay no
interest initially but eventually begin to pay a coupon

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The Fund's investment objective and strategies

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rate prior to maturity, which rate may increase at stated intervals during the
life of the security. Payment- in-kind securities ("PIKs") are debt obligations
that pay "interest" in the form of other debt obligations, instead of in cash.
Each of these instruments is normally issued and traded at a deep discount from
face value. Zero-coupon bonds, step-ups and PIKs allow an issuer to avoid or
delay the need to generate cash to meet current interest payments and, as a
result, may involve greater credit risk than bonds that pay interest currently
or in cash. The Fund would be required to distribute the income on these
instruments as it accrues, even though the Fund will not receive the income on
a current basis or in cash. Thus, the Fund may have to sell other investments,
including when it may not be advisable to do so, to make income distributions
to its shareholders.

Other Investment Companies
The Fund may invest in securities of other open- or closed-end investment
companies to the extent that such investments are consistent with the Fund's
investment objective and policies and permissible under the 1940 Act. The Fund
may invest in other investment companies either during periods when it has
large amounts of uninvested cash, such as the period shortly after the Fund
receives the proceeds of the offering of its Common Shares or Preferred Shares,
during periods when there is a shortage of attractive convertible securities
and non-convertible income-producing securities available in the market, or
when NACM believes share prices of other investment companies offer attractive
values. The Fund may invest in investment companies that are advised by NACM or
its affiliates to the extent permitted by applicable law and/or pursuant to
exemptive relief from the Securities and Exchange Commission. As a stockholder
in an investment company, the Fund will bear its ratable share of that
investment company's expenses, and would remain subject to payment of the
Fund's management fees and other expenses with respect to assets so invested.
Common Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests in other investment companies. NACM will take expenses
into account when evaluating the investment merits of an investment in an
investment company relative to available investments in convertible securities
and non-convertible income-producing securities. In addition, the securities of
other investment companies may also be leveraged and will therefore be subject
to the same leverage risks described herein. As described in the section
entitled "Risks--Leverage Risk," the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares.

Commercial Paper
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by corporations such as banks or bank holding companies and finance
companies. The rate of return on commercial paper may be linked or indexed to
the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.

Bank Obligations
The Fund may invest in certain bank obligations, including certificates of
deposit, bankers' acceptances and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation.

Loan Participations and Assignments
The Fund may invest in fixed- and floating-rate loans issued by banks and other
corporations, which investments generally will be in the form of loan
participations and assignments of portions of such

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loans. Participations and assignments involve credit risk, interest rate risk,
liquidity risk and the risks of being a lender. If the Fund purchases a
participation, it may only be able to enforce its rights through the lender,
and may assume the credit risk of both the lender and the borrower. Given the
current structure of the markets for loan participations and assignments, the
Fund expects to treat these securities as illiquid.

REITs and Other Mortgage-Related and Asset-Backed Securities
The Fund may invest in real estate investment trusts ("REITs"). REITs primarily
invest in income-producing real estate or real estate related loans or
interests. REITs are generally classified as equity REITs, mortgage REITs or a
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive income from the collection
of interest payments. REITs are not taxed on income distributed to shareholders
provided they comply with the applicable requirements of the Internal Revenue
Code of 1986, as amended. The Fund will indirectly bear its proportionate share
of any management and other expenses paid by REITs in which it invests in
addition to the expenses paid by the Fund. Debt securities issued by REITs are,
for the most part, general and unsecured obligations and are subject to risks
associated with REITs.

Other mortgage-related securities include debt instruments which provide
periodic payments consisting of interest and/or principal that are derived from
or related to payments of interest and/or principal on underlying mortgages.
Additional payments on mortgage-related securities may be made out of
unscheduled prepayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs that may be incurred.

The Fund may invest in commercial mortgage-related securities issued by
corporations. These are securities that represent an interest in, or are
secured by, mortgage loans secured by commercial property, such as industrial
and warehouse properties, office buildings, retail space and shopping malls,
multifamily properties and cooperative apartments, hotels and motels, nursing
homes, hospitals, and senior living centers. They may pay fixed or adjustable
rates of interest. The commercial mortgage loans that underlie commercial
mortgage-related securities have certain distinct risk characteristics.
Commercial mortgage loans generally lack standardized terms, which may
complicate their structure. Commercial properties themselves tend to be unique
and difficult to value. Commercial mortgage loans tend to have shorter
maturities than residential mortgage loans, and may not be fully amortizing,
meaning that they may have a significant principal balance, or "balloon"
payment, due on maturity. In addition, commercial properties, particularly
industrial and warehouse properties, are subject to environmental risks and the
burdens and costs of compliance with environmental laws and regulations.

Other mortgage-related securities in which the Fund may invest include mortgage
pass-through securities, collateralized mortgage obligations ("CMOs"), mortgage
dollar rolls, CMO residuals (other than residual interests in real estate
mortgage investment conduits), stripped mortgage-backed securities ("SMBSs")
and other securities that directly or indirectly represent a participation in,
or are secured by and payable from, mortgage loans on real property.

The Fund may invest in other types of asset-backed securities that are offered
in the marketplace, including Enhanced Equipment Trust Certificates ("EETCs").
Although any entity may issue EETCs, to date, U.S. airlines are the primary
issuers. An airline EETC is an obligation secured directly by aircraft or
aircraft engines as collateral. EETCs tend to be less liquid than corporate
bonds. Other asset-backed securities may be collateralized by the fees earned
by service providers. The value of asset-backed securities may be substantially
dependent on the servicing of the underlying asset pools and are therefore

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The Fund's investment objective and strategies

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subject to risks associated with the negligence of, or defalcation by, their
servicers. In certain circumstances, the mishandling of related documentation
may also affect the rights of the security holders in and to the underlying
collateral. The insolvency of entities that generate receivables or that
utilize the assets may result in added costs and delays in addition to losses
associated with a decline in the value of the underlying assets.

Please see "Investment Objective and Policies--REITs and Other Mortgage-Related
and Other Asset-Backed Securities" in the Statement of Additional Information
and "Risks--REITs and Mortgage-Related Risk" in this Prospectus for a more
detailed description of the types of mortgage-related and other asset-backed
securities in which the Fund may invest and their related risks.

Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The Fund may invest in floating rate
debt instruments ("floaters") and engage in credit spread trades. While
floaters provide a certain degree of protection against rising interest rates,
the Fund will participate in any decline in interest rates as well. A credit
spread trade is an investment position relating to a difference in the prices
or interest rates of two bonds or other securities, where the value of the
investment position is determined by changes in the difference between such
prices or interest rates, as the case may be, of the respective securities.

When Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase securities which it is eligible to purchase on a
when-issued basis, may purchase and sell such securities for delayed delivery
and may make contracts to purchase such securities for a fixed price at a
future date beyond normal settlement time (forward commitments). When-issued
transactions, delayed delivery purchases and forward commitments involve a risk
of loss if the value of the securities declines prior to the settlement date.
The risk is in addition to the risk that the Fund's other assets will decline
in value. Therefore, these transactions may result in a form of leverage and
increase the Fund's overall investment exposure. Typically, no income accrues
on securities the Fund has committed to purchase prior to the time delivery of
the securities is made, although the Fund may earn income on securities it has
segregated to cover these positions.

Reverse Repurchase Agreements
As described under "Preferred Shares and related leverage," the Fund may
utilize reverse repurchase agreements, generally as a substitute for, rather
than in addition to, the leverage obtained through the issuance of Preferred
Shares. In a reverse repurchase agreement, the Fund sells securities to a bank
or broker-dealer and agrees to repurchase the securities at a mutually agreed
date and price. Generally, the effect of such a transaction is that the Fund
can recover and reinvest all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement and
still be entitled to the returns associated with those portfolio securities.
Such transactions are advantageous if the interest cost to the Fund of the
reverse repurchase transaction is less than the returns it obtains on
investments purchased with the cash.

Unless the Fund covers its positions in reverse repurchase agreements (by
segregating liquid assets at least equal in amount to the forward purchase
commitment), its obligations under the agreements will be subject to the Fund's
limitations on borrowings. Reverse repurchase agreements involve leverage risk
and also the risk that the market value of the securities that the Fund is
obligated to repurchase under the agreement may decline below the repurchase
price. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.

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Lending of Portfolio Securities
For the purpose of achieving income, the Fund may lend its portfolio securities
to brokers, dealers, and other financial institutions provided a number of
conditions are satisfied, including that the loan is fully collateralized.
Please see "Investment Objective and Policies--Securities Loans" in the
Statement of Additional Information for details. When the Fund lends portfolio
securities, its investment performance will continue to reflect changes in the
value of the securities loaned, and the Fund will also receive a fee or
interest on the collateral. Securities lending involves the risk of loss of
rights in the collateral or delay in recovery of the collateral if the borrower
fails to return the security loaned or becomes insolvent. The Fund may pay
lending fees to the party arranging the loan.

Please see "Investment Objective and Policies" in the Statement of Additional
Information for additional information regarding the investments of the Fund
and their related risks.

Preferred Shares and related leverage

Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund presently intends to
offer Preferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the Preferred Shares. The Preferred Shares
will have complete priority upon distribution of assets over the Common Shares.
The issuance of Preferred Shares will leverage the Common Shares. Leverage
involves special risks and there is no assurance that the Fund's leveraging
strategy will be successful. Although the timing and other terms of the
offering of the Preferred Shares will be determined by the Fund's Board of
Trustees, the Fund expects to invest the net proceeds of the Preferred Shares
in convertible securities, non-convertible income-producing securities and
other investments in accordance with the Fund's investment objective and
policies. The Preferred Shares will pay dividends typically based on short-term
rates (which would normally be redetermined periodically by an auction
process). So long as the Fund's portfolio is invested in securities that
provide a higher rate of return than the dividend rate of the Preferred Shares
(after taking expenses into consideration), the leverage will allow Common
Shareholders to receive a higher current rate of return than if the Fund were
not leveraged.

Changes in the value of the Fund's portfolio (including investments bought with
the proceeds of the Preferred Shares offering) will be borne entirely by the
Common Shareholders. If there is a net decrease (or increase) in the value of
the Fund's investment portfolio, the leverage will decrease (or increase) the
net asset value per Common Share to a greater extent than if the Fund were not
leveraged. During periods in which the Fund is using leverage, the fees paid to
the Manager and NACM will be higher than if the Fund did not use leverage
because the fees paid will be calculated on the basis of the Fund's total
managed assets, including the proceeds from the issuance of Preferred Shares
and any assets attributable to other forms of leverage. Thus, the Manager and
NACM each have a financial incentive for the Fund to issue Preferred Shares and
utilize other forms of leverage, which may result in a conflict of interest
between the Manager/NACM and the holders of Common Shares. Fees and expenses
paid by the Fund are borne entirely by the Common Shareholders (and not by
Preferred Shareholders, if any). These include costs associated with any
offering of Preferred Shares by the Fund (which costs are estimated to be
slightly more than 1% of the total dollar amount of a Preferred Share
offering), which will be borne immediately by Common Shareholders.

Under the 1940 Act, the Fund is not permitted to issue Preferred Shares unless
immediately after such issuance the value of the Fund's total net assets is at
least 200% of the liquidation value of the outstanding Preferred Shares plus
the aggregate amount of any senior securities of the Fund representing
indebtedness (i.e., such liquidation value plus the aggregate amount of senior
securities representing

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Preferred Shares and related leverage

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indebtedness may not exceed 50% of the Fund's total net assets). In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its Common Shares unless, at the time of such declaration, the value of the
Fund's total net assets satisfies the above-referenced 200% coverage
requirement. If Preferred Shares are issued, the Fund intends, to the extent
possible, to repurchase Preferred Shares from time to time to the extent
necessary in order to maintain coverage of at least 200%. If the Fund has
Preferred Shares outstanding, two of the Fund's Trustees will be elected by the
holders of Preferred Shares, voting separately as a class. The remaining
Trustees of the Fund will be elected by holders of Common Shares and Preferred
Shares voting together as a single class. In the event the Fund were to fail to
pay dividends on Preferred Shares for two years, Preferred Shareholders would
be entitled to elect a majority of the Trustees of the Fund.

The Fund may be subject to certain restrictions imposed by guidelines of one or
more rating agencies that may issue ratings for Preferred Shares issued by the
Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed on the Fund by the 1940
Act. It is not anticipated that these covenants or guidelines will impede NACM
from managing the Fund's portfolio in accordance with the Fund's investment
objective and policies.

Assuming that the Preferred Shares will represent approximately 35% of the
Fund's capital and pay dividends at an annual average rate of 2.50%, the income
generated by the Fund's portfolio (net of expenses) would have to exceed 0.88%
in order to cover such dividend payments. Of course, these numbers are merely
estimates, used for illustration. Actual Preferred Share dividend rates will
vary frequently and may be significantly higher or lower than the rate
identified above.

The following table is furnished in response to requirements of the Securities
and Exchange Commission. It is designed to illustrate the effect of leverage on
Common Share total return, assuming investment portfolio total returns
(consisting of income and changes in the value of investments held in the
Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative
of the investment portfolio returns expected to be experienced by the Fund. The
table further assumes the issuance of Preferred Shares representing
approximately 35% of the Fund's total capital, a 9.75% yield on the Fund's
investment portfolio, net of expenses, and the Fund's currently projected
annual Preferred Share dividend rate of 2.50%. See "Risks."

Assumed Portfolio Total Return (10.00)% (5.00)% 0.00% 5.00% 10.00%
Common Share Total Return..... (16.73)% (9.04 )% (1.35 )% 6.35% 14.04%

Common Share total return is comprised of two elements--the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on Preferred Shares)
and gains or losses on the value of the securities the Fund owns. As required
by Securities and Exchange Commission rules, the table assumes that the Fund is
more likely to suffer capital losses than to enjoy capital appreciation. For
example, to assume a total return of 0%, the Fund must assume that the interest
it receives on its investments is entirely offset by losses in the value of
those investments.

Other Forms of Leverage and Borrowings
The Fund may also leverage the portfolio by borrowing money, issuing debt
securities and utilizing reverse repurchase agreements and other derivative
instruments, although these forms of leverage will generally be used as a
substitute for, rather than in addition to, the leverage obtained through the
issuance of Preferred Shares.

Under the 1940 Act, the Fund generally is not permitted to engage in borrowings
(including through the use of reverse repurchase agreements and other
derivatives to the extent that these instruments constitute senior securities)
unless immediately after a borrowing the value of the Fund's total assets less
liabilities

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Preferred Shares and related leverage

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(other than the borrowing) is at least 300% of the principal amount of such
borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
borrowing, is at least 300% of such principal amount. If the Fund borrows, it
intends, to the extent possible, to prepay all or a portion of the principal
amount of the borrowing to the extent necessary in order to maintain the
required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle Preferred
Shareholders to elect a majority of the Trustees of the Fund. Derivative
instruments used by the Fund will not constitute senior securities (and will
not be subject to the Fund's limitations on borrowings) to the extent that the
Fund segregates liquid assets at least equal in amount to its obligations under
the instruments, or enters into offsetting transactions or owns positions
covering its obligations. For instance, the Fund may cover its position in a
reverse repurchase agreement by segregating liquid assets at least equal in
amount to its forward purchase commitment.

The Fund also may borrow money in order to repurchase its shares or as a
temporary measure for extraordinary or emergency purposes, including for the
payment of dividends or the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.

Risks

The net asset value of the Common Shares will fluctuate with and be affected
by, among other things, market discount risk, convertible securities risk,
synthetic convertible securities risk, credit risk, high yield risk, interest
rate risk, issuer risk, equities securities risk, leverage risk, liquidity
risk, foreign (non-U.S.) investment risk, smaller company risk, derivatives
risk, counterparty risk, reinvestment risk, REITs and mortgage-related risk,
inflation risk, management risk, market disruption and geopolitical risk and
risks associated with the affiliations of the Fund, the Manager and/or NACM. An
investment in Common Shares will also be subject to the risk associated with
the fact that the Fund is newly organized. These risks are summarized below.

NEWLY ORGANIZED

The Fund is a newly organized, diversified, closed-end management investment
company and has no operating history.

MARKET DISCOUNT RISK

CONVERTIBLE SECURITIES RISK

The Fund may invest without limit in convertible securities, and these
securities will ordinarily constitute a principal component of the Fund's
investment program. Convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality. The market
values of convertible securities tend to decline as interest rates increase
and, conversely, to increase as interest rates

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Risks

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decline. However, the convertible security's market value tends to reflect the
market price of the common stock of the issuing company when that stock price
is greater than the convertible's "conversion price." The conversion price is
defined as the predetermined price at which the convertible could be exchanged
for the associated stock. As the market price of the underlying common stock
declines, the price of the convertible security tends to be influenced more by
the yield of the convertible security. Thus, it may not decline in price to the
same extent as the underlying common stock, and convertible securities
generally have less potential for gain or loss than common stocks. However,
securities that are convertible other than at the option of the holder
generally do not limit the potential for loss to the same extent as securities
convertible at the option of the holder. In the event of a liquidation of the
issuing company, holders of convertible securities would be paid before the
company's common stockholders but after holders of any senior debt obligations
of the company. Consequently, the issuer's convertible securities generally
entail less risk than its common stock but more risk than its debt obligations.
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. See "High Yield Risk."

SYNTHETIC CONVERTIBLE SECURITIES RISK

The Fund may invest without limit in synthetic convertible securities. The
value of a synthetic convertible security will respond differently to market
fluctuations than a convertible security because a synthetic convertible is
composed of two or more separate securities, each with its own market value.
Because the convertible component is achieved by investing in warrants or
options to buy common stock at a certain exercise price, or options on a stock
index, synthetic convertible securities are subject to the risks associated
with derivatives. See "Convertible Securities Risk" and "Derivatives Risk." In
addition, if the value of the underlying common stock or the level of the index
involved in the convertible component falls below the exercise price of the
warrant or option, the warrant or option may lose all value.

CREDIT RISK

The Fund could lose money if the issuer of a convertible security or
non-convertible income-producing security or the counterparty to an option
contract, swap contract, loan of portfolio securities or other obligation, is,
or is perceived to be, unable or unwilling to make timely principal and/or
interest payments, or to otherwise honor its obligations.

HIGH YIELD RISK

In general, lower rated securities carry a greater degree of risk that the
issuer will lose its ability to make interest and principal payments, which
could have a negative impact on the Fund's net asset value or dividends. The
Fund may invest without limit in securities that are rated below investment
grade quality (i.e., below a rating of Baa or BBB by Moody's or S&P,
respectively), or that are unrated but judged to be of comparable quality by
NACM, and expects that ordinarily NACM's portfolio strategies will result in
the Fund investing primarily in these securities. Securities rated below
investment grade quality are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as "high yield" securities or "junk bonds." The
prices of these lower grade securities are more sensitive to negative
developments, such as a decline in the issuer's revenues or a general economic
downturn, than are the prices of higher grade securities. In addition, the
secondary market on which high yield securities are traded may be less liquid
than the market for investment grade securities, meaning these securities are
subject to greater liquidity risk than investment grade securities. Securities
in the lowest investment grade category also may be considered to possess some
speculative characteristics by certain rating agencies.

INTEREST RATE RISK

Interest rate risk is the risk that convertible securities and non-convertible
income-producing securities (and the Fund's net assets) will decline in value
because of changes in interest rates. Generally, income-producing

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Risks

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

securities will decrease in value when interest rates rise and increase in
value when interest rates decline. This means that the net asset value of the
Common Shares will fluctuate with interest rate changes and the corresponding
changes in the value of the Fund's holdings. Because market interest rates are
currently near their lowest levels in many years, there is a greater risk that
the Fund's portfolio will decline in value. The Fund's use of leverage through
the issuance of Preferred Shares or other strategies will tend to increase
Common Share interest rate risk.

ISSUER RISK

The value of securities in the Fund's portfolio may decline for a number of
reasons which directly relate to the issuer, such as management performance,
financial leverage and reduced demand for the issuer's goods and services.

EQUITY SECURITIES RISK

The Fund will often have substantial exposure to equity securities by virtue of
the equity component of the convertible securities in which the Fund invests.
The Fund may also hold equity securities in its portfolio upon conversion of a
convertible security or through direct investments in preferred stocks. The
market price of equity securities may go up or down, sometimes rapidly or
unpredictably. Equity securities may decline in value due to factors affecting
equity securities markets generally, particular industries represented in those
markets or the issuer itself, including the historical and prospective earnings
of the issuer and the value of its assets. The values of equity securities may
decline due to general market conditions which are not specifically related to
a particular company, such as real or perceived adverse economic conditions,
changes in the general outlook for corporate earnings, changes in interest or
currency rates or adverse investor sentiment generally. They may also decline
due to factors which affect a particular industry or industries, such as labor
shortages or increased production costs and competitive conditions within an
industry. Equity securities generally have greater price volatility than debt
and other income-producing securities.

LEVERAGE RISK

The Fund presently intends to use leverage by issuing Preferred Shares
representing approximately 35% of the Fund's capital immediately after their
issuance. The Fund may also leverage the portfolio by borrowing money, issuing
debt securities and utilizing reverse repurchase agreements and other
derivative instruments, although these forms of leverage will generally be used
as a substitute for, rather than in addition to, the leverage obtained through
the issuance of Preferred Shares. There can be no assurance that the Fund's
leveraging strategy involving Preferred Shares or any other leveraging
strategies will be successful. Once the Preferred Shares are issued or other
forms of leverage are used, the net asset value and market value of Common
Shares will be more volatile, and the yield and total return to Common
Shareholders will tend to fluctuate more in response to changes in interest
rates and with changes in the short-term dividend rates on the Preferred
Shares. The Fund anticipates that the Preferred Shares, at least initially,
would likely pay cumulative dividends at rates determined over relatively
short-term periods (such as seven days), by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedures. See "Description of shares--Preferred Shares." The rates of return
on intermediate- and long-term obligations are typically, although not always,
higher than the rates of return on short-term obligations. If the dividend rate
on the Preferred Shares approaches the net rate of return on the Fund's
investment portfolio, the benefit of leverage to Common Shareholders will be
reduced. If the dividend rate on the Preferred Shares exceeds the net rate of
return on the Fund's portfolio, the leverage will result in a lower rate of
return to Common Shareholders than if the Fund were not leveraged. Because the
longer-term instruments included in the Fund's portfolio will typically pay
fixed rates of interest while the dividend rate on the Preferred Shares will be
adjusted periodically,

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Risks

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

this could occur even when both long-term and short-term interest rates rise.
In addition, the Fund will pay (and Common Shareholders will bear) any costs
and expenses relating to the issuance and ongoing maintenance of the Preferred
Shares. The Fund cannot assure you that it will issue Preferred Shares or use
other forms of leverage or, if used, that these strategies will result in a
higher yield or return to Common Shareholders.

Similarly, any decline in the net asset value of the Fund's investments will be
borne entirely by Common Shareholders. Therefore, if the market value of the
Fund's portfolio declines or the reference security or index of a derivatives
instrument fluctuates adversely, any leverage will result in a greater decrease
in net asset value to Common Shareholders than if the Fund were not leveraged.
Any such decrease will also tend to cause a greater decline in the market price
for the Common Shares. The Fund might be in danger of failing to maintain the
required 200% asset coverage or of losing its expected AAA/Aaa ratings on any
Preferred Shares or, in an extreme case, the Fund's current investment income
might not be sufficient to meet the dividend requirements on the Preferred
Shares. In order to counteract such an event, or in order to meet its other
obligations, the Fund might need to liquidate investments in order to fund the
repurchase of some or all of the Preferred Shares. Liquidation at times of low
securities prices may result in capital loss and may reduce returns to Common
Shareholders.

While the Fund may from time to time consider reducing leverage in response to
actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance if the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and Common Share price if the prediction were to turn out
to be correct, and determine not to reduce leverage as described above.

LIQUIDITY RISK

The Fund may invest up to 5% of its total assets in securities which are
illiquid at the time of investment. The term "illiquid securities" for this
purpose is determined using the Securities and Exchange Commission's standard
applicable to open-end investment companies, i.e., securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the value at which the Fund has valued the securities. Illiquid
securities may be subject to wide fluctuations in market value. The Fund may be
subject to significant delays in disposing of illiquid securities. Accordingly,
the Fund may be forced to sell these securities at less than fair market value
or may not be able to sell them when NACM believes it is desirable to do so.
Illiquid securities also may entail registration expenses and other transaction
costs that are higher than those for liquid securities. Restricted securities,
i.e., securities subject to legal or contractual restrictions on resale, may
also be illiquid. However, some restricted securities (such as securities
issued pursuant to Rule 144A under the Securities Act of 1933 and certain
commercial paper) may be treated as liquid for these purposes.

FOREIGN (NON-U.S.) INVESTMENT RISK

The Fund may invest up to 20% of its total assets in U.S. dollar-denominated
securities of foreign issuers based in developed countries. The Fund's
investments in foreign issuers involve special risks. There may be less
information publicly available about a foreign issuer than about a U.S. issuer,
and foreign issuers

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Risks

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are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage costs, custodial
expenses and other fees are also generally higher than for securities traded in
the United States. With respect to certain foreign countries, there is also a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could affect the value
of investments in those countries. In addition, income received by the Fund
from sources within foreign countries may be reduced by withholding and other
taxes imposed by such countries.

SMALLER COMPANY RISK

The general risks associated with corporate income-producing and equity
securities are particularly pronounced for securities issued by companies with
smaller market capitalizations. These companies may have limited product lines,
markets or financial resources, or they may depend on a few key employees. As a
result, they may be subject to greater levels of credit, market and issuer
risk. Securities of smaller companies may trade less frequently and in lesser
volume than more widely held securities and their values may fluctuate more
sharply than other securities. Companies with medium-sized market
capitalizations may have risks similar to those of smaller companies.

DERIVATIVES RISK

Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index (or relationship
between two indexes). The Fund may utilize derivative instruments for
investment purposes, as well as to leverage its portfolio, generally as a
substitute for, rather than in addition to, the issuance of Preferred Shares.
These may include derivatives used as a component of a synthetic convertible
security or to gain exposure to high yield securities and other securities in
which the Fund may invest (pending investment of the proceeds of this
offering). Such derivative instruments include, but are not limited to,
warrants, options on common stock or stock indexes, futures contracts and swap
agreements. The Fund will invest in warrants and options only to the extent
that the convertible components of the synthetic convertible securities in
which it invests consist of a warrant, call option on common stock or call
option on a stock index. The Fund may also have exposure to derivatives, such
as credit default swaps and interest swaps through investments in credit-linked
trust certificates and other securities issued by special purpose or structured
vehicles. The Fund's use of derivative instruments involves risks different
from, and possibly greater than, the risks associated with investing directly
in securities and other traditional investments. Derivatives are subject to a
number of risks described elsewhere in this Prospectus, such as liquidity risk,
equity securities risk, issuer risk, credit risk, interest rate risk,
leveraging risk, management risk and, if applicable, smaller companies risk.
They also involve the risk of mispricing or improper valuation, the risk of
ambiguous documentation and the risk that changes in the value of the
derivative may not correlate perfectly with the underlying asset, rate or
index. Also, suitable derivative transactions may not be available in all
circumstances, and there can be no assurance that the Fund will engage in these
transactions when that would be beneficial. The use of derivatives also may
increase the amount of taxes payable by shareholders.

COUNTERPARTY RISK

The Fund will be subject to credit risk with respect to the counterparties to
the derivative contracts entered into directly by the Fund or held by special
purpose or structured vehicles in which the Fund invests. If a counterparty
becomes bankrupt or otherwise fails to perform its obligations under a
derivative contract due to financial difficulties, the Fund may experience
significant delays in obtaining any recovery under the derivative contract in a
bankruptcy or other reorganization proceeding. The Fund may obtain only a
limited recovery or may obtain no recovery in such circumstances.

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Risks

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REINVESTMENT RISK

Reinvestment risk is the risk that income from the Fund's portfolio will
decline if and when the Fund invests the proceeds from matured, traded or
called obligations at market interest rates that are below the portfolio's
current earnings rate. A decline in income could affect the Common Shares'
market price or their overall returns.

REITS AND MORTGAGE-RELATED RISK

Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. An equity
REIT may be affected by changes in the value of the underlying properties owned
by the REIT. A mortgage REIT may be affected by changes in interest rates and
the ability of the issuers of its portfolio mortgages to repay their
obligations. REITs are dependent upon the skills of their managers and are not
diversified. REITs are generally dependent upon maintaining cash flows to repay
borrowings and to make distributions to shareholders and are subject to the
risk of default by lessees or borrowers. REITs whose underlying assets are
concentrated in properties used by a particular industry, such as health care,
are also subject to risks associated with such industry.

REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans the interest
rates on which are reset periodically, yields on a REIT's investments in such
loans will gradually align themselves to reflect changes in market interest
rates. This causes the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate
obligations.

REITs may have limited financial resources, may trade less frequently and in a
limited volume and may be subject to more abrupt or erratic price movements
than larger company securities. Historically, REITs have been more volatile in
price than the larger capitalization stocks included in Standard & Poor's 500
Stock Index.

In addition to REITs, the Fund may invest in a variety of other
mortgage-related securities, including commercial mortgage securities and other
mortgage-backed instruments. Rising interest rates tend to extend the duration
of mortgage-related securities, making them more sensitive to changes in
interest rates. As a result, in a period of rising interest rates,
mortgage-related securities held by the Fund may exhibit additional volatility.
This is known as extension risk. In addition, mortgage-related securities are
subject to prepayment risk--the risk that borrowers may pay off their mortgages
sooner than expected, particularly when interest rates decline. This can reduce
the Fund's returns because the Fund may have to reinvest that money at lower
prevailing interest rates. The Fund's investments in other asset-backed
securities are subject to risks similar to those associated with
mortgage-related securities, as well as additional risks associated with the
nature of the assets and the servicing of those assets.

INFLATION RISK

Inflation risk is the risk that the value of assets or income from the Fund's
investments will be worth less in the future as inflation decreases the value
of money. As inflation increases, the real, or inflation-adjusted, value of the
Common Shares and distributions can decline and the dividend payments on the
Fund's Preferred Shares, if any, may increase.

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Risks

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MANAGEMENT RISK

The Fund is subject to management risk because it is an actively managed
investment portfolio. NACM and the individual portfolio manager will apply
investment techniques and risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will produce the desired results.

MARKET DISRUPTION AND GEOPOLITICAL RISK

CERTAIN AFFILIATIONS

Certain broker-dealers may be considered to be affiliated persons of the Fund,
the Manager and/or NACM due to their possible affiliations with Allianz AG, the
ultimate parent of the Manager and NACM. Absent an exemption from the
Securities and Exchange Commission or other regulatory relief, the Fund is
generally precluded from effecting certain principal transactions with
affiliated brokers, and its ability to purchase securities being underwritten
by an affiliated broker or a syndicate including an affiliated broker, or to
utilize affiliated brokers for agency transactions, is subject to restrictions.
This could limit the Fund's ability to engage in securities transactions and
take advantage of market opportunities. In addition, unless and until the
underwriting syndicate is broken in connection with the initial public offering
of the Common Shares, the Fund will be precluded from effecting principal
transactions with brokers who are members of the syndicate.

How the Fund manages risk

INVESTMENT LIMITATIONS

The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations (two
of which are listed below) are fundamental and may not be changed without the
approval of the holders of a majority of the outstanding Common Shares and, if
issued, Preferred Shares voting together as a single class, and the approval of
the holders of a majority of the Preferred Shares voting as a separate class.
The Fund may not:

.. Concentrate its investments in a particular "industry," as that term is used
in the 1940 Act, and as interpreted, modified or otherwise permitted by
regulatory authority having jurisdiction, from time to time; and

.. With respect to 75% of the Fund's total assets, purchase the securities of
any issuer, except securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities or securities of other investment
companies, if, as a result, (i) more than 5% of the Fund's total assets
would be invested in the securities of that issuer or (ii) the Fund would
hold more than 10% of the outstanding voting securities of that issuer.

The Fund would be deemed to "concentrate" its investments in a particular
industry if it invested 25% or more of its total assets in that industry. The
Fund's industry concentration policy does not preclude

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How the Fund manages risk

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

it from focusing investments in issuers in a group of related industrial
sectors (such as different types of utilities).

The Fund may become subject to asset coverage and other guidelines which are
more limiting than the investment restrictions set forth above and other
restrictions set forth in the Statement of Additional Information in order to
obtain and maintain a rating or ratings from Moody's, S&P and/or Fitch, Inc. on
the Preferred Shares that it presently intends to issue. The Fund does not
anticipate that such guidelines would have a material adverse effect on the
Fund's Common Shareholders or the Fund's ability to achieve its investment
objective. See "Investment Objective and Policies" and "Investment
Restrictions" in the Statement of Additional Information for information about
these guidelines and a complete list of the fundamental investment policies of
the Fund.

LIMITED ISSUANCE OF PREFERRED SHARES

Under the 1940 Act, the Fund could issue Preferred Shares having a total
liquidation value (original purchase price of the shares being liquidated plus
any accrued and unpaid dividends) of up to one-half of the value of the total
assets of the Fund, less liabilities. To the extent that the Fund has
outstanding any senior securities representing indebtedness, the aggregate
amount of such senior securities will be added to the total liquidation value
of any outstanding Preferred Shares for purposes of this asset coverage
requirement. If the total liquidation value of the Preferred Shares plus the
aggregate amount of such other senior securities were ever more than one-half
of the value of the Fund's total net assets, the Fund would not be able to
declare dividends on the Common Shares until such liquidation value and/or
aggregate amount of other senior securities, as a percentage of the Fund's
total assets, were reduced. The Fund presently intends to issue Preferred
Shares representing approximately 35% of the Fund's total capital immediately
after their issuance approximately one to three months after the completion of
the offering of Common Shares. This higher than required margin of net asset
value provides a cushion against later fluctuations in the value of the Fund's
portfolio and will subject Common Shareholders to less income and net asset
value volatility than if the Fund were more highly leveraged through Preferred
Shares. No assurance can be given that this cushion will not be reduced or
eliminated. The Fund intends to repurchase Preferred Shares, if necessary, to
keep the liquidation value of the Preferred Shares plus the aggregate amount of
other senior securities representing indebtedness below one-half of the value
of the Fund's total net assets.

MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK

The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average weighted
maturity of its investment portfolio (which will typically range from five to
ten years), by investing in short-term, high grade securities or may extend the
dividend period of outstanding Preferred Shares. The Fund also may attempt to
reduce leverage by repurchasing or otherwise retiring Preferred Shares or by
reducing any holdings in other instruments that create leverage. As explained
above under "Risks--Leverage Risk," the success of any such attempt to limit
leverage risk depends on NACM's ability to accurately predict interest rate or
other market changes. Because of the difficulty of making such predictions, the
Fund may not be successful in managing its interest rate exposure in the manner
described above.

If market conditions suggest that additional leverage would be beneficial, the
Fund may sell previously unissued Preferred Shares or Preferred Shares that the
Fund previously issued but later repurchased. As a

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How the Fund manages risk

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substitute for, rather than in addition to, the leverage obtained through the
issuance of Preferred Shares under such conditions, the Fund may also leverage
the portfolio by borrowing money, issuing debt securities and/or utilizing
reverse repurchase agreements and other derivative instruments.

Management of the Fund

TRUSTEES AND OFFICERS

The Board of Trustees is responsible for the management of the Fund, including
supervision of the duties performed by the Manager and NACM. There are
presently three Trustees of the Fund, none of whom is currently treated by the
Fund as an "interested person" (as defined in the 1940 Act). The names and
business addresses of the Trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.

INVESTMENT MANAGER

PIMCO Advisors Fund Management LLC serves as the investment manager of the
Fund. Subject to the supervision of the Board of Trustees, the Manager is
responsible for managing, either directly or through others selected by it, the
investment activities of the Fund and the Fund's business affairs and other
administrative matters. The Manager is located at 1345 Avenue of the Americas,
New York, New York 10105.

Organized in 2000 as a subsidiary successor in the restructuring of a business
originally organized in 1987, the Manager provides investment management and
advisory services to several closed-end and open-end investment company
clients. As of December 31, 2002, the Manager had approximately $16.6 billion
in assets under management. Allianz Dresdner Asset Management of America L.P.
is the direct parent company of PIMCO Advisors Retail Holdings LLC, of which
the Manager is a wholly-owned subsidiary. As of December 31, 2002, Allianz
Dresdner Asset Management of America L.P. and its subsidiary partnerships,
including NACM, had approximately $357 billion in assets under management.

The Manager has retained its affiliate, NACM, to manage the Fund's investments.
See "--Portfolio Manager" below. The Manager and NACM are each majority-owned
indirect subsidiaries of Allianz AG, a publicly traded German insurance and
financial services company.

PORTFOLIO MANAGER

NACM serves as the portfolio manager for the Fund pursuant to a sub-advisory
agreement between the Manager and NACM. Subject to this agreement and the
supervision of the Manager, NACM has full investment discretion and makes all
determinations with respect to the investment of the Fund's assets.

For its services pursuant to the sub-advisory agreement, the Manager (and not
the Fund) will pay to NACM a monthly fee equal to (i) fifty percent (50%) of
the management fees payable by the Fund to the

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Management of the Fund

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Manager for such month with respect to the first $300 million of the Fund's
average daily total managed assets and (ii) seventy-five percent (75%) of the
management fees payable by the Fund to the Manager for such month with respect
to the Fund's average daily total managed assets in excess of $300 million;
provided, however, that the amounts payable under (i) and (ii) above shall be
reduced to reflect that NACM will bear 50% and 75%, respectively, of any
Service or Incentive Fees payable by the Manager for such month with respect to
the specified total managed assets. For these purposes, "Service or Incentive
Fees" for any period equals the sum of any Shareholder Servicing Fees payable
by the Manager to UBS Warburg LLC (as described under "Shareholder servicing
agent, custodian and transfer agent") for such period and any incentive fees
payable by the Manager to other underwriters (as described under
"Underwriting") for such period.

The following six individuals are part of the Convertibles/High Yield team at
NACM and constitute the team that has primary responsibility for the day-to-day
portfolio management of the Fund, with Mr. Forsyth serving as the head of the
team:

Since Recent Professional Experience
----------------------------------------------------------------------------------------------

Douglas Forsyth, CFA 2003 Mr. Forsyth is a Senior Portfolio Manager and Member of the
(Inception) Executive Committee at NACM. He joined NACM in 1994 after
three years of investment management experience at AEGON
USA. Mr. Forsyth holds a B.B.A. from the University of Iowa.
William L. Stickney 2003 Mr. Stickney is a portfolio manager at NACM. He joined
(Inception) NACM in 1999 after an aggregate of ten years of investment
experience with ABN AMRO, Inc., Cowen & Company and
Wayne Hummer & Company. Mr. Stickney holds a B.S. from
Miami University and is an M.M. candidate at Northwestern
University, J.L. Kellogg School of Management.
Michael E. Yee 2003 Mr. Yee is a portfolio manager at NACM. He joined NACM
(Inception) in 1995 and has been a portfolio manager since 1998. Mr.
Yee holds a B.S. from the University of California, San Diego
and an M.B.A. from San Diego State University.
Justin Kass 2003 Mr. Kass is an investment analyst at NACM. He joined
(Inception) NACM in 2000 after serving as an intern on the
Convertibles/High Yield team and has four years of
investment experience. Mr. Kass holds a B.S. from the
University of California, Davis and an M.B.A. from the
Anderson School at the University of California, Los Angeles.
Elizabeth Lemesevski 2003 Ms. Lemesevski is an investment analyst at NACM. She
(Inception) joined NACM in 2001 after an aggregate of nine years of
investment and research experience with T.A. McKay & Co.,
Citibank and CoreStates Philadelphia International Bank.
Ms. Lemesevski holds a B.S. from Rutgers University and an
M.B.A. from Fordham University.
Nicole Larrabee 2003 Ms. Larrabee is a trading assistant/analyst at NACM. She
(Inception) joined NACM in 2000 after an aggregate of four years of
investment and research experience with Salomon Smith
Barney (Schroders), Lehman Brothers, Inc., Heflin and Co.,
LLC, Sun Alliance Holdings, Ltd. and Cantor Fitzgerald and
Co., Inc. Ms. Larrabee holds a B.S. from the University of
Arizona.

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Management of the Fund

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INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an investment management agreement between the Manager and the Fund
(the "Investment Management Agreement"), the Fund has agreed to pay the Manager
an annual management fee payable on a monthly basis at the annual rate of 0.70%
of the Fund's average daily total managed assets for the services and
facilities it provides.

In addition to the fees of the Manager, the Fund pays all other costs and
expenses of its operations, including compensation of its Trustees (other than
those affiliated with the Manager), custodial expenses, shareholder servicing
expenses, transfer agency and dividend disbursing expenses, legal fees,
expenses of independent auditors, expenses of repurchasing shares, expenses of
issuing any Preferred Shares, expenses of preparing, printing and distributing
prospectuses, shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.

Because the fees received by the Manager and NACM are based on the total
managed assets of the Fund (including assets attributable to Preferred Shares
and any other forms of leverage that may be outstanding), the Manager and NACM
each have a financial incentive for the Fund to issue Preferred Shares and
utilize other forms of leverage, which may create a conflict of interest
between the Manager/NACM and the holders of the Fund's Common Shares.

Net asset value

The net asset value ("NAV") of the Fund equals the total value of the Fund's
portfolio investments and other assets, less any liabilities. For purposes of
calculating NAV, portfolio securities and other assets for which market quotes
are available are stated at market value. Market value is generally determined
on the basis of the last reported sales price, or if no sales are reported,
based on quotes obtained from a quotation reporting system, established market
makers or pricing services. Certain securities or investments for which market
quotations are not readily available may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to other securities or
indexes. For instance, a pricing service may recommend a fair market value
based on prices of comparable securities. Short-term investments having a
maturity of 60 days or less are generally valued at amortized cost. Other
securities for which market quotes are not readily available are valued at fair
value as determined in good faith by the Board of Trustees or persons acting at
its direction.

The NAV of the Fund will be determined as of the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m., Eastern time) (the "NYSE
Close") on each day the New York Stock Exchange is open. For purposes of
calculating the NAV, the Fund normally uses pricing data for domestic equity
securities received shortly after the NYSE Close and does not normally take
into account trading, clearances or settlements that take place after the NYSE
Close. Domestic securities and foreign securities are normally priced using
data reflecting the earlier closing of the principal markets for those
securities. Information that becomes known to the Fund or its agent after the
Fund's NAV has been calculated on a particular day will not be used to
retroactively adjust the price of a security or the Fund's NAV determined
earlier that day.

Investments initially valued in currencies other than the U.S. dollar are
converted to U.S. dollars using exchange rates obtained from pricing services.
As a result, the NAV of the Fund's shares may be affected by changes in the
value of currencies in relation to the U.S. dollar. The value of securities
traded in markets outside the United States or denominated in currencies other
than the U.S. dollar may be affected significantly on a day that the New York
Stock Exchange is closed.

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Net asset value

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In unusual circumstances, instead of valuing securities in the usual manner,
the Fund may value securities at fair value as determined in good faith by the
Board of Trustees, generally based upon recommendations provided by NACM. The
Fund may also be required to use fair valuation as a result of events occurring
after the close of the relevant market but prior to the NYSE Close.

Distributions

Commencing with the first dividend, the Fund intends to make regular monthly
cash distributions to Common Shareholders at a rate based upon the projected
performance of the Fund. Distributions can only be made from net investment
income after paying any accrued dividends to Preferred Shareholders. The
dividend rate that the Fund pays will depend on a number of factors, including
dividends payable on the Preferred Shares and the expenses of any other
leveraging transactions. The net income of the Fund consists of all income paid
or accrued on portfolio assets less all expenses of the Fund. Expenses of the
Fund are accrued each day. Over time, substantially all the net investment
income of the Fund will be distributed. At least annually, the Fund also
intends to distribute to you your pro rata share of any available net capital
gain. Initial distributions to Common Shareholders are expected to be declared
approximately 45 days, and paid approximately 60 to 90 days, from the
completion of this offering, depending on market conditions. Although it does
not now intend to do so, the Board of Trustees may change the Fund's dividend
policy and the amount or timing of the distributions based on a number of
factors, including the amount of the Fund's undistributed net investment income
and historical and projected investment income and the amount of the expenses
and dividend rates on any outstanding Preferred Shares.

To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value.

Dividend reinvestment plan

Pursuant to the Fund's dividend reinvestment plan (the "Plan"), all Common
Shareholders whose shares are registered in their own names will have all
dividends, including any capital gain dividends, reinvested automatically in
additional Common Shares by PFPC Inc., as agent for the Common Shareholders
(the "Plan Agent"), unless the shareholder elects to receive cash. An election
to receive cash may be revoked or reinstated at the option of the shareholder.
In the case of record shareholders such as banks, brokers or other nominees
that hold Common Shares for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of Common Shares
certified from time to time by the record shareholder as representing the total
amount registered in such shareholder's name and held for the account of
beneficial owners who are to participate in the Plan. Shareholders whose shares
are held in the name of a bank, broker or nominee should contact the bank,
broker or nominee for details. Such shareholders may not be able to transfer
their shares to another bank or broker and continue to participate in the Plan.
All distributions to investors who elect not to participate in the Plan (or
whose broker or nominee elects not to participate on the investor's behalf),
will be paid in cash by check mailed, in the case of direct shareholders, to
the record holder by PFPC Inc., as the Fund's dividend disbursement agent.

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Dividend reinvestment plan

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

Unless you elect (or your broker or nominee elects) not to participate in the
Plan, the number of Common Shares you will receive will be determined as
follows:

(1) If Common Shares are trading at or above net asset value on the payment
date, the Fund will issue new shares at the greater of (i) the net asset
value per Common Share on the payment date or (ii) 95% of the market
price per Common Share on the payment date; or

(2) If Common Shares are trading below net asset value (minus estimated
brokerage commissions that would be incurred upon the purchase of Common
Shares on the open market) on the payment date, the Plan Agent will
receive the dividend or distribution in cash and will purchase Common
Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. It is possible that the market price for
the Common Shares may increase before the Plan Agent has completed its
purchases. Therefore, the average purchase price per share paid by the
Plan Agent may exceed the market price on the payment date, resulting in
the purchase of fewer shares than if the dividend or distribution had
been paid in Common Shares issued by the Fund. The Plan Agent will use
all dividends and distributions received in cash to purchase Common
Shares in the open market on or shortly after the payment date, but in
no event later than the ex-dividend date for the next distribution.
Interest will not be paid on any uninvested cash payments.

You may withdraw from the Plan at any time by giving written notice to the Plan
Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions.

The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. The Plan Agent will also furnish each person who
buys Common Shares with written instructions detailing the procedures for
electing not to participate in the Plan and to instead receive distributions in
cash. Common Shares in your account will be held by the Plan Agent in
non-certificated form. Any proxy you receive will include all Common Shares you
have received under the Plan.

There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.

Automatically reinvested dividends and distributions are taxed in the same
manner as cash dividends and distributions.

The Fund and the Plan Agent reserve the right to amend or terminate the Plan.
There is no direct service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants. Additional information about the Plan may be obtained from
PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809, telephone number
1-800-331-1710.

Description of shares

COMMON SHARES

The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares will be issued with a par value of $0.00001 per
share. All Common Shares have equal rights to

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Description of shares

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

the payment of dividends and the distribution of assets upon liquidation.
Common Shares will, when issued, be fully paid and, subject to matters
discussed in "Anti-takeover and other provisions in the Declaration of Trust,"
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. Whenever Preferred Shares are outstanding, Common
Shareholders will not be entitled to receive any distributions from the Fund
unless all accrued dividends on Preferred Shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to Preferred Shares
would be at least 200% after giving effect to the distributions. See
"--Preferred Shares" below.

The Common Shares have been authorized for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.

The Fund's net asset value per share generally increases when interest rates
decline, and decreases when interest rates rise, and these changes are likely
to be greater because the Fund intends to have a leveraged capital structure.
Net asset value will be reduced immediately following the offering by the
amount of the sales load and offering expenses paid by the Fund. The Manager
has agreed to pay all of the Fund's organizational expenses and the amount by
which the Fund's offering costs (other than the sales load) exceeds $0.03 per
Common Share.

Unlike open-end funds, closed-end funds like the Fund do not continuously offer
shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies may frequently trade on an exchange
at prices lower than net asset value. Shares of closed-end investment companies
have during some periods traded at prices higher than net asset value and
during other periods have traded at prices lower than net asset value. The
Fund's Declaration limits the ability of the Fund to convert to open-end
status. See "Anti-takeover and other provisions in the Declaration of Trust."

Because the market value of the Common Shares may be influenced by such factors
as dividend levels (which are in turn affected by expenses), call protection,
dividend stability, portfolio credit quality, net asset value, relative demand
for and supply of such shares in the market, general market and economic
conditions and other factors beyond the control of the Fund, the Fund cannot
assure you that the Common Shares will trade at a price equal to or higher than
net asset value in the future. The Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the
Fund as a vehicle for trading purposes. See "Preferred shares and related
leverage" and the Statement of Additional Information under "Repurchase of
Common Shares; Conversion to Open-End Fund."

PREFERRED SHARES

The Declaration authorizes the issuance of an unlimited number of Preferred
Shares. The Preferred Shares may be issued in one or more classes or series,
with such par value and rights as determined by the Board of Trustees, by
action of the Board of Trustees without the approval of the Common Shareholders.

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Description of shares

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

Common Shareholders described in this Prospectus. Although the terms of the
Preferred Shares will be determined by the Board of Trustees (subject to
applicable law and the Fund's Declaration) if and when it authorizes a
Preferred Shares offering, the Board has determined that the Preferred Shares,
at least initially, would likely pay cumulative dividends at rates determined
over relatively short-term periods (such as seven days), by providing for the
periodic redetermination of the dividend rate through an auction or remarketing
procedure. The Board of Trustees has indicated that the preference on
distribution, liquidation preference, voting rights and repurchase provisions
of the Preferred Shares will likely be as stated below. The Fund expects to
obtain and maintain a rating or ratings from one or more rating agencies in
connection with the Preferred Shares, which may subject the Fund to asset
coverage and other guidelines that are more limiting than the investment
restrictions set forth in this Prospectus and the Statement of Additional
Information. See "How the Fund manages risk--Investment Limitations."

As used in this Prospectus, unless otherwise noted, the Fund's "net assets"
include assets of the Fund attributable to any outstanding Preferred Shares,
with no deduction for the liquidation preference of the Preferred Shares.
Solely for financial reporting purposes, however, the Fund is required to
exclude the liquidation preference of Preferred Shares from "net assets," so
long as the Preferred Shares have repurchase features that are not solely
within the control of the Fund. For all regulatory and tax purposes, the Fund's
Preferred Shares will be treated as stock (rather than indebtedness).

Limited Issuance of Preferred Shares
Under the 1940 Act, the Fund could issue Preferred Shares with an aggregate
liquidation value of up to one-half of the value of the Fund's total net assets
(total assets less all liabilities and indebtedness not represented by "senior
securities," as defined in the 1940 Act), measured immediately after issuance
of the Preferred Shares. "Liquidation value" means the original purchase price
of the shares being liquidated plus any accrued and unpaid dividends. In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless the liquidation value of the Preferred
Shares is less than one-half of the value of the Fund's total net assets
(determined after deducting the amount of such dividend or distribution)
immediately after the distribution. The liquidation value of the Preferred
Shares is expected to be approximately 35% of the value of the Fund's total net
assets. The Fund intends to repurchase or otherwise retire Preferred Shares, if
necessary, to keep that fraction below one-half.

Distribution Preference
The Preferred Shares have complete priority over the Common Shares as to
distribution of assets.

Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Fund, holders of Preferred Shares will be
entitled to receive a preferential liquidating distribution (expected to equal
the original purchase price per share plus accumulated and unpaid dividends
thereon, whether or not earned or declared) before any distribution of assets
is made to holders of Common Shares.

Voting Rights
Preferred Shares are required to be voting shares. Except as otherwise provided
in the Declaration or the Fund's Bylaws or otherwise required by applicable
law, holders of Preferred Shares will vote together with Common Shareholders as
a single class.

Holders of Preferred Shares, voting as a separate class, will also be entitled
to elect two of the Fund's Trustees. The remaining Trustees will be elected by
Common Shareholders and holders of Preferred Shares, voting together as a
single class. In the unlikely event that two full years of accrued dividends are

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Description of shares

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

unpaid on the Preferred Shares, the holders of all outstanding Preferred
Shares, voting as a separate class, will be entitled to elect a majority of the
Fund's Trustees until all dividends in arrears have been paid or declared and
set apart for payment.

Repurchase and Sale of Preferred Shares
The terms of the Preferred Shares may provide that they may be repurchased by
the Fund at certain times, in whole or in part, at the original purchase price
per share plus accumulated dividends. The terms also may state that the Fund
may tender for or purchase Preferred Shares and resell any shares so tendered.
Any repurchase or other retirement of Preferred Shares by the Fund will reduce
the leverage applicable to Common Shares, while any resale of Preferred Shares
by the Fund will increase such leverage. See "Preferred Shares and related
leverage."

The discussion above describes the Board of Trustees' present intention with
respect to a possible offering of Preferred Shares. If the Board of Trustees
determines to authorize such an offering, the terms of the Preferred Shares may
be the same as, or different from, the terms described above, subject to
applicable law and the Fund's Declaration and Bylaws.

Anti-takeover and other provisions
in the Declaration of Trust

The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. The Fund's Trustees are divided into three classes. At each
annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, the Declaration provides that a Trustee may be removed only for cause
and only (i) by action of at least seventy-five percent (75%) of the
outstanding shares of the classes or series of shares entitled to vote for the
election of such Trustee or (ii) by at least seventy-five percent (75%) of the
remaining Trustees.

As described below, the Declaration grants special approval rights with respect
to certain matters to members of the Board who qualify as "Continuing
Trustees," which term means a Trustee who either (i) has been a member of the
Board for a period of at least thirty-six months (or since the commencement of
the Fund's operations, if less than thirty-six months) or (ii) was nominated to
serve as a member of the Board of Trustees by a majority of the Continuing
Trustees then members of the Board.

The Declaration requires the affirmative vote or consent of at least
seventy-five percent (75%) of the Board of Trustees and holders of at least
seventy-five percent (75%) of the Fund's shares (including Common and Preferred
Shares) to authorize certain Fund transactions not in the ordinary course of
business, including a merger or consolidation or a sale or transfer of Fund
assets, unless the transaction is authorized by both a majority of the Trustees
and seventy-five percent (75%) of the Continuing Trustees (in which case no
shareholder authorization would be required by the Declaration, but may be
required in certain cases under the 1940 Act). The Declaration also requires
the affirmative vote or consent of holders of at least seventy-five percent
(75%) of each class of the Fund's shares entitled to vote on the matter to
authorize a conversion of the Fund from a closed-end to an open-end investment
company, unless the conversion is authorized by both a majority of the Trustees
and seventy-five percent (75%) of the Continuing Trustees (in which case
shareholders would have only the minimum voting rights

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Anti-takeover and other provisions in the Declaration of Trust

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

required by the 1940 Act with respect to the conversion). Also, the Declaration
provides that the Fund may be terminated at any time by vote or consent of at
least seventy-five percent (75%) of the Fund's shares or, alternatively, by
vote or consent of both a majority of the Trustees and seventy-five percent
(75%) of the Continuing Trustees. See "Anti-Takeover and Other Provisions in
the Declaration of Trust" in the Statement of Additional Information for a more
detailed summary of these provisions.

The Trustees may from time to time grant other voting rights to shareholders
with respect to these and other matters in the Fund's Bylaws.

The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking
control of the Fund to negotiate with its management regarding the price to be
paid and facilitating the continuity of the Fund's investment objective and
policies. The provisions of the Declaration described above could have the
effect of depriving the Common Shareholders of opportunities to sell their
Common Shares at a premium over the then current market price of the Common
Shares by discouraging a third party from seeking to obtain control of the Fund
in a tender offer or similar transaction. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its Common Shareholders.

The foregoing is intended only as a summary and is qualified in its entirety by
reference to the full text of the Declaration and the Fund's Bylaws, both of
which are on file with the Securities and Exchange Commission.

Under Massachusetts law, shareholders could, in certain circumstances, be held
personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
remote.

Repurchase of Common Shares;
conversion to open-end fund

The Fund is a closed-end investment company and as such its shareholders will
not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Shares of a
closed-end investment company may frequently trade at prices lower than net
asset value. The Fund's Board of Trustees regularly monitors the relationship
between the market price and net asset value of the Common Shares. If the
Common Shares were to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of its Common
Shares on the open market or in private transactions, the making of a tender
offer for such shares or the

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Repurchase of Common Shares; conversion to open-end fund

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

conversion of the Fund to an open-end investment company. The Fund cannot
assure you that its Board of Trustees will decide to take or propose any of
these actions, or that share repurchases or tender offers will actually reduce
market discount.

If the Fund were to convert to an open-end company, it would be required to
repurchase all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares would
no longer be listed on the New York Stock Exchange. In contrast to a closed-end
investment company, shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less any
redemption charge that is in effect at the time of redemption.

Before deciding whether to take any action to convert the Fund to an open-end
investment company, the Board would consider all relevant factors, including
the extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders,
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a discount, the Board of Trustees may determine that, in
the interest of the Fund and its shareholders no action should be taken. See
the Statement of Additional Information under "Repurchase of Common Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.

Tax matters

FEDERAL INCOME TAX MATTERS

The following federal income tax discussion is based on the advice of Ropes &
Gray, counsel to the Fund, and reflects provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing Treasury regulations, rulings
published by the Internal Revenue Service (the "Service"), and other applicable
authority, as of the date of this Prospectus. These authorities are subject to
change by legislative or administrative action, possibly with retroactive
effect. The following discussion is only a summary of some of the important tax
considerations generally applicable to investments in the Fund. For more
detailed information regarding tax considerations, see the Statement of
Additional Information. There may be other tax considerations applicable to
particular investors. In addition, income earned through an investment in the
Fund may be subject to state and local taxes.

The Fund intends to qualify each year for taxation as a regulated investment
company eligible for treatment under the provisions of Subchapter M of the
Code. If the Fund so qualifies and satisfies certain distribution requirements,
the Fund will not be subject to federal income tax on income distributed in a
timely manner to its shareholders in the form of dividends or capital gain
distributions.

To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Fund to its shareholders, including
holders of its Preferred Shares, must qualify for the dividends-paid deduction.
In certain circumstances, the Service could take the position that dividends
paid on the Preferred Shares constitute preferential dividends under Section
562(c) of the Code, and thus do not qualify for the dividends-paid deduction.

If at any time when Preferred Shares are outstanding the Fund does not meet
applicable asset coverage requirements, it will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% federal excise tax

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Tax matters

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

(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income and
capital gain net income) and income tax on undistributed income or gains, and
may, in certain circumstances, prevent the Fund from qualifying for treatment
as a regulated investment company. The Fund may repurchase or otherwise retire
Preferred Shares in an effort to comply with the distribution requirement
applicable to regulated investment companies and to avoid income and excise
taxes.

The Fund's investments in certain debt obligations may cause the Fund to
recognize taxable income in excess of the cash generated by such obligations.
Thus, the Fund could be required at times to liquidate other investments in
order to satisfy its distribution requirements.

For federal income tax purposes, distributions of investment income are taxable
as ordinary income. Whether distributions of capital gains are taxed as
ordinary income or capital gains is determined by how long the Fund owned the
investments that generated such capital gains rather than how long a
shareholder has owned his or her shares. Distributions are taxable to
shareholders even if they are paid from income or gains earned by the Fund
before a shareholder's investment (and thus were included in the price the
shareholder paid). Distributions of gains from the sale of investments that the
Fund owned for more than one year and that are properly designated by the Fund
as capital gain dividends will be taxable as capital gains. Distributions of
gains from the sale of investments that the Fund owned for one year or less
will be taxable as ordinary income. Distributions are taxable whether
shareholders receive them in cash or reinvest them in additional shares through
the dividend reinvestment plan. Any gain resulting from the sale or exchange of
Fund shares generally will be taxable as capital gains, assuming the shares are
held as a capital asset.

The Fund's investments in foreign securities may be subject to foreign
withholding taxes. In that case, the Fund's yield on those securities would be
decreased. In addition, the Fund's investments in foreign securities may
increase or accelerate the Fund's recognition of ordinary income and may affect
the timing or amount of the Fund's distributions.

Under current law, the backup withholding tax rate will be 30% for amounts paid
during 2003 if the Fund is required to apply backup withholding to taxable
distributions payable to a shareholder. Please see "Tax Matters" in the
Statement of Additional Information for additional information about (and
possible changes to) the new backup withholding tax rates.

The Bush Administration has announced a proposal to reduce or eliminate the tax
on dividends paid out of earnings previously taxed at the corporate level. Many
of the details of the proposal have not been specified, and the prospects for
this proposal are unclear. Accordingly, it is not possible to evaluate how this
proposal might affect the tax discussion above. The elimination of the double
taxation of corporate distributions may reduce the value of, and thus the
return on, previously issued debt obligations and similar securities which are
part of the Fund's investment portfolio. This change could reduce the Fund's
net asset value and distributions made by the Fund.

This section relates only to federal income tax consequences of investing in
the Fund; the consequences under other tax laws may differ. You should consult
your tax advisor as to the possible application of foreign, state and local
income tax laws to Fund dividends and capital distributions. Please see "Tax
Matters" in the Statement of Additional Information for additional information
regarding the tax aspects of investing in the Fund.

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

Underwriting

The Underwriters named below, acting through UBS Warburg LLC, 299 Park Avenue,
New York, New York, as lead manager, and Prudential Securities Incorporated,
Wachovia Securities, Inc., Legg Mason Wood Walker, Incorporated, RBC Dain
Rauscher Incorporated, Wells Fargo Securities, LLC, Advest, Inc., H&R Block
Financial Advisors, Inc., Fahnestock & Co. Inc., Ferris, Baker Watts,
Incorporated, Janney Montgomery Scott LLC, McDonald Investments Inc., a KeyCorp
Company and Wedbush Morgan Securities Inc. as their representatives (together
with the lead manager, the "Representatives"), have severally agreed, subject
to the terms and conditions of an underwriting agreement with the Fund and the
Manager (the "Underwriting Agreement"), to purchase from the Fund the number of
Common Shares set forth opposite their respective names. The Underwriters are
committed to purchase and pay for all of such Common Shares (other than those
covered by the over-allotment option described below) if any are purchased.

Number of
Underwriters Common Shares
--------------------------------------------------------------------------

UBS Warburg LLC.............................................
Prudential Securities Incorporated..........................
Wachovia Securities, Inc....................................
Legg Mason Wood Walker, Incorporated........................
RBC Dain Rauscher Incorporated..............................
Wells Fargo Securities, LLC.................................
Advest, Inc.................................................
H&R Block Financial Advisors, Inc...........................
Fahnestock & Co. Inc........................................
Ferris, Baker Watts, Incorporated...........................
Janney Montgomery Scott LLC.................................
McDonald Investments Inc., a KeyCorp Company................
Wedbush Morgan Securities Inc...............................
-------
Total....................................................
=======

The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to an additional Common
Shares to cover over-allotments, if any, at the initial offering price per
common share minus the commission described in the following paragraph. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the Common Shares offered hereby. To
the extent that the Underwriters exercise this option, each of the Underwriters
will have a firm commitment, subject to the terms and conditions of the
Underwriting Agreement, to purchase an additional number of Common Shares
proportionate to such Underwriter's initial commitment.

The Fund has agreed to pay a commission to the Underwriters in the amount of up
to $ per Common Share ( % of the public offering price per Common Share).
The Representatives have advised the Fund that the Underwriters may pay up to
$ per Common Share from such commission to selected dealers who sell the
Common Shares and that such dealers may reallow a concession of up to $ per
Common Share to certain other dealers who sell shares. Investors must pay for
any Common Shares purchased on or before March 31, 2003.

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

Underwriting

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

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

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

The Fund has agreed not to offer, sell or register with the Securities and
Exchange Commission any equity securities of the Fund, other than issuances of
Common Shares, including pursuant to the Fund's dividend reinvestment plan, and
issuances in connection with any offering of Preferred Shares, each as
contemplated in this Prospectus, for a period of 180 days after the date of the
Underwriting Agreement without the prior written consent of the Representatives.

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

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

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

In connection with this offering, certain of the Underwriters or selected
dealers may distribute prospectuses electronically.

The Manager (and not the Fund) has also agreed to pay from its own assets to
certain of the Underwriters an incentive fee at an annual rate equal to up to
0.10% of the Fund's average daily total managed assets attributable to Common
Shares sold by such Underwriter (including a proportionate share of net assets
attributable to Preferred Shares and other forms of leverage). This fee will be
payable in arrears at the end of each calendar quarter so long as the
Investment Management Agreement remains in effect between the Fund and the
Manager or any successor in interest or affiliate of the Manager, as and to the
extent that such Investment Management Agreement is renewed periodically in
accordance with the 1940 Act. If an Underwriter meets certain requirements
established by the Manager (each a "Qualifying Underwriter") (which may be
waived or modified in the discretion of the Manager), it will

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

Underwriting

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

receive a fee at the annual rate of 0.10% of the Fund's average daily total
managed assets (including net assets attributable to Preferred Shares and other
forms of leverage) multiplied by the percentage of the Fund's Common Shares
sold by the Qualifying Underwriter in this offering. The total amount of the
incentive fee payments will not exceed 4.5% of the aggregate initial offering
price of the Common Shares offered hereby; provided that, in determining when
the maximum amount has been paid, the value of each of the quarterly payments
shall be discounted at the annual rate of 10% to the closing date of this
offering.

As described below under "Shareholder servicing agent, custodian and transfer
agent," UBS Warburg LLC will provide shareholder services to the Fund pursuant
to a shareholder servicing agreement with the Manager.

Shareholder servicing agent, custodian and transfer agent

The Manager (and not the Fund) has agreed to pay from its own assets to UBS
Warburg LLC a shareholder servicing fee (the "Shareholder Servicing Fee") at an
annual rate of 0.10% of the average daily total managed assets (including net
assets attributable to Preferred Shares and other forms of leverage) of the
Fund pursuant to a shareholder servicing agreement between the Manager and UBS
Warburg LLC (the "Shareholder Servicing Agreement"). Pursuant to the
Shareholder Servicing Agreement, UBS Warburg LLC will: (i) undertake to make
public information pertaining to the Fund on an ongoing basis and to
communicate to investors and prospective investors the Fund's features and
benefits (including periodic seminars or conference calls, responses to
questions from current or prospective shareholders and specific shareholder
contact where appropriate); (ii) make available to investors and prospective
investors market price, net asset value, yield and other information regarding
the Fund, if reasonably obtainable, for the purpose of maintaining the
visibility of the Fund in the investor community; (iii) at the request of the
Manager, provide certain economic research and statistical information and
reports, if reasonably obtainable, on behalf of the Fund, and consult with
representatives and Trustees of the Fund in connection therewith, which
information and reports shall include: (a) statistical and financial market
information with respect to the Fund's market performance and (b) comparative
information regarding the Fund and other closed-end management investment
companies with respect to (1) the net asset value of their respective shares,
(2) the respective market performance of the Fund and such other companies and
(3) other relevant performance indicators; and (iv) at the request of the
Manager, provide information to and consult with the Board of Trustees with
respect to applicable modifications to dividend policies or capital structure,
repositioning or restructuring of the Fund, conversion of the Fund to an
open-end investment company or a Fund liquidation or merger; provided, however,
that under the terms of the Shareholder Servicing Agreement, UBS Warburg LLC is
not obligated to render any opinions, valuations or recommendations of any kind
or to perform any such similar services. Under the terms of the Shareholder
Servicing Agreement, UBS Warburg LLC is relieved from liability to the Manager
or the Fund for any act or omission in the course of its performances under the
Shareholder Servicing Agreement in the absence of gross negligence or willful
misconduct. The Shareholder Servicing Agreement will remain in effect until
, 2005, and will continue thereafter unless terminated by either the Manager or
UBS Warburg LLC.

The custodian of the assets of the Fund is Brown Brothers Harriman & Co., 40
Water Street, Boston, Massachusetts 02109. The Custodian performs custodial and
fund accounting services.

PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as the
Fund's transfer agent, registrar and dividend disbursement agent, as well as
agent for the Fund's dividend reinvestment plan.

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

Legal matters

Certain legal matters in connection with the Common Shares will be passed upon
for the Fund by Ropes & Gray, Boston, Massachusetts, and for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois, and its
affiliated entities.

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

Table of contents for the
Statement of Additional Information

Use of Proceeds...................................................... 3
Investment Objective and Policies.................................... 3
Investment Restrictions.............................................. 38
Management of the Fund............................................... 41
Investment Manager and Portfolio Manager............................. 50
Portfolio Transactions............................................... 55
Distributions........................................................ 57
Description of Shares................................................ 57
Anti-Takeover and Other Provisions in the Declaration of Trust....... 61
Repurchase of Common Shares; Conversion to Open-End Fund............. 63
Tax Matters.......................................................... 65
Performance Related and Comparative Information...................... 73
Custodian, Transfer Agent and Dividend Disbursement Agent............ 73
Independent Accountants.............................................. 74
Counsel.............................................................. 74
Registration Statement............................................... 74
Report of Independent Accountants.................................... 75
Financial Statements................................................. 76
Appendix A--Performance Related and Comparative and Other Information A-1

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

Appendix A

DESCRIPTION OF SECURITIES RATINGS

The Fund's investments may range in quality from securities rated in the lowest
category to securities rated in the highest category (as rated by Moody's or
S&P or, if unrated, determined by NACM to be of comparable quality). The
percentage of a Fund's assets invested in securities in a particular rating
category will vary. The following terms are generally used to describe the
credit quality of debt securities:

High Quality Debt Securities are those rated in one of the two highest rating
categories (the highest category for commercial paper) or, if unrated, deemed
comparable by NACM.

Investment Grade Debt Securities are those rated in one of the four highest
rating categories or, if unrated, deemed comparable by NACM.

Below Investment Grade, High Yield Securities ("Junk Bonds") are those rated
lower than Baa by Moody's or BBB by S&P and comparable securities. They are
deemed predominantly speculative with respect to the issuer's ability to repay
principal and interest.

Following is a description of Moody's and S&P's rating categories applicable to
debt securities.

Moody's Investors Service, Inc.

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

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

A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that 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.

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

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

Appendix A

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

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

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

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

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Moody's bond ratings, where specified, are applicable to financial contracts,
senior bank obligations and insurance company senior policyholder and claims
obligations with an original maturity in excess of one year. Obligations
relying upon support mechanisms such as letter-of-credit and bonds of indemnity
are excluded unless explicitly rated. Obligations of a branch of a bank are
considered to be domiciled in the country in which the branch is located.

Unless noted as an exception, Moody's rating on a bank's ability to repay
senior obligations extends only to branches located in countries which carry a
Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated
at the lower of the bank's rating or Moody's Sovereign Rating for the Bank
Deposits for the country in which the branch is located. When the currency in
which an obligation is denominated is not the same as the currency of the
country in which the obligation is domiciled, Moody's ratings do not
incorporate an opinion as to whether payment of the obligation will be affected
by the actions of the government controlling the currency of denomination. In
addition, risk associated with bilateral conflicts between an investor's home
country and either the issuer's home country or the country where an issuer
branch is located are not incorporated into Moody's ratings.

Moody's makes no representation that rated bank obligations or insurance
company obligations are exempt from registration under the U.S. Securities Act
of 1933 or issued in conformity with any other applicable law or regulation.
Nor does Moody's represent any specific bank or insurance company obligation is
legally enforceable or a valid senior obligation of a rated issuer.

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on

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

Appendix A

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

funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity.

PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.

Standard & Poor's

Issue Credit Rating Definitions
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The issue credit rating is not
a recommendation to purchase, sell, or hold a financial obligation, inasmuch as
it does not comment as to market price or suitability for a particular investor.

Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.

Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition
to the usual long-term rating. Medium-term notes are assigned long-term ratings.

Issue credit ratings are based, in varying degrees, on the following
considerations: likelihood of payment--capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance with the terms
of the obligation; nature of and provisions of the obligation; protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.

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

Appendix A

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

The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.

Corporate and Municipal Bond Ratings

Investment Grade
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.

AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB: An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.

Speculative Grade
Obligations rated BB, B, CCC, CC, and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.

BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B: An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

CC: An obligation rated CC is currently highly vulnerable to nonpayment.

C: A subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but
payments on this obligation are being continued. A C also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.

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

Appendix A

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

CI: The rating CI is reserved for income bonds on which no interest is being
paid.

D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

Provisional ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt 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 of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.

r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.

N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

Commercial Paper Rating Definitions
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. Ratings are graded into several categories, ranging from A for
the highest quality obligations to D for the lowest. These categories are as
follows:

A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.

A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

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

Appendix A

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

B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.

C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.

D: A short-term obligation rated D is in payment default. The D rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished
to Standard & Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.

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

[LOGO] PIMCO
ADVISORS

CENCV.02/03

The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION - DATED , 2003

NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

, 2003

Nicholas-Applegate Convertible & Income Fund (the "Fund") is a newly
organized, diversified closed-end management investment company.

This Statement of Additional Information relating to common shares of
the Fund ("Common Shares") is not a prospectus, and should be read in
conjunction with the Fund's prospectus relating thereto dated , 2003 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing Common
Shares, and investors should obtain and read the Prospectus prior to purchasing
such shares. A copy of the Prospectus may be obtained without charge by calling
(800) 331-1710. You may also obtain a copy of the Prospectus on the web site
(http://www.sec.gov) of the Securities and Exchange Commission ("SEC").
Capitalized terms used but not defined in this Statement of Additional
Information have the meanings ascribed to them in the Prospectus.

-1-

TABLE OF CONTENTS

USE OF PROCEEDS ........................................................... 3
INVESTMENT OBJECTIVE AND POLICIES ......................................... 3
INVESTMENT RESTRICTIONS ................................................... 38
MANAGEMENT OF THE FUND .................................................... 41
INVESTMENT MANAGER AND PORTFOLIO MANAGER .................................. 50
PORTFOLIO TRANSACTIONS .................................................... 55
DISTRIBUTIONS ............................................................. 57

DESCRIPTION OF SHARES ..................................................... 57
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST ............ 61
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND .................. 63
TAX MATTERS ............................................................... 65
PERFORMANCE RELATED AND COMPARATIVE INFORMATION ........................... 73
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT ................. 73
INDEPENDENT ACCOUNTANTS ................................................... 74
COUNSEL ................................................................... 74

REGISTRATION STATEMENT .................................................... 74
REPORT OF INDEPENDENT ACCOUNTANTS ......................................... 75
FINANCIAL STATEMENTS ...................................................... 76
APPENDIX A - Performance Related and Comparative and Other Information..... A-1

This Statement of Additional Information is dated , 2003.

-2-

USE OF PROCEEDS

The net proceeds of the offering of Common Shares of the Fund will be
approximately $ (or $ if the Underwriters exercise the over-allotment option in
full) after payment of offering costs.

On behalf of the Fund, PIMCO Advisors Fund Management LLC (the
"Manager"), the Fund's investment manager, has agreed to pay all of the Fund's
organizational expenses and the amount by which the Fund's offering costs (other
than the sales load) exceeds $0.03 per Common Share.

Pending investment in convertible securities, non-convertible
income-producing securities and other securities that meet the Fund's investment
objective and policies, it is anticipated that the net proceeds of the offering
will be invested in high grade, short-term securities.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and general investment policies of the Fund
are described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.

Convertible Securities

The Fund may invest without limit in convertible securities, and these
securities will ordinarily constitute a principal component of the Fund's
investment program. Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted or exchanged (by the
holder or by the issuer) into shares of the underlying common stock (or cash or
securities of equivalent value) at a stated exchange ratio or predetermined
price (the "conversion price"). A convertible security is designed to provide
current income and also the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases in the
market price of the underlying common stock. A convertible security may be
called for redemption or conversion by the issuer after a particular date and
under certain circumstances (including a specified price) established upon
issue. If a convertible security held by the Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption, convert it
into the underlying common stock, or sell it to a third party, which may have an
adverse effect on the Fund's ability to achieve its investment objective.
Convertible securities have general characteristics similar to both debt and
equity securities.

A convertible security generally entitles the holder to receive
interest paid or accrued until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a debt obligation. Before conversion,
convertible securities have characteristics similar to non-convertible debt
obligations and are designed to provide for a stable stream of income with
generally higher yields than common stocks. However, there can

-3-

be no assurance of current income because the issuers of the convertible
securities may default on their obligations. Convertible securities are
subordinate in rank to any senior debt obligations of the issuer, and,
therefore, an issuer's convertible securities entail more risk than its debt
obligations. Moreover, convertible securities are often rated below investment
grade or not rated because they fall below debt obligations and just above
common equity in order of preference or priority on an issuer's balance sheet.
See "--High Yield Securities" below.

Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar credit quality because of the
potential for capital appreciation. The common stock underlying convertible
securities may be issued by a different entity than the issuer of the
convertible securities.

The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate based on the credit quality of the
issuer and will fluctuate inversely with changes in prevailing interest rates.
However, at the same time, the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock, and
will therefore be subject to risks relating to the activities of the issuer
and/or general market and economic conditions. Depending upon the relationship
of the conversion price to the market value of the underlying security, a
convertible security may trade more like an equity security than a debt
instrument.

If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding an
income-producing security.

Synthetic Convertible Securities

Nicholas-Applegate Capital Management LLC ("NACM"), the Fund's
portfolio manager, may also create a "synthetic" convertible security by
combining separate securities that possess the two principal characteristics of
a true convertible security, i.e., an income-producing security
("income-producing component") and the right to acquire an equity security
("convertible component"). The income-producing component is achieved by
investing in non-convertible, income-producing securities such as bonds,
preferred stocks and money market instruments. The convertible component is
achieved by investing in warrants or options to buy common stock at a certain
exercise price, or options on a stock index. Unlike a true convertible security,
which is a single security having a unitary market value, a synthetic
convertible comprises two or more separate securities, each with its own market
value. Therefore, the "market value" of a synthetic convertible security is the
sum of the values of its income-producing component and its

-4-

convertible component. For this reason, the values of a synthetic convertible
security and a true convertible security may respond differently to market
fluctuations.

More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. Although synthetic
convertible securities may be selected where the two components are issued by a
single issuer, thus making the synthetic convertible security similar to the
true convertible security, the character of a synthetic convertible security
allows the combination of components representing distinct issuers, when NACM
believes that such a combination would better promote the Fund's investment
objective. A synthetic convertible security also is a more flexible investment
in that its two components may be purchased separately. For example, the Fund
may purchase a warrant for inclusion in a synthetic convertible security but
temporarily hold short-term investments while postponing the purchase of a
corresponding bond pending development of more favorable market conditions.

A holder of a synthetic convertible security faces the risk of a
decline in the price of the security or the level of the index involved in the
convertible component, causing a decline in the value of the call option or
warrant purchased to create the synthetic convertible security. Should the price
of the stock fall below the exercise price and remain there throughout the
exercise period, the entire amount paid for the call option or warrant would be
lost. Because a synthetic convertible security includes the income-producing
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the
income-producing instrument.

The Fund may also purchase synthetic convertible securities created by
other parties, including convertible structured notes. Convertible structured
notes are income-producing debentures linked to equity, and are typically issued
by investment banks. Convertible structured notes have the attributes of a
convertible security; however, the investment bank that issued the convertible
note, rather than the issuer of the underlying common stock into which the note
is convertible, assumes the credit risk associated with the investment.

The Fund's holdings of synthetic convertible securities are considered
convertible securities for purposes of the Fund's policy to invest at least 50%
of its assets in convertible securities and 80% of its total assets in a
diversified portfolio of convertible and non-convertible income-producing
securities.

High Yield Securities

As described under "The Fund's investment objective and strategies" in
the Prospectus, the Fund may invest without limit in securities rated lower than
Baa by Moody's or BBB by S&P, or in securities that are unrated but judged to be
of comparable quality by NACM, and expects that ordinarily NACM's portfolio
strategies will result in the Fund investing primarily in these securities.
These securities are sometimes referred to as "high yield" securities or "junk
bonds."

Investments in high yield securities generally provide greater income
and increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk, including the possibility of

-5-

issuer default and bankruptcy. High yield securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Securities in the lowest investment grade
category also may be considered to possess some speculative characteristics by
certain rating agencies. In addition, analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality securities.

High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of an issuer to make
principal and interest payments on its debt obligations. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Fund may incur additional expenses to seek recovery.
The market prices of high yield securities structured as zero-coupon, step-up or
payment-in-kind securities will normally be affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than the prices of
securities that pay interest currently and in cash. NACM seeks to reduce these
risks through diversification, credit analysis and attention to current
developments and trends in both the economy and financial markets.

The secondary market on which high yield securities are traded may be
less liquid than the market for investment grade securities. Less liquidity in
the secondary trading market could adversely affect the price at which the Fund
could sell a high yield security, and could adversely affect the net asset value
of the shares. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of high yield
securities, especially in a thinly traded market. When secondary markets for
high yield securities are less liquid than the market for investment grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Fund may have greater
difficulty selling its portfolio securities. The Fund will be more dependent on
NACM's research and analysis when investing in high yield securities. NACM seeks
to minimize the risks of investing through in-depth credit analysis and
attention to current developments in interest rates and market conditions.

A general description of the ratings of securities by Moody's and S&P
is set forth in Appendix A to the Prospectus. The ratings of Moody's and S&P
represent their opinions as to the quality of the securities they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, in the case of debt obligations, certain
debt obligations with the same maturity, coupon and rating may have different
yields while debt obligations with the same maturity and coupon with different
ratings may have the same yield. For these reasons, the use of credit ratings as
the sole method of evaluating high yield securities can involve certain risks.
For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield securities. Also, credit
rating agencies may fail to change credit ratings in a timely fashion to reflect
events since the security was last rated. NACM does not rely solely on credit
ratings when selecting securities for the Fund, and develops its own independent
analysis of issuer credit quality.

-6-

The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency or NACM downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, NACM may consider such factors as NACM's assessment of the
credit quality of the issuer of such security, the price at which such security
could be sold and the rating, if any, assigned to such security by other rating
agencies. However, analysis of creditworthiness may be more complex for issuers
of high yield securities than for issuers of higher quality debt securities.

Foreign (Non-U.S.) Securities

The Fund may invest up to 20% of its total assets in U.S.
dollar-denominated securities of foreign issuers based in developed countries.
For this purpose, foreign securities include, but are not limited to, foreign
convertible securities and non-convertible income-producing securities, foreign
equity securities (including preferred securities of foreign issuers), foreign
bank obligations, and obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. For this purpose, foreign securities do not include American
Depository Receipts ("ADRs") or securities guaranteed by a United States person,
but may include foreign securities in the form of Global Depository Receipts
("GDRs") or other securities representing underlying shares of foreign issuers.

ADRs are U.S. dollar-denominated receipts issued generally by domestic
banks and represent the deposit with the bank of a security of a foreign issuer.
GDRs may be offered privately in the United States and also trade in public or
private markets in other countries. ADRs and GDRs may be issued as sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities trade in the form of ADRs or GDRs. In unsponsored programs,
the issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs are
generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a sponsored
program.

Other foreign securities in which the Fund may invest include
Eurodollar obligations and "Yankee Dollar" obligations. Eurodollar obligations
are U.S. dollar-denominated certificates of deposit and time deposits issued
outside the U.S. capital markets by foreign branches of U.S. banks and by
foreign banks. Yankee Dollar obligations are U.S. dollar-denominated obligations
issued in the U.S. capital markets by foreign banks. Eurodollar and Yankee
Dollar obligations are generally subject to the same risks that apply to
domestic debt issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee Dollar) obligations
are subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of U.S. dollars, from
flowing across its borders. Other risks include adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers.

The Fund also may invest in Brady Bonds. Brady Bonds are securities
created through the exchange of existing commercial bank loans to sovereign
entities for new obligations in connection with debt restructurings under a debt
restructuring plan introduced by former U.S.

-7-

Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented in a number of countries, including:
Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic,
Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines, Poland,
Uruguay, and Venezuela.

Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (although the Fund may invest only in U.S. dollar-denominated
securities) and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government securities. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero-coupon bonds having the same maturity as the
Brady Bonds. Interest payments on these Brady Bonds generally are collateralized
on a one-year or longer rolling-forward basis by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's interest payments based on the applicable interest rate at that time
and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (the
uncollateralized amounts constitute the "residual risk").

Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have repayments at
final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.

Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Fund may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Fund to suffer a loss of interest or principal on any of its holdings.

Investing in the securities of foreign issuers involves special risks
and considerations not typically associated with investing in U.S. companies.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends and
interest payable on those securities may be subject to

-8-

foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility.

Sovereign Debt. Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of the debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.

Corporate Bonds

The Fund may invest in a wide variety of bonds and related debt
obligations of varying maturities issued by U.S. and foreign corporations
(including banks) and other business entities. Bonds are fixed or variable rate
debt obligations, including bills, notes, debentures, money market instruments
and similar instruments and securities. Bonds generally are used by corporations
and other issuers to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and normally must repay the amount borrowed
on or before maturity. Certain bonds are "perpetual" in that they have no
maturity date. The Fund may invest up to 20% of its total assets in U.S. dollar-
denominated securities of foreign issuers based in developed countries,
including corporate debt securities of foreign issuers in accordance with the
Fund's investment objective and policies as described in the Prospectus. See
"--Foreign (Non-U.S.) Securities" above. The Fund may also invest without limit
in corporate bonds that are below investment grade quality. See "--High Yield
Securities" above.

The Fund's investments in corporate bonds are subject to a number of
risks described in the Prospectus and elaborated upon elsewhere in this section
of the Statement of Additional Information, including interest rate risk, credit
risk, high yield risk, issuer risk, foreign (non-U.S.) investment risk,
inflation risk, liquidity risk, smaller company risk and management risk.

-9-

Commercial Paper

Commercial paper represents short-term unsecured promissory notes
issued in bearer form by corporations such as banks or bank holding companies
and finance companies. The Fund may invest in commercial paper of any credit
quality consistent with the Fund's investment objective and policies, including
unrated commercial paper for which NACM has made a credit quality assessment.
See Appendix A to the Prospectus for a description of the ratings assigned by
Moody's and S&P to commercial paper. The rate of return on commercial paper may
be linked or indexed to the level of exchange rates between the U.S. dollar and
a foreign currency or currencies.

Preferred Stock

Preferred stock represents an equity interest in a company that
generally entitles the holder to receive, in preference to the holders of other
stocks such as common stocks, dividends and a fixed share of the proceeds
resulting from a liquidation of the company. Some preferred stocks also entitle
their holders to receive additional liquidation proceeds on the same basis as
holders of a company's common stock, and thus also represent an ownership
interest in that company. The Fund's investments in preferred stocks typically
will be convertible securities, although the Fund may also invest in
non-convertible preferred stocks.

As described below, the Fund may invest in preferred stocks that pay
fixed or adjustable rates of return. The value of a company's preferred stock
may fall as a result of factors relating directly to that company's products or
services. A preferred stock's value may also fall because of factors affecting
not just the company, but companies in the same industry or in a number of
different industries, such as increases in production costs. The value of
preferred stock may also be affected by changes in financial markets that are
relatively unrelated to the company or its industry, such as changes in interest
rates or currency exchange rates. In addition, a company's preferred stock
generally pays dividends only after the company makes required payments to
holders of its bonds and other debt. For this reason, the value of the preferred
stock will usually react more strongly than bonds and other debt to actual or
perceived changes in the company's financial condition or prospects. Preferred
stocks of smaller companies may be more vulnerable to adverse developments than
those of larger companies.

Fixed Rate Preferred Stocks. Some fixed rate preferred stocks in which
the Fund may invest, known as perpetual preferred stocks, offer a fixed return
with no maturity date. Because they never mature, perpetual preferred stocks act
like long-term bonds and can be more volatile than other types of preferred
stocks that have a maturity date and may have heightened sensitivity to changes
in interest rates. The Fund may also invest in sinking fund preferred stocks.
These preferred stocks also offer a fixed return, but have a maturity date and
are retired or redeemed on a predetermined schedule. The shorter duration of
sinking fund preferred stocks makes them perform somewhat like intermediate-term
bonds and they typically have lower yields than perpetual preferred stocks.

Adjustable Rate and Auction Preferred Stocks. Typically, the dividend
rate on an adjustable rate preferred stock is determined prospectively each
quarter by applying an adjustment formula established at the time of issuance of
the stock. Although adjustment

-10-

formulas vary among issues, they typically involve a fixed premium or discount
relative to rates on specified debt securities issued by the U.S. Treasury.
Typically, an adjustment formula will provide for a fixed premium or discount
adjustment relative to the highest base yield of three specified U.S. Treasury
securities: the 90-day Treasury bill, the 10-year Treasury note and the 20-year
Treasury bond. The premium or discount adjustment to be added to or subtracted
from this highest U.S. Treasury base rate yield is fixed at the time of issue
and cannot be changed without the approval of the holders of the stock. The
dividend rate on other preferred stocks in which the Fund may invest, commonly
known as auction preferred stocks, is adjusted at intervals that may be more
frequent than quarterly, such as every 49 days, based on bids submitted by
holders and prospective purchasers of such stocks and may be subject to stated
maximum and minimum dividend rates. The issues of most adjustable rate and
auction preferred stocks currently outstanding are perpetual, but are redeemable
after a specified date at the option of the issuer. Certain issues supported by
the credit of a high-rated financial institution provide for mandatory
redemption prior to expiration of the credit arrangement. No redemption can
occur if full cumulative dividends are not paid. Although the dividend rates on
adjustable and auction preferred stocks are generally adjusted or reset
frequently, the market values of these preferred stocks may still fluctuate in
response to changes in interest rates. Market values of adjustable preferred
stocks also may substantially fluctuate if interest rates increase or decrease
once the maximum or minimum dividend rate for a particular stock is approached.

Investments in Equity Securities

Consistent with its investment objective, the Fund may hold or have
exposure to equity securities. The Fund will often have substantial exposure to
equity securities by virtue of the equity component of the convertible
securities in which the Fund invests. The Fund may also hold equity securities
in its portfolio upon conversion of a convertible security or through direct
investment in preferred stocks. Equity securities, such as common stock,
generally represent an ownership interest in a company. Although equity
securities have historically generated higher average returns than debt
securities, equity securities have also experienced significantly more
volatility in those returns. An adverse event, such as an unfavorable earnings
report, may depress the value of a particular equity security held by the Fund.
Also, the price of an equity security, particularly a common stock, is sensitive
to general movements in the stock market. A drop in the stock market may depress
the price of equity securities held by the Fund.

Derivative Instruments

In pursuing its investment objective, the Fund may purchase and sell
(write) both put options and call options on securities, swap agreements, and
securities indexes, and enter into interest rate, securities and index futures
contracts and purchase and sell options on such futures contracts ("futures
options") to add leverage to the portfolio or as part of its overall investment
strategy. The Fund also may enter into swap agreements with respect to interest
rates, securities indexes and other assets and measures of risk or return. If
other types of financial instruments, including other types of options, futures
contracts or futures options are traded in the future, the Fund may also use
those instruments, provided that the Trustees determine that their use is
consistent with the Fund's investment objective.

-11-

The value of some derivative instruments in which the Fund may invest
may be particularly sensitive to changes in prevailing interest rates, and, like
the other investments of the Fund, the ability of the Fund to successfully
utilize these instruments may depend in part upon the ability of NACM to
forecast interest rates and other economic factors correctly. If NACM
incorrectly forecasts such factors and has taken positions in derivative
instruments contrary to prevailing market trends, the Fund could be exposed to
the risk of loss.

The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If NACM incorrectly
forecasts interest rates, market values or other economic factors in utilizing a
derivatives strategy for the Fund, the Fund might have been in a better position
if it had not entered into the transaction at all. Also, suitable derivative
transactions may not be available in all circumstances. The use of these
strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies
involving derivative instruments can reduce the risk of loss, they can also
reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in related investments or otherwise, due to the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable or the possible need to sell a portfolio security
at a disadvantageous time because the Fund is required to maintain asset
coverage or offsetting positions in connection with transactions in derivative
instruments, and the possible inability of the Fund to close out or to liquidate
its derivatives positions. Income earned by the Fund from many derivative
strategies will be treated as capital gain and, if not offset by net realized
capital loss, will be distributed to shareholders in taxable distributions.

Warrants to Purchase Securities. The Fund may invest in warrants to
purchase debt securities or equity securities. A warrant to purchase equity
securities is a right to purchase common stock at a specific price (usually at a
premium above the market value of the underlying common stock at time of
issuance) during a specified period of time. Such a warrant may have a life
ranging from less than a year to twenty years or longer, but the warrant becomes
worthless unless it is exercised or sold before expiration. In addition, if the
market price of the common stock does not exceed an equity security warrant's
exercise price during the life of the warrant, the warrant will expire
worthless. Equity security warrants have no voting rights, pay no dividends and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the value of an equity security warrant may
be greater than the percentage increase or decrease in the value of the
underlying common stock.

Debt obligations with warrants attached to purchase equity securities
have many characteristics of convertible securities and their prices may, to
some degree, reflect the performance of the underlying stock. Debt obligations
also may be issued with warrants attached to purchase additional debt securities
at the same coupon rate. A decline in interest rates would permit the Fund to
buy additional bonds at the favorable rate or to sell such warrants at a profit.
If interest rates rise, these warrants would generally expire with no value.

Options on Securities, Swap Agreements and Indexes. The Fund may
purchase and sell both put and call options on securities, swap agreements or
indexes in standardized contracts traded on domestic or other securities
exchanges, boards of trade, or similar entities, or quoted on

-12-

NASDAQ or on an over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of debt obligations from a
dealer.

An option on a security (or an index) is a contract that gives the
holder of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a specified
exercise price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of the underlying security. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect features of a
particular securities market, a specific group of financial instruments or
securities, or certain economic indicators.)

The Fund will write call options and put options only if they are
"covered." In the case of a call option on a debt obligation or other security,
the option is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or other
assets determined to be liquid by NACM in accordance with procedures established
by the Board of Trustees, in such amount are segregated by its custodian) upon
conversion or exchange of other securities held by the Fund. For a call option
on an index, the option is covered if the Fund maintains with its custodian
assets determined to be liquid by NACM in accordance with procedures established
by the Board of Trustees, in an amount equal to the contract value of the index.
A call option is also covered if the Fund holds a call on the same security or
index as the call written where the exercise price of the call held is (i) equal
to or less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written, provided the difference is maintained by the
Fund in segregated assets determined to be liquid by NACM in accordance with
procedures established by the Board of Trustees. A put option on a security or
an index is "covered" if the Fund segregates assets determined to be liquid by
NACM in accordance with procedures established by the Board of Trustees equal to
the exercise price. A put option is also covered if the Fund holds a put on the
same security or index as the put written where the exercise price of the put
held is (i) equal to or greater than the exercise price of the put written, or
(ii) less than the exercise price of the put written, provided the difference is
maintained by the Fund in segregated assets determined to be liquid by NACM in
accordance with procedures established by the Board of Trustees.

If an option written by the Fund expires unexercised, the Fund realizes
on the expiration date a capital gain equal to the premium received by the Fund
at the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid. Prior
to the earlier of exercise or expiration, an exchange-traded option may be
closed out by an offsetting purchase or sale of an option of the same series
(type, exchange, underlying security or index, exercise price, and expiration).
There can be no assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.

The Fund may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. Prior to

-13-

exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series. The Fund will realize a capital gain from
a closing purchase transaction if the cost of the closing option is less than
the premium received from writing the option, or, if it is more, the Fund will
realize a capital loss. If the premium received from a closing sale transaction
is more than the premium paid to purchase the option, the Fund will realize a
capital gain or, if it is less, the Fund will realize a capital loss. The
principal factors affecting the market value of a put or a call option include
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until the
expiration date.

The premium paid for a put or call option purchased by the Fund is an
asset of the Fund. The premium received for an option written by the Fund is
recorded as a deferred credit. The value of an option purchased or written is
marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.

The Fund may write covered straddles consisting of a combination of a
call and a put written on the same underlying security. A straddle will be
covered when sufficient assets are deposited to meet the Fund's immediate
obligations. The Fund may use the same liquid assets to cover both the call and
put options where the exercise price of the call and put are the same, or the
exercise price of the call is higher than that of the put. In such cases, the
Fund will also segregate liquid assets equivalent to the amount, if any, by
which the put is "in the money."

Risks Associated with Options on Securities and Indexes. There are
several risks associated with transactions in options on securities and on
indexes. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.

During the option period, the covered call writer has, in return for
the premium on the option, given up the opportunity to profit from a price
increase in the underlying security above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying security at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price (in the case of a put), or remains less than or
equal to the exercise price (in the case of a call), the Fund will lose its
entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.

There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a

-14-

security, it would have to exercise the option in order to realize any profit or
the option may expire worthless. If the Fund were unable to close out a covered
call option that it had written on a security, it would not be able to sell the
underlying security unless the option expired without exercise. As the writer of
a covered call option, the Fund forgoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price of
the call.

If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

Futures Contracts and Options on Futures Contracts. The Fund may invest
in interest rate futures contracts and options thereon ("futures options"). The
Fund may also purchase and sell futures contracts on high yield and other
securities (to the extent they are available) and U.S. Government and agency
securities, as well as purchase put and call options on such futures contracts.

A futures contract provides for the future sale by one party and
purchase by another party of a specified quantity of the security or other
financial instrument at a specified price and time. A futures contract on an
index is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the index contract was originally written. Although the value of an index
might be a function of the value of certain specified securities, physical
delivery of these securities is not always made. A public market exists in
futures contracts covering a number of indexes as well as financial instruments,
including, without limitation: U.S. Treasury bonds; U.S. Treasury notes; GNMA
Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank
certificates of deposit; and Eurodollar certificates of deposit. It is expected
that other futures contracts will be developed and traded in the future.

The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.

To comply with applicable rules of the Commodity Futures Trading
Commission ("CFTC") under which the Fund avoids being deemed a "commodity pool"
or a "commodity pool operator," the Fund intends generally to limit its use of
futures contracts and futures options to "bona fide hedging" transactions, as
such term is defined in applicable regulations, interpretations and practice.
For example, the Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's

-15-

debt obligations or the price of the debt obligations that the Fund intends to
purchase. The Fund's hedging activities may include sales of futures contracts
as an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge
its exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.

The Fund may enter into futures contracts and futures options that are
standardized and traded on a U.S. or other exchange, board of trade, or similar
entity, or quoted on an automated quotation system, and the Fund may also enter
into OTC options on futures contracts.

When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of assets determined to be liquid by NACM in accordance with
procedures established by the Board of Trustees ("initial margin"). The margin
required for a futures contract is set by the exchange on which the contract is
traded and may be modified during the term of the contract. The initial margin
is in the nature of a performance bond or good faith deposit on the futures
contract that is returned to the Fund upon termination of the contract, assuming
all contractual obligations have been satisfied. The Fund expects to earn
taxable interest income on its initial margin deposits. A futures contract held
by the Fund is valued daily at the official settlement price of the exchange on
which it is traded. Each day the Fund pays or receives cash, called "variation
margin," equal to the daily change in value of the futures contract. This
process is known as "marking to market." Variation margin does not represent a
borrowing or loan by the Fund but is instead a settlement between the Fund and
the broker of the amount one would owe the other if the futures contract
expired. In computing daily net asset value, the Fund will mark to market its
open futures positions.

The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same exchange, underlying security or index, and delivery month).
If an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. The transaction costs must also be included in these calculations.

The Fund may write covered straddles consisting of a call and a put
written on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Fund's immediate obligations. The
Fund may use the same liquid assets to cover both the call and put options where
the exercise price of the call and put are the same, or the exercise price of
the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."

-16-

Limitations on Use of Futures and Futures Options. As noted above, the
Fund generally intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in the money," would exceed 5% of the
Fund's liquidation value, after taking into account unrealized profits and
unrealized losses on any such contracts into which the Fund has entered. A call
option is "in the money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in the money"
if the exercise price exceeds the value of the futures contract that is the
subject of the option.

When purchasing a futures contract, the Fund will maintain with its
custodian (and mark to market on a daily basis) assets determined to be liquid
by NACM in accordance with procedures established by the Board of Trustees,
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high as or higher than the price of the contract
held by the Fund.

When selling a futures contract, the Fund will maintain with its
custodian (and mark to market on a daily basis) assets determined to be liquid
by NACM in accordance with procedures established by the Board of Trustees, that
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Fund's custodian).

When selling a call option on a futures contract, the Fund will
maintain with its custodian (and mark to market on a daily basis) assets
determined to be liquid by NACM in accordance with procedures established by the
Board of Trustees, that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.

When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark to market on a daily basis) assets determined to be
liquid by NACM in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the Fund may cover the position either by entering
into a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same as or higher than the strike price
of the put option sold by the Fund.

-17-

To the extent that securities with maturities greater than one year are
used to segregate assets to cover the Fund's obligations under futures contracts
and related options, such use will not eliminate the leverage risk arising from
such use, which may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio, and may
require liquidation of portfolio positions when it is not advantageous to do so.

The requirements for qualification as a regulated investment company
also may limit the extent to which the Fund may enter into futures, futures
options or forward contracts. See "Tax Matters."

Risks Associated with Futures and Futures Options. There are several
risks associated with the use of futures contracts and futures options as
hedging techniques. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected interest
rate trends.

Futures contracts on U.S. Government securities historically have
reacted to an increase or decrease in interest rates in a manner similar to that
in which the underlying U.S. Government securities reacted. To the extent,
however, that the Fund enters into such futures contracts, the value of such
futures will not vary in direct proportion to the value of the Fund's holdings
of debt obligations. Thus, the anticipated spread between the price of the
futures contract and the hedged security may be distorted due to differences in
the nature of the markets. The spread also may be distorted by differences in
initial and variation margin requirements, the liquidity of such markets and the
participation of speculators in such markets.

Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.

There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a futures contract or a futures option
position, and the Fund would remain obligated to

-18-

meet margin requirements until the position is closed. In addition, many of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active secondary
market will develop or continue to exist.

Additional Risks of Options on Securities, Futures Contracts and
Options on Futures Contracts. Options on securities, futures contracts and
options on futures contracts may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States, may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. Some foreign exchanges may be principal markets
so that no common clearing facility exists and a trader may look only to the
broker for performance of the contract. The value of such positions also could
be adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (v) lesser
trading volume. The Fund's use of such instruments may cause the Fund to realize
higher amounts of short-term capital gains (generally taxed to shareholders at
ordinary income tax rates) than if the Fund had not used such instruments.

Swap Agreements. The Fund may enter into swap agreements with respect
to interest rates, indexes of securities and other assets or measures of risk or
return. The Fund may also enter into options on swap agreements ("swaptions").
These transactions are entered into in an attempt to obtain a particular return
when it is considered desirable to do so, possibly at a lower cost to the Fund
than if the Fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which may be adjusted for an interest
factor. The gross returns to be exchanged or "swapped" between the parties are
generally calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate or in a "basket" of securities representing a particular index.
Forms of swap agreements include interest rate caps, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified rate, or "floor"; and
interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels. The Fund may use interest rate caps,
floors and collars in connection with its leveraging strategies. See "--Certain
Interest Rate Transactions" below. A swaption is a contract that gives a
counterparty the right (but not the obligation) to enter into a new swap
agreement or to shorten, extend, cancel or otherwise modify an existing swap
agreement, at some designated future time on specified terms. The Fund may write
(sell) and purchase put and call swaptions.

The Fund may have exposure to credit default swaps through investments
in credit-linked trust certificates. In connection with such investments, the
Fund would be in the position of a seller of a credit default swap contract
because the trust that issues the certificates would be selling one or more
credit default swap contracts. The seller of a credit default swap contract is
required to pay the par (or other agreed-upon) value of a referenced debt
obligation to the counterparty in the event of a default or similar triggering
event by a third party, such as a U.S. or foreign corporate issuer, on the debt
obligation. In return, the trust issuing the certificates receives from the
counterparty a periodic stream of payments over the term of the contract
provided that no event of default or similar triggering event has occurred. The
trust in turn passes the stream of payments along to the holders of the
certificates it has issued. If no default or other triggering event occurs, the
trust, and thus the Fund, would keep the stream of payments and would have no
payment obligations. In connection with its investments in credit-linked trust
certificates, the Fund is therefore subject to credit risk relating to the
counterparty to any credit default swap contract entered into by the trust and
also the issuer and/or any guarantor of any referenced debt obligation.

Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund's current obligations (or

-19-

rights) under a swap agreement will generally be equal only to the net amount to
be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). The Fund's
current obligations under a swap agreement will be accrued daily (offset against
any amounts owed to the Fund). The Fund may use swap agreements to add leverage
to the portfolio. The Fund may (but is not required to) cover any accrued but
unpaid net amounts owed to a swap counterparty through the segregation of assets
determined to be liquid by NACM in accordance with procedures established by the
Board of Trustees. Obligations under swap agreements so covered will not be
construed to be "senior securities" for purposes of the Fund's investment
restriction concerning senior securities and borrowings.

Whether the Fund's use of swap agreements or swaptions will be
successful in furthering its investment objective will depend on NACM's ability
to predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Fund will enter into
swap agreements only with counterparties that meet certain standards of
creditworthiness. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.

Depending on the terms of the particular option agreement, the Fund
will generally incur a greater degree of risk when it writes a swaption than it
will incur when it purchases a swaption. When the Fund purchases a swaption, it
risks losing only the amount of the premium it has paid should it decide to let
the option expire unexercised. However, when the Fund writes a swaption, upon
exercise of the option the Fund will become obligated according to the terms of
the underlying agreement.

Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA.

Certain Interest Rate Transactions. As described above, the Fund may
enter into interest rate swaps and caps. Interest rate swaps involve the Fund's
agreement with the swap counterparty to pay a fixed rate payment in exchange for
the counterparty paying the Fund a variable rate payment that may be structured
so as to approximate the Fund's variable rate payment obligation on any
Preferred Shares the Fund may issue or any variable rate borrowing. The payment
obligation would be based on the notional amount of the swap. The Fund may use
an interest rate cap, which would require the Fund to pay a premium to the cap
counterparty and would entitle the Fund, to the extent that a specified variable
rate index exceeds a predetermined fixed rate, to receive from the counterparty
payment of the difference based on the notional amount. The Fund may use
interest rate swaps or caps with the intent to reduce or eliminate the risk that
an increase in short-term interest rates could have on the performance of the
Common Shares as a result of the Fund's investments and capital structure, and
may also use these instruments for other hedging purposes.

-20-

Bank Obligations

Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates that are issued against funds deposited in a
commercial bank for a definite period of time and that earn a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are generally no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. The Fund may also hold funds on deposit with its custodian bank in an
interest-bearing account for temporary purposes.

The Fund may invest up to 20% of its total assets in U.S.
dollar-denominated obligations of foreign banks. Obligations of foreign banks
involve certain risks associated with investing in foreign securities described
under "--Foreign (Non-U.S.) Securities" above, including the possibilities that
their liquidity could be impaired because of future political and economic
developments, that their obligations may be less marketable than comparable
obligations of U.S. banks, that a foreign jurisdiction might impose withholding
taxes on interest income payable on those obligations, that foreign deposits may
be seized or nationalized, that foreign governmental restrictions such as
exchange controls may be adopted which might adversely affect the payment of
principal and interest on those obligations and that the selection of those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to U.S. banks. Foreign banks are not generally
subject to examination by any U.S. Government agency or instrumentality.

Loan Participations and Assignments

The Fund may purchase participations in commercial loans. Such
indebtedness may be secured or unsecured. Loan participations typically
represent direct participations in a loan to a corporate borrower, and generally
are offered by banks or other financial institutions or lending syndicates. The
Fund may participate in such syndications, or can buy part of a loan, becoming a
part lender. When purchasing loan participations, the Fund assumes the credit
risk associated with the corporate borrower and may assume the credit risk
associated with an interposed bank or other financial intermediary. The
participation interests in which the Fund intends to invest may not be rated by
any nationally recognized rating service. Given the current structure of the
markets for loan participations and assignments, the Fund expects to treat these
securities as illiquid.

A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions

-21-

which are parties to the loan agreement. Unless, under the terms of the loan or
other indebtedness, the Fund has direct recourse against the corporate borrower,
the Fund may have to rely on the agent bank or other financial intermediary to
apply appropriate credit remedies against a corporate borrower.

A financial institution's employment as agent bank might be terminated
in the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Fund were determined to be
subject to the claims of the agent bank's general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or government agency) similar risks may arise.

Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the corporate borrower for payment of
principal and interest. If the Fund does not receive scheduled interest or
principal payments on such indebtedness, the Fund's share price and yield could
be adversely affected. Loans that are fully secured offer the Fund more
protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.

The Fund may invest in loan participations with credit quality
comparable to that of issuers of its securities investments. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, the Fund bears a
substantial risk of losing the entire amount invested.

The Fund limits the amount of its total assets that it will invest in
any one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, the Fund generally will treat the
corporate borrower as the "issuer" of indebtedness held by the Fund. In the case
of loan participations where a bank or other lending institution serves as a
financial intermediary between the Fund and the corporate borrower, if the
participation does not shift to the Fund the direct debtor-creditor relationship
with the corporate borrower, SEC interpretations require the Fund to treat both
the lending bank or other lending institution and the corporate borrower as
"issuers" for the purposes of determining whether the Fund has invested more
than 5% of its total assets in a single issuer. Treating a financial
intermediary as an issuer of indebtedness may restrict the Fund's ability to
invest in indebtedness related to a single financial intermediary, or a group of
intermediaries engaged in the same industry, even if the underlying borrowers
represent many different companies and industries.

Loans and other types of direct indebtedness may not be readily
marketable and may be subject to restrictions on resale. In some cases,
negotiations involved in disposing of indebtedness may require weeks to
complete. Consequently, some indebtedness may be difficult or impossible to
dispose of readily at what NACM believes to be a fair price. In addition,

-22-

valuation of illiquid indebtedness involves a greater degree of judgment in
determining the Fund's net asset value than if that value were based on
available market quotations, and could result in significant variations in the
Fund's daily share price. At the same time, some loan interests are traded among
certain financial institutions and accordingly may be deemed liquid. As the
market for different types of indebtedness develops, the liquidity of these
instruments is expected to improve. In addition, the Fund currently intends to
treat indebtedness for which there is no readily available market as illiquid
for purposes of the Fund's limitation on illiquid investments. Investments in
loan participations are considered to be debt obligations for purposes of the
Fund's investment restriction relating to the lending of funds or assets.

Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that,
under emerging legal theories of lender liability, the Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on NACM's research in
an attempt to avoid situations where fraud or misrepresentations could adversely
affect the Fund.

Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities

Zero-coupon securities are debt obligations that do not entitle the
holder to any periodic payments of interest either for the entire life of the
obligation or for an initial period after the issuance of the obligations. Like
zero-coupon bonds, "step-up" bonds pay no interest initially but eventually
begin to pay a coupon rate prior to maturity, which rate may increase at stated
intervals during the life of the security. Payment-in-kind securities ("PIKs")
pay dividends or interest in the form of additional securities of the issuer,
rather than in cash. Each of these instruments is typically issued and traded at
a deep discount from its face amount. The amount of the discount varies
depending on such factors as the time remaining until maturity of the
securities, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. The market prices of zero-coupon bonds,
step-ups and PIKs generally are more volatile than the market prices of debt
instruments that pay interest currently and in cash and are likely to respond to
changes in interest rates to a greater degree than do other types of securities
having similar maturities and credit quality. In order to satisfy a requirement
for qualification as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended (the "Code"), an investment company, such as the Fund,
must distribute each year at least 90% of its net investment income, including
the original issue discount accrued on zero-coupon bonds, step-ups and PIKs.
Because the Fund will not on a current basis receive cash payments from the
issuer of these securities in respect of any accrued original issue discount, in
some years the Fund may have to distribute cash obtained from selling other
portfolio holdings of the Fund. In some circumstances, such sales might be
necessary in order to satisfy cash distribution requirements even though
investment considerations might otherwise make it undesirable for the Fund to
sell securities at such time. Under many market conditions, investments in
zero-coupon bonds, step-ups and PIKs may be illiquid, making it difficult for
the Fund to dispose of them or determine their current value.

-23-

Real Estate Investment Funds ("REITs")

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

Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. An
equity REIT may be affected by changes in the value of the underlying properties
owned by the REIT. A mortgage REIT may be affected by changes in interest rates
and the ability of the issuers of its portfolio mortgages to repay their
obligations. REITs are dependent upon the skills of their managers and are not
diversified. REITs are generally dependent upon maintaining cash flows to repay
borrowings and to make distributions to shareholders and are subject to the risk
of default by lessees or borrowers. REITs whose underlying assets are
concentrated in properties used by a particular industry, such as health care,
are also subject to risks associated with such industry.

REITs (especially mortgage REITs) are also subject to interest rate
risks. When interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans the interest
rates on which are reset periodically, yields on a REIT's investments in such
loans will gradually align themselves to reflect changes in market interest
rates. This causes the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate
obligations.

REITs may have limited financial resources, may trade less frequently
and in a limited volume and may be subject to more abrupt or erratic price
movements than larger company securities. Historically REITs have been more
volatile in price than the larger capitalization stocks included in Standard &
Poor's 500 Stock Index.

Mortgage-Related and Other Asset-Backed Securities

The Fund may invest in mortgage-related securities, and in other
asset-backed securities (unrelated to mortgage loans) that are offered to
investors currently or in the future. Mortgage-related securities are interests
in pools of residential or commercial mortgage loans, including mortgage loans
made by savings and loan institutions, mortgage bankers, commercial banks and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations.
The value of some mortgage-

-24-

related or asset-backed securities in which the Fund may invest may be
particularly sensitive to changes in prevailing interest rates, and, like other
debt obligations, the ability of the Fund to successfully utilize these
instruments may depend in part upon the ability of NACM to forecast interest
rates and other economic factors correctly. See "--Mortgage Pass-Through
Securities" below. Certain debt obligations are also secured with collateral
consisting of mortgage-related securities. See "--Collateralized Mortgage
Obligations ("CMOs")" below.

Commercial Mortgage-Backed Securities. Commercial mortgage-backed
securities include securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property. The market for commercial
mortgage-backed securities developed more recently and in terms of total
outstanding principal amount of issues is relatively small compared to the
market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities.

Mortgage Pass-Through Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans secured by
residential or commercial real property. Interests in pools of mortgage-related
securities differ from other forms of debt obligations, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential or commercial mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association (the "GNMA")) are described as
"modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.

The rate of prepayments on underlying mortgages will affect the price
and volatility of a mortgage-related security, and may have the effect of
shortening or extending the effective maturity of the security beyond what was
anticipated at the time of purchase. Early repayment of principal on some
mortgage-related securities (arising from prepayments of principal due to the
sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, the value of the premium would be lost in the event of
prepayment. Like other debt obligations, when interest rates rise, the value of
a mortgage-related security generally will decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment features
may not increase as much as other debt obligations. To the extent that
unanticipated rates of prepayment on underlying mortgages increase the effective
maturity of a mortgage-related security, the volatility of such security can be
expected to increase.

-25-

Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by the GNMA) or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by the Federal National Mortgage Association (the "FNMA") or the Federal Home
Loan Mortgage Corporation (the "FHLMC"). The principal governmental guarantor of
mortgage-related securities is the GNMA. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full faith and credit of the U.S. Government,
the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of mortgages insured by the
Federal Housing Administration (the "FHA"), or guaranteed by the Department of
Veterans Affairs (the "VA").

Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved sellers/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks, and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. Instead, they are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations.

FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government. Instead, they are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations.

Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in such pools.
However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations

-26-

may not be readily marketable. The Fund will not purchase mortgage-related
securities or any other assets which in NACM's opinion are illiquid if, as a
result, more than 5% of the value of the Fund's total assets (taken at market
value at the time of investment) will be invested in illiquid securities.

Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions (see "Investment Restrictions") by virtue of
the exclusion from that test available to all U.S. Government securities. In the
case of privately issued mortgage-related securities, the Fund takes the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real
properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.

Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.

CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.

In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds (the "Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
(the "Collateral"). The Collateral is pledged to a third party trustee as
security for the Bonds. Principal and interest payments from the Collateral are
used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B and
C Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B or
C Bond currently being paid off. When the Series A, B and C Bonds are paid in
full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan

-27-

originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.

CMOs that are issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities will be considered U.S. Government securities
by the Fund, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying the Fund's diversification tests.

FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semi-annually, as opposed to monthly. The amount of principal
payable on each semi-annual payment date is determined in accordance with
FHLMC's mandatory sinking fund schedule, which in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payments of principal on the mortgage loans in the collateral pool
in excess of the amount of FHLMC's minimum sinking fund obligation for any
payment date are paid to the holders of the CMOs as additional sinking fund
payments. Because of the "pass-through" nature of all principal payments
received on the collateral pool in excess of FHLMC's minimum sinking fund
requirement, the rate at which principal of the CMOs is actually repaid is
likely to be such that each class of bonds will be retired in advance of its
scheduled maturity date.

If collection of principal (including prepayments) on the mortgage
loans during any semi-annual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.

Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.

CMO Residuals. CMO residuals are mortgage securities issued by agencies
or instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.

-28-

The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
IO class of stripped mortgage-backed securities. See "--Stripped Mortgage-Backed
Securities" below. In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances the Fund may
fail to recoup some or all of its initial investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has developed fairly recently and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may, or pursuant to an exemption therefrom, may not,
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed "illiquid"
and subject to the Fund's limitations on investment in illiquid securities. As
used in this Statement of Additional Information, the term CMO residual does not
include residual interests in real estate mortgage investment conduits.

Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.

SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the Fund's
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to recoup some or all of its initial investment in these securities even if the
security is in one of the highest rating categories.

-29-

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were developed fairly recently. As a result, established trading markets have
not yet developed and, accordingly, these securities may be deemed "illiquid"
and subject to the Fund's limitations on investment in illiquid securities.

Other Asset-Backed Securities. Similarly, NACM expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future and may be purchased by the Fund. Several types of
asset-backed securities have already been offered to investors, including
Enhanced Equipment Trust Certificates ("EETCs") and Certificates for Automobile
ReceivablesSM ("CARS/SM/").

Although any entity may issue EETCs, to date, U.S. airlines are the
primary issuers. An airline EETC is an obligation secured directly by aircraft
or aircraft engines as collateral. Airline EETCs generally have credit
enhancement in the form of overcollateralization and cross-subordination (i.e.,
multiple tranches and multiple aircraft as collateral). They also generally have
a dedicated liquidity facility provided by a third-party insurer to insure that
coupon payments are made on a timely basis until collateral is liquidated in the
event of a default by the lessor of the collateral. Aircraft EETCs issued by
registered U.S. carriers also benefit from a special section of the U.S.
Bankruptcy Code, which allows the aircraft to be sold by the trust holding the
collateral to repay note holders without participating in bankruptcy
proceedings. EETCs tend to be less liquid than corporate bonds.

CARS/SM/ represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.

Consistent with the Fund's investment objective and policies, NACM also
may invest in other types of asset-backed securities. Other asset-backed
securities may be collateralized by the fees earned by service providers. The
value of asset-backed securities may be substantially dependent on the servicing
of the underlying asset pools and are therefore subject to risks associated with
the negligence by, or defalcation of, their servicers. In certain circumstances,
the mishandling of related documentation may also affect the rights of the
security holders in and to the underlying collateral. The insolvency of entities
that generate receivables or that utilize the assets may result in added costs
and delays in addition to losses associated with a decline in the value of the
underlying assets.

-30-

Other Investment Companies

The Fund may invest in securities of open-or closed-end investment
companies to the extent that such investments are consistent with the Fund's
investment objective and policies and permissible under the 1940 Act. The Fund
may invest in other investment companies either during periods when it has large
amounts of uninvested cash, such as the period shortly after the Fund receives
the proceeds of the offering of its Common Shares or Preferred Shares, during
periods when there is a shortage of attractive convertible securities and
non-convertible income-producing securities available in the market, or when
NACM believes share prices of other investment companies offer attractive
values. The Fund may invest in investment companies that are advised by NACM or
its affiliates to the extent permitted by applicable law and/or pursuant to
exemptive relief from the SEC. As a stockholder in an investment company, the
Fund will bear its ratable share of that investment company's expenses and would
remain subject to payment of the Fund's management fees with respect to assets
so invested. Holders of the Common Shares (the "Common Shareholders") would
therefore be subject to duplicative expenses to the extent the Fund invests in
other investment companies. NACM will take expenses into account when evaluating
the investment merits of an investment in an investment company relative to
available convertible securities and non-convertible income-producing
securities. In addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage risks described
in the Prospectus and herein. As described in the Prospectus in the section
entitled "Risks--Leverage Risk," the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares.

Variable and Floating Rate Securities

Variable and floating rate securities provide for a periodic adjustment
in the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.

The Fund may invest in floating rate debt instruments ("floaters") and
engage in credit spread trades. The interest rate on a floater is a variable
rate that is tied to another interest rate, such as a corporate bond index or
Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Fund with a certain degree of protection against rising
interest rates, the Fund will participate in any declines in interest rates as
well. A credit spread trade is an investment position relating to a difference
in the prices or interest rates of two bonds or other securities, where the
value of the investment position is determined by movements in the difference
between the prices or interest rates, as the case may be, of the respective
securities or currencies.

The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality.

-31-

Event-Linked Bonds

The Fund may invest in "event-linked bonds." Event-linked bonds, which
are sometimes referred to as "catastrophe bonds," are debt obligations for which
the return of principal and payment of interest is contingent on the
non-occurrence of a specific "trigger" event, such as a hurricane or an
earthquake. They may be issued by government agencies, insurance companies,
reinsurers, special purpose corporations or other on-shore or off-shore
entities. If a trigger event causes losses exceeding a specific amount in the
geographic region and time period specified in a bond, the Fund may lose a
portion or all of its principal invested in the bond. If no trigger event
occurs, the Fund will recover its principal plus interest. For some event-linked
bonds, the trigger event or losses may be based on company-wide losses,
index-portfolio losses, industry indexes or readings of scientific instruments
rather than specified actual losses. Often event-linked bonds provide for
extensions of maturity that are mandatory, or optional at the discretion of the
issuer, in order to process and audit loss claims in those cases when a trigger
event has, or possibly has, occurred. In addition to the specified trigger
events, event-linked bonds may also expose the Fund to certain unanticipated
risks including but not limited to issuer (credit) default, adverse regulatory
or jurisdictional interpretations and adverse tax consequences.

Event-linked bonds are a relatively new type of financial instrument.
As such, there is no significant trading history of these securities, and there
can be no assurance that a liquid market in these instruments will develop. Lack
of a liquid market may impose the risk of higher transaction costs and the
possibility that the Fund may be forced to liquidate positions when it would not
be advantageous to do so. Event-linked bonds are typically rated.

U.S. Government Securities

U.S. Government securities are obligations of, or guaranteed by, the
U.S. Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Fund's shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the GNMA, are supported by the full faith and credit of the United States;
others, such as those of the Federal Home Loan Banks, are supported by the right
of the issuer to borrow from the U.S. Treasury; others, such as those of the
FNMA, are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. See "--Zero-Coupon
Bonds, Step-Ups and Payment-In-Kind Securities" above. Custodial receipts issued
in connection with so-called trademark zero-coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero-coupon Treasury securities
(e.g., STRIPs and CUBEs) are direct obligations of the U.S. Government.

-32-

When-Issued, Delayed Delivery and Forward Commitment Transactions

The Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. When such purchases are outstanding, the
Fund will segregate until the settlement date assets determined to be liquid by
NACM in accordance with procedures established by the Board of Trustees, in an
amount sufficient to meet the purchase price. Typically, no income accrues on
securities the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
segregated.

When purchasing a security on a when-issued, delayed delivery, or
forward commitment basis, the Fund assumes the rights and risks of ownership of
the security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the Fund
is not required to pay for the security until the delivery date, these risks are
in addition to the risks associated with the Fund's other investments. If the
Fund remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.

When the Fund has sold a security on a when-issued, delayed delivery,
or forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or could suffer a loss. The Fund may dispose of or renegotiate
a transaction after it is entered into, and may sell when-issued, delayed
delivery or forward commitment securities before they are delivered, which may
result in a capital gain or loss. There is no percentage limitation on the
extent to which the Fund may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.

Borrowing and Related Strategies

The Fund may borrow money or issue other senior securities representing
indebtedness (hereinafter referred to collectively as borrowings) to the extent
permitted under the 1940 Act as interpreted, modified or otherwise permitted by
regulatory authority having jurisdiction, from time to time. The Fund may from
time to time borrow for investment purposes or to add leverage to the portfolio.
However, borrowing for leveraging purposes will generally be used as a
substitute for, rather than in addition to, any leverage obtained through the
issuance of Preferred Shares. The Fund may also borrow in order to repurchase
its shares or as a temporary measure for extraordinary or emergency purposes,
including for the payment of dividends or the settlement of securities
transactions which otherwise might require untimely dispositions of Fund
securities.

Borrowings may include the issuance of notes, commercial paper or other
evidences of indebtedness. The Fund may secure any borrowings by mortgaging,
pledging or otherwise granting a security interest in the Fund's assets. The
terms of any borrowings will be subject to the provisions of any credit
agreements related to the borrowings and, to the extent that the Fund seeks a
rating for the borrowings, any additional guidelines imposed by any rating
agency that is rating the borrowings. Credit agreement provisions and rating
agency guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed

-33-

on the Fund by the 1940 Act. Any credit agreement to which the Fund may become
subject may include customary limits on the Fund's ability to (i) incur
additional debt or issue Preferred Shares without approval of the lenders, (ii)
incur liens or pledge portfolio securities, (iii) incur obligations under
derivative instruments, and (iv) change its investment objective or fundamental
investment restrictions without the approval of lenders. The rights of lenders
to receive payments of interest on and repayments of principal of any borrowings
made by the Fund under any commercial paper program, liquidity facility, credit
facility or other evidence of indebtedness will be senior to the rights of
holders of Preferred Shares ("Preferred Shareholders") with respect to the
payment of dividends or upon liquidation.

Under the 1940 Act, the Fund generally is not permitted to engage in
borrowings unless immediately after a borrowing the value of the Fund's total
assets less liabilities (other than the borrowing) is at least 300% of the
principal amount of such borrowing (i.e., such principal amount may not exceed
33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on Common Shares unless, at the
time of such declaration, the value of the Fund's total assets, less liabilities
other than borrowing, is at least 300% of such principal amount. If the Fund
borrows, it intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the Preferred
Shareholders to elect a majority of the Trustees of the Fund.

As described elsewhere in this section, the Fund also may enter into
certain transactions involving derivative instruments and, prior to the issuance
of Preferred Shares, reverse repurchase agreements, although the Fund's exposure
to certain derivative instruments will be limited by the Fund's 5% limit on
illiquid investments to the extent they are determined to be illiquid. The Fund
may enter into these transactions in order to add leverage to the portfolio. See
"The Fund's investment objective and strategies," "Risks - Leverage Risk" and
"Preferred Shares and related leverage" in the Prospectus. The Fund may (but is
not required to) cover its commitment under these instruments by the segregation
of assets determined to be liquid by NACM in accordance with procedures adopted
by the Trustees, equal in value to the amount of the Fund's commitment, or by
entering into offsetting transactions or owning positions covering its
obligations. In that case, the instruments will not be considered "senior
securities" under the 1940 Act for purposes of the asset coverage requirements
otherwise applicable to borrowings by the Fund or the Fund's issuance of
Preferred Shares.

Any borrowing in which the Fund engages will tend to exaggerate the
effect on net asset value of any increase or decrease in the market value of the
Fund's portfolio. Money borrowed will be subject to interest costs which may or
may not be recovered by appreciation of the securities purchased. The Fund also
may be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.

Reverse Repurchase Agreements

The Fund may utilize reverse repurchase agreements, generally as a
substitute for, rather than in addition to, the leverage obtained through the
issuance of Preferred Shares. In a reverse

-34-

repurchase agreement, the Fund sells securities to a bank or broker-dealer and
agrees to repurchase the securities at a mutually agreed date and price.
Generally, the effect of such a transaction is that the Fund can recover and
reinvest all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement and still be entitled to the
returns associated with those portfolio securities. Such transactions are
advantageous if the interest cost to the Fund of the reverse repurchase
transaction is less than the returns it obtains on investments purchased with
the cash.

Reverse repurchase agreements involve leverage risk and also the risk
that the market value of the securities that the Fund is obligated to repurchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.

The Fund may (but is not required to) segregate assets determined to be
liquid by NACM in accordance with procedures established by the Board of
Trustees, equal (on a daily mark-to-market basis) to its obligations under
reverse repurchase agreements. To the extent that positions in reverse
repurchase agreements are not so covered, such transactions would be subject to
the Fund's limitations on borrowings, which would, among other things, restrict
the aggregate of such transactions (plus any other borrowings) to one-third of
the Fund's total assets.

Short Sales

The Fund may make short sales of securities as part of its overall
portfolio management strategy and to offset potential declines in long positions
in securities in the Fund's portfolio. A short sale is a transaction in which
the Fund sells a security it does not own in anticipation that the market price
of that security will decline.

When the Fund makes a short sale on a security, it must borrow the
security sold short and deliver it to the broker-dealer through which it made
the short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any accrued interest and dividends
on such borrowed securities.

If the price of the security sold short increases between the time of
the short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.

To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer. A short sale is "against the box" to the extent
that the Fund contemporaneously owns, or has the right to obtain at no added
cost, securities identical to those sold short. The Fund may also engage in
so-called "naked" short sales (i.e., short sales that are not "against the
box"), in which case the Fund's losses could theoretically be unlimited, in
cases where the Fund is unable

-35-

for whatever reason to close out its short position. The Fund has the
flexibility to engage in short selling to the extent permitted by the 1940 Act
and rules and interpretations thereunder.

Illiquid Securities

The Fund may invest up to 5% of its total assets in securities which
are illiquid at the time of investment. The term "illiquid securities" for this
purpose is determined using the SEC's standard applicable to open-end investment
companies, i.e., securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities. Illiquid securities are considered to include, among
other things, written over-the-counter options, securities or other liquid
assets being used as cover for such options, certain loan participation
interests, fixed time deposits which are not subject to prepayment or provide
for withdrawal penalties upon prepayment (other than overnight deposits), and
other securities whose disposition is restricted under the federal securities
laws (other than securities issued pursuant to Rule 144A under the 1933 Act and
certain commercial paper that NACM has determined to be liquid under procedures
approved by the Board of Trustees).

Illiquid securities may include privately placed securities, which are
sold directly to a small number of investors, usually institutions. Unlike
public offerings, such securities are not registered under the federal
securities laws. Although certain of these securities may be readily sold,
others may be illiquid, and their sale may involve substantial delays and
additional costs.

Portfolio Trading and Turnover Rate

Portfolio trading may be undertaken to accomplish the investment
objective of the Fund in relation to actual and anticipated movements in
interest rates and for other reasons. In addition, a security may be sold and
another of comparable quality purchased at approximately the same time to take
advantage of what NACM believes to be a temporary price disparity between the
two securities. Temporary price disparities between two comparable securities
may result from supply and demand imbalances where, for example, a temporary
oversupply of certain securities may cause a temporarily low price for such
security, as compared with other securities of like quality and characteristics.
The Fund may also engage in short-term trading consistent with its investment
objective. Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold, or to recognize a gain.

A change in the securities held by the Fund is known as "portfolio
turnover." NACM manages the Fund without regard generally to restrictions on
portfolio turnover. The use of certain derivative instruments with relatively
short maturities may tend to exaggerate the portfolio turnover rate for the
Fund. High portfolio turnover (e.g., greater than 100%) involves correspondingly
greater expenses to the Fund, including brokerage commissions or dealer mark-ups
and other transaction costs on the sale of securities and reinvestments in other
securities. Trading in debt obligations does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. The use
of futures contracts may involve the payment of commissions to futures
commission merchants. The higher the rate of portfolio turnover of the Fund, the
higher the transaction costs borne by the Fund generally will be.

-36-

Transactions in the Fund's portfolio securities may result in realization of
taxable capital gains (including short-term capital gains which are generally
taxed to shareholders at ordinary income tax rates). The trading costs and tax
effects associated with portfolio turnover may adversely affect the Fund's
performance.

The portfolio turnover rate of the Fund is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by (b) the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less.

Securities Loans

Subject to the Fund's "Investment Restrictions" listed below, the Fund
may make secured loans of its portfolio securities to brokers, dealers and other
financial institutions amounting to no more than one-third of its total assets.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. However, such
loans will be made only to broker-dealers that are believed by NACM to be of
relatively high credit standing. Securities loans are made to broker-dealers
pursuant to agreements requiring that loans be continuously secured by
collateral consisting of U.S. Government securities, cash or cash equivalents
(negotiable certificates of deposit, bankers' acceptances or letters of credit)
maintained on a daily mark-to-market basis in an amount at least equal at all
times to the market value of the securities lent. The borrower pays to the Fund,
as the lender, an amount equal to any dividends or interest received on the
securities lent. The Fund may invest only the cash collateral received in
interest-bearing, short-term securities or receive a fee from the borrower. In
the case of cash collateral, the Fund typically pays a rebate to the lender.
Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, the Fund, as the lender, retains the right to
call the loans and obtain the return of the securities loaned at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. The Fund may also call such
loans in order to sell the securities involved. When engaged in securities
lending, the Fund's performance will continue to reflect changes in the value of
the securities loaned and will also reflect the receipt of either interest,
through investment of cash collateral by the Fund in permissible investments, or
a fee, if the collateral is U.S. Government securities.

Participation on Creditors Committees

The Fund may from time to time participate on committees formed by
creditors to negotiate with the management of financially troubled issuers of
securities held by the Fund. Such participation may subject the Fund to expenses
such as legal fees and may make the Fund an "insider" of the issuer for purposes
of the federal securities laws, and therefore may restrict the Fund's ability to
trade in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by the Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws governing the rights

-37-

of creditors and debtors. The Fund would participate on such committees only
when NACM believes that such participation is necessary or desirable to enforce
the Fund's rights as a creditor or to protect the value of securities held by
the Fund.

Short-Term Investments / Temporary Defensive Strategies

Upon NACM's recommendation, for temporary defensive purposes and in
order to keep the Fund's cash fully invested, including the period during which
the net proceeds of the offering are being invested, the Fund may invest up to
100% of its net assets in investments (other than convertible securities and
non-convertible income-producing securities in which the Fund ordinarily
invests), such as high grade, short-term debt instruments. Such investments
may prevent the Fund from achieving its investment objective.

INVESTMENT RESTRICTIONS

Fundamental Investment Restrictions

Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, Preferred Shares voting together as a single class, and
of the holders of a majority of the outstanding Preferred Shares voting as a
separate class:

(1) Concentrate its investments in a particular "industry," as
that term is used in the Investment Company Act of 1940, as amended,
and as interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time.

(2) With respect to 75% of the Fund's total assets, purchase
the securities of any issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities or
securities issued by other investment companies, if, as a result, (i)
more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (ii) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.

(3) Purchase or sell real estate, although it may purchase
securities secured by real estate or interests therein, or securities
issued by companies which invest in real estate, or interests therein.

(4) Purchase or sell commodities or commodities contracts or
oil, gas or mineral programs. This restriction shall not prohibit the
Fund, subject to restrictions described in the Prospectus and elsewhere
in this Statement of Additional Information, from purchasing, selling
or entering into futures contracts, options on futures contracts,
forward contracts, or any interest rate, securities-related or other
hedging instrument, including swap agreements and other derivative
instruments, subject to compliance with any applicable provisions of
the federal securities or commodities laws.

-38-

(5) Borrow money or issue any senior security, except to the
extent permitted under the Investment Company Act of 1940, as amended,
and as interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time.

(6) Make loans, except to the extent permitted under the
Investment Company Act of 1940, as amended, and as interpreted,
modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.

(7) Act as an underwriter of securities of other issuers,
except to the extent that in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter under the
federal securities laws.

Currently under the 1940 Act, the Fund generally is not permitted to
engage in borrowings unless immediately after a borrowing the value of the
Fund's total assets less liabilities (other than the borrowing) is at least 300%
of the principal amount of such borrowing (i.e., such principal amount may not
exceed 33 1/3% of the Fund's total assets). In addition, the Fund is not
permitted to declare any cash dividend or other distribution on Common Shares
unless, at the time of such declaration, the value of the Fund's total assets,
less liabilities other than borrowing, is at least 300% of such principal
amount.

Currently under the 1940 Act, the Fund may generally not lend money or
property to any person, directly or indirectly, if such person controls or is
under common control with the Fund, except for a loan from the Fund to a company
which owns all of the outstanding securities of the Fund, except directors' and
qualifying shares.

For purposes of the foregoing and "Description of Shares--Preferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of the Fund (whether voting together as a single
class or voting as separate classes), means (i) 67% or more of such shares
present at a meeting, if the holders of more than 50% of such shares are present
or represented by proxy, or (ii) more than 50% of such shares, whichever is
less.

Unless otherwise indicated, all limitations applicable to the Fund's
investments (as stated above and elsewhere in this Statement of Additional
Information) apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a security (or,
if unrated, deemed by NACM to be of comparable quality), or change in the
percentage of the Fund's total assets invested in certain securities or other
instruments, or change in the average maturity or duration of the Fund's
investment portfolio, resulting from market fluctuations or other changes in the
Fund's total assets, will not require the Fund to dispose of an investment until
NACM determines that it is practicable to sell or close out the investment
without undue market or tax consequences to the Fund. In the event that rating
agencies assign different ratings to the same security, NACM will determine
which rating it believes best reflects the security's quality and risk at that
time, which may be the higher of the several assigned ratings.

Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding

-39-

5% of the value of the total assets of the issuer at the time the loan is made.
A loan is presumed to be for temporary purposes if it is repaid within sixty
days and is not extended or renewed.

The Fund would be deemed to "concentrate" in a particular industry if
it invested 25% or more of its total assets in that industry. The Fund's
industry concentration policy does not preclude it from focusing investments in
issuers in a group of related industrial sectors (such as different types of
utilities).

The Fund may not change its policy to invest at least 80% of its total
assets in a diversified portfolio of convertible securities and non-convertible
income-producing securities unless it provides shareholders with notice of such
change if and to the extent required by the 1940 Act and the rules thereunder.

To the extent the Fund covers its commitment under a derivative
instrument by the segregation of assets determined by NACM to be liquid in
accordance with procedures adopted by the Trustees, equal in value to the amount
of the Fund's commitment, such instrument will not be considered a "senior
security" for purposes of the asset coverage requirements otherwise applicable
to borrowings by the Fund or the Fund's issuance of Preferred Shares. For
instance, the Fund may cover its position in a reverse repurchase agreement by
segregating liquid assets at least equal in amount to its forward purchase
commitment.

The Fund interprets its policies with respect to borrowing and lending
to permit such activities as may be lawful for the Fund, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom pursuant
to exemptive order of the SEC.

The Fund intends to apply for ratings for its Preferred Shares from
Moody's, S&P and/or Fitch. In order to obtain and maintain the required ratings,
the Fund may be required to comply with investment quality, diversification and
other guidelines established by Moody's, S&P and/or Fitch. Such guidelines will
likely be more restrictive than the restrictions set forth above. The Fund does
not anticipate that such guidelines would have a material adverse effect on
Common Shareholders or its ability to achieve its investment objective. The Fund
presently anticipates that any Preferred Shares that it intends to issue would
be initially given the highest ratings by Moody's ("Aaa"), S&P ("AAA") and/or
Fitch ("AAA"), but no assurance can be given that such ratings will be obtained.
No minimum rating is required for the issuance of Preferred Shares by the Fund.
Moody's, S&P and Fitch receive fees in connection with their ratings issuances.

-40-

MANAGEMENT OF THE FUND

Trustees and Officers

The business of the Fund is managed under the direction of the Fund's
Board of Trustees. Subject to the provisions of the Fund's Amended and Restated
Agreement and Declaration of Trust (the "Declaration"), its Bylaws and
Massachusetts law, the Trustees have all powers necessary and convenient to
carry out this responsibility, including the election and removal of the Fund's
officers.

The Trustees and officers of the Fund, their ages, the position they
hold with the Fund, their term of office and length of time served, a
description of their principal occupations during the past five years, the
number of portfolios in the fund complex that the Trustee oversees and any other
directorships held by the Trustee are listed in the two tables immediately
following. Except as shown, each Trustee's and officer's principal occupation
and business experience for the last five years have been with the employer(s)
indicated, although in some cases the Trustee may have held different positions
with such employer(s). Unless otherwise indicated, the business address of the
persons listed below is c/o PIMCO Advisors Fund Management LLC, 1345 Avenue of
the Americas, New York, New York 10105.

-41-

Independent Trustees*
---------------------

Number of
Portfolios in
Term of Office Fund Complex
Name, Address Position(s) and Length of Principal Occupation(s) During Overseen by Other Directorships
and Age Held with Fund Time Served the Past 5 Years Trustee Held by Trustee

Paul Belica Trustee Since inception Trustee, Fixed Income SHares, 14 None.
Age 81 (February, 2003). PIMCO Corporate Opportunity Fund, PIMCO
Corporate Income Fund, PIMCO Municipal
Income Fund, PIMCO California Municipal
Income Fund, PIMCO New York Municipal
Income Fund, PIMCO Municipal Income Fund
II, PIMCO California Municipal Income
Fund II, PIMCO New York Municipal Income
Fund II, PIMCO Municipal Income Fund III,
PIMCO California Municipal Income Fund
III and PIMCO New York Municipal Income
Fund III; Manager, Stratigos Fund, LLC,
Whistler Fund, LLC, Xanthus Fund, LLC and
Wynstone Fund, LLC; Director, Student
Loan Finance Corp., Education Loans,
Inc., Goal Funding, Inc., Goal Funding
II, Inc., Surety Loan Funding, Inc.
Formerly, Advisor, Salomon Smith Barney
Inc.; Director, Central European Value
Fund, Inc., Deck House Inc., The Czech
Republic Fund, Inc.

Robert E. Connor Trustee Since inception Trustee, Fixed Income SHares, PIMCO 15 None.
Age 68 (February, 2003). Corporate Opportunity Fund, PIMCO
Corporate Income Fund, PIMCO Municipal
Income Fund, PIMCO California Municipal
Income Fund, PIMCO New York Municipal
Income Fund, PIMCO Municipal Income Fund
II, PIMCO California Municipal Income
Fund II, PIMCO New York Municipal Income
Fund II, PIMCO Municipal Income Fund III,
PIMCO California Municipal Income Fund
III and PIMCO New York Municipal Income
Fund III; Director, Municipal Advantage
Fund, Inc.; Corporate Affairs Consultant.
Formerly, Senior Vice President,
Corporate Office, Salomon Smith Barney
Inc.

-42-

Independent Trustees*
---------------------

John J. Dalessandro II* Trustee Since inception President and Director, J.J. Dalessandro 12 None.
Age 65 (February, 2003). II Ltd., registered broker-dealer and
member of the New York Stock Exchange;
Trustee, PIMCO Corporate Opportunity
Fund, PIMCO Corporate Income Fund, PIMCO
Municipal Income Fund, PIMCO California
Municipal Income Fund, PIMCO New York
Municipal Income Fund, PIMCO Municipal
Income Fund II, PIMCO California
Municipal Income Fund II, PIMCO New York
Municipal Income Fund II, PIMCO Municipal
Income Fund III, PIMCO California
Municipal Income Fund III and PIMCO New
York Municipal Income Fund III.

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

* Mr. Dalessandro is treated by the Fund as not being an "interested person" (as
defined in Section 2(a)(19) of the 1940 Act) of the Fund, the Manager, NACM or
the Underwriters, despite his affiliation with J.J. Dalessandro II Ltd., a
member of the New York Stock Exchange, Inc. (the "Exchange") that operates as a
floor broker and does not effect portfolio transactions for entities other than
other members of the Exchange.

-43-

Interested Trustees

Currently no Trustees are treated as "interested persons" (as defined
in Section 2(a)(19) of the 1940 Act) of the Fund.

In accordance with the Fund's staggered board (see "Anti-Takeover and
Other Provisions in the Declaration of Trust"), the Common Shareholders of the
Fund will elect Trustees to fill the vacancies of Trustees whose terms expire at
each annual meeting of Common Shareholders, unless any Preferred Shares are
outstanding, in which event Preferred Shareholders, voting as a separate class,
will elect two Trustees and the remaining Trustee shall be elected by Common
Shareholders and Preferred Shareholders, voting together as a single class.
Preferred Shareholders will be entitled to elect a majority of the Fund's
Trustees under certain circumstances.

-44-

Officers
--------

Position(s) Term of Office
Held with and Length of
Name, Address and Age Fund Time Served Principal Occupation(s) During the Past 5 Years

Stephen J. Treadway Chairman Since inception Managing Director, Allianz Dresdner Asset Management
2187 Atlantic Street (February, 2003). of America L.P.; Managing Director and Chief Executive
Stamford, CT 06902 Officer, PIMCO Advisors Fund Management LLC; Managing
Age 55 Director and Chief Executive Officer, PIMCO Advisors
Distributors LLC ("PAD"); Trustee and Chairman, PIMCO
Funds: Multi-Manager Series; Chairman, Fixed Income
SHares; Trustee, Chairman and President, OCC
Accumulation Trust; Trustee and Chairman, PIMCO
Corporate Income Fund, PIMCO Municipal Income Fund,
PIMCO California Municipal Income Fund, PIMCO New York
Municipal Income Fund, PIMCO Municipal Income Fund II,
PIMCO California Municipal Income Fund II, PIMCO New
York Municipal Income Fund II and Municipal Advantage
Fund, Inc.; Chairman, PIMCO Corporate Opportunity
Fund, PIMCO Municipal Income Fund III, PIMCO
California Municipal Income Fund III and PIMCO New
York Municipal Income Fund III.

Brian S. Shlissel President Since inception Senior Vice President, PIMCO Advisors Fund Management
Age 38 and Chief (February, 2003). LLC; Executive Vice President and Treasurer, OCC
Executive Accumulation Trust; President and Chief Executive
Officer Officer, Fixed Income SHares, PIMCO Corporate
Opportunity Fund, PIMCO Corporate Income Fund, PIMCO
Municipal Income Fund, PIMCO California Municipal
Income Fund, PIMCO Officer New York Municipal Income
Fund, PIMCO Municipal Income Fund II, PIMCO California
Municipal Income Fund II, PIMCO New York Municipal
Income Fund II, PIMCO Municipal Income Fund III, PIMCO
California Municipal Income Fund III, PIMCO New York
Municipal Income Fund III and Municipal Advantage
Fund, Inc.; Formerly, Vice President, Mitchell
Hutchins Asset Management Inc.

Lawrence G. Altadonna Treasurer; Since inception Vice President, PIMCO Advisors Fund Management LLC;
Age 36 Principal (February, 2003). Treasurer and Principal Financial and Accounting
Financial Officer, PIMCO Corporate Opportunity Fund, PIMCO
and Corporate Income Fund, PIMCO Municipal Income Fund,
Accounting PIMCO California Municipal Income Fund, PIMCO New York
Officer Municipal Income Fund, PIMCO Municipal Income Fund II,
PIMCO California Municipal Income Fund II, PIMCO New
York Municipal Income Fund II, PIMCO Municipal Income
Fund III, PIMCO California Municipal Income Fund III,
PIMCO New York Municipal Income Fund III and Municipal
Advantage Fund, Inc.; Treasurer, Fixed Income SHares;
Assistant Treasurer, OCC Accumulation Trust. Formerly,
Director of Fund Administration, Prudential
Investments.

Newton B. Schott, Jr. Vice Since inception Managing Director, Chief Administrative Officer,
2187 Atlantic Street President, (February, 2003). Secretary and General Counsel, PAD; Managing Director,
Stamford, CT 06902 Secretary Chief Legal Officer and Secretary, PIMCO Advisors Fund
Age 60 Management LLC; President, Chief Executive Officer and
Secretary, PIMCO Funds: Multi-Manager Series; Vice
President and Secretary, PIMCO Corporate Opportunity
Fund, PIMCO Corporate Income Fund, PIMCO Municipal
Income Fund, PIMCO California Municipal Income Fund,
PIMCO New York Municipal Income Fund, PIMCO Municipal
Income Fund II, PIMCO California Municipal Income Fund
II, PIMCO New York Municipal Income Fund II, PIMCO
Municipal Income Fund III, PIMCO California Municipal
Income Fund III, PIMCO New York Municipal Income Fund
III and Municipal Advantage Fund, Inc.; Secretary,
Fixed Income SHares.

Douglas Forsyth Vice Since inception Senior Portfolio Manager and Member of the Executive
600 West Broadway President (February, 2003). Committee of NACM.
San Diego, CA 92101
Age 34

-45-

For interested Trustees and officers, positions held with affiliated
persons or principal underwriters of the Fund are listed in the following table:

Positions Held with Affiliated Persons or
Name Principal Underwriters of the Fund

Stephen J. Treadway See above.

Brian S. Shlissel See above.

Lawrence Altadonna See above.

Newton B. Schott, Jr. See above.

Douglas Forsyth See above.

Committees of the Board of Trustees

Audit Oversight Committee

Provides oversight with respect to the internal and external accounting
and auditing procedures of the Fund and, among other things, considers the
selection of independent public accountants for the Fund and the scope of the
audit, approves all significant services proposed to be performed by those
accountants on behalf of the Fund, and considers other services provided by
those accountants to the Fund, the Manager and NACM and the possible effect of
those services on the independence of those accountants. Messrs. Belica and
Connor, each of whom is an Independent Trustee, serve on this committee.

Nominating Committee

Responsible for reviewing and recommending qualified candidates to the
Board in the event that a position is vacated or created. The Nominating
Committee will review and consider nominees recommended by shareholders to serve
as Trustee, provided any such recommendation is submitted in writing to the
Fund, c/o Newton B. Schott, Jr., Secretary, at the address of the principal
executive offices of the Fund. The Nominating Committee has full discretion to
reject nominees recommended by shareholders, and there is no assurance that any
such person so recommended and considered by a committee will be nominated for
election to the Board. Messrs. Belica and Connor, each of whom is an Independent
Trustee, serve on this committee.

Valuation Committee

Reviews procedures for the valuation of securities and periodically
reviews information from the Manager and NACM regarding fair value and liquidity
determination made pursuant to the Board-approved procedures, and makes related
recommendations to the full Board and assists the full Board in resolving
particular valuation matters. Messrs. Belica and Connor, each of whom is an
Independent Trustee, serve on this committee.

-46-

Compensation Committee

The Compensation Committee periodically reviews and sets compensation
payable to the Trustees of the Fund who are not directors, officers, partners or
employees of the Manager, NACM or any entity controlling, controlled by or under
common control with the Manager or NACM. Messrs. Belica and Connor, each of whom
is an Independent Trustee, serve on this committee.

Securities Ownership

For each Trustee, the following table discloses the dollar range of
equity securities beneficially owned by the Trustee in the Fund and, on an
aggregate basis, in any registered investment companies overseen by the Trustee
within the Fund's family of investment companies as of December 31, 2002:

Aggregate Dollar Range of Equity Securities in All
Dollar Range of Equity Registered Investment Companies Overseen by Trustee
Name of Trustee Securities in the Fund in Family of Investment Companies

Paul Belica None. (greater than) $100,000

Robert E. Connor None. None.

John J. Dalessandro II None. None.

For independent Trustees and their immediate family members, the
following table provides information regarding each class of securities owned
beneficially in an investment adviser or principal underwriter of the Fund, or a
person (other than a registered investment company) directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of the Fund as of December 31, 2002:

Name of Owners and
Relationships to Value of Percent of
Name of Trustee Trustee Company Title of Class Securities Class

Paul Belica None.

Robert E. Connor None.

John J. Dalessandro II None.

As of March 19, 2003, the Fund's officers and Trustees as a
group owned less than 1% of the outstanding Common Shares.

-47-

As of March 19, 2003, the following persons owned of record the
number of Common Shares noted below, representing the indicated percentage of
the Fund's outstanding shares as of such date.

Percentage of the Fund's
Number of Common outstanding shares as of
Shareholder Shares March 19, 2003
----------- ------ --------------

Allianz Dresdner Asset Management
of America L.P.
1345 Avenue of the Americas
New York, New York 10105 6,981 100%

Compensation

Messrs. Belica, Connor and Dalessandro also serve as Trustees of PIMCO
Municipal Income Fund, PIMCO California Municipal Income Fund, PIMCO New York
Municipal Income Fund, PIMCO Municipal Income Fund II, PIMCO California
Municipal Income Fund II, PIMCO New York Municipal Income Fund II, PIMCO
Municipal Income Fund III, PIMCO California Municipal Income Fund III and PIMCO
New York Municipal Income Fund III (together, the "Municipal Funds"), PIMCO
Corporate Opportunity Fund and PIMCO Corporate Income Fund, eleven closed-end
funds for which the Manager serves as investment manager and Pacific Investment
Management Company LLC ("PIMCO"), an affiliate of the Manager, serves as
portfolio manager. In addition to the Fund, the Municipal Funds, PIMCO Corporate
Opportunity Fund, and PIMCO Corporate Income Fund, Mr. Belica is a director or
trustee, as the case may be, of one open-end investment company (comprising two
separate investment portfolios) advised by the Manager, and Mr. Connor is a
director or trustee, as the case may be, of one open-end investment company
(comprising two separate investment portfolios) and one closed-end investment
company advised by the Manager. To the best of the Fund's knowledge, none of the
"independent" Trustees has ever been a director, officer, or employee of, or a
consultant to, the Manager, NACM, any one or more of the Underwriters or any one
or more affiliates of any of the foregoing, except that Mr. Connor provides
occasional editorial consulting services as an independent contractor to an
administrative unit of Salomon Smith Barney Inc. As indicated above, certain of
the officers and Trustees of the Fund are affiliated with the Manager and/or
NACM.

The Municipal Funds, PIMCO Corporate Income Fund, PIMCO Corporate
Opportunity Fund, and the Fund (together, the "PIMCO Closed-End Funds") are
expected to hold joint meetings of their Boards of Trustees whenever possible.
Each Trustee, other than any Trustee who is a director, officer, partner or
employee of the Manager, NACM, PIMCO or any entity controlling, controlled by or
under common control with the Manager, NACM or PIMCO, receives $24,000 for each
joint meeting for the first four joint meetings in each year and $12,000 for
each additional joint meeting in such year if the meetings are attended in
person. Trustees receive $6,000 per joint meeting if the meetings are attended
telephonically. Members of the Audit Oversight Committee will receive $500 per
fund per joint meeting of the PIMCO Closed-

-48-

End Funds' Audit Oversight Committees if the meeting takes place on a day other
than the day of a regularly scheduled Board meeting. Trustees will also be
reimbursed for meeting-related expenses.

The PIMCO Closed-End Funds will allocate the Trustees' compensation and
other costs of their joint meetings pro rata based on each PIMCO Closed-End
Fund's net assets, including assets attributable to any Preferred Shares.

It is estimated that the Trustees will receive the amounts set forth in
the following table from the Fund for its initial fiscal year ending February
29, 2004. For the calendar year ended December 31, 2002, the Trustees received
the compensation set forth in the following table for serving as trustees of
other funds in the "Fund Complex." Each officer and Trustee who is a director,
officer, partner or employee of the Manager, NACM or any entity controlling,
controlled by or under common control with the Manager or NACM serves without
any compensation from the Fund.

Total Compensation
Estimated Compensation from the Fund Complex Paid
from the Fund for the to the Trustees for the
Fiscal Year Ending Calendar Year Ending
Name of Trustee February 29, 2004* December 31, 2002**
--------------- ------------------ -----------------

Paul Belica $5,000 $78,400

Robert E. Connor $5,000 $87,170

John J. Dalessandro II $5,000 $76,400

----------
* Since the Fund has not completed its first full fiscal year,
compensation is estimated based upon future payments to be made by the Fund
during the current fiscal year and upon estimated relative net assets of the
PIMCO Closed-End Funds.

** In addition to the PIMCO Closed-End Funds, during the year ended
December 31, 2002, Mr. Belica served as a trustee of one open-end investment
company (comprising two separate investment portfolios) advised by the Manager,
and Mr. Connor served as a director or trustee of one open-end investment
company (comprising two separate investment portfolios) and one closed-end
investment company advised by the Manager. These investment companies are
considered to be in the same "Fund Complex" as the Fund.

The Fund has no employees. Its officers are compensated by the Manager
and/or NACM.

Codes of Ethics

The Fund, the Manager and NACM have each adopted a separate code of
ethics governing personal trading activities of, as applicable, all Trustees and
officers of the Fund, directors, officers and employees of the Manager and NACM,
who, in connection with their regular functions, play a role in the
recommendation of any purchase or sale of a security by the Fund or obtain
information pertaining to such purchase or sale or who have the power to
influence the management or policies of the Fund, the Manager or NACM, as
applicable. Such

-49-

persons are prohibited from effecting certain transactions, allowed to effect
certain exempt transactions (including with respect to securities that may be
purchased or held by the Fund), and are required to preclear certain security
transactions with the applicable compliance officer or his designee and to
report certain transactions on a regular basis. The Fund, the Manager and NACM
have each developed procedures for administration of their respective codes.
Text-only versions of the codes of ethics can be viewed online or downloaded
from the EDGAR Database on the SEC's internet web site at www.sec.gov. You may
also review and copy those documents by visiting the SEC's Public Reference Room
in Washington, DC. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 202-942-8090. In addition, copies of the codes
of ethics may be obtained, after mailing the appropriate duplicating fee, by
writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington,
DC 20549-0102 or by e-mail request at publicinfo@sec.gov.

INVESTMENT MANAGER AND PORTFOLIO MANAGER

Investment Manager

The Manager serves as investment manager to the Fund pursuant to an
investment management agreement (the "Investment Management Agreement") between
it and the Fund. The Manager, a Delaware limited liability company organized in
2000, is wholly-owned by PIMCO Advisors Retail Holdings LLC, a wholly-owned
subsidiary of Allianz Dresdner Asset Management of America L.P. ("ADAM of
America," formerly PIMCO Advisors L.P.). ADAM of America was organized as a
limited partnership under Delaware law in 1987. ADAM of America's sole general
partner is Allianz-Paclife Partners LLC. Allianz-Paclife Partners LLC is a
Delaware limited liability company with three members, ADAM U.S. Holding LLC, a
Delaware limited liability company, Pacific Asset Management LLC, a Delaware
limited liability company, and Pacific Life Insurance Company ("Pacific Life"),
a California stock life insurance company. Pacific Asset Management LLC is a
wholly-owned subsidiary of Pacific Life, which is a wholly-owned subsidiary of
Pacific Mutual Holding Company. Pacific Life owns an indirect minority equity
interest in ADAM of America. The sole member of ADAM U.S. Holding LLC is Allianz
Dresdner Asset Management of America LLC. Allianz Dresdner Asset Management of
America LLC has two members, Allianz of America, Inc. ("Allianz of Amercia"), a
Delaware corporation which owns a 99.9% non-managing interest, and Allianz
Dresdner Asset Management of America Holding Inc., a Delaware corporation which
owns a 0.01% managing interest. Allianz of America is a wholly-owned subsidiary
of Allianz Aktiengesellschaft ("Allianz AG"). Allianz Dresdner Asset Management
of America Holding Inc. is a wholly-owned subsidiary of ADAM GmbH, which is a
wholly-owned subsidiary of Allianz AG. Allianz AG indirectly holds a controlling
interest in ADAM of America. Allianz AG is a European-based, multinational
insurance and financial services holding company. Allianz AG's address is
Koeniginstrasse 28, D-80802, Munich, Germany. Pacific Life's address is 700
Newport Center Drive, Newport Beach, California 92660. ADAM of America's address
is 888 San Clemente Drive, Suite 100, Newport Beach, California 92660.

The general partner of ADAM of America has substantially delegated its
management and control of ADAM of America to an Executive Committee. The
Executive Committee of ADAM of America is comprised of William S. Thompson, Jr.
and David C. Flattum.

-50-

The Manager is located at 1345 Avenue of the Americas, New York, New
York 10105. As of December 31, 2002, the Manager had approximately $16.64
billion in assets under management. As of December 31, 2002, ADAM of America and
its subsidiary partnerships, including NACM, had approximately $357 billion in
assets under management.

Allianz of America has entered into a put/call arrangement for the
possible disposition of Pacific Life's indirect interest in ADAM of America. The
put option held by Pacific Life will allow it to require Allianz of America, on
the last business day of each calendar quarter following May 5, 2000, to
purchase at a formula-based price all ADAM of America's units owned directly or
indirectly by Pacific Life. The call option held by Allianz of America will
allow it, beginning January 31, 2003 or upon a change in control of Pacific
Life, to require Pacific Life to sell or cause to be sold to Allianz of America,
at the same formula-based price, all of ADAM of America's units owned directly
or indirectly by Pacific Life.

As of the date of this Statement of Additional Information, significant
institutional shareholders of Allianz AG currently include Munchener
Ruckversicherungs-Gesellschaft AG ("Munich Re") and HypoVereinsbank. Allianz AG
in turn owns more than 95% of Dresdner Bank AG. Credit Lyonnais, Munich Re and
HypoVereinsbank, as well as certain broker-dealers that might be controlled by
or affiliated with these entities or Dresdner Bank AG, such as Dresdner
Klienwort Wasserstein, Dresdner Kleinwort Benson and Grantchester Securities,
Inc., may be considered to be affiliated persons of the Manager and NACM.
(Broker-dealer affiliates of such significant institutional shareholders are
sometimes referred to herein as "Affiliated Brokers.") Absent an SEC exemption
or other relief, the Fund generally is precluded from effecting principal
transactions with the Affiliated Brokers, and its ability to purchase securities
being underwritten by an Affiliated Broker or a syndicate including an
Affiliated Broker is subject to restrictions. Similarly, the Fund's ability to
utilize the Affiliated Brokers for agency transactions is subject to the
restrictions of Rule 17e-1 under the 1940 Act. NACM does not believe that the
restrictions on transactions with the Affiliated Brokers described above will
materially adversely affect its ability to provide services to the Fund, the
Fund's ability to take advantage of market opportunities, or the Fund's overall
performance.

The Manager, subject to the supervision of the Board of Trustees, is
responsible for managing, either directly or through others selected by the
Manager, the investments of the Fund. The Manager also furnishes to the Board of
Trustees periodic reports on the investment performance of the Fund. As more
fully discussed below, the Manager has retained NACM to serve as the Fund's
portfolio manager.

Under the terms of the Investment Management Agreement, subject to such
policies as the Trustees of the Fund may determine, the Manager, at its expense,
will furnish continuously an investment program for the Fund and will make
investment decisions on behalf of the Fund and place all orders for the purchase
and sale of portfolio securities subject always to the Fund's investment
objective, policies and restrictions; provided that, so long as NACM serves as
the portfolio manager for the Fund, the Manager's obligation under the
Investment Management Agreement with respect to the Fund is, subject always to
the control of the Trustees, to determine and review with NACM the investment
policies of the Fund.

-51-

Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business of the Fund, furnishes
office space and equipment, provides bookkeeping and certain clerical services
(excluding determination of the net asset value of the Fund, shareholder
accounting services and the accounting services for the Fund) and pays all
salaries, fees and expenses of officers and Trustees of the Fund who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Fund's portfolio
transactions may be placed with broker-dealers which furnish the Manager and
NACM, without cost, certain research, statistical and quotation services of
value to them or their respective affiliates in advising the Fund or their other
clients. In so doing, the Fund may incur greater brokerage commissions and other
transactions costs than it might otherwise pay.

Pursuant to the Investment Management Agreement, the Fund has agreed to

pay the Manager an annual management fee, payable on a monthly basis, at the
annual rate of 0.70% of the Fund's average daily total managed assets for the
services and facilities it provides. "Total managed assets" means the total
assets of the Fund (including any assets attributable to any Preferred Shares or
other forms of leverage that may be outstanding) minus accrued liabilities
(other than liabilities representing leverage). All fees and expenses are
accrued daily and deducted before payment of dividends to investors.

Except as otherwise described in the Prospectus, the Fund pays, in
addition to the investment management fee described above, all expenses not
assumed by the Manager, including, without limitation, fees and expenses of
Trustees who are not "interested persons" of the Manager or the Fund, interest
charges, taxes, brokerage commissions, expenses of issue of shares, fees and
expenses of registering and qualifying the Fund and its classes of shares for
distribution under federal and state laws and regulations, charges of
custodians, auditing and legal expenses, expenses of determining net asset value
of the Fund, reports to shareholders, expenses of meetings of shareholders,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing shareholders, and its proportionate share of insurance premiums and
professional association dues or assessments. The Fund is also responsible for
such nonrecurring expenses as may arise, including litigation in which the Fund
may be a party, and other expenses as determined by the Trustees. The Fund may
have an obligation to indemnify its officers and Trustees with respect to such
litigation.

Portfolio Manager

NACM serves as portfolio manager for the Fund pursuant to a portfolio
management agreement (the "Portfolio Management Agreement") between NACM and the
Manager. Under the Portfolio Management Agreement, subject always to the control
of the Trustees and the supervision of the Manager, NACM's obligation is to
furnish continuously an investment program for the Fund, to make investment
decisions on behalf of the Fund and to place all orders for the purchase and
sale of portfolio securities and all other investments for the Fund.

Under the Portfolio Management Agreement, the Manager (and not the
Fund) has agreed to pay NACM a monthly fee equal to (i) fifty percent (50%) of
the management fees payable by the Fund to the Manager for such month with
respect to the first $300 million of the Fund's average daily total managed
assets and (ii) seventy-five percent (75%) of the management fees payable by the
Fund to the Manager for such month with respect to the Fund's average daily
total managed assets in excess of $300 million; provided, however, that the
amounts payable under (i) and (ii) above shall be reduced to reflect that NACM
will bear 50% and 75%, respectively, of any Service or Incentive Fees payable by
the Manager for such month with respect to the specified total managed assets.
For these purposes, "Service or Incentive Fees" for any period equals the sum of
any Shareholder Servicing Fees payable by the Manager to UBS Warburg LLC (as
described under "Shareholder servicing agent, custodian and transfer agent" in
the Prospectus) for such period and any incentive fees payable by the Manager to
other underwriters (as described under "Underwriting" in the Prospectus) for
such period.

NACM is an investment management firm organized as a Delaware limited
liability company (formerly Nicholas-Applegate Capital Management, a California
limited partnership). NACM is wholly owned by Nicholas-Applegate Holdings LLC, a
Delaware limited liability

-52-

company, which is a wholly owned subsidiary of Allianz Dresdner Asset Management
U.S. Equities LLC ("ADAM Equities"), a Delaware limited liability company. ADAM
Equities is a wholly owned subsidiary of ADAM of America.

NACM was organized in 1984 to manage discretionary accounts investing
primarily in publicly traded equity securities and securities convertible into
or exercisable for publicly traded equity securities, with the goal of capital
appreciation. As of December 31, 2002, NACM had approximately $16.6 billion in
assets under management. NACM is located at 600 West Broadway, 30th Floor, San
Diego, California 92101.

Certain Terms of the Investment Management and Portfolio Management Agreements

The Investment Management Agreement and the Portfolio Management
Agreement were each approved by the Trustees of the Fund (including all of the
Trustees who are not "interested persons" of the Manager or NACM). The
Investment Management Agreement and Portfolio Management Agreement will each
continue in force with respect to the Fund for two years from their respective
dates, and from year to year thereafter, but only so long as their continuance
is approved at least annually by (i) vote, cast in person at a meeting called
for that purpose, of a majority of those Trustees who are not "interested
persons" of the Manager, NACM or the Fund, and (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding shares
of all classes of the Fund. Each of the Investment Management Agreement and
Portfolio Management Agreement automatically terminates on assignment. The
Investment Management Agreement may be terminated on not less than 60 days'
notice by the Manager to the Fund or by the Fund to the Manager. The Portfolio
Management Agreement may be terminated on not less than 60 days' notice by the
Manager to NACM or by NACM to the Manager, or by the Fund at any time by notice
to the Manager and NACM.

The Investment Management Agreement and the Portfolio Management
Agreement each provide that the Manager or NACM, as applicable, shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.

Basis for Approval of the Investment Management and Portfolio Management
Agreements

In determining to approve the Investment Management Agreement and the
Portfolio Management Agreement, the Trustees met with the relevant investment
advisory personnel from the Manager and NACM and considered information relating
to the education, experience and number of investment professionals and other
personnel who would provide services under the applicable agreement. See
"Management of the Fund" in the Prospectus and this Statement of Additional
Information. The Trustees also took into account the time and attention to be
devoted by senior management to the Fund and the other funds in the complex. The
Trustees evaluated the level of skill required to manage the Fund and concluded
that the human resources to be available at the Manager and NACM were
appropriate to fulfill effectively the duties of the Manager and NACM on behalf
of the Fund under the applicable agreement. The Trustees also considered the
business reputation of the Manager and NACM, their financial resources and
professional liability insurance coverage and concluded that they would be able
to meet any reasonably foreseeable obligations under the applicable agreement.

-53-

The Trustees received information concerning the investment philosophy
and investment process to be applied by NACM in managing the Fund. In this
connection, the Trustees considered NACM's in-house research capabilities as
well as other resources available to NACM's personnel, including research
services available to NACM as a result of securities transactions effected for
the Fund and other investment advisory clients. The Trustees concluded that
NACM's investment process, research capabilities and philosophy were well suited
to the Fund, given the Fund's investment objective and policies.

The Trustees considered the scope of the services provided by the
Manager and NACM to the Fund under the Investment Management Agreement and
Portfolio Management Agreement, respectively, relative to services provided by
third parties to other mutual funds. The Trustees noted that the Manager's and
NACM's standard of care was comparable to that found in most investment company
advisory agreements. See "--Certain Terms of the Investment Management Agreement
and the Portfolio Management Agreement" above. The Trustees concluded that the
scope of the Manager's and NACM's services to be provided to the Fund was
consistent with the Fund's operational requirements, including, in addition to
its investment objective, compliance with the Fund's investment restrictions,
tax and reporting requirements and related shareholder services.

The Trustees considered the quality of the services to be provided by
the Manager and NACM to the Fund. The Trustees also evaluated the procedures of
the Manager and NACM designed to fulfill the their fiduciary duty to the Fund
with respect to possible conflicts of interest, including their codes of ethics
(regulating the personal trading of their officers and employees) (see
"Management of the Fund--Code of Ethics" above), the procedures by which NACM
allocates trades among its various investment advisory clients, the integrity of
the systems in place to ensure compliance with the foregoing and the record of
NACM in these matters. The Trustees also received information concerning
standards of the Manager and NACM with respect to the execution of portfolio
transactions. See "Portfolio Transactions" below.

In approving the agreements, the Trustees also gave substantial
consideration to the fees payable under the agreements. The Trustees reviewed
information concerning fees paid to investment advisers of similar funds. The
Trustees also considered the fees of the Fund as a percentage of assets at
different asset levels and possible economies of scale to the Manager. The
Trustees evaluated the Manager's profitability with respect to the Fund,
concluding that such profitability was not inconsistent with levels of
profitability that had been determined by courts not to be "excessive." In
evaluating the Fund's advisory fees, the Trustees also took into account the
complexity of investment management for the Fund relative to other types of
funds.

-54-

PORTFOLIO TRANSACTIONS

Investment Decisions and Portfolio Transactions

Investment decisions for the Fund and for the other investment advisory
clients of the Manager and NACM are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved
(including the Fund). Some securities considered for investments by the Fund may
also be appropriate for other clients served by the Manager and NACM. Thus, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. If a purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these clients served by the Manager or NACM is considered at or
about the same time, transactions in such securities will be allocated among the
Fund and clients in a manner deemed fair and reasonable by the Manager or NACM,
as applicable. The Manager or NACM may aggregate orders for the Fund with
simultaneous transactions entered into on behalf of its other clients so long as
price and transaction expenses are averaged either for that transaction or for
the day. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling the security. In some instances, one client
may sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which the
Manager or NACM believes is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients.

Brokerage and Research Services

There is generally no stated commission in the case of debt securities,
which are traded in the over-the-counter markets, but the price paid by the Fund
usually includes an undisclosed dealer commission or mark-up. In underwritten
offerings, the price paid by the Fund includes a disclosed, fixed commission or
discount retained by the underwriter or dealer. Transactions on U.S. stock
exchanges and other agency transactions involve the payment by the Fund of
negotiated brokerage commissions. Such commissions vary among different brokers.
Also, a particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction.

Subject to the supervision of the Manager, NACM places all orders for
the purchase and sale of portfolio securities, options, futures contracts and
other instruments for the Fund and buys and sells such securities, options,
futures contracts and other instruments for the Fund through a substantial
number of brokers and dealers. In so doing, NACM uses its best efforts to obtain
for the Fund the most favorable price and execution available, except to the
extent it may be permitted to pay higher brokerage commissions as described
below. In seeking the most favorable price and execution, NACM, having in mind
the Fund's best interests, considers all factors it deems relevant, including,
by way of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealer involved and the quality
of service rendered by the broker-dealer in other transactions.

Subject to the supervision of the Manager, NACM places orders for the
purchase and sale of portfolio investments for the Fund's account with brokers
or dealers selected by it in its discretion. In effecting purchases and sales of
portfolio securities for the account of the Fund, NACM will seek the best price
and execution of the Fund's orders. In doing so, the Fund may

-55-

pay higher commission rates than the lowest available when NACM believes it is
reasonable to do so in light of the value of the brokerage and research services
provided by the broker effecting the transaction, as discussed below.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
NACM may receive research services from many broker-dealers with which NACM
places the Fund's portfolio transactions. NACM may also receive research or
research credits from brokers which are generated from underwriting commissions
when purchasing new issues of debt securities or other assets for the Fund.
These services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to NACM in advising
various of its clients (including the Fund), although not all of these services
are necessarily useful and of value in managing the Fund. Neither the management
fee paid by the Fund to the Manager nor the portfolio management fee paid by the
Manager to NACM is reduced because NACM and its affiliates receive such
services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934,
NACM may cause the Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in such Act) to NACM an amount of disclosed
commission for effecting a securities transaction for the Fund in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.

The Fund may use broker-dealers that are affiliates (or affiliates of
affiliates) of the Fund, the Manager and/or NACM, subject to certain
restrictions discussed above under "Investment Manager and Portfolio
Manager--Investment Manager."

References to NACM in this section would apply equally to the Manager
if the Manager were to assume portfolio management responsibilities for the Fund
and place orders for the purchase and sale of the Fund's portfolio investments.

-56-

DISTRIBUTIONS

As described in the Prospectus, initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of the offering of the Common
Shares, depending on market conditions. To permit the Fund to maintain a more
stable monthly distribution, the Fund will initially, and may from time to time
thereafter, distribute less than the entire amount of net investment income
earned in a particular period. Such undistributed net investment income would be
available to supplement future distributions, including distributions that might
otherwise have been reduced by a decrease in the Fund's monthly net income due
to fluctuations in investment income or expenses, or due to an increase in the
dividend rate on the Fund's outstanding Preferred Shares. As a result, the
distributions paid by the Fund for any particular period may be more or less
than the amount of net investment income actually earned by the Fund during such
period. Undistributed net investment income will be added to the Fund's net
asset value and, correspondingly, distributions from undistributed net
investment income will be deducted from the Fund's net asset value.

For tax purposes, the Fund is currently required to allocate net
capital gain and other taxable income, if any, between and among Common Shares
and any series of Preferred Shares in proportion to total distributions paid to
each class for the year in which such net capital gain or other taxable income
is realized. For information relating to the impact of the issuance of Preferred
Shares on the distributions made by the Fund to Common Shareholders, see the
Prospectus under "Preferred Shares and related leverage."

While any Preferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the Preferred Shares have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of any outstanding Preferred Shares. This latter
limitation on the Fund's ability to make distributions on its Common Shares
could cause the Fund to incur income and excise tax and, under certain
circumstances, impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Tax Matters."

DESCRIPTION OF SHARES

Common Shares

The Fund's Declaration authorizes the issuance of an unlimited number
of Common Shares. The Common Shares will be issued with a par value of $0.00001
per share. All Common Shares of the Fund have equal rights as to the payment of
dividends and the distribution of assets upon liquidation of the Fund. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Anti-Takeover and Other Provisions in the Declaration of Trust--Shareholder
Liability" below, non-assessable, and will have no pre-emptive or conversion
rights or rights to cumulative voting. At any time when the Fund's Preferred
Shares are outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Preferred Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to Preferred Shares would be at least 200% after giving effect to such
distributions. See "--Preferred Shares" below.

The Common Shares are expected to be listed on the New York Stock
Exchange. The Fund intends to hold annual meetings of shareholders so long as
the Common Shares are listed on a national securities exchange and such meetings
are required as a condition to such listing.

Shares of closed-end investment companies may frequently trade at
prices lower than net asset value. Shares of closed-end investment companies
have during some periods traded at prices higher than net asset value and during
other periods traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other similar funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering

-57-

of Common Shares after payment of the sales load and offering expenses and
immediately following any offering of Preferred Shares by the costs of that
offering paid by the Fund. Net asset value generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater in the case of a fund, such as the Fund, having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon the Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of the Fund's Common Shares will be determined by factors beyond the
control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Common Shares; Conversion
to Open-End Fund" and the Prospectus under "Preferred Shares and related
leverage" and "Description of shares--Common Shares."

Preferred Shares

The Declaration authorizes the issuance of an unlimited number of
Preferred Shares. The Preferred Shares may be issued in one or more classes or
series, with such par value and rights as determined by the Board of Trustees of
the Fund, by action of the Board of Trustees without the approval of the Common
Shareholders.

The Fund's Board of Trustees has indicated its intention to authorize
an offering of Preferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the Preferred Shares are issued) within
approximately one to three months after completion of the offering of Common
Shares, subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of Preferred Shares
is likely to achieve the benefits to the Common Shareholders described in the
Prospectus and this Statement of Additional Information. Although the terms of
the Preferred Shares, including their dividend rate, voting rights, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees (subject to applicable law and the Declaration) if and when it
authorizes a Preferred Shares offering, the Board has stated that the initial
series of Preferred Shares would likely pay cumulative dividends at relatively
short-term periods (such as 7 days), by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The liquidation preference, preference on distribution, voting rights
and redemption provisions of the Preferred Shares are expected to be as stated
below.

As used in this Statement of Additional Information, unless otherwise
noted, the Fund's "net assets" include assets of the Fund attributable to any
outstanding Preferred Shares, with no deduction for the liquidation preference
of the Preferred Shares. Solely for financial reporting purposes, however, the
Fund is required to exclude the liquidation preference of Preferred Shares from
"net assets," so long as the Preferred Shares have redemption features that are
not solely within the control of the Fund. For all regulatory and tax purposes,
the Fund's Preferred Shares will be treated as stock (rather than indebtedness).

-58-

Limited Issuance of Preferred Shares. Under the 1940 Act, the Fund
could issue Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets (total assets less all
liabilities and indebtedness not represented by "senior securities," as defined
in the 1940 Act), measured immediately after issuance of the Preferred Shares.
"Liquidation value" means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common
Shares unless the liquidation value of the Preferred Shares is less than
one-half of the value of the Fund's total net assets (determined after deducting
the amount of such dividend or distribution) immediately after the distribution.
To the extent that the Fund has outstanding any senior securities representing
indebtedness (such as through the use of reverse repurchase agreements and other
derivative instruments that constitute senior securities), the aggregate amount
of such senior securities will be added to the total liquidation value of any
outstanding Preferred Shares for purposes of these asset coverage requirements.
The liquidation value of the Preferred Shares is expected to be approximately
35% of the value of the Fund's total net assets. The Fund intends to repurchase
Preferred Shares, if necessary, to keep the liquidation value of the Preferred
Shares plus the aggregate amount of other senior securities representing
indebtedness at or below one-half of the value of the Fund's total net assets.

Distribution Preference. The Preferred Shares will have complete
priority over the Common Shares as to distribution of assets.

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, Preferred
Shareholders will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus accumulated and
unpaid dividends thereon, whether or not earned or declared) before any
distribution of assets is made to holders of Common Shares. After payment of the
full amount of the liquidating distribution to which they are entitled,
Preferred Shareholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any Massachusetts business trust or corporation or a sale of all or
substantially all of the assets of the Fund shall not be deemed to be a
liquidation, dissolution or winding up of the Fund.

Voting Rights. In connection with any issuance of Preferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that Preferred Shares be voting shares. Except as otherwise provided in
the Declaration or the Fund's Bylaws or otherwise required by applicable law,
Preferred Shareholders will vote together with Common Shareholders as a single
class.

In connection with the election of the Fund's Trustees, Preferred
Shareholders, voting as a separate class, will also be entitled to elect two of
the Fund's Trustees, and the remaining Trustees shall be elected by Common
Shareholders and Preferred Shareholders, voting together as a single class. In
addition, if at any time dividends on the Fund's outstanding Preferred Shares
shall be unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's Trustees until all dividends in
arrears have been paid or declared and set apart for payment.

-59-

The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, shall be required to approve any
action requiring a vote of security holders under Section 13(a) of the 1940 Act
including, among other things, changes in the Fund's investment objective, the
conversion of the Fund from a closed-end to an open-end company, or changes in
the investment restrictions described as fundamental policies under "Investment
Restrictions." The class or series vote of Preferred Shareholders described
above shall in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares necessary to authorize the
action in question.

The foregoing voting provisions will not apply with respect to the
Fund's Preferred Shares if, at or prior to the time when a vote is required,
such shares shall have been (1) repurchased or (2) called for repurchase and
sufficient funds shall have been deposited in trust to effect such repurchase.

Repurchase and Sale of Preferred Shares by the Fund. The terms of the
Preferred Shares may provide that they may be repurchases by the Fund at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends, that the Fund may tender for or purchase Preferred Shares
and that the Fund may subsequently resell any shares so tendered for or
purchased. Any repurchase or other retirement of Preferred Shares by the Fund
will reduce the leverage applicable to Common Shares, while any resale of shares
by the Fund will increase such leverage.

The discussion above describes the present intention of the Board of
Trustees of the Fund with respect to a possible offering of Preferred Shares. If
the Board of Trustees determines to authorize such an offering, the terms of the
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Declaration.

-60-

ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST

Shareholder Liability

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration also provides for indemnification out
of the Fund's property for all loss and expense of any shareholder held
personally liable on account of being or having been a shareholder. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which such disclaimer is inoperative or
the Fund is unable to meet its obligations, and thus should be considered
remote.

Anti-Takeover Provisions

As described below, the Declaration includes provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Trustees, and
could have the effect of depriving shareholders of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund.

The Fund's Trustees are divided into three classes (Class I, Class II
and Class III), having initial terms of one, two and three years, respectively.
At each annual meeting of shareholders, the term of one class will expire and
each Trustee elected to that class will hold office for a term of three years.
The classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, the Declaration provides that a Trustee may be removed only for cause
and only (i) by action of at least seventy-five percent (75%) of the outstanding
shares of the classes or series of shares entitled to vote for the election of
such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining
Trustees.

Except as provided in the next paragraph, the affirmative vote or
consent of at least seventy-five percent (75%) of the Board of Trustees and at
least seventy-five percent (75%) of the shares of the Fund outstanding and
entitled to vote thereon are required to authorize any of the following
transactions (each a "Material Transaction"): (1) a merger, consolidation or
share exchange of the Fund or any series or class of shares of the Fund with or
into any other person or company, or of any such person or company with or into
the Fund or any such series or class of shares; (2) the issuance or transfer by
the Fund or any series or class of shares (in one or a series of transactions in
any twelve-month period) of any securities of the Fund or such series or class
to any other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more, excluding sales of securities of the Fund or such series or class in
connection with a public offering, issuances of securities of the Fund or such
series or class pursuant to a dividend reinvestment plan adopted by the Fund and
issuances of securities of the Fund or such series or class upon the exercise of
any stock subscription rights distributed by the Fund; or (3) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition by the Fund or any
series or class of shares (in one or a series of transactions in any
twelve-month period) to or with any person of any assets of the Fund or such
series or class having an aggregate fair market value of $1,000,000 or more,
except for transactions in securities effected by the Fund or such series or
class in the ordinary course of its business. The same affirmative votes are
required with respect to any shareholder proposal as to specific investment
decisions made or to be made with respect to the Fund's assets or the assets of
any series or class of shares of the Fund.

-61-

Notwithstanding the approval requirements specified in the preceding
paragraph, the Declaration requires no vote or consent of the Fund's
shareholders to authorize a Material Transaction if the transaction is approved
by a vote of both a majority of the Board of Trustees and seventy-five percent
(75%) of the Continuing Trustees (as defined below), so long as all other
conditions and requirements, if any, provided for in the Fund's Bylaws and
applicable law (including any shareholder voting rights under the 1940 Act) have
been satisfied.

In addition, the Declaration provides that the Fund may be terminated
at any time by vote or consent of at least seventy-five percent (75%) of the
Fund's shares or, alternatively, by vote or consent of both a majority of the
Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as
defined below).

In certain circumstances, the Declaration also imposes shareholder
voting requirements that are more demanding than those required under the 1940
Act in order to authorize a conversion of the Fund from a closed-end to an
open-end investment company. See "Repurchase of Common Shares; Conversion to
Open-End Fund" below.

As noted, the voting provisions described above could have the effect
of depriving Common Shareholders of an opportunity to sell their Common Shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
In the view of the Fund's Board of Trustees, however, these provisions offer
several possible advantages, including: (1) requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies
that are consistent with its investment objective and management policies. The
Board of Trustees has determined that the voting requirements described above,
which are generally greater than the minimum requirements under the 1940 Act,
are in the best interests of the Fund's Common Shareholders generally.

A "Continuing Trustee," as used in the discussion above, is any member
of the Fund's Board of Trustees who either (i) has been a member of the Board
for a period of at least thirty-six months (or since the commencement of the
Fund's operations, if less than thirty-six months) or (ii) was nominated to
serve as a member of the Board of Trustees by a majority of the Continuing
Trustees then members of the Board.

The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's Bylaws,
both of which have been filed as exhibits to the Fund's registration statement
on file with the SEC.

Liability of Trustees

The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.

-62-

REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND

The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Shares of a closed-end
investment company may frequently trade at prices lower than net asset value.
The Fund's Board of Trustees regularly monitors the relationship between the
market price and net asset value of the Common Shares. Ifthe Common Shares were
to trade at a substantial discount to net asset value for an extended period of
time, the Board may consider the repurchase of its Common Shares on the open
market or in private transactions, or the making of a tender offer for such
shares. There can be no assurance, however, that the Board of Trustees will
decide to take or propose any of these actions, or that share repurchases or
tender offers, if undertaken, will reduce market discount. The Fund has no
present intention to repurchase its Common Shares and would do so only in the
circumstances described in this section.

Notwithstanding the foregoing, at any time when the Fund's Preferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued dividends on Preferred Shares
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding Preferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon).

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

The Fund's Board of Trustees may also from time to time consider
submitting to the holders of the shares of beneficial interest of the Fund a
proposal to convert the Fund to an open-end investment company. In determining
whether to exercise its sole discretion to submit this issue to shareholders,
the Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Fund's capital structure is leveraged and the possibility of
re-leveraging, the spread, if any, between the yields on securities in the
Fund's portfolio and interest and dividend charges on Preferred Shares issued by
the Fund and general market and economic conditions.

The Declaration requires the affirmative vote or consent of holders of
at least seventy-five percent (75%) of each class of the Fund's shares entitled
to vote on the matter to authorize a conversion of the Fund from a closed-end to
an open-end investment company, unless the conversion is authorized by both a
majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined above under "Anti-Takeover and Other Provisions
in the Declaration of Trust--Anti-Takeover Provisions"). This seventy-five
percent (75%) shareholder approval requirement is higher than is required under
the 1940 Act. In the event that a conversion is approved by the Trustees and the
Continuing Trustees as described above, the minimum shareholder vote required
under the 1940 Act would be necessary to authorize the conversion. Currently,
the 1940 Act would require approval of the holders of a "majority of the
outstanding" Common Shares and, if issued, Preferred Shares voting together as a
single class, and the holders of a "majority of the outstanding" Preferred
Shares voting as a separate class, in order to authorize a conversion.

-63-

If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
likely would no longer be listed on the New York Stock Exchange. Shareholders of
an open-end investment company may require the company to redeem their shares on
any business day (except in certain circumstances as authorized by or under the
1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management.

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

In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets. This would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when Preferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See the Prospectus under
"Risks--Leverage Risk."

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

-64-

TAX MATTERS

Taxation of the Fund. The Fund intends to qualify each year as a
regulated investment company under Subchapter M of the Code. In order to qualify
for the special tax treatment accorded regulated investment companies and their
shareholders, the Fund must, among other things:

(a) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains
from the sale of stock, securities or foreign currencies, or other
income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in
such stock, securities, or currencies;

(b) distribute with respect to each taxable year at least 90%
of the sum of its net tax-exempt income, taxable ordinary income and
the excess, if any, of net short-term capital gains over net long-term
capital losses for such year; and

(c) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year, (i) at least 50% of the market value of the
Fund's total assets is represented by cash and cash items, U.S.
Government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to
a value not greater than 5% of the value of the Fund's total assets and
not more than 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or
more issuers which the Fund controls and which are engaged in the same,
similar, or related trades or businesses.

If the Fund qualifies as a regulated investment company that is
accorded special tax treatment, the Fund will not be subject to federal income
tax on income distributed in a timely manner to its shareholders in the form of
dividends (including Capital Gain Dividends, as defined below).

If the Fund failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Fund would be subject to
tax on its taxable income at corporate rates, and all distributions from
earnings and profits, including any distributions of net tax-exempt income and
net long-term capital gains, would be taxable to shareholders as ordinary
income. Such distributions generally would be eligible for the dividends
received deduction in the case of corporate shareholders. In addition, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying as a regulated
investment company that is accorded special tax treatment.

The Fund intends to distribute at least annually to its shareholders
all or substantially all of its investment company taxable income and any net
tax-exempt interest, and may distribute its net capital gain. The Fund may also
retain for investment its net capital gain. If the Fund does retain any net
capital gain or any investment company taxable income, it will be subject to tax
at regular corporate rates on the amount retained. If the Fund retains any net
capital gain, it may designate the retained amount as undistributed capital
gains in a notice to its shareholders who, if subject to federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on such undistributed amount against their
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For federal income tax purposes, the tax basis
of shares owned by a shareholder of the Fund will be increased by an amount
equal under current law to the difference between the amount of undistributed
capital gains included in the shareholder's gross income and the tax deemed paid
by the shareholder under clause (ii) of the preceding sentence.

Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain, to elect
to treat all or part of any net

-65-

capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.

If the Fund fails to distribute in a calendar year at least an amount
equal to the sum of 98% of its ordinary income for such year and 98% of its
capital gain net income for the one-year period ending October 31 of such year,
plus any retained amount from the prior year, the Fund will be subject to a
non-deductible 4% excise tax on the undistributed amounts. For these purposes,
the Fund will be treated as having distributed any amount for which it is
subject to income tax. A dividend paid to shareholders in January of a year
generally is deemed to have been paid by the Fund on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Fund intends generally to make distributions sufficient to avoid imposition of
the 4% excise tax, although there can be no assurance that it will be able to do
so.

Fund Distributions. Distributions from the Fund will be taxable to
shareholders as ordinary income to the extent derived from investment income and
net short-term capital gains. Distributions of net capital gains (that is, the
excess of net gains from the sale of capital assets held more than one year over
net losses from the sale of capital assets held for not more than one year)
properly designated as capital gain dividends ("Capital Gain Dividends") will be
taxable to shareholders as long-term capital gain, regardless of how long a
shareholder has held the shares in the Fund.

Dividends (including Capital Gain Dividends) will be taxable as
described above whether received in cash or in shares. A shareholder whose
distributions are reinvested in shares will be treated as having received a
dividend equal to either (i) the fair market value of the new shares issued to
the shareholder, or (ii) if the shares are trading below net asset value, the
amount of cash allocated to the shareholder for the purchase of shares on its
behalf in the open market.

Dividends of net investment income received by corporate shareholders
of the Fund will qualify for the 70% dividends received deduction generally
available to corporations to the extent of the amount of qualifying dividends
received by the Fund from domestic corporations for the taxable year. A dividend
received by the Fund will not be treated as a qualifying dividend (1) if the
stock on which the dividend is paid is considered to be "debt-financed"
(generally, acquired with borrowed funds), (2) if it has been received with
respect to any share of stock that the Fund has held for less than 46 days (91
days in the case of certain preferred stock) during the 90-day period beginning
on the date which is 45 days before the date on which such share becomes
ex-dividend with respect to such dividend (during the 180-day period beginning
90 days before such date in the case of certain preferred stock) or (3) to the
extent that the Fund is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in substantially
similar or related property. Moreover, the dividends received deduction may be
disallowed or reduced (1) if the corporate shareholder fails to satisfy the
foregoing requirements with respect to its shares of the Fund or (2) by
application of the Code.

-66-

The Internal Revenue Service currently requires that a regulated
investment company that has two or more classes of stock allocate to each such
class proportionate amounts of each type of its income (such as ordinary income
and capital gains) based upon the percentage of total dividends distributed to
each class for the tax year. Accordingly, the Fund intends each year to allocate
Capital Gain Dividends between and among its Common Shares and any series of its
Preferred Shares in proportion to the total dividends paid to each class with
respect to such tax year. Dividends qualifying and not qualifying for the
dividends received deduction will similarly be allocated between and among the
two (or more) classes.

Return of Capital Distributions. If the Fund makes a distribution to a
shareholder in excess of the Fund's current and accumulated earnings and profits
in any taxable year, the excess distribution will be treated as a return of
capital to the extent of such shareholder's tax basis in its shares, and
thereafter as capital gain. A return of capital is not taxable, but it reduces a
shareholder's tax basis in its shares, thus reducing any loss or increasing any
gain on a subsequent taxable disposition by the shareholder of its shares. Where
one or more such distributions occur in any taxable year of the Fund, the
available earnings and profits will be allocated, first, to the distributions
made to the holders of Preferred Shares, and only thereafter to distributions
made to holders of Common Shares. As a result, the holders of Preferred Shares
will receive a disproportionate share of the distributions treated as dividends,
and the holders of the Common Shares will receive a disproportionate share of
the distributions treated as a return of capital.

Dividends and distributions on the Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Distributions are taxable to a shareholder even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus included in the price paid by the shareholders).

Securities Issued or Purchased at a Discount. The Fund's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a market discount may) require the Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold.

Capital Loss Carryover. Distributions from capital gains are generally
made after applying any available capital loss carryovers.

-67-

Sale or Redemption of Shares. The sale, exchange or redemption of Fund
shares may give rise to a gain or loss. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gain
or loss if the shares have been held for more than 12 months. Otherwise, the
gain or loss on the taxable disposition of Fund shares will be treated as
short-term capital gain or loss. However, any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term,
rather than short-term, to the extent of any long-term capital gain
distributions received (or deemed received) by the shareholder with respect to
the shares. All or a portion of any loss realized upon a taxable disposition of
Fund shares will be disallowed if other substantially identical shares of the
Fund are purchased within 30 days before or after the disposition. In such a
case, the basis of the newly purchased shares will be adjusted to reflect the
disallowed loss.

From time to time the Fund may make a tender offer for its Common
Shares. It is expected that the terms of any such offer will require a tendering
shareholder to tender all Common Shares and dispose of all Preferred Shares
held, or considered under certain attribution rules of the Code to be held, by
such shareholder. Shareholders who tender all Common Shares and dispose of all
Preferred Shares held, or considered to be held, by them will be treated as
having sold their shares and generally will realize a capital gain or loss. If a
shareholder tenders fewer than all of its Common Shares, or retains a
substantial portion of its Preferred Shares, such shareholder may be treated as
having received a taxable dividend upon the tender of its Common Shares. In such
a case, there is a remote risk that non-tendering shareholders will be treated
as having received taxable distributions from the Fund. Likewise, if the Fund
repurchases some but not all of the Preferred Shares held by a Preferred
Shareholder and such shareholder is treated as having received a taxable
dividend upon such redemption, there is a remote risk that Common Shareholders
and Preferred Shareholders whose shares are not repurchased will be treated as
having received taxable distributions from the Fund. To the extent that the Fund
recognizes net gains on the liquidation of portfolio securities to meet such
tenders of Common Shares, the Fund will be required to make additional
distributions to its Common Shareholders.

Original Issue Discount and Payment-in-Kind Securities. Current federal
tax law requires the holder of a U.S. Treasury or other fixed income zero-coupon
security to accrue as income each year a portion of the discount at which the
security was issued, even though the holder receives no interest payment in cash
on the security during the year. In addition, payment-in-kind securities will
give rise to income which is required to be distributed and is taxable even
though the Fund holding the security receives no interest payment in cash on the
security during the year.

Some of the debt obligations (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Fund may be
treated as debt obligations that are issued originally at a discount. Generally,
the amount of the original issue discount ("OID") is treated as interest income
and is included in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures.

-68-

Some of the debt obligations (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
obligations having market discount, which could affect the character and timing
of recognition of income.

Some debt obligations (with a fixed maturity date of one year or less
from the date of issuance) that may be acquired by the Fund may be treated as
having acquisition discount, or OID in the case of certain types of debt
obligations. Generally, the Fund will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even
though payment of that amount is not received until a later time, usually when
the debt security matures. The Fund may make one or more of the elections
applicable to debt obligations having acquisition discount, or OID, which could
affect the character and timing of recognition of income.

If the Fund holds the foregoing kinds of securities, it may be required
to pay out as an income distribution each year an amount which is greater than
the total amount of cash interest the Fund actually received. Such distributions
may be made from the cash assets of the Fund or by liquidation of portfolio
securities, if necessary. The Fund may realize gains or losses from such
liquidations. In the event the Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution
than they would in the absence of such transactions.

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

Issuer Deductibility of Interest. A portion of the interest paid or
accrued on certain high yield discount obligations owned by the Fund may not
(and interest paid on debt obligations, if any, that are considered for tax
purposes to be payable in the equity of the issuer or a related party will not)
be deductible to the issuer. This may affect the cash flow of the issuer. If a
portion of the interest paid or accrued on certain high yield discount
obligations is not deductible, that portion will be treated as a dividend for
purposes of the corporate dividends received deduction. In such cases, if the
issuer of the high yield discount obligations is a domestic corporation,
dividend payments by the Fund may be eligible for the dividends received
deduction to the extent of the deemed dividend portion of such accrued interest.

-69-

Certain Investments in REITs. The Fund may invest in REITs that hold
residual interests in real estate mortgage investment conduits ("REMICs"). Under
Treasury regulations that have not yet been issued, but may apply retroactively,
a portion of the Fund's income from a REIT that is attributable to the REIT's
residual interest in a REMIC (referred to in the Code as an "excess inclusion")
will be subject to federal income tax in all events. These regulations are also
expected to provide that excess inclusion income of a regulated investment
company, such as the Fund, will be allocated to shareholders of the regulated
investment company in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related REMIC
residual interest directly.

In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a non-U.S. shareholder, will not qualify for any reduction in U.S.
federal withholding tax. Under current law, if a charitable remainder trust
(defined in section 664 of the Code) realizes any unrelated business taxable
income for a taxable year, it will lose its tax-exempt status for the year. The
Bush Administration has proposed imposing a 100% tax on a charitable remainder
trust's unrelated business income in lieu of removing the trust's income tax
exemption. In addition, if at any time during any taxable year a "disqualified
organization" (as defined in the Code) is a record holder of a share in a
regulated investment company, then the regulated investment company will be
subject to a tax equal to that portion of its excess inclusion income for the
taxable year that is allocable to the disqualified organization, multiplied by
the highest federal income tax rate imposed on corporations. The Fund does not
intend to invest in REITS in which a substantial portion of the assets will
consist of residual interests in REMICs.

Options, Futures Contracts and Swap Agreements. The Fund's transactions
in options, futures contracts, hedging transactions, swap agreements, and
straddles will be subject to special tax rules (including mark-to-market,
constructive sale, straddle, wash sale and short sale rules), the effect of
which may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.

Certain of the Fund's hedging activities are likely to produce a
difference between its book income and its taxable income. If the Fund's book
income exceeds its taxable income, the distribution (if any) of such excess
generally will be treated as (i) a dividend to the extent of the Fund's
remaining earnings and profits (including earnings and profits arising from
tax-exempt income), (ii) thereafter, as a return of capital to the extent of the
recipient's basis in its shares, and (iii) thereafter, as gain from the sale or
exchange of a capital asset. If the Fund's book income is less than taxable
income, the Fund could be required to make distributions exceeding book income
to qualify as a regulated investment company that is accorded special tax
treatment.

-70-

Foreign Taxation. Income received by the Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Shareholders generally will not be entitled to claim a
credit or deduction with respect to foreign taxes.

Passive Foreign Investment Companies. Equity investments by the Fund in
certain "passive foreign investment companies" ("PFICs") could potentially
subject the Fund to a U.S. federal income tax (including interest charges) on
distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to Fund shareholders. However, the Fund may elect to avoid the
imposition of that tax. For example, the Fund may elect to treat a PFIC as a
"qualified electing fund" (a "QEF election"), in which case the Fund will be
required to include its share of the company's income and net capital gains
annually, regardless of whether it receives any distribution from the company.
The Fund also may make an election to mark the gains (and to a limited extent
losses) in such holdings "to the market" as though it had sold and repurchased
its holdings in those PFICs on the last day of the Fund's taxable year. Such
gains and losses are treated as ordinary income and loss. The QEF and
mark-to-market elections may accelerate the recognition of income (without the
receipt of cash) and increase the amount required to be distributed by the Fund
to avoid taxation. Making either of these elections therefore may require the
Fund to liquidate other investments (including when it is not advantageous to do
so) to meet its distribution requirement, which also may accelerate the
recognition of gain and affect the Fund's total return.

Shares Purchased Through Tax-Qualified Plans. Special tax rules apply
to investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax advisers to determine the suitability of
shares of the Fund as an investment through such plans and the precise effect of
an investment on their particular tax situation.

Non-U.S. Shareholders. Under U.S. federal tax law, dividends other than
Capital Gain Dividends paid on shares beneficially held by a person who is a
"foreign person" within the meaning of the Code, are, in general, subject to
withholding of U.S. federal income tax at a rate of 30% of the gross dividend,
which rate may, in some cases, be reduced by an applicable tax treaty. Dividends
are subject to withholding even if they are funded by income or gains (such as
portfolio interest, short-term capital gains, or foreign-source dividend and
interest income) that, if paid to a foreign person directly, would not be
subject to withholding. However, Capital Gain Dividends will not be subject to
withholding of U.S. federal income tax. If a beneficial holder who is a foreign
person has a trade or business in the United States, and the dividends are
effectively connected with the conduct by the beneficial holder of a trade or
business in the United States, the dividend will be subject to U.S. federal net
income taxation at regular income tax rates.

-71-

Under U.S. federal tax law, a beneficial holder of shares who is a
foreign person is not, in general, subject to U.S. federal income tax on gains
(and is not allowed a deduction for losses) realized on the sale of such shares
unless (i) such gain is effectively connected with the conduct of a trade or
business carried on by such holder within the United States or (ii) in the case
of an individual holder, the holder is present in the United States for a period
or periods aggregating 183 days or more during the year of the sale and certain
other conditions are met.

If you are eligible for the benefits of a tax treaty, any effectively
connected income or gain will generally be subject to U.S. federal income tax on
a net basis only if it is also attributable to a permanent establishment
maintained by you in the United States.

A beneficial holder of shares who is a foreign person may be subject to
state and local tax and to the U.S. federal estate tax in addition to the
federal tax on income referred to above.

Backup Withholding. The Fund generally is required to withhold and
remit to the U.S. Treasury a percentage of the taxable dividends and other
distributions paid to any individual shareholder who fails to properly furnish
the Fund with a correct taxpayer identification number ("TIN"), who has
under-reported dividend or interest income, or who fails to certify to the Fund
that he or she is not subject to such withholding. The backup withholding tax
rate is (i) 30% for amounts paid during 2003, (ii) 29% for amounts paid during
2004 and 2005, and (iii) 28% for amounts paid during 2006 through 2010. The
backup withholding rate will be 31% for amounts paid after December 31, 2010,
unless Congress enacts tax legislation providing otherwise. The Bush
Administration has announced a proposal to accelerate reductions in tax rates,
which may change the backup withholding rate as well.

In order for a foreign investor to qualify for exemption from the
back-up withholding tax rates under income tax treaties, the foreign investor
must comply with special certification and filing requirements. Foreign
investors in the Fund should consult their tax advisers in this regard.

Recent Tax Shelter Reporting Regulations. Under recently enacted
Treasury regulations, if a shareholder realizes a loss on disposition of Common
Shares of $2 million or more for an individual shareholder or $10 million or
more for a corporate shareholder, the shareholder must file with the Internal
Revenue Service a disclosure statement on Form 8886. Direct shareholders of
portfolio securities are in many cases excepted from this reporting requirement,
but under current guidance, shareholders of a regulated investment company are
not excepted. Future guidance may extend the current exception from this
reporting requirement to shareholders of most or all regulated investment
companies.

Recent Tax Proposal. The Bush Administration has announced a proposal
to reduce or eliminate the tax on dividends paid out of earnings previously
taxed at the corporate level. Many of the details of the proposal have not been
specified, and the prospects for this proposal are unclear. Accordingly, it is
not possible to evaluate how this proposal might affect the tax discussion
above. The elimination of the double taxation of corporate distributions may
reduce the value of, and thus the return on, previously issued debt obligations
and similar securities which are part of the Fund's investment portfolio. This
change could reduce the Fund's net asset value and distributions made by the
Fund.

-72-

General. The federal income tax discussion set forth above is for
general information only. Prospective investors should consult their tax
advisers regarding the specific federal tax consequences of purchasing, holding,
and disposing of shares of the Fund, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.

PERFORMANCE RELATED AND COMPARATIVE INFORMATION

The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar
Inc. or other independent services. Comparison of the Fund to an alternative
investment should be made with consideration of differences in features and
expected performance. The Fund may obtain data from sources or reporting
services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund
believes to be generally accurate.

The Fund, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. At any time in the future, yields and
total return may be higher or lower than past yields and there can be no
assurance that any historical results will continue.

Past performance is not indicative of future results. At the time
Common Shareholders sell their shares, they may be worth more or less than their
original investment.

See Appendix A for additional performance related and comparative and
other information.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT

Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, serves as custodian for assets of the Fund. The custodian performs
custodial and fund accounting services.

PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
the transfer agent, registrar and dividend disbursement agent for the Common
Shares, as well as agent for the Dividend Reinvestment Plan relating to the
Common Shares.

-73-

INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036, serves as independent accountants for the Fund.
PricewaterhouseCoopers LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings to the
Fund.

COUNSEL

Ropes & Gray, One International Place, Boston, MA 02110, passes upon
certain legal matters in connection with shares offered by the Fund, and also
acts as counsel to the Fund.

REGISTRATION STATEMENT

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

-74-

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder and Board of Trustees of
Nicholas-Applegate Convertible & Income Fund

In our opinion, the accompanying statement of net assets presents
fairly, in all material respects, the financial position of Nicholas-Applegate
Convertible & Income Fund (the "Fund") at March 19, 2003 in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New York
March 21, 2003

-75-

FINANCIAL STATEMENTS

NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND

STATEMENT OF NET ASSETS
MARCH 19, 2003

Assets:
Cash $100,003
--------
Total Assets 100,003
--------

Net Assets (6,981 shares of $0.00001 par value shares of beneficial
interest issued and outstanding; unlimited shares authorized) 100,003
--------
Net asset value per share $14.33
========

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NOTES TO FINANCIAL STATEMENTS:

1. Organization

Nicholas-Applegate Convertible & Income Fund (the "Fund") was organized as a
Massachusetts business trust on January 17, 2003. The Fund has had no operations
to date other than matters relating to its organization and registration as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended, and the sale and issuance to Allianz Dresdner
Asset Management of America, L.P. ("ADAM") of 6,981 shares of beneficial
interest at an aggregate purchase price of $100,003. PIMCO Advisors Fund
Management LLC (the "Investment Manager") serves as the Fund's investment
manager, and is an indirect, wholly-owned subsidiary of ADAM and an indirect,
majority-owned subsidiary of Allianz AG, a publicly traded German insurance and
financial services company. The Investment Manager has agreed to absorb all
organizational expenses as well as reimburse the amount by which the Fund's
offering costs (other than the sales load) exceeds $0.03 per share. The Fund's
offering costs are estimated to be $675,000, assuming 20,000,000 shares of
beneficial interest are sold in the Fund's initial public offering. Offering
costs will be charged to paid-in-capital at the time such shares of beneficial
interest are issued. The actual number of shares that are sold in the initial
public offering, and associated offering costs, may be significantly higher or
lower than the above estimates.

2. Accounting Policies

The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
these estimates. In the normal course of business the Fund enters into contracts
that contain a variety of representations which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, the Fund expects the risk of loss to be
remote.

3. Investment Manager and Related Parties

The Fund has entered into an Investment Management Agreement (the "Agreement")
with the Investment Manager, pursuant to which, the Fund will pay the Investment
Manager an annual management fee, payable monthly, at the annual rate of 0.70%
of the Fund's average daily total managed assets. Total managed assets refer to
the total assets of the Fund (including any assets attributable to any Preferred
Shares or other forms of leverage that may be outstanding) minus accrued
liabilities (other than liabilities representing leverage). The Investment
Adviser has retained its affiliate, Nicholas-Applegate Capital Management LLC
("NACM"), to manage the Fund's investments. For its services, the Investment
Manager (not the Fund) will pay to NACM a monthly fee equal to (i) 50% of the
management fee payable by the Fund to the Investment Manager for such month with
respect to the first $300 million of the Fund's average daily total managed
assets and (ii) 75% of the management fees payable by the Fund to the Investment
Manager for such month with respect to the Fund's average daily total managed
assets in excess of $300 million; provided however, that the amounts payable
under (i) and (ii) above shall be reduced to reflect that NACM will bear 50% and
75%, respectively, of any "Service or Incentive Fees" payable by the Investment
Manager for such month with respect to the specified total managed assets. For
these purposes, Service or Incentive Fees for any period equals the sum of any
shareholder servicing fees

-77-

payable by the Investment Manager to UBS Warburg LLC, the lead underwriter of
the Fund's shares and any incentive fees payable by the Investment Manager to
other underwriters for such period.

4. Federal Income Taxes

The Fund intends to comply with the requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies. Accordingly, no
provision for U.S. federal income taxes is required. In addition, by
distributing substantially all of its ordinary income and long-term capital
gains, if any, during each calendar year, the Fund intends not to be subject to
U.S. federal excise tax.

-78-

APPENDIX A

PERFORMANCE RELATED AND
COMPARATIVE AND OTHER INFORMATION

From time to time, the Fund, the Manager and/or NACM may report to
shareholders or to the public in advertisements concerning the performance of
the Manager and/or NACM as adviser to clients other than the Fund, or on the
comparative performance or standing of the Manager and/or NACM in relation to
other money managers. The Manager and/or NACM also may provide current or
prospective private account clients, in connection with standardized performance
information for the Fund, performance information for the Fund gross of fees and
expenses for the purpose of assisting such clients in evaluating similar
performance information provided by other investment managers or institutions.
Comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information, whether related
to the Fund, the Manager or NACM, should be considered in light of the Fund's
investment objective and policies, characteristics and quality of the Fund, and
the market conditions during the time period indicated, and should not be
considered to be representative of what may be achieved in the future.
Performance information for the Fund may be compared to various unmanaged
indexes.

Nicholas-Applegate Convertible & Income Fund

A portfolio of select convertible and high yield securities designed to offer

. Total return through capital appreciation and high current income
. Flexibility to take advantage of opportunities in varying market
environments
. A consistent disciplined investment strategy
. Access to the extensive research and investment expertise of
institutional investment manager Nicholas-Applegate Capital Management

Proven Institutional Investment Expertise

Organized in 1984, NACM had over $16.6 billion in assets under
management as of December 31, 2002. NACM has a substantial list of institutional
clients. Its 62-member investment management team provides comprehensive equity
and fixed-income investing expertise.

An Established Portfolio Team

Douglas Forsyth, who specializes in convertible and high yield
securities, is lead portfolio manager. He has more than 12 years of investment
management experience and heads a team of six portfolio managers and investment
analysts primarily responsible for the Fund. Mr. Forsyth's team is able to draw
on the extensive research and analytical resources of NACM.

Unique Combination of Equity & Bond Expertise

NACM draws on broad-ranging capabilities in assessing potential
investments. The firm pairs traditional credit analysis with a disciplined,
fundamental bottom-up research process that facilitates the early identification
of issuers demonstrating an ability to improve their fundamental
characteristics. NACM develops its own analysis of issuer credit quality because
ratings assigned by a ratings agency are not absolute standards of credit
quality and do not evaluate market risk. In analyzing specific companies for
possible investment, NACM ordinarily looks for several compelling
characteristics, including high return on invested capital, a healthy balance
sheet, strong management, and general operating characteristics that will enable
the companies to compete successfully in their respective markets.

A-1

A Focus on the Potential For Investment Gains and Losses on Convertible
Securities

In selecting convertible securities for investment by the Fund,
Nicholas-Applegate evaluates each security's income-producing characteristics,
as well as its potential for capital appreciation, using techniques that focus
on the security's equity characteristics. Nicholas-Applegate seeks to capture
approximately 70-80% of the upside performance of the underlying equities with
50% or less of the downside exposure.

[GRAPHIC INDICATING A FOCUS ON THE POTENTIAL FOR INVESTMENT
GAINS AND LOSSES ON CONVERTIBLE SECURITIES APPEARS HERE]

As indicated in the graphic above, in selecting convertible securities,
NACM attempts to identify securities that it anticipates will capture
approximately 70-80% of any increase in the market price of the underlying
equities (upside potential) and 50% or less of any decrease in the market price
of the underlying equities (downside exposure).

The foregoing graphic is not meant to be representative of all
convertible securities in which the Fund may invest and NACM may not be
successful in identifying securities that have the characteristics described
above or that perform as anticipated. NACM may purchase convertible securities
for the Fund that capture substantially less than 70-80% of any positive total
return of the underlying equity or substantially more than 50% of any negative
total return of the underlying equity during any period or over extended
periods. Future performance results are not guaranteed.

Potential Benefits of Convertible and High Yield Securities in Today's Market

* The performance of convertible and high yield securities could
benefit if the economy strengthens.

* High yield securities can offer attractive income potential while
stock market conditions remain uncertain.

A-2

* Convertible securities can offer attractive capital appreciation
potential if stock markets rise.

* Convertible security assets have quadrupled since 1990./1/

* Credit spreads are near a 10-year high, raising the potential for
stronger performance.

High Yield Securities Currently Offer The Potential For Exceptional Value

High yield debt spreads (the yield on high yield debt less the 10-year U.S.
Treasury yield) are near their highest levels in almost 10 years. Historically,
as yield spreads have begun to contract, high yield securities have experienced
significant capital appreciation.

--------
/1/ Source: Merrill Lynch, "Convertibles as an Asset Class," Nov. 11, 2002. From
Dec. 31, 1989 to Oct. 31, 2002, the aggregate fair market value of all
outstanding U.S. dollar-denominated convertible securities trading in U.S.
markets increased from approximately $51.0 billion to approximately $199.8
billion. The U.S. convertible securities market may not continue to grow in the
future and may contract. This data does not indicate what portion of the
convertible securities market will be available for investment by the Fund.

[GRAPH APPEARS HERE]

High Yield Performance(%)

1987 4.471
1988 13.359
1989 2.309
1990 -4.362
1991 39.171
1992 17.44
1993 16.69
1994 -1.03
1995 20.462
1996 11.27
1997 13.266
1998 2.953
1999 2.511
2000 -5.117
2001 4.477
2002 -1.89 12/31/2002

High Yield Debt Spreads (basis points)

Jan-87 444.00
Feb-87 425.00
Mar-87 400.00
Apr-87 416.00
May-87 318.00
Jun-87 435.00
Jul-87 338.00
Aug-87 323.00
Sep-87 380.00
Oct-87 572.00
Nov-87 472.00
Dec-87 459.00
Jan-88 480.00
Feb-88 458.00
Mar-88 467.00
Apr-88 447.00
May-88 417.00
Jun-88 424.00
Jul-88 391.00
Aug-88 406.00
Sep-88 443.00
Oct-88 451.00
Nov-88 434.00
Dec-88 448.00
Jan-89 419.00
Feb-89 406.00
Mar-89 451.00
Apr-89 517.00

A-3

May-89 525.00
Jun-89 591.00
Jul-89 629.00
Aug-89 583.00
Sep-89 636.00
Oct-89 745.00
Nov-89 771.00
Dec-89 790.00
Jan-90 774.00
Feb-90 837.00
Mar-90 794.00
Apr-90 773.00
May-90 793.00
Jun-90 736.00
Jul-90 718.00
Aug-90 798.00
Sep-90 970.00
Oct-90 1060.00
Nov-90 1058.00
Dec-90 1096.00
Jan-91 1058.00
Feb-91 909.00
Mar-91 802.00
Apr-91 772.00
May-91 784.00
Jun-91 743.00
Jul-91 723.00
Aug-91 746.00
Sep-91 754.00
Oct-91 724.00
Nov-91 686.00
Dec-91 729.00
Jan-92 589.00
Feb-92 538.00
Mar-92 490.00
Apr-92 500.00
May-92 499.00
Jun-92 521.00
Jul-92 544.00
Aug-92 555.00
Sep-92 563.00
Oct-92 583.00
Nov-92 532.00
Dec-92 548.00
Jan-93 490.48
Feb-93 473.18
Mar-93 433.43
Apr-93 437.29
May-93 406.09
Jun-93 409.38
Jul-93 399.72
Aug-93 433.69
Sep-93 452.43
Oct-93 433.79
Nov-93 406.69
Dec-93 404.90
Jan-94 391.17
Feb-94 359.37
Mar-94 389.64
Apr-94 393.47
May-94 388.43
Jun-94 396.82

A-4

Jul-94 425.87
Aug-94 427.91
Sep-94 405.71
Oct-94 405.09
Nov-94 419.05
Dec-94 420.29
Jan-95 444.10
Feb-95 441.64
Mar-95 440.62
Apr-95 425.34
May-95 457.09
Jun-95 469.53
Jul-95 432.46
Aug-95 451.63
Sep-95 450.80
Oct-95 454.28
Nov-95 478.36
Dec-95 476.87
Jan-96 466.88
Feb-96 415.18
Mar-96 412.79
Apr-96 387.72
May-96 372.53
Jun-96 396.39
Jul-96 387.93
Aug-96 364.09
Sep-96 352.99
Oct-96 390.74
Nov-96 389.97
Dec-96 342.14
Jan-97 336.45
Feb-97 307.43
Mar-97 329.05
Apr-97 343.16
May-97 317.94
Jun-97 320.27
Jul-97 329.11
Aug-97 318.12
Sep-97 312.78
Oct-97 361.07
Nov-97 347.03
Dec-97 359.11
Jan-98 365.65
Feb-98 349.50
Mar-98 344.78
Apr-98 356.65
May-98 384.04
Jun-98 409.45
Jul-98 400.06
Aug-98 617.43
Sep-98 687.07
Oct-98 734.68
Nov-98 617.72
Dec-98 640.85

A-5

Jan-99 626.17
Feb-99 585.15
Mar-99 587.64
Apr-99 537.21
May-99 545.28
Jun-99 549.29
Jul-99 553.18
Aug-99 573.33
Sep-99 610.99
Oct-99 615.75
Nov-99 577.29
Dec-99 549.44
Jan-00 549.24
Feb-00 572.56
Mar-00 657.32
Apr-00 653.70
May-00 695.58
Jun-00 695.53
Jul-00 694.09
Aug-00 715.61
Sep-00 755.43
Oct-00 831.71
Nov-00 939.27
Dec-00 958.51
Jan-01 845.20
Feb-01 829.78
Mar-01 855.96
Apr-01 820.40
May-01 785.65
Jun-01 811.37
Jul-01 831.00
Aug-01 825.00
Sep-01 1018.00
Oct-01 993
Nov-01 877
Dec-01 867
Jan-02 834
Feb-02 854
Mar-02 744
Apr-02 739
May-02 736
Jun-02 823
Jul-02 954
Aug-02 968
Sep-02 1064
Oct-02 1080
Nov-02 929
Dec-02 947

A-6

Sources: Credit Suisse First Boston; Merrill Lynch. All data through December
31, 2002. The bars in the chart show the historical calendar-year performance
for 1987 through 2001 (and the performance from Jan. 1, 2002, through Sept. 30,
2002) of the Merrill Lynch High Yield Index (the "Merrill Lynch Index"), which
is an index consisting of all U.S. dollar-denominated bonds issued in U.S.
markets (including "yankee bonds") with a credit rating of below investment
grade (but not in default), a minimum outstanding principal amount of $100
million and at least one year remaining until maturity. Bonds that are rated
investment grade by one rating agency and below investment grade by another are
included in the Merrill Lynch Index based on the bond's corresponding composite
rating. The line in the chart shows the historical difference (or spread)
between the yield-to-maturity of the Credit Suisse First Boston High Yield Index
II (the "CSFB Index") and the yield of the 10-Year U.S. Treasury bond. The CSFB
Index is an index consisting of U.S. dollar-denominated corporate bonds with a
credit rating of below investment grade (including bonds that are rated in the
lowest investment grade category by one rating agency and below investment grade
by another) and a minimum outstanding principal amount of $50 million. The
performance of the Merrill Lynch Index and the yield of the CSFB Index do not
reflect the deduction of any management fees, account charges or other fees and
expenses that will apply to the Fund. It is not possible to invest directly in
either index. 10-Year U.S. Treasury bonds offer a government guarantee as to
timely payment of interest and repayment of principal on maturity. The bonds in
the Merrill Lynch Index, the bonds in the CSFB Index and the securities in which
the Fund may invest are not similarly guaranteed by the U.S. Government or any
governmental agency. In addition, a portion of the spreads between the CSFB
Index and 10-Year Treasury Bonds is attributable to higher coupon rates paid on
corporate bonds to account for additional risk associated with their call
features.

Past performance is no guarantee of future results. The historical information
provided in the chart does not predict how high yield bonds or 10-Year U.S.
Treasury bonds will perform in the future or how the Fund's investments would
have performed under similar market conditions. The securities that the Fund
will own will not match, and are not intended to be representative of,

A-7

those of the Merrill Lynch Index or the CSFB Index. This table is not intended
to predict the Fund's performance.

The Closed End Fund Advantage

Monthly Dividends

Commencing with the first dividend, the Fund intends to make regular monthly
cash distributions to investors at a level rate based on projected performance
of the Fund. The first dividend is expected to be declared approximately 45
days, and paid approximately 60 to 90 days, after the initial public offering of
common shares, depending on market conditions./2/

Low Minimum Investment

The Fund will be offered for $15 per share, with a minimum purchase of 100
shares. Investors will pay a sales load of 4.5% of the offering price of common
shares purchased, which will reduce the initial amount invested.

Exchange-Traded Liquidity

The Fund expects to list its shares on the New York Stock Exchange (NYSE), which
should promote liquidity and convenient access to daily share prices through
electronic services and/or in newspaper stock tables. The Fund's expected stock
symbol is NCV.3

Easy Reinvestment

Unless an investor elects to receive distributions in cash, all distributions
will be automatically reinvested in additional common shares, compounding the
investment and providing even more income potential over time. This does not
ensure a profit nor does it protect against loss in a declining market.
Automatically reinvested dividends and distributions are taxed in the same
manner as cash dividends and distributions.

/2/ The Fund's ability to maintain a level dividend rate will depend on a number
of factors, including dividends payable on any preferred shares that are issued.
As portfolio and market conditions change, the rate of dividends on common
shares and the Fund's dividend policy could change. The Fund's distributions of
ordinary income (including net short-term capital gain)will be taxable to
shareholders as ordinary income, and capital gain dividends will be subject to
capital gains taxes.

/3/ Like any exchange-traded security, the Fund's share price will fluctuate
with market conditions and other factors. If an investor decides to sell his
shares, the market price may be above or below net asset value, and may be worth
more or less than the original investment. The net asset value will be reduced
immediately following the offering by the amount of the sales load and
organization and offering expenses paid by the Fund and later by any
organizational and offering costs of issuing preferred shares. The common shares
are designed primarily for long-term investors and should not be viewed as
trading vehicles.

A-8

PART C - OTHER INFORMATION

Item 24: Financial Statements and Exhibits

1. Financial Statements:

Registrant has not conducted any business as of the date of this
filing, other than in connection with its organization. Financial
Statements indicating that the Registrant has met the net worth
requirements of Section 14(a) of the 1940 Act are filed herewith as part
of the Statement of Additional Information.

2. Exhibits:

a.1 Agreement and Declaration of Trust dated January 17, 2003.(1)

a.2 Amended and Restated Agreement and Declaration of Trust dated March 12,
2003.(3)

b.1 Bylaws of Registrant dated January 17, 2003.(1)

b.2 Amended and Restated Bylaws of Registrant dated March 12, 2003.(3)

c. None.

d.1 Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Amended and Restated Agreement and Declaration of
Trust.(3)

d.2 Article 10 (Shareholders' Voting Powers and Meetings) of the Amended and
Restated Bylaws of Registrant.(3)

d.3 Form of Share Certificate of the Common Shares.(3)

e. Terms and Conditions of Dividend Reinvestment Plan.(3)

f. None.

g.1 Investment Management Agreement between Registrant and PIMCO Advisors
Fund Management LLC dated March 12, 2003.(3)

g.2 Portfolio Management Agreement between PIMCO Advisors Fund Management LLC
and Nicholas-Applegate Capital Management LLC dated March 12, 2003.(3)

h.1 Form of Underwriting Agreement.(3)

h.2 Form of Master Selected Dealer Agreement.(3)

h.3 Form of Master Agreement Among Underwriters.(3)

h.4 Form of Additional Compensation Agreement.(3)

i. None.

j.1 Form of Custodian Agreement between Registrant and Brown Brothers Harriman
& Co.(3)

j.2 Form of Accounting Agency Agreement between Registrant and Brown Brothers
Harriman & Co.(3)

k.1 Form of Transfer Agency Services Agreement between Registrant and
PFPC Inc.(3)

C-1

k.2 Form of Organizational and Offering Expenses Reimbursement Agreement
between Registrant and PIMCO Advisors Fund Management LLC dated as of
March 12, 2003.(3)

k.3 Form of Shareholder Servicing Agreement.(3)

l. Opinion and consent of Ropes & Gray.(3)

m. None.

n. Consent of Registrant's independent accountants.(3)

o. None.

p. Subscription Agreement of Allianz Dresdner Asset Management of
America L.P. dated as of March 20, 2003, filed herewith.

q. None.

r.1 Code of Ethics of Registrant dated March 12, 2003.(3)

r.2 Code of Ethics of PIMCO Advisors Fund Management LLC dated January 1,
2002.(3)

r.3 Code of Ethics of Nicholas-Applegate Capital Management LLC dated March
1, 2003.(3)

s. Power of Attorney for Messrs. Shlissel, Belica, Connor, Dalessandro,
Altadonna and Schott.(2)

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

(1) Incorporated by reference to the Registrant's Initial
Registration Statement on Form N-2, File No. 333-102624, filed on
January 21, 2003.

(2) Incorporated by reference to the Pre-Effective Amendment No. 1 to the
Registrant's Initial Registration Statement on Form N-2, File No.
333-102624, filed on February 24, 2003.

(3) Incorporated by reference to the Pre-Effective Amendment No. 2 to the
Registrant's Initial Registration Statement on Form N-2, File No.
333-102624, filed on March 21, 2003.

C-2

Item 25: Marketing Arrangements

See Sections 3(p), 4(h), 5(i), 8 and 9 of Exhibit h.1 of Item 24 of this
Registration Statement and Sections 8, 9 and 15 of Exhibit h.3 of Item 24 of
this Registration Statement.

Item 26: Other Expenses of Issuance and Distribution

Securities and Exchange Commission Fees $ 89,190*
National Association of Securities Dealers, Inc. Fees 30,500*
Printing and engraving expenses 225,000*
Legal fees 400,000*
New York Stock Exchange listing fees 240,300*
Accounting expenses 15,000*
Transfer Agent fees 3,000*
Marketing expenses 150,000*
Miscellaneous expenses 2,010*
---------
Total 1,155,000*

PIMCO Advisors Fund Management LLC has agreed to pay all the Fund's
organizational expenses and the amount by which the Fund's offering
costs (other than the sales load) exceeds $0.03 per share.

* Estimated expenses.

Item 27: Persons Controlled by or under Common Control with Registrant

Not applicable.

Item 28: Number of Holders of Securities

At March 26, 2003

Number of
Title of Class Record Holders
-------------- --------------

Common Shares, par value $0.00001 1

Item 29: Indemnification

Reference is made to Article VIII, Sections 1 through 4, of the
Registrant's Amended and Restated Agreement and Declaration of Trust, which is
filed herewith.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to the Trust's
Amended and Restated Agreement and Declaration of Trust, its Amended and
Restated Bylaws or otherwise, the Registrant is aware that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustees, officers or controlling
persons in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

C-3

Item 30: Business and Other Connections of Investment Adviser

Descriptions of the business of PIMCO Advisors Fund Management LLC, the
Registrant's investment manager, and Nicholas-Applegate Capital Management LLC,
the Registrant's portfolio manager, are set forth under the captions "Investment
Manager" and "Portfolio Manager" under "Management of the Fund" in both the
prospectus and Statement of Additional Information forming part of this
Registration Statement. The following sets forth business and other connections
of each director and executive officer (and persons performing similar
functions) of PIMCO Advisors Fund Management LLC and Nicholas-Applegate Capital
Management LLC.
PIMCO Advisors Fund Management LLC
1345 Avenue of the Americas
New York, NY 10105

Name Position with Advisor Other Connections
---------------- -------------------------- ------------------------------

Larry A. Altadonna Vice President Vice President, OpCap
Advisors LLC

Andrew Bocko Senior Vice President and Senior Vice President,
Director of IT PIMCO Advisors Fund Management
LLC, Allianz Dresdner Asset
Management U.S. Equities LLC,
PIMCO Advisors Fund Management
LLC, Allianz Dresdner Asset
Management of America L.P.

Tim Clark Managing Director

Cindy Columbo Vice President

Patrick Coyne Vice President

Derek Hayes Senior Vice President

Steve Jobe Senior Vice President

Alan Kwan Vice President

John C. Maney Chief Financial Officer Executive Vice President and
Chief Financial Officer,
Allianz Dresdner Asset
Management of America L.P.;
Chief Financial Officer, PIMCO
Advisors Fund Management
LLC, Allianz Dresdner Asset
Management U.S. Equities
LLC, Cadence Capital
Management LLC, NFJ
Investment Group L.P., OCC
Distributors LLC, OpCap
Advisors LLC, Oppenheimer
Capital LLC, Pacific
Investment Management
Company LLC, PIMCO Advisors
Managed Accounts LLC, PIMCO
Advisors CD Distributors
LLC, PIMCO Equity Advisors
LLC, PIMCO Equity Partners
LLC, PIMCO Advisors
Advertising Agency Inc.,
PIMCO Advisors Distributors
LLC, Allianz Private Client
Services LLC, and StocksPLUS
Management Inc. and Value
Advisors LLC

Vinh T. Nguyen Vice President and Vice President and Controller,
Controller PIMCO Advisors Fund Management
LLC, Allianz Dresdner Asset
Management of America L.P.,
Allianz Dresdner Asset
Management U.S. Equities LLC,
Cadence Capital Management
LLC, NFJ Investment Group
L.P., OCC Distributors LLC,
OpCap Advisors LLC,
Oppenheimer Capital LLC,
Pacific Investment Management
Company LLC, PIMCO Advisors
Managed Accounts LLC, PIMCO
Advisors CD Distributors LLC,
PIMCO Equity Advisors LLC,

C-4

PIMCO Equity Partners LLC,
PIMCO Advisors Advertising
Agency Inc., PIMCO Advisors
Distributors LLC, Allianz
Private Client Services LLC,
and StocksPLUS Management Inc.

Francis C. Poli Executive Vice President, Chief Legal and Compliance
Director of Compliance Officer, PIMCO Advisors Fund
and Assistant Secretary Management LLC, Allianz
Dresdner Asset Management Of
America L.P., Allianz Dresdner
Asset Management U.S. Equities
LLC, Allianz Hedge Fund
Partners L.P., Allianz Private
Client Services LLC, Cadence
Capital Management LLC, NFJ
Investment Group L.P., OCC
Distributors LLC, OpCap
Advisors LLC, Oppenheimer
Capital LLC, PIMCO Advisors
Retail Holdings LLC, PIMCO
Advisors Managed Accounts
LLC, PIMCO Advisors CD
Distributors LLC, PIMCO
Equity Advisors LLC

Bob Rokose Vice President and
Assistant Controller

Newton B. Schott, Jr. Managing Director, Vice President, PIMCO Advisors
Chief Legal Officer Managed Accounts LLC;
and Secretary Executive Vice President,
Chief Legal Officer and
Secretary, PIMCO Advisors
Advertising Agency Inc.;
Managing Director, Executive
Vice President, General
Counsel and Secretary, PIMCO
Advisors Distributors LLC

Brian S. Shlissel Senior Vice President Senior Vice President and
Treasurer, OpCap Advisors LLC

Stewart A. Smith Vice President and Secretary, PIMCO Advisors Fund
Assistant Secretary Management LLC, Allianz
Dresdner Asset Management of
America L.P., Allianz Dresdner
Asset Management U.S.
Equities LLC, Allianz Hedge
Fund Partners L.P., Allianz
Private Client Services LLC,
Cadence Capital Management
LLC, NFJ Investment Group
L.P., PIMCO Advisors Retail
Holdings LLC, PIMCO Advisors
Managed Accounts LLC, PIMCO
Advisors CD Distributors LLC
and PIMCO Equity Advisors
LLC; Assistant Secretary,
Oppenheimer Capital LLC,
OpCap Advisors and OCC
Distributors LLC

Stephen J. Treadway Managing Director and Chairman, President and Chief
Chief Executive Officer Executive Officer, PIMCO
Advisors Advertising Agency
Inc.; Managing Director and
Chief Executive Officer,
PIMCO Advisors Distributors
LLC; Managing Director,
PIMCO Advisors Managed
Accounts LLC, Allianz
Private Client Services LLC,
Allianz Dresdner Asset
Management of America L.P.

James G. Ward Executive Vice President Executive Vice President,
and Director of Human Allianz Asset Management of
Resources America L.P.; Director of
Human Resources, Allianz Asset
Management U.S. Equities LLC,
PIMCO Advisors Distributors
LLC

C-5

Nicholas-Applegate Capital Management LLC
600 West Broadway 30th Floor
San Diego, CA 92101

--------------------------------------------------------------------------------
Name Position with Portfolio Manager Other Affiliations
--------------------------------------------------------------------------------

Charles H. Field Deputy General Counsel Secretary, Nicholas-
Applegate Institutional
Funds; Director, Torrey
Pines Ltd., Convertible
Arbitrage Fund Ltd.,
Nicholas-Applegate
South East Asia Fund;
Deputy General Counsel,
Nicholas-Applegate
Securities LLC

Peter J. Johnson Head of Institutional Sales

C. William Maher, CPA Chief Financial Officer Chief Financial Officer
and Treasurer,
Nicholas-Applegate
Securities; Treasurer,
Nicholas-Applegate
Institutional Funds

E. Blake Moore, Jr. General Counsel and Secretary Trustee, Chairman of
the Board and
President, Nicholas-
Applegate Institutional
Funds; General Counsel
and Secretary,
Nicholas-Applegate
Securities; Director,
Nicholas-Applegate
Southeast Asia Fund

Arthur E. Nicholas Chairman Chairman and President,
Nicholas-Applegate

C-6

Securities; Director
and Chairman of the
Board, Nicholas-
Applegate Fund, Inc.;
President, Nicholas-
Applegate Securities
International LDC

Eric S. Sagerman Head of Global Marketing Director, Nicholas-
Applegate South East
Asia Fund

Horacio A. Valeiras, CFA Chief Investment Officer

Marna C. Whittington, President and Chief Executive
Ph.D. Officer

C-7

Item 31: Location of Accounts and Records

The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109 and/or PFPC Inc.,
400 Bellevue Parkway, Wilmington, Delaware 19809.

Item 32: Management Services

Not applicable.

Item 33: Undertakings

1. Registrant undertakes to suspend the offering of its Common Shares
until it amends the prospectus filed herewith if (1) subsequent to the effective
date of its registration statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of the registration
statement, or (2) the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.

2. Not applicable.

3. Not applicable.

4. Not applicable.

5. The Registrant undertakes that:

a. For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective; and

b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.

6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.

Notice

A copy of the Agreement and Declaration of Trust of Nicholas-Applegate
Convertible & Income Fund (the "Fund"), together with all amendments thereto, is
on file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the Fund by
any officer of the Fund as an officer and not individually and that the
obligations of or arising out of this instrument are not binding upon any of the
Trustees of the Fund or shareholders of the Fund individually, but are binding
only upon the assets and property of the Fund.

C-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and the State of New York on the 26th day
of March, 2003.

NICHOLAS-APPLEGATE CONVERTIBLE &
INCOME FUND

By: /s/ Brian S. Shlissel
---------------------
Brian S. Shlissel,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

Name Capacity Date
---- -------- ----
/s/ Brian S. Shlissel March 26, 2003
------------------------- President, Chief -------------------
Brian S. Shlissel Executive Officer

Paul Belica* Trustee March 26, 2003
------------------------- -------------------
Paul Belica

Robert E. Connor* Trustee March 26, 2003
------------------------- -------------------
Robert E. Connor

John J. Dalessandro II* Trustee March 26, 2003
------------------------- -------------------
John J. Dalessandro II

/s/ Lawrence G. Altadonna March 26, 2003
------------------------- Treasurer, Principal -------------------
Lawrence G. Altadonna Financial and
Accounting Officer

*By: /s/ Brian S. Shlissel
------------------------
Brian S. Shlissel
Attorney-In-Fact

Date: March 26, 2003

INDEX TO EXHIBITS

Exhibit Exhibit Name
------- ------------
p. - Subscription Agreement of Allianz Dresdner Asset Management of
America L.P. dated as of March 20, 2003.